Scottish Government sets out economic benefits of natural capital markets

  • New research provides important evidence on the economic benefits from natural capital investment at the regional scale
  • It provides an estimate of the economic benefit from investing in natural capital – £1.35 generated for every £1 invested and the significant numbers of jobs sustained and created in rural economies
  • The report builds on previous Scottish Government research understanding the local economic impacts of natural capital investment – published in 2022
  • The new economic model produced by the research has been published so that it can be used by regional economic development actors to support their natural capital investment policy and programme appraisal at a regional level

A NEW report by Scottish Government assesses the cumulative and cross-sector economic benefits of investment in natural capital in Scotland.

The analysis quantifies the likely economic impacts, measured as output and jobs created, from hypothetical cross-sector regional and national programmes of natural capital investment in Scotland.

Scotland has set a strong precedent for taking action to support responsible investment in natural capital as part of a just transition to a net zero and nature-positive economy.

The Scottish Government’s National Strategy for Economic Transformation (NSET) includes a commitment to developing a values-led, high-integrity market for responsible investment in natural capital. This builds on existing market mechanisms such as the Woodland Carbon and Peatland Codes, which aim to help mobilise private investment into nature-based projects.

This report builds on a project that WSP undertook for Scottish Government in 2021/22 on Understanding the local economic impacts of natural capital investment.

Together with eftec, WSP looked at the economic benefits of committed, planned and investment gap spending to secure nature-related outcomes in Scotland by 2030.

The approach mapped the GFI outcome categories (e.g. clean water, protect and/or restore biodiversity, reduce flood risk) across different types of natural capital interventions (e.g. woodland creation and management, peatland restoration, regenerative agriculture) through desktop research and stakeholder engagement. These natural capital interventions allowed us to link environmental-economic activities, using Input-Output models and Standard Industrial Classification (SIC) codes identified in the previous study, to GFI outcome categories.

The study estimated that public and private investment forthcoming to address the GFI nature finance gap for Scotland (over the period 2022-2032) could be £12.5bn. Deploying this capital on nature restoration activities would generate an estimated output effect of £17bn into the Scottish economy, meaning every £1 invested in nature recovery would generate £1.35 for the economy.

In terms of jobs created, the potential economic impact of closing the £12.5bn nature finance gap investment could be around 146,000 direct and 197,000 direct and indirect jobs. The study also provided an indication of how these economic impacts could be distributed over time, based on the maturity of current, planned and future drivers and market enabling mechanisms.

The largest output effect was observed in silviculture and the provision of other forestry services, yielding an output effect of £4.4 billion and 66,990 direct and indirect jobs created. Significant output effects may also be seen in sectors concerning: (i) the renting and leasing of agricultural machinery and equipment; and (ii) in the provision of support services to forestry.

Market Structures – Current

  • Woodland carbon code (established); data from FGS
  • Peatland code (expanding rapidly)
  • Catchment (natural flood management/nutrients) (pilots); Food & drink sector.

Market Structures – Potential

  • Short-term:Biodiversity credits (voluntary)
  • Medium-Long term: Saltmarsh Code
  • Agro-Forestry Code
  • Soil Codes

The time horizon of this study is 10 years (between 2022-2032), which is in line with the time horizon of the finance gap estimations in the GFI study.

Using the adapted GFI model, the project team estimated the required scale of investment in nature objectives for Scotland by linking the nature-related activities, drivers and enabling mechanisms, to different funding categories and their assumed time horizons. This being said, different market-related mechanisms have different rates of maturity and/or expected rates of development. With overlaps, scale and timing assumptions, the project team was able to model the expected future financial investment into nature recovery along the following lines:

Mechanisms that are ready to operate and scale up are assumed to increase within five years: Example mechanisms within this category are the Woodland Carbon and Peatland Codes which are already in use across the UK (the former being more mature). These codes are voluntary quality assurance and certification standards which are already operational and issue verifiable carbon credits for new woodland creation and peatland restoration projects, respectively, in Scotland and the rest of the UK;

Mechanisms that are in development but still several years from being ready due to further R&D being required: These are assumed to increase spending during the middle of the 10-year period. Example mechanisms include voluntary biodiversity credits, which are currently in the early development stages in Scotland; and

Mechanisms with unclear development pathways: These will primarily increase beyond Year 10. The precise form of these mechanisms still has uncertainties, and so they only stimulate increased spending towards the end of the 10-year period at best.

Going forward, Scottish Government says that it is crucial to ensure that economic benefits in the nature-based sector can be captured in local and regional economies by ensuring strong enabling frameworks and skills programmes. There is also the opportunity cost and risk of delaying investments (e.g. in terms of missing climate change targets, loss of first-mover advantage etc). Further, complementing the economic impacts with community benefits and wider social value can create stronger drivers for scaling up investments in natural capital. Strong partnership models are required as nature-based solutions can have multiple impacts and require a range of capabilities. Finally, the study and the newly developed models therein can be used to test the delivery and planning frameworks mentioned in Scotland’s latest Biodiversity Strategy.

Read the full report Assessing the cumulative and cross-sector economic benefits of investment in natural capital in Scotland

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