Peatland restoration is crucial but how do we pay for it?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Labanya Prakash Jena, Regional Climate Finance Adviser Indo-Pacific Region, The Commonwealth Secretariat, Jolly Sinha, ESG Consultant EMEA, ISS ESG

• Peatlands, covering around 3% of the Earth, are the largest natural terrestrial carbon store – producing around 4 gigatons of CO2 a year.
• Exploitation and overuse of land are degrading peatlands, risking them turning from a carbon sink to a carbon source.
• Governments must factor the right financing for peatland restoration to meet nationally determined contributions and goals under the Paris Agreement.

Peatlands, called moors, mires or bogs, are terrestrial wetland ecosystems formed from partially decomposed carbon-rich organic matter. Peatlands cover about 3% of the surface of the Earth (see Figure 1) and create the largest natural terrestrial carbon store, maintaining a constant amount of carbon.

Aside from minimizing flood risk, conserving biodiversity, preserving air quality and purifying the water table, peatlands sequester approximately 4 gigatons of CO2 per year, more than all other vegetation types in the world combined. Preserving peatlands can help achieve global net-zero ambition and benefits climate adaptation.

Exploitative land use practices, large-scale artificial drainage and underestimation of ecosystem services have made peatlands vulnerable to irreversible degradation. As a result, we face an ever-increasing risk of tipping the global peatland greenhouse gas balance (GHG) from a carbon sink – absorbing more carbon than it releases – to a carbon source – releasing more carbon than it absorbs.

It has been calculated that the global CO2 emissions from drained peatlands have increased by 20% between 1990 and 2008 and now roughly account for 5% of all anthropogenic emissions.

A meta-study conducted by the International Union for Conservation of Nature and the University of Oxford reveals that most countries need to explicitly include actions related to peatlands or wetlands in their nationally determined contributions. So, governments need to invest the required capital for peatland restoration. Capital must flow for the restoration of peatland; devoid of timely action, the bill is likely to get bulkier.

Capital intensive peatland restoration

The costs of a restoration project primarily include capital outlays associated with rewetting, replanting, brash cutting and sphagnum plugging, amongst other restoration techniques. These restoration costs account for over 85% of the total costs related to the project. Being a capital-intensive business, it needs long-term capital at a reasonable cost.

Public finance is unlikely to provide sufficient additional funds. In the United Kingdom, the government promised £10 million through its natural environment impact fund toward the restoration of 35,000 hectares of wetland, which represents 1% of all the modified to actively degraded peatlands in the country. However, public finance can be key in establishing institutions and mechanisms to attract private capital.

There is a need for more revenue-generating, self-sustaining financing mechanisms which provide a lucrative opportunity for private capital providers to participate in the peatland restoration business.

We propose setting up a natural capital financing facility that blends public and private capital. The facility pools capital from various sources and offers upfront, low-cost and long-duration capital to aggregators to cover capital and operating expenses for the peatlands restoration programme.

Public financiers provide crucial capital grants to finance a significant portion of upfront restoration costs, while private investors cover the residual part of capital costs. Public capital with a mandate to generate public capital can provide non-returnable grant capital, enabling private investors to generate a required return from their investment.

The private capital providers would be the class of investors having long-term investment horizons with an appetite for taking illiquidity risks, such as pension funds and insurance companies. The owner of peatlands, mostly public authorities, transfers the usage rights to the financing facility for a certain year, enabling the facility to recover capital through monetizing the services of the peatland.

Recovering cost of restoration

The financing facility can appoint a project developer responsible for assessing the peatland’s condition (near natural to actively eroded) and restoring and maintaining the peatland. The developer will collect a management fee from the financing facility for the restoration and maintenance services of the peatland. The financing facility can hire a third party to provide quality assurance certification that can increase the marketability and price of the ecosystem services.

The primary financial benefit is derived from selling tradable carbon emissions from carbon sequestration (capturing, removal and storage of CO2 from Earth’s atmosphere) from peatland restoration. There can be a long-term contract between buyer and seller to purchase emission credits at a predetermined price to mitigate carbon pricing volatility. As the carbon price is expected to increase in the future, this source of revenue will be key for the commercial viability of peatland restoration.

Besides generating revenue from the sale of carbon credit, there will be a series of payments for a guaranteed flow of ecosystem services (PES). In most cases, the PES is derived from water purification, flood protection and recreational benefits.

Water quality-related benefits derived from peatland restoration can be categorized into two broad categories: 1) reduced drinking water treatment costs and 2) benefits associated with the good ecological condition of water bodies.

The water authorities can pay for the water purification benefits. A long water purchase agreement between the water authority and developers can reduce cash flow uncertainty.

Often, upland peatlands’ contribution to storing water decreases the likelihood of flooding downstream. The local authorities or federal government can pay a portion of the peatland restoration cost as they would invest less for flood protection.

Besides, general insurance companies can also cover a part of the restoration cost as insurance claims on assets vulnerable to flood in that area are less likely.

Grazing can be carried out on some of the restoration wetlands – a commercially-priced agreement with local farmers that can generate additional revenue. In addition, peatland can offer recreation services drawing large numbers of tourists; these services can be priced by selling tickets to tourists. Similarly, additional revenue can be generated from outdoor advertising on the peatland.

The payments received from the above sources will be used to pay back private financiers, while the multiple revenue sources can mitigate the credit risk of investors.

Besides, a long-term contract with carbon credit buyers, water bodies and government authorities can improve the revenue predictability of the project, thereby mitigating risk for private financiers.

The views expressed in this paper are solely those of the author(s) and not necessarily those of ISS ESG or Institutional Shareholder Services Inc.