Alternative approach to deliver nutrient neutrality

September 1, 2023

The Development Sector is willing to build more sustainably. They know there is a still a need to tackle the nutrient pollution problem. We have outlined a plan where developers pay a contribution to helpcompensate for their impact on nutrient pollution. This contribution will bepaid at the point of receiving planning permission, discharging requirements inrelation to nutrients. Contributions are pooled in a catchment level nutrient compensationscheme that pays for the delivery of nutrient management projects.

Issues with the new amendments to the LURB

1.       Theamendments do not legally secure the additional funding pledges to deliver nutrientmanagement programmes.

2.     Theinvestment in the Natural England Nutrient Mitigation Scheme only covers 15% ofthe total mitigation requirement to 2030.

3.     Thereis no legal mechanism for housing developers to contribute towards mitigation, despitethis being pledged by the Government.

An alternative funding model

The Government has pivoted to a more centralised,strategic approach to reducing nutrient pollution. Centralised delivery ofnutrient mitigation could be done via a monopsony market (single buyer, withmultiple sellers). LPAs buy mitigation from third-party scheme providers, maintainingthe advantages of a market-based approach (reduced costs via innovation). This willbring more certainty to scheme providers as they know the approximate price formitigation ahead of developing a scheme.

This funding model should be primed by seed moneyfrom the Government, e.g. the Nutrient Mitigation Scheme, while developercontributions are collected to support ongoing provision of the scheme. Belowwe outline the core principles for the funding model.

Developer compensation scheme

·       Thiswould take the form of an overarching Habitats Regulations Derogation –residential development in affected catchments is all considered to meet IROPItests.

·       Underthe requirements of IROPI, developers would have to pay into a compensationscheme.

·       Developerspay into the compensation scheme at the point they achieve planning permission.

·       Thecompensation payments are ringfenced in a scheme that is administered at thecatchment level, with a separate scheme for each catchment designated as a“nutrient affected area”.

·       Thecompensation schemes are administered by a lead LPA within each catchment.

·       Themoney in the compensation schemes is used to purchase nutrient compensationfrom compensation schemes run by third-party providers or by LPAs.

·       Therewill be a requirement for developers to still calculate the amount of nutrientpollution that will result from their development using the existing NENutrient Budget Calculators.

·       Therequirement to calculate the amount of nutrient pollution from new developmentwill not be required for developers to show compliance or calculate costs to bepaid by developers, it is intended to track how much compensation supply thelead LPA needs to procure.

·       Thelead LPA will use the funds in the compensation scheme to procure the amount ofnutrient compensation as calculated by developers.   

Commercial structure for the compensation scheme

·       Developercompensation payments will be calculated on a fixed price per unit basis, witha discount for single-occupancy units..

·       Thepayment rate per unit will be fixed to at the outset based on a formula thataccounts for the present cost of mitigation.

·       Thepayment rate can incorporate a regional multiplier to consider both housing andland values, and the cost of creating nutrient compensation schemes.

·       Theprice paid for nutrient compensation will be reviewed in response to changes incompensation supply and the cost of creating compensation schemes.

·       Outcomesfrom price reviews should flow through to developer payment rates such thatoversupply of compensation and/or reduced creation costs results in lowerdeveloper payment rates and vice versa.

Outline guidance on scheme administration

·       LeadLPAs will have criteria for purchasing compensation, including:

§  Apreference for more cost-efficient compensation schemes – scheme providers willneed to show audits of scheme costs.

§  Considerationof a spatial strategy to allocate compensation to more at-risk areas wherepossible.

§  Anaim to align compensation schemes with the wider nature recovery schemes.

·       LPAscan purchase compensation from their own schemes if they meet the criteria.  

Other practical considerations

Our proposed costings are based on in-depth knowledgeof the cost of scheme creation and the current pricing.  We alsoincorporate marketplace dynamics where supply and demand will impact pricing.

Our suggested costs are balanced to reflect the costof creating compensation vs. a viable price for housebuilders. Housebuilders have been paying £5-12k/house depending on the area. We know thatin some areas, these prices are only just viable. We have therefore introduceda regional multiplier. 

We need to maintain a higher rate to encourage schemedeployment.  When we have liquidity in the market, we can use this to dropthe prices. 

If an LPA has under-purchased compensation, it canuse the reduced cost to top up compensation purchased without reflecting thisin the price to developers.

We know that farmers will not do land use change schemes for N forless than £2.5k/kg.  

We know that the cost of P is currently ~£60-90k/kg in most areas. We have benchmarked this at the lower end.

Scheme providers will almost always produce both N&P.  Thereduced cost per kg in N&P areas is designed to reflect the efficiency inthis dual provision. Suggested starting prices for the scheme are provided inthe table below.  




Kim Connor Streich

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