Policy paper

Environmental land management schemes: payment principles

Published 30 June 2021

Applies to England

1. Executive summary

This document sets out some principles we will use to guide our approach to setting payment rates for environmental schemes during the agricultural transition. ‘Environmental land management schemes’ includes the full range of Defra schemes where we pay farmers to provide agreed environmental outcomes including historic environment and public access to green space.

So that we can provide good value for money whilst achieving ambitious environmental outcomes, we have 4 principles for environmental land management payments:

1. We will set payment rates to encourage wide participation, whilst fairly and effectively paying farmers for achieving environmental and climate outcomes.

2. We want payments that, as far as possible, recognise and pay for outcomes that can be delivered through a wide range of activities.

3. We want payments which recognise the value of existing natural assets and don’t unfairly disadvantage those who are already protecting and enhancing these assets to achieve good environmental and climate outcomes.

4. We want payments that form part of a growing market for environmental outcomes, where scheme participants can earn income from public and private sector sources.

We will work through these principles as we co-design new schemes and decide how to treat existing schemes. We will publish details about how we have applied the principles when we launch each scheme.

2. Introduction

2.1 Context

The 25 Year Environment Plan sets out the government’s commitment to leave the environment in a better state than we found it. We have since gone further and made a commitment to reduce carbon emissions by 78% by 2035, on the pathway to net-zero by 2050.

Land management has a unique and essential role in meeting these commitments. Through environmental land management, we can store carbon, reduce the risks from a changing climate and restore wildlife and habitats. We can do this whilst maintaining a thriving agricultural and forestry sector, growing quality food and timber and supporting the health and wellbeing of all of us.

We have set out in the Agriculture Act and Environment Bill a policy framework for environmental land management which will, in combination with and supported by proportionate regulation, make a significant and increasing contribution to the commitments set out in the 25 Year Environment Plan and Climate Change Act.

Within this framework, we are introducing a set of environmental land management schemes. Environmental land management schemes refers to the government led interventions, where government pays land managers, primarily farmers, to provide agreed environmental outcomes. This document, and the principles within it, cover all Defra schemes which are purchasing environmental outcomes from farmers and private sector land managers, unless specified otherwise.

We have designed a package of schemes with clearly defined roles which will be increasingly based on a common set of principles and delivery systems:

• new environmental land management schemes: Sustainable Farming Incentive, Local Nature Recovery and Landscape Recovery. These schemes are being developed, piloted and for Sustainable Farming Incentive rolled out in a phased way
• mature schemes, such as Countryside Stewardship and Environmental Stewardship, that we continue to maintain and simplify to secure environmental outcomes as we develop new offers. These will be withdrawn to new entrants, and existing contract holders transitioned where possible and appropriate, as the new offers become widely available. This will ensure fairness and simplicity for farmers
• transitional schemes, such as Farming in Protected Landscapes and the Nature for Climate Fund schemes, which reduce the gaps in the offers that are currently available and accelerate environmental delivery now, in advance of full Sustainable Farming Incentive, Local Nature Recovery and Landscape Recovery offers being available
• schemes which demonstrate proof of concept and provide technical assistance to stimulate and de-risk private sector investment, through the Natural Environment Investment Readiness Fund, Solent Nutrient Trading Pilot Project and planned Nature for Climate Impact Fund

We are currently piloting and refining this package. As we co-design these schemes with users and evaluate how they work, we will adapt so that we maintain a coherent and effective package that reflects the scale of the challenges we face.

All of our schemes will work alongside and complement other policies, such as those in the Environment Bill, and will be underpinned by clearly described and proportionately enforced regulatory requirements. Across the agricultural transition we will keep under review the balance between paying for outcomes and what we require through an evolving regulatory baseline.

2.2 Purpose of the document

A core aspect of environmental land management schemes is how much we pay and for what. We want to make sure that our approach to payment rates is clear, consistent, fair and effective across all the schemes. Throughout this document, we describe the principles that we will use to design payment rates across environmental land management schemes and how we will apply the principles.

We will set out detailed information on exactly what we will pay for through each scheme and how much we will pay when we launch the respective schemes. We are using this staged approach – overarching principles with the details in subsequent schemes – as it allows us to learn, adapt and co-design individual schemes, whilst setting out now what we want to achieve and the basis upon which we are undertaking detailed design work.

Environmental land management payments need to be consistent with cross-government policies, and domestic and international obligations. These include the (currently draft) Policy Statement on Environmental Principles, subsidy control and the UK’s leadership within the World Trade Organisation (WTO).

Detailed development of policies also needs to account for Managing Public Money, the Green Book and Accounting Office Assessments.

This document and the principles are designed to be consistent with and to support the achievement of those wider goals and policies.

3. The payment principles for environmental land management

3.1 Reviewing the evidence

There is more than 20 years of experience in environmental land management schemes within England. We have learnt from that experience and gathered evidence from a range of sources to inform the development of our proposals on payments. This includes:

• engagement with stakeholders and subject matter experts
• reviewing and synthesising the international academic scientific research and evidence
• responses to the policy discussion document on environmental land management, which closed in July 2020 and received over 1,600 written responses
• the environmental land management tests and trials - there are currently more than 20 tests and trials piloting a range of potential approaches to payments
• learning from previous schemes, based on a considerable body of evidence from the evaluation of current and previous agri-environment schemes

Regarding payments, the combined evidence suggests that:

• payments for environmental outcomes under current and previous schemes have not always provided a sufficient return to farmers and land managers. This is partly due to constrained budgets as a result of a high proportion of spend being allocated to area-based Basic Payments. They have therefore not encouraged the level of participation we need to deliver the required environmental outcomes
• basing payments on the ‘typical’ income foregone and/or capital costs incurred in undertaking land management actions is not always the most effective way to reward farmers and land managers in all circumstances. For example:
  • where it does not capture the full long-term costs incurred in undertaking actions
  • where it does not reflect diversity across different farmers, land managers and land types, or areas of natural constraints such as uplands and protected sites
• for restoration and permanent land use change, such as woodland creation, covering the direct costs of establishment does not fully take account of the permanent nature of the land use change. Other costs such as land devaluation, maintenance in perpetuity and any future value from alternative land uses which is now limited are often not fully captured and this can suppress uptake
• environmental interventions can provide both public and private goods and there is significant scope to sell some environmental outcomes as ‘ecosystem services’ to private sector beneficiaries
• there can be wide variation in the individual circumstances of different farmers and land managers, which is not fully reflected in payments based only on a typical farmer or land manager
• where there are different approaches to payments, different environmental land management offers can compete with rather than complement each other. This can suppress engagement in schemes as participants are unsure about the most appropriate offer for them; this is especially true where schemes require long term commitments

Drawing on this understanding, to achieve our vision, we need environmental land management schemes that:

• attract participation that reflects the scale of the need
• increase take-up of the highest value actions and combinations of actions
• secure good value for money so we can get the best outcomes with available budgets
• cover the range of outcomes we want to achieve and increase the outcomes that are being delivered
• do not ‘crowd out’ funding from private sector sources
• work with the business models of as wide a range of farmers and land managers as needed
• have a clearly defined relationship with other interventions such as other environmental land management schemes, regulatory requirements and private sector funding and finance

This is the basis upon which we will develop our environmental land management schemes and forms the basis for the payment principles.

3.2 The principles

The payment principles will guide the detailed development of payment rates and policy design across all of our environmental land management schemes. The principles will also form the framework within which our approach to payment rates and policy design across those schemes will operate and change over time.

Individual schemes will implement these principles in a way that best meets their policy goals. It will not always be practical or deliverable to apply all principles to all schemes, for instance where it adds additional complexity or costs. But we will as far as possible design environmental land management schemes to meet these principles.

So that we can provide good value for money whilst achieving ambitious environmental outcomes, we have 4 principles for environmental land management payments.

Principle 1 – We will set payment rates to encourage wide participation, whilst fairly and effectively paying farmers for achieving environmental and climate outcomes

The basis for the payments will, at least initially, be a cost-based methodology in most cases, that recognises the costs of achieving the outcome and/or the potential loss of income. Within that methodology, a range of payment rates are possible for any given action. Wherever adopting a costs-based approach, we will find a balance between paying rates that are high to encourage wide participation, which is necessary to drive environmental outcomes; but not unnecessarily high, which would restrict the amount of environmental outcomes we can deliver for a given budget.

In finding this balance, we will regularly review payment rates, with a focus on value for money, costs, income, participation rates and environmental benefits. We will be fully transparent, setting out how methodologies have been applied and the data that has been used for calculations.

Our intention is that farmers and land managers with existing environmental agreements will be able to apply for environmental land management schemes alongside their other agreements (provided the actions are complementary) but will not be able to be paid for the same intervention twice through different schemes.

We will therefore design, as far as we can, schemes that allow land managers to enter into environmental land management scheme agreements on parcels/areas of land not covered by other environmental schemes/obligations. We will also look to allow land managers to layer environmental land management scheme agreements and other environmental agreements on a given parcel/area where the outcomes of the schemes are different or complementary and not in conflict with one another.

We recognise that there are some circumstances where different or more targeted incentives may be required in order to deliver more ambitious environmental outcomes, recognising constrained resources and circumstances, for example, on uplands farms and protected sites. We will work with relevant land managers, experts and others to co-design how we might set and adjust payments in those areas to ensure they represent a fair reward for the important outcomes being achieved and deliver good value for money.

We will design payment schemes to make sure they work for the full range of farmers including tenants, where we recognise there are particular issues that can make participation in schemes difficult, especially for those on short-term tenancies.

An approach to payments based on annual and in arrears payments can cause cash flow problems for farmers and land managers. It is important that we safeguard public money and only pay when we have confidence the work is complete. We are developing ways to pay more frequently and will test these through early piloting and rollout of schemes.

For some environmental activities and in some instances, it will be more appropriate to require them through regulation. We will regularly review the balance between providing financial incentives and setting regulatory requirements so that over time we meet the challenging longer-term targets we have set and continue to provide value for money.

Flat rate grants may not offer best value for money or incentivise participation by all types of farmers. We expect to increasingly deploy more innovative, market-based mechanisms for setting payment rates. This will include competitive price discovery approaches such as reverse auctions. We will be testing these models through our environmental land management tests and trial and when we pilot Local Nature Recovery – building on the learning of existing schemes such as the Woodland Carbon Guarantee. We also expect to make greater use of payments by results.

We recognise that the complexity of services and the associated transaction costs can also be a barrier to participation. We will work to ensure our services are joined-up by removing duplication or disparities between new and legacy schemes wherever possible. By embracing digital technology, we will make our services simpler, seamless, and accessible to all our users.

Principle 2 - We want payments that, as far as possible, recognise and pay for outcomes that can be delivered through a wide range of activities

We will pay revenue for actions that we know can drive outcomes, over multiple years where that is the best way to achieve enduring outcomes. We will also offer capital grants. We will support collaboration between farmers – we have been looking at this as part of our tests and trials and will continue as we pilot our Local Nature Recovery scheme. We will pay for selected preparatory work for the cost incurred, where that is good value for money. We will also, over time, look to pay for outcomes where these can be measured and accurately attributed.

We need to safeguard public money, such as requiring proof that grants have been used for the intended purpose, demonstrating proof of costs, and creating deadlines for the use of that money. These policies limit the risks of fraud, they also allow us to manage budgets and demand. As we develop detailed design for our schemes, we will continually review the evidence requirements to ensure proportionality and work with our users so that invoice periods for capital grants reflect the realities of delivering environmental activities.

Principle 3 - We want payments which recognise the value of existing natural assets and don’t unfairly disadvantage those who are already protecting and enhancing these assets to achieve good environmental and climate outcomes

We will achieve this by paying for ongoing management and maintenance of the condition of existing environmental assets (where not required by regulations), so no one is unfairly disadvantaged. We will also ensure that where appropriate, those with existing agreements have the opportunity to either move into or apply for complementary environmental land management scheme agreements where they want to or when their existing agreement expires.

We will avoid perverse incentives that inadvertently reward historic non-compliance or incentivise the degradation or removal of existing assets.

Principle 4 - We want payments that form part of a growing market for environmental outcomes, where scheme participants can earn income from public and private sector sources

We recognise that natural assets and the ecosystems services they provide offer both public and private benefits. Tapping into finance from both these sources can open up new income opportunities for farmers and lead to greater total investment in our environmental and climate priorities. For this reason, we want to ensure that all environmental land management schemes are fully compatible with the blending of public and private finance, and that public money does not “crowd out” private investment.

We will support the stacking of multiple public schemes and public and private finance to maximise the impact of public and private money, wherever this can unlock a wider range of benefits, or lead to better overall environmental outcomes. We will do this so long as schemes are compatible, pay for different or additional outcomes and do not pay for the same action twice.

We will further develop and promote private markets for high quality ecosystems and their services, in partnership with suppliers, purchasers, and investors and building on existing best practice. Our Natural Environment Investment Readiness Fund, and planned Nature for Climate Impact Fund, will support our ambition to build the role for private finance in nature’s recovery.

Private sources of revenue include established markets for sustainable forestry or agriculture and eco-tourism, and growing markets for the sale of carbon or biodiversity credits. Organisations such as local authorities, water companies or businesses are increasingly interested in paying for outcomes such as water quality, flood mitigation or health and social benefits.

As confidence in these different revenue streams grows, we anticipate more interest from finance organisations in offering upfront investment. This will provide farmers and land managers with more financing options to help them initiate new environmentally beneficial projects. We welcome the role of reputable intermediaries and habitat banks in partnering with farmers to deliver environmental outcomes.

Enabling these private revenue streams and investment will give farmers and land managers more opportunity to derive an attractive return from delivering ecosystem services. It will also allow public sector money to go further, enabling us to scale up our ambitions and achieve our environmental goals.

We will design our schemes so that it is as explicit as possible what private sector funding streams farmers and land managers can access alongside government funded environmental land management scheme payments. Eligibility rules and guidance, the application process and use of land management plans will also need to be clear about how different schemes can and cannot be stacked.

We intend to ensure that farmers will always be better off if they participate in ecosystems services markets, or secure other private investment, beyond a publicly funded environmental land management scheme. Our regular reviews of payment rates will help ensure we keep pace with these developing private markets and can adjust payments accordingly.

4. Outstanding policy challenges

We are progressing through detailed design of payments across our environmental land management offer. There are some outstanding challenges that we propose to draw out further into the open and reflecting our commitment to codesign work with users, farmers, stakeholders, and experts to jointly share.

Across the rest of 2021, we will be exploring the following outstanding policy questions:

How can we reflect in our payments the challenges of farming in areas of natural constraint and the environmental benefits that can be delivered?

• What is the case for a differentiated approach to payments in areas of natural constraint?
• What are those areas of natural constraint?
• What are the options for reflecting the circumstances in areas of natural constraint (noting the agreed vision for farmers to be profitable and economically sustainable without subsidy)?

How can we best enable scheme participants to earn additional income from private sector sources for delivering additional benefits?

• How can we get the right balance between ensuring we are paying for additional benefits and avoiding paying for the same thing twice, whilst not ‘crowding out’ private funding and investment?
• What is the role of national frameworks and rules, and how should they interact with local mechanisms to provide national consistency while allowing contextual flexibility? Related to this, what tools and intermediary functions are needed to support land managers in accessing private funding and investment for natural assets and ecosystem services?
• How should our schemes and approach to payments evolve as private markets for ecosystem services become more established?

This document does not represent a formal consultation or call for views. However, if you want to share your opinion and work with us to co-design these challenges, contact ffcpcodesign@defra.gov.uk.