The Woodland Carbon Code recently commissioned EY to run an independent consultation on the financial additionality test that projects need to pass to be eligible for the code.
Additionality is an important principal for environmental markets as buyers want to know their purchase is making a difference.
The consultation took place towards the end of last year and 46 formal responses from a range of individuals and organisations were received.
The Woodland Carbon Code and EY have now published a consultation report, and David McCulloch, Head of CarbonStore, summarised his key takeaways on LinkedIn.
He said that the consultation report finds, “The current data used to assess projects’ planting and management costs is unrepresentative. They are out of date and they don’t reflect regional variations.
“The estimates for projects’ potential timber revenues are widely seen as inaccurate. Blanket assumptions are made for thinning regimes, timber values and implicitly harvesting costs.
“Many feel that the current discount rate, i.e. the Green Book Rate of 3.5 per cent, is appropriate. Perhaps this reflects the multi-year decline in the risk premium of forestry investments? I would prefer a rate that reflects more accurately both the risks of planting trees and prevailing risk attitudes in financial markets.
“Many want the income that’s assumed to have been foregone by planting trees to reflect the real world scenario more accurately.”
“However,” McCulloch said, “these various conclusions highlight a fundamental tension. Some argued that ‘complexity discourages engagement’ while many more stated that the test ‘requires more flexibility’ and that it contains ‘inaccurate cost data.’ Accuracy requires detail and specialist knowledge so it will be interesting to see how EY resolve this contradiction.”
The report’s Executive Summary sets out its key findings:
Perceived biases within the test – There was a recurring theme of perceived bias towards certain types of forestry, and of the test itself being inaccessibly complex to smaller projects and newcomers to the WCC additionality test.
The current approach is seen as broadly effective – Most respondents are broadly happy with the current standardised structure and approach to additionality, but desire more flexibility, particularly in aligning project costs to specific project characteristics.
Alternative data sources – Various data sources were suggested to improve accuracy and reliability, but it is critical to balance this demand with the sources’ viability and feasibility for regular updates, such as publicly available and easily accessible annual data refreshes.
Alignment with other methodologies – There is a strong desire to align with recognised methodologies for accessibility and consistency, making assumptions more defensible while having divergences reflect the nuances of the UK woodland landscape.
Data quality – This is a key concern across all assumptions that poor data quality may impact accuracy, including a recurring theme of regional data variation. Quick wins can be achieved by applying data cleansing techniques e.g. removing outliers and anomalies.
Demographics of respondents – Responses need to be contextualised by the fact that most respondents were project developers and forestry & land management organisations, and that limited input was provided by stakeholders such as other standard setters.
Sensitivity testing – Changes to the model and assumptions (especially the discount rate) will require feasibility and sensitivity testing to understand the impact on the model, in order to ensure the integrity of the test, in light of many calls for refinements to the discount rate.
Actual project costs – Allowing actual project costs to be inputted instead of assumed or standardised costs was a major theme, with a key suggestion being to remove cost caps within the model. The extra need to require evidence and validate costs may be demanding.
Operating model implications – The outcomes of this consultation need to be considered in conjunction with the broader ecosystem and operating model. There me be interactions with other forestry-related initiatives and components such as grant schemes.
Post-consultation communications – Consideration needs to be given to the communication plan to the market, e.g. the areas which will not be changed and their justification. Market participants require certainty and clarity on next steps, including clear timelines.