Project Nutcracker: Wishful thinking by Government on "strategic compensation" proposals and Nature Recovery Fund

In my recent Nutcracker "Bat shed crazy: can Starmer really bulldoze the environmental blockers to growth?" I explained why the Habitats Regulations are a particular challenge for developers and Starmer's pro-growth Government.

I mentioned the "Planning Reform Working Paper on Development and Nature Recovery" recently published jointly by MHCLG and DEFRA. It seems to me that the Working Paper deserves a deeper-dive. So in this Nutcracker I summarise exactly how the Government envisages "strategic compensation" working, and touch upon some of its potential limitations.

I hope my thoughts will be useful to Government, who are currently seeking views on their paper: [here]. Although it seems the Government has already decided to go ahead with these proposals – see announcement of 22 January [here].

In summary, I can see the logic of it as a fix for the nutrient neutrality problem which is blocking housing consents – albeit I question how quickly this fix can be implemented (and I can't comment on any practical problems with delivery of such compensation schemes). For other projects impeded by the Habitats regime it's harder to see it working: the Government would need a crystal ball to foresee projects coming forward with problematic impacts, and to deliver compensation schemes which can be relied upon by those projects when their applications are made. Besides, moving the duty to deliver compensation to a body other than the developer doesn't make the legal test easier to meet.

The authors of the Working Paper are valiantly looking for a way to make the Habitats regime less of a blocker while still complying with existing environmental laws. I don't think this is workable in practice for most projects.

I am also dismayed to see that the idea of Environmental Outcome Reports is still live, and the related idea of monitoring outcomes with a view to delivery of top-up measures. This is not an investable proposition.

The Government's "win-win" vision – unlocking development and enhancing nature

The basic idea is that "some environmental obligations may be more efficiently discharged – with better outcomes for development and growth, as well as nature, water, air, and climate resilience – at a more strategic level, rather than project-by-project." The paper suggests that the UK "moves to a system that can identify and deliver on opportunities for development to collectively fund nature projects at the right spatial scale." Instead of "small, poorly targeted, and time-consuming project-specific obligations" the proposal is to have "strategic action plans [..] where these will deliver the most for nature."

The paper is clear that the Government "will not reduce the level of environmental protection" provided for in existing law, but will make "targeted amendments to legislation" including the Habitats Regulations and the Wildlife and Countryside Act. The stated aim is "not to move away from the outcomes envisaged by existing environmental law, but instead [change] the process of how these outcomes are achieved." The hope is that this new regime will "leverage economies of scale and reduce the need for costly project-level assessments."

The Government's specific proposals

The Government envisages:

• Moving more responsibility for planning and implementing these strategic actions onto the state. The idea is that where the Government identifies an issue "related to a specific environmental objective" it will task a "delivery body" (an expert public body like Natural England) with addressing it strategically. The delivery body will be given the powers they need, including compulsory purchase powers.
• Before Government "switches on" this strategic compensation regime for a "specific environmental issue", the relevant delivery body must produce "Delivery Plans" which will: (i) assess the baseline environmental conditions; (ii) set out the actions necessary over time to deal with the environmental impacts "from in-scope development at a strategic level"; (iii) present opportunities for further environmental uplift; and (iv) calculate the costs and apportion them to development as they come forward.
• Delivery Plans will need to "clearly demonstrate that the relevant environmental impacts of development would be effectively addressed." They must be "underpinned by relevant analysis and accompanying methodologies/assessments of the actions to be taken."
• Before a Delivery Plan can take effect it would be "subject to scrutiny and sign-off by the Secretary of State who would need to be satisfied it was aligned with our wider environmental and growth ambitions and is consistent with our domestic and international legal commitments."
• Developers relying on the Delivery Plan measures will make financial payments into a Nature Recovery Fund which will be used to help fund its strategic actions "so development can proceed more quickly". The required contribution for different types of development would be set out in a publicly available schedule.
• "The Government may in some instances provide upfront funding to a delivery body to commence actions identified in Delivery Plans in advance of need, with cost recovered over time as developments come forward. This could allow this model to unlock development more quickly."
• The first Delivery Plans will be operational for developers to use shortly after Royal Assent.
• Legislation is to be amended to "clarify" that where an environmental impact was addressed by a Delivery Plan, that impact would no longer need to be considered in individual case-by-case assessments.
• There will be a duty placed on delivery bodies to monitor and publish data to demonstrate the impact of interventions over time, and "secure actions to address any underperformance." If more measures are needed than originally anticipated then charges may be increased for future developers.
• Government recognises that: "There may be environmental effects for which this model is not suited to supplanting existing environmental assessment, or specific types or locations of development for which it is not appropriate".

Strategic compensation could work for known multi-developer problems with a common solution (Scenario A)

It feels as if the proposals have been designed with nutrient neutrality as their central paradigm. The nutrient neutrality problem is given as the first of the three example scenarios set out in the paper (referred to as "Scenario A – Mitigation of harm from diffuse pollution").

This environmental issue is preventing new housing from being built in areas of the country where watercourses are already heavily nutrient polluted. "Nutrient load" is created by the additional wastewater produced by the assumed increase in inhabitants in an area. Developers currently need to mitigate this load either onsite or elsewhere within the same catchment. This typically involves creating new wetlands to strip nutrients from water or creating buffer zones along rivers and other watercourses. Without such measures, new housing in such areas is deemed to cause an "adverse effect on the integrity" of protected habitats and fail the requirements of the Habitats Regulations. It is very difficult for individual developers to provide compensatory measures which address the individual impacts of their development in a way which is financially viable. In practice, therefore, the duty to achieve nutrient neutrality is blocking development in areas of the country where additional housing is much needed.

I can certainly see the logic of pooling funds from a number of developers and tasking a state-owned delivery body to create large-scale projects to mitigate nutrient pollution.

If there are any similar environmental issues, where the requirements of the Habitats Regulations are failing to be met by a number of developers and pooled funds could be used to create a compensation scheme which addressed those impacts, then I can see in principle that it could also work for them. I question, however, how many Habitats problems fall into this category.

Timing and cost issues

The main challenges I foresee in addressing nutrient neutrality through strategic compensation are timing and cost. The Government wants to deliver 1.5 million homes in this parliament. Is it realistic to expect public sector deliver bodies to design schemes, acquire land, get them consented and deliver them in time for developers to rely upon them under the Habitat Regulations when they make planning applications? To be fair, the Working Paper does note (in a single throwaway line): "we recognise that upstream improvements take time". There will also, surely, need to be advance funding by Government on a grand scale so that such compensation projects can be kicked off without delay. Presumably it could take many years before the tariffs that developers pay into the Nature Recovery Fund fully reimburse the funds spent upfront.

A crystal ball needed for unknown and project-specific impacts

The Working Paper proposals also seem unlikely to help with the large number of Habitats problems that developers run into which are caused by their project alone, and are highly localised. Unless the Government has a crystal ball, they won't be able to foresee all of the projects which are coming forward across the country, work out the Habitats problems they may cause, and set about delivering compensation schemes in time for the project developers to rely on them when they make their applications. This will limit the problems the Working Paper proposals can solve.

Each protected habitat is designated as such by virtue of being home to very special flora and fauna. The sites' listed "conservation objectives" will reference these. When a developer starts to engage with Natural England and the Environment Agency in relation to its proposals, a huge amount of time and effort goes into assessing what the impact of the proposals might be on each of the protected species. I don't see how this process could be circumvented by the concept of strategic compensation. The £100m HS2 bat shed was only needed as and when HS2 came forward with proposals likely to affect those very special bats. As far as I know, it wasn't that multiple projects in the area were known to be coming forward and all affecting those same bats. By the time HS2 worked out it had a problem, it would have been a bit late for the Government to step in and get the public sector to design a Delivery Plan to address it. In any event, the price tag would presumably have been the full £100m as there would have been no other developers causing part of the problem which this bat shed addressed. If that's the case, I'm not sure what advantage HS2 would get from outsourcing delivery. Having control of delivery itself was in fact probably preferable.

Given the exceptionally conservative approach to compensation adopted by the environmental regulators in my experience, the price tag might also have been even higher if they were leading the design and delivery of a compensation project at the developer's expense.

Theoretically, of course, if the whole baseline environment of the UK were to be enhanced (such that we had lots of bats and other rare species thriving across the country) it would be easier for each individual developer to pass the tests under the Habitats regulations because the hit caused by each project could be better absorbed without causing "adverse effects". This is, sadly, pure fantasy given the time this would take, the costs involved and the effects of climate change that we cannot control. At best it's an extremely long-term strategy. So I hope this isn't any part of the premise the Working Paper is based on.

Energy project example (Scenario B)

Scenario B in the Working Paper imagines that there is a large energy project proposed which will impact particular species of designated habitats. The compensatory measures are imagined to be "difficult to identify and put in place" and may require purchasing large areas of land which "can hold up the progress of the project and add considerable costs." The scenario imagines that "the incentive is for the developer to find the cheapest way of discharging their obligations, rather than deploying compensatory measures strategically, in a way that provides the greatest benefit to the site network."

Scenario B imagines that there is a Delivery Plan in place "covering the impacts of energy development" on the particular protected habitats affected by this energy project. In such circumstances, the idea is that the developer would pay into a strategic habitat creation scheme which would be delivered by a delivery body on a site which "aligns with mitigation measures being put in place in the context of another project." No details are provided of the other project and its relationship to the large energy project.

Presumably the Working Paper proposal would only work if the Government was aware (in good time) of a number of such energy projects coming forward, all affecting the same species and habitats. This may be the case for offshore wind projects in the same location, but is much less likely for onshore energy projects.

If the aim of strategic compensation in this scenario is primarily to address the impact of the "large energy project", I go back to my points made above in relation to the HS2 bat shed. Requiring a public sector body to deliver compensatory habitat to address its impacts would just be shifting the problem of meeting the Habitats Regulations requirements from one body to another. The tests themselves under the Regulations would still need to be satisfied at the time the consent is granted, regardless of whether it is the developer or a delivery body providing the compensatory habitat. The habitat need not necessarily be delivered instantly (where the full adverse effect arises only gradually), but the plan for its delivery surely cannot be different/looser/later just because a third party is delivering it rather than the developer. The Working Paper is very clear that Government "will not reduce the level of environmental protection provided for in the existing law". Contrary to this aim, any change that made the standard lower where strategic compensation is involved would reduce the level of protection.

I'm sure there may be cases where developers would welcome having the burden of delivering compensation taken off them, in exchange for simply providing funding. My point is just that this moves the problem rather than eliminating it.

We can't legislate to remove assessment duties

I am also unsure how the Government thinks it can legislate to remove the duty to carry out relevant environmental impact assessments or Habitats assessments where a Delivery Plan is in place. The Environmental Impact Assessment Regulations and the Habitats Regulations are very specific about when and what assessments must be carried out – essentially where there is the possibility of a likely significant effect. If delivery of strategic compensation is so certain (and expected to be so effective) that it can be relied upon to boost baseline environmental conditions such that the impact of the project will not be significant, then the developer could, I suppose, make the case that there are not likely to be significant effects and so no assessment of that topic is required.

But if the Government is thinking of legislating to the effect that "where a Delivery Plan is in place no assessment of the topics covered by that Delivery Plan is to be required" that would go much further and amount to the law decreeing matters of fact.

In many cases, developers are also likely to want to carry out their own Environmental Impact Assessments and Habitats Regulations Assessments so that they can define the level of financial contribution it is reasonable for them to make given the impact of their scheme. Without individual assessment how can this be judged?

Monitoring and delivery of extra measures could be problematic

The idea of delivery bodies monitoring the condition of habitats on an ongoing basis and increasing the contributions of future developers where the measures in place are insufficient worries me. The baseline condition of the natural environment is, sadly, deteriorating at a significant rate, largely due to factors which have nothing to do with the sorts of projects which will be paying for compensation. Fishing, climate change, intensive farming, pesticides etc are all leading nature to struggle year on year. It cannot be right (and certainly won't be affordable) to get developers to pay into Nature Recovery Funds at a scale that addresses these wider issues not of their making.

My colleague, Ian Mack, talks about monitoring in his article "Environmental Outcome Reports: friend or foe?" (see section "Or Worse?"). He explains why monitoring for the purpose of general scientific learning about impacts may be helpful, but project-by-project monitoring would not be.

Environmental Outcome Reports

My heart sank at the mention of "environmental outcome reports" ("EOR") in the Working Paper. Like most people, I hoped this idea had been quietly dropped. I cannot see how such reports will be better than the status quo (environmental impact assessments), for reasons discussed in Ian's article referred to above. The topics they are required by law to cover are almost identical. I imagine the hope of those who came up with the idea was that it would shortcut the environmental impact assessment process – and that a developer would simply be able to commit to certain "outcomes" for the environment their project affects. The problem is that to do that meaningfully, a developer will need to ascertain what the baseline environment is like today, what the impacts of their project will be on it, and therefore what an achievable outcome for the environment is with their project in it.

The EOR regime is also in one sense worse than the current EIA regime in that it places more importance on ongoing monitoring to ensure those outcomes are achieved. Presumably developers will be expected to commit to further mitigation measures in the event that the monitoring suggests the anticipated outcomes are not occurring. It will be impossible to prove to what degree any failure is due to the developer's action as opposed to background environmental deterioration. As I know from years of doing due diligence for investors buying into assets, any open-ended commitments are a huge red flag. No one wants to own an offshore wind farm if they might end up responsible for ever increasing habitat creation schemes if climate change and fishing take their toll over the years on marine mammals in the vicinity. No funder will make a financial investment decision without fixity on end-costs.

Conclusion

A win-win is a lovely idea, but I don't think the proposals put forward in the Working Paper will achieve as much as the Government is hoping. It makes sense to create some public sector delivered schemes to address the nutrient neutrality problem, but there is no need to change the Habitat Regulations or the Wildlife and Countryside Act to do this. I have no idea at what scale or cost such schemes would need to be pursued in order to lead to less nutrient pollution and therefore more headroom for housing development. But if we are committed to abiding by our international commitments to the Habitats regime we have little choice.

It seems to me much more difficult for Delivery Plans and strategic compensation to assist developers of other projects in dealing with Habitats issues. The issues each encounter will generally be project-specific, and the Government will not be able to predict in advance where these will arise in order to task public bodies with starting to form schemes to deal with them. Simply shifting the requirements of the Habitats Regulations from a developer to a public sector delivery body will not make those requirements easier to comply with.

As explained in my previous article Bat shed crazy: can Starmer really bulldoze the environmental blockers to growth?" the Government may have to consider more radical options, which cut across international treaty obligations and the Trade and Co-operation Agreement if it really wants to expedite growth and enhance the environment (its win-win) without having to comply with the straitjacket of the Habitats regime.

My prediction is that the Government will include provisions in the Infrastructure and Planning Bill that give the Secretary of State sweeping powers to make secondary legislation to change the Habitat regime along the lines of their Working Paper (I imagine such provisions will look something like s291 and s292 of the Energy Act 2023 for offshore wind). But the secondary legislation necessary to make it happen may never be made because of the legal problems with doing so, or otherwise the changes made will be relatively minor. Either way, I think most infrastructure projects will be stuck with the status quo – individual assessment and individual provision of compensation measures. While primary legislation can't be legal challenged, secondary legislation can, and must also grapple with the detail that primary legislation can dodge. Hence why many big ideas by Governments tend to die quietly despite being on the statute books. I fear this may be another example of "performative legislation".