Carbon Contracts – Application Guidance

         

 

Introduction

Carbon Contracts are a way to offer alternative finance approaches to increase support for peatland restoration activity. The aim is to attract private investment alongside public funding, to help restore more peatland across Scotland.

The Carbon Contract pilot was launched in 2025. Phase II of the pilot is applicable to projects applying for 2027/28 Peatland ACTION grant funding.  Carbon Contracts give applicants the option to sell a portion of future Peatland Carbon Units* (PCUs) - a unit of peatland carbon - equivalent to one tonne of active CO₂ emission reductions - as defined under the Peatland Code - to the Scottish Government at a pre-agreed price, in exchange for reduced Peatland ACTION grant funding. 

Carbon Contracts provide greater certainty over future carbon income. They are intended to help projects strengthen funding models and provide support where projects may require additional finance (such as applicant contributions, private investment, and lending).

* Peatland Carbon Unit (PCU) means a unit of peatland carbon - equivalent to one tonne of active CO₂ emission reductions - as defined under the Peatland Code.

What are Carbon Contracts and how do they work?

Carbon Contracts are designed to support peatland restoration projects that are registered under the Peatland Code and that will generate PCU's in the future.

Carbon Contracts provide greater certainty over the future value of a proportion of the PCU's and help support projects that may require additional finance alongside grant funding. Under the scheme, the Scottish Government will enter into a contract with eligible projects to purchase an agreed proportion of future PCU's at a pre-agreed price. However, the project retains flexibility to sell all or some of these PCUs to the market if the market price is higher than the Scottish Government price.

The Contract will specify:

• The number of future PCU's purchased by Scottish Government
• The PCU vintages included
• A minimum purchase price for those PCU's

Once the relevant PCU's have been verified and issued under the Peatland Code, the project can choose either to:

• Sell the PCU's on the open market, or
• Sell the PCU's to the Scottish Government at the agreed contract price

The contract does not require projects to sell their PCU's to the Scottish Government. Instead, once the relevant PCU's have been verified and issued under the Peatland Code, projects would have an option to either sell the credits on the open market or sell them to the Scottish Government at the agreed price.

This means that if market prices are higher at the point of sale, projects can continue to benefit from those higher market values. However, if market prices are lower than expected, the contract provides a guaranteed fallback option and acts as a safety net in reducing exposure to any lower market prices. 

Carbon Contracts are not intended to provide additional public funding on top of grants. Instead, they are designed to reduce uncertainty around future carbon income and encourage a greater contribution from additional non-public finance sources such as applicants, investors or other third-party sources towards the capital costs of restoration.

They are best seen as a risk management tool, not a way to maximise profit. They provide confidence and stability, particularly in uncertain markets, but may not deliver the highest possible financial return.

As such projects will only be eligible where the combined value of the Peatland ACTION grant funding and the Carbon Contract remains below the equivalent level of maximum public grant support that could otherwise have been provided through grant funding alone. This helps ensure that public support remains proportionate and affordable while supporting projects to attract additional private funds into peatland restoration.

Are Carbon Contracts for me?

Carbon Contracts won’t suit every project, so it’s worth considering the following:

• You are applying for a Peatland ACTION grant and want to strengthen your funding application.

  Carbon Contracts can help demonstrate additional financial commitment to the project and support applications that are bringing private finance alongside public funding.

• Would your project benefit from greater income certainty?

  Carbon Contracts allow you to secure a minimum price for future PCU's, providing confidence over future revenues in uncertain market conditions, while protecting the value of your PCU's and allowing you to benefit if market prices rise above the agreed price.

• You want to strengthen your funding case with lenders or investors.

  Having a contracted minimum price for future carbon units can help provide confidence over future revenues and demonstrate greater financial certainty to lenders or private investors.

They may be less suitable for the following:

• The administrative requirements outweigh the benefits to your project.

  Smaller or less complex projects may determine that the additional application or contractual requirements do not justify the value of, or provide sufficient financial incentives, to enter into a contract agreement. 

• Your project has limited expected carbon yield.

  Projects generating relatively low volumes of PCU's may receive less overall benefit from the scheme compared with larger projects, noting that outcomes will vary depending on the specific contract terms agreed. Unit prices will vary with each project.

Things to think about before applying:

• How could a Carbon Contract support your project’s overall funding and value, including grant funding and future carbon income?
• How important is income certainty to your project?
• Would a guaranteed minimum PCU price unlock your project or accelerate delivery?
• What proportion of your PCU's are you willing to commit under contract?

Carbon Contracts are designed to complement, not replace, Peatland ACTION grants.

• Therefore, the combined value of grant funding and contracted carbon units will be assessed to ensure it does not exceed the maximum support that would have been available through grant funding alone.
• This ensures value for money for public funds, while still allowing projects to benefit from increased certainty over future carbon revenues.
• As a result, Carbon Contracts should be viewed as a way to reduce risk within the existing funding envelope, rather than increase the overall funding package.

Application Process

There are six steps in the process

Step one - Pre-application stage

When developing a project and considering its funding structure, applicants should consider what level of funding they will be contributing to the project, the likely level of grant support available, the expected volume and timing of PCU's, and whether a Carbon Contract could help attract additional private finance. 

Applicants considering a carbon contract application are encouraged to engage with us at the pre-application stage to discuss their proposed application, helping to ensure that submissions are well developed, eligible and aligned with the requirement of the contract and the application.

Under the Peatland ACTION restoration funding application criteria, the scale of any private contribution is also a relevant consideration in assessing applications and may strengthen the overall case for support.

At this stage, applicants should consider:

• Whether they expect to register the project under the Peatland Code
• The likely number of PCU's the project could generate
• Which credit vintages they wish to include within a Carbon Contract. These are restricted to years 5, 15 and 25.
• The minimum price at which they would be prepared to sell those PCU's
• The extent to which the project will rely on other forms of finance alongside grant support, such as applicant funding or private investment, or loan finance
• There is an expectation that the contribution will be at least 20% of the capital costs of restoration. This does not include maintenance costs.

Step two - Application stage

Applicants would apply for a Peatland ACTION grant through the standard application process.

At application stage, applicants would complete the Carbon Contract section on the grant application form.

As part of the Carbon Contract application process, applicants would set out:

• The number of PCU's they wish to include within the contract
• The vintages from which those PCU's would be drawn, including whether applicants wish to prioritise earlier vintages to provide greater short-term support or earlier financial returns
• The minimum contract price sought for those credits
• Any private finance being brought into the project

Step three - Grant assessment stage

The Peatland ACTION grant application would first be assessed in the usual way, considering project eligibility, restoration costs, deliverability and value for money.

This stage would determine the level of grant support that the project could receive.

The grant assessment would remain the primary decision-making process. A project would need to be eligible for grant support before any Carbon Contract could be considered.

Step four - Carbon Contract assessment stage

Where a project is eligible for grant support, the Carbon Contract application would then be assessed.

This assessment would consider:

• Whether the requested number of PCU's and vintages are realistic
• Whether the proposed contract price represents value for money
• Whether the combined value of the grant and Carbon Contract remains below the equivalent maximum level of public support
• Whether the Carbon Contract would help unlock additional private investment
• Whether the contract provides an appropriate balance of risk between the applicant and the Scottish Government.

Applicants should propose a reasonable contract price. Where applications seek to contract a small number of units at disproportionately high prices this may be considered poor value for money and would be scored accordingly within the assessment processes.

If a Carbon Contract agreement is not put in place, applicants would still have the flexibility to proceed with the grant-funded project. Equally, this could involve a revision of the project funding structure or grant contribution levels as part of the grant application process.

Step five - Offer stage

If both grant and Carbon Contract applications are approved, applicants will receive:

• A Peatland ACTION grant offer confirming the level of grant funding available
• A Carbon Contract offer, confirming the number of PCU's allocated, the vintages included and the agreed contract price.

Project delivery and contract exercise 

The restoration project would then be delivered as per the terms of grant and the Carbon Contract.

Once PCU's have been verified and issued under the Peatland Code, the applicant would have a choice:

• Sell the PCU's on the open market if market prices are higher
• Sell the PCU's to the Scottish Government at the agreed contract price if market prices are lower
• Retain the PCU's and let the contract expire

The Carbon Contract therefore acts as a safety net rather than a fixed obligation. It provides confidence that a minimum value is available for PCU's, while allowing projects to benefit from potential higher market values.

Calculating your Carbon Contract value

To support applicants, a carbon contracts calculator is available to download to help estimate the potential value of a Carbon Contract based on PCU volumes and vintages selected. Applicants are encouraged to use the calculator before applying to ensure that the proposed contract values align with project funding requirements and the delivery plan, as well as meeting value for money criteria.

Applicants should consider carefully how much support is required through a Carbon Contract and how the proposed contract value fits within the wider project funding package. Applicants demonstrating a stronger overall funding contribution may provide greater value for money.

Example scenarios

Example scenarios including outcomes and when it works well.

1. Grant and Carbon Contract project

Where a project is applying for a Peatland ACTION grant and contributes additional funding towards restoration, therefore applying for a lower level of grant. In return they secure an agreed future price for some or all the of the PCU's expected to be generated by the project by entering into a Carbon Contract.

Outcome

• Provides greater certainty over future carbon income 
• Reduced exposure to future price volatility
• Improved ability to attract private investment into the project
• Creates a potential income stream to support ongoing peatland maintenance

When this works well

• Applicant can contribute upfront capital
• Strengthens case for a successful grant application by increasing private finance contribution
• Long-term funding certainty is needed for future management or maintenance
• A buyer or investor is willing to agree future carbon prices in return for early commitment or investment

2. Private investment supported though a Carbon Contract

Where a project is seeking private finance to fund delivery costs and long-term management, a Carbon Contract is used alongside the investment arrangement to provide greater certainty over a portion of future carbon income by applying a minimum price to the selected PCU's. This will improve confidence for investors and land managers by reducing exposure to future market uncertainty and supporting clearer long-term financial planning.

Outcome

• Increased confidence in future project revenues
• Improved ability to attract private investment into peatland restoration
• Reduced exposure to future carbon market uncertainty
• Support for longer term restoration planning and project delivery

When this works well

• Where a project is seeking external investment or finance to support delivery
• Additional funding is needed alongside grant support to fund delivery
• Investors or partners require greater certainty over future income projections

3. Using a Carbon Contract to support lending

The project is progressed with support from Peatland ACTION. While the grant covers a significant proportion of costs, the landowner requires additional upfront capital to complete delivery. A debt facility could be arranged with a lender to raise funds for the additional costs.

An application is submitted for a Carbon Contract alongside the grant application. This provides a predictable future revenue stream linked to PCU's.

Outcome

• The lender is able to take a more confident view of future cashflows
• A portion of future carbon income is treated as contracted revenue, rather than speculative
• The landowner secures a loan to cover remaining upfront costs

Why this works

• Carbon Contracts reduce revenue uncertainty, which is a key barrier to lending
• They provide a floor price, allowing lenders to model downside scenarios
• They demonstrate a level of due diligence and public sector backing when combined with grant funding

4. Grant funded project (no Carbon Contract)

A project receives a higher level of Peatland ACTION grant support and is registered under the Peatland Code, allowing it to generate PCU's. The applicant chooses not to enter into a Carbon Contract and instead retains full responsibility for managing and selling PCU's on the voluntary carbon market.

Outcome

• Full exposure to market prices, including both potential market upside and downside 
• The project does not access the additional price certainty or risk reduction offered through a Carbon Contract arrangement with the Scottish Government

When this works well

• The applicant is comfortable with carbon market risk
• There is confidence in achieving strong prices in the market
• The project does not require additional certainty to attract finance or support delivery
• The project intends to sell Pending Issuance Units (PIUs)

Other information

To be considered for a Carbon Contract, projects must:

• Meet the requirements as set out in the NatureScot Peatland ACTION criteria for application.
• Register the project under the Peatland Code.
• Be undertaken on land that is entirely within the boundaries of Scotland.
• Not be the result of statutory or contractual restoration requirements for other projects or contracts.
• Be undertaken on land on which the applicant has management control for the length of the agreement. 
• Not conflict with other land management agreements.
• Agree to participate in the pilot evaluation, providing written feedback and participating in an interview.
• Meet key value for money criteria*.

How to contact us for further information

Applicants are strongly encouraged to contact us before applying. If you are considering applying for the Carbon Contract pilot or have specific questions, contact: [email protected]

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