Carbon Credits

14 Apr 2022


Carbon sequestration is one of the main tools available to governments to tackle the climate crisis. The COP26 conference made big gains in producing protocol to reduce carbon emissions, however the capturing of already emitted carbon is also very important. The three main areas of land sequestration of carbon are through woodland, peatland and soil, all of which have a huge role to play in the challenge to tackle climate change.

Using woodland to sequester carbon

Woodlands offers potential to both improve biodiversity and is also efficient at sequestering carbon. There is now a large demand for carbon offsetting and the Woodland Carbon Code (WCC) has been brought in to regulate this marketplace in the UK and give purchasers of carbon credits certainty as to what they are purchasing.

The WCC ensure that projects meet set criteria to ensure that both real carbon benefits are delivered, and actual outputs are verified. The WCC works by having a solid framework from which each woodlands ability to absorb carbon can be measured in a uniform way.

The WCC uses Woodland Carbon Units (WCU) to measure output from each project. One WCU equates to one tonne of carbon captured by the woodland. It is estimated that one hectare of new native woodland can capture up to 300-400 tonnes of carbon. This could therefore bring in significant additional value to an area of land that, originally, may have had very minimal income. This is already been seen through large increases in values for land with potential for woodland planting.

A business can also purchase a Pending Issuance Unit (PIU). These are purchased when the forests are being planted and established. The woodland wouldn’t be sequestering the full amount of carbon the year it is planted however there is still value in the potential of what it will be sequestering once fully grown. Therefore, buying a PIU allows businesses to plan cover for future emissions scaling with growth, but will not be targeting today’s emissions. Once certain growth targets of the woodland are met, the PIUs can be verified and converted into WCUs.

Using peatland to sequester carbon

As mentioned above, peatland can also play a big role in the UK’s goal of reaching net zero. The Peatland Carbon Code (PCC) has been set up, with similar standards and practices to the WCC. This assures carbon buyers that what they are buying is what they are receiving, and this helps to provide confidence to the market.

Peatland sequesters carbon quite differently to woodland, due to the fact that peatlands have formed over thousands of years and new man-made ones cannot be created easily or quickly. When planting trees, a landowner creates new areas of woodland and generally takes land out of agricultural production, however this is not the case with the peatland improvement and restoration schemes. Poorly looked after peatland releases its stored carbon and so the PCC schemes measure how much carbon would have been released if the peatland in question had not been restored or improved. This difference creates the number of eligible credits a business can claim to offset its carbon.

How are carbon credits taxed?

In certain circumstances the sale of PIUs and WCUs when associated with a commercial forestry operation should be tax free income. There are questions around this point however which we have sought clarification from HMRC about. There are also important VAT considerations about the VAT status of the sale of PIUs and WCUs which requires detailed advice to be taken. There is also the risk of generating income tax charges where carbon is offset by one ‘family’ entity when the carbon is sequestered in another.

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Peter Harker
Partner, London

Key experience

Peter specialises in Landed Estates and manages client portfolio which includes wealthy individuals, owner managed businesses, agribusiness and not-for-profit entities.