From COP27 to carbon credits

From COP27 to carbon credits

With COP27 this month focusing global attention on climate change measures, ATT technical officer Helen Thornley has a look at the tax impacts of some of the natural ways to capture carbon in the UK

From COP27 to carbon credits

This November, the 27th UN conference on climate change (COP27) is being held in Egypt. One of the key conference objectives is to enhance mitigation measures. Attending countries will be asked to hold to, or improve on, pledges to reduce their greenhouse gas emissions to keep the increase in average global temperatures to 1.5°C. If we warm the planet beyond this level, we risk passing a tipping point beyond which it will become impossible to reverse the catastrophic effects of global warming.

As part of our own mitigation measures, the UK Government is already legally committed to reaching net zero emissions by 2050. In terms of what this might mean in practice, in October 2021, the government published a policy paper Net Zero Strategy: Build Back Green. This contains a number of objectives to transition all aspects of our economy to lower carbon alternatives.

It is impossible to reduce emissions to zero – the target is net zero not absolute zero. This means that we also need ways of removing or ‘cancelling out’ unavoidable emissions of greenhouse gases like carbon dioxide (often referred to just as ‘carbon’). Called carbon capture or sequestration, there are both engineered and natural solutions to remove carbon from the atmosphere. In this article, we will look at the latter.

Natural solutions for carbon capture include growing trees, which store carbon in their wood, and restoring peatbogs. A degraded and drying peatbog will emit carbon dioxide into the atmosphere, a happy, squidgy one will capture carbon in layers of dead plant material.

Landowners willing to plant trees or restore peatland are able to gain an income from selling their ability to store carbon in the form of carbon credits. The Woodland Carbon Code and Peatland Carbon Code provide a mechanism for carbon emitters to purchase units to offset their unavoidable emissions. A Woodland Carbon Unit (WCU) represents one tonne of carbon dioxide removed from the atmosphere, while a Peatland Carbon Unit (PCU) represents the prevention of one tonne of emissions from a peat bog.

As it takes time for trees to grow, or for the effects of restoration to reverse peatland emissions, landowners can instead opt to sell Pending Issuance Units (PIUs) to get cash flow earlier in the project. As long as the project is successful, these will mature into WCU/PCUs which the new owner can use to offset their emissions. All PIUs and WCU/PCUs are listed on a central UK registry, and once a WCU/PCU has been offset it must be retired to prevent double counting.

Crucially, PIUs/WCUs/PCUs are not automatically attributed to any tree planting or peatland restoration project. Each project must be verified in order for any PIUs that the project is expected to deliver to be listed on the registry. A key requirement is that the landowner must be able to demonstrate that the project would not have been financially viable without the income from a carbon credits scheme.

The tax perspective

From the tax perspective, there are various elements to consider – from the potential for tax on sales of WCU/PCUs or PIUs, to the longer term implications for CGT and IHT depending on how the land value is affected. Understanding what these units are, and the nature of the agreements between landowner and end user, is key to establishing the tax position. These are potentially long term obligations, as the total amount of carbon (and thus PIUs) that might be attributed to a woodland could represent up to 100 years’ growth.

In some ways, the units are an intangible asset, but the landowner could also be argued to be providing some kind of service in removing carbon from the atmosphere. Many of those growing trees are keen for any income from PIU/WCU sales to fall within the commercial woodlands exemption (which says that the commercial occupation of woodlands is outside of the scope of income and corporation tax), while we have also seen commentary taking the view that a sale of all the PIUs from a project upfront should be considered a capital disposal.

The position remains unclear and such uncertainty is mutually unhelpful for landowners, unit purchasers and the development of the schemes. At the present time there is little to no HMRC guidance on the taxation of credits and the ATT has helped to set up and facilitate a group of interested parties to look at these issues including foresters, land agents, tax specialists, lawyers and accountants.

It is likely that the number of carbon credit schemes will only increase as we seek to find more ways to capture carbon to meet challenging net zero targets. Carbon sequestration is not limited to woodland or peatland. Soils, hedgerows and marine plants like seagrass also have the ability to capture carbon. There is also the potential for the development of similar offset schemes where credits could be bought to offset an environmental harm, such as a loss of biodiversity or a polluting nutrient outflow which is unavoidable.

For example, a building project may increase the flow of nutrients to a local water course, damaging the ecology of a local stream. If it is not possible to offset or prevent the damage on site, the person doing the damage could be required to buy nutrient credits which would generate funds to prevent, remove or reduce nutrient outflows which also affect that water course.

The whole area of carbon capture is complex and growing but to date much of the focus has, naturally, been on increasing scientific research and understanding and developing projects. However, as more individuals, businesses and landowners get involved, we will also need to ensure that there is clarity and certainty on the tax treatment of these new schemes to make sure that tax concerns don’t get in the way of necessary environmental changes.

Share

Subscribe to get your daily business insights

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata
Professional Services

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

3y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

3y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine
Accounting Firms

Turn Accounts Payable into a value-engine

3y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021
Making Tax Digital

Digital Links: A guide to MTD in 2021

3y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource