“Not only is the ‘nature finance gap’,” said Future Economy Scotland Senior Economist Hanna Wheatley, “ far smaller than has been assumed, but relying on private finance may actively deter restoration by increasing costs and risks for land managers while diverting scarce public funds towards extractive investor returns.
“As Scotland found out by embracing PFI contracts for infrastructure, such arrangements can be lucrative for investors while imposing large costs on everyone else.”
The Scottish Government and its nature agency, NatureScot, have in recent years been stepping up efforts to attract private investors to help fill Scotland’s funding gap for nature restoration.
Recently, the Scottish Government’s Natural Capital Market Framework pledged to establish a new peatlands pilot to attract more private finance into peatland restoration.
In 2022 it published its ‘Principles for Responsible Investment in Natural Capital’, and in 2023 NatureScot announced a new private finance pilot aiming to mobilise £2bn private investment in woodland creation.
The report, titled Restoring Nature to Deliver a Just Transition to Net Zero, finds that “the status quo is not delivering” and the Scottish Government has repeatedly “fallen far short of targets” for woodland creation and peatland restoration.
Wheatley said: “Scaling up woodland creation and peatland creation is absolutely vital if Scotland is to become net zero by 2045. Yet despite some progress, targets have consistently been missed. While the Scottish Government hopes that private finance can plug the investment gap, our research reveals that this approach is fundamentally flawed.”
But the report’s analysis finds that “the £20 billion “nature finance gap” is overstated” and has been “widely discredited”.
“Using a variety of different approaches,” it says, “we estimate that the additional funding required to meet woodland and peatland targets is likely to fall in the range of between £41m to £176m per year. While this still represents a considerable sum, at between just 0.1% and 0.3% of the Scottish Government’s annual budget, we find the conclusion that attracting private finance is the only viable route to meeting these targets to be premature.”
Not only is the approach not working, but private finance, it describes, comes with public risk and attracting it at scale “would require costly subsidies, diverting taxpayers’ money to guarantee investor profits and creating significant future liabilities for the Scottish Government”.
It could also cause costs, it says, to soar. It finds that “models that rely on commercial finance could significantly increase project costs by up to 48% – potentially rendering them loss-making”.
The Future Economy Scotland report recommends an alternative approach focused on increasing public support for nature restoration and tackling systemic barriers that are preventing action.
“We find,” it says, “that pursuing market-based solutions without sufficient scrutiny may in fact be slowing down progress on land use change, and that delivering on Scotland’s climate and nature goals will require ‘public investment for public goods’.”
Such investment in public goods would involve replacing “up-front peatland grants with zero-interest, income-contingent loans” which could work in a manner similar to student loans, written off if future revenues from carbon credits fail to materialise.
“However,” the think tank points out, “if landowners subsequently make profits from rising carbon prices, these would be shared with the state and local communities – ensuring costs and benefits are fairly shared.”
Scottish Government could also reduce uncertainty by providing “up-front financial support for landowners should be combined with ‘operating payments’ – annual grants to cover maintenance costs for the first 15 years of peatland restoration projects, mitigating the financial uncertainty associated with carbon markets”.
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The report also recommends tax reform through the phasing in a of green Land Value Tax and a possible new tax on degraded peatlands, which would incentivise restoration; strengthening Community Right to Buy; scaling up public land acquisition for nature restoration.
It advocates for tackling deer numbers by committing to a National Deer Management Plan to cut unsustainable populations and accelerate woodland recovery, estimating that this “could save close to £900 million of taxpayer money”.
“Scottish Government should go further to set a national target density of 5 deer/km2 and allocate the required funding to achieve this.”
“Furthermore,” it notes, “increasing forestry creation without reducing deer densities would increase the deer population due to increased food and shelter, which suggests that increasing woodland creation must go hand in hand with reducing Scotland’s deer density.”
Wheatley said: “If the Scottish Government is serious about meeting its nature targets, it must adopt a more holistic and coordinated strategy – one that moves beyond market-based approaches and recognises nature as a public good. This means combining a new public investment model with steps to overcome systemic barriers. Our comprehensive proposals would mobilise investment, unlock systemic barriers, and ensure that Scotland’s approach to nature restoration is aligned with the principles of a just transition.”
A Scottish Government spokesperson said: “Since 2020 we have invested more than £90 million in peatland restoration which has led to the restoration of around 90,000 hectares to date including 14,860 hectares in 2024-25 alone.
“We aim to maximise the value of public spending in our natural environment, as part of this greater private investment has a role to play and we are proud to be piloting blended finance mechanisms for our world class peatland restoration programme.”
