Carbon Contracts Pilot – Application Guidance

         

 

Introduction

The Peatland ACTION fund is helping to address climate change and biodiversity loss. It supports work to put Scotland’s degrading peatlands on the road to recovery.

To complement this, the Scottish Government and NatureScot are piloting a new additional funding mechanism for peatland restoration – Carbon Contracts. This new funding mechanism will not replace the existing Peatland ACTION fund but will work alongside it. 

The pilot will be open to a limited number of projects who are applying for NatureScot Peatland ACTION funds for the 2026/2027 financial year.

Purpose

The Scottish Government has a target date for net zero emissions of all greenhouse gases by 2045. Given that degraded peatlands account for over 15% of Scotland’s planet warming carbon emissions (2024), restoration has a vital role to play in Scotland’s path to net zero. 

An ambitious target has been set to restore 250,000 hectares of degraded peatlands by 2030. This target is part of the broader strategy to address climate change and biodiversity loss, recognising that active, or functioning, peatlands are vital carbon sinks and habitats.

Restoring Scotland’s peatlands is a public and private responsibility. Whilst the Scottish Government has committed to spend £250m, it is acknowledged that other funds are required to meet the target.

Carbon Contracts are being explored with the intent of implementing finance approaches for peatland restoration that support increased restoration activity.  The aim is to maximise the value of public spending by attracting responsible private investment. 

As such, the Scottish Government is seeking to increase the level of private investment into the sector to help support an increase in the pace and scale of restoration required to meet the targets. 

Through this pilot, we seek to learn more about the viability of the Carbon Contract funding mechanism, including its attractiveness to the market and ability to influence our aims of increasing rates of private investment and restoration work. 

As a pilot, we are open to taking on board learnings and improvements that can guide our approach in the future.  Whilst the pilot is focused on restoration projects being progressed through the NatureScot Peatland ACTION process, if proved successful, it is envisaged that the approach will be rolled out by all Peatland ACTION delivery partners.

What are Carbon Contracts?

Carbon Contracts will provide more financial security for Peatland Code projects through ensuring price certainty on a portion of the future peatland carbon credit income for those entering into contracts. 

Under this mechanism, Scottish Government will enter into a contract with individual Peatland ACTION restoration projects whereby it will give the project an option to sell a portion of the resulting carbon credits to the Scottish Government, acquired through registration with the Peatland Code, at an agreed price. The contract will be in return for reduced capital grant funding from (for the pilot, NatureScot) Peatland ACTION to undertake the restoration. This part of the process will be managed by NatureScot.

It will be the responsibility of the seller to ensure that the project is verified and managed according to the standards set out under the Peatland Code and the number of PCUs[1]  issued is recorded in the UK Land Carbon Registry. Failure to manage the peatland post restoration in accordance with the standards set out in the Peatland Code will result in the termination of the Carbon Contract. 

The Peatland Code - How it works | IUCN UK Peatland Programme (iucn-uk-peatlandprogramme.org)

Applicants will not be under an obligation to sell their credits to Scottish Government when the relevant vintage [2] matures (time periods during which the underlying emissions reductions activities are expected to occur). However, they must inform Scottish Government of their intention three months in advance of the scheduled transaction date.

Purchases will be carried out, and credits held, on behalf of the Scottish Government by an approved third-party organisation. 

The contract will detail the agreed price at which Scottish Government will purchase peatland carbon credits and will note which PCU yield purchases will be made from. This allows the contract to be flexible.

The purchase price will be index-linked on an annual basis based on the 12-month rate Consumer Price Index in April of each year as published by the Office of National Statistics.

This funding mechanism is currently in a pilot phase with a limited delivery budget. A small number of projects will be taken forward to test the application, assessment, offer and evaluation process. 

Application process

To participate in the Carbon Contracts pilot, interested parties should complete the Carbon Contract section of the NatureScot Peatland ACTION application form. These details will form part of a competitive application process to assess the most appropriate applications to take forward to the pilot.

Details to be provided, as outlined in the NatureScot Peatland ACTION application form, are:

• The price of the carbon unit that you are applying for (carbon price requested).
• Level of private contribution being made to the application.
  • It is expected that projects seeking a Carbon Contract will take on a reduced level of Peatland ACTION grant funding.
• Number of hectares that will be contracted.
  • Contracts will be awarded based on up to 50 hectares of restoration.
• Term of Contract.
  • The maximum term for the pilot contract will be 25yrs.
• Number of Peatland Carbon Units (PCUs) contracted at each vintage.

 

The Carbon Contracts application deadline is 30 September for NatureScot Peatland ACTION funded projects with an intended start date after 01 April 2026.

To be considered for a Carbon Contract, projects must:

• Meet the requirements as set out in the NatureScot Peatland ACTION criteria for application.
• Be registered and managed under the IUCN UK Peatland Programme for Peatland Code.
• Be able to provide the Peatland Code project number.
• Be undertaken on land that is entirely within the boundaries of Scotland.
• Projects within the national parks must apply through NatureScot, not the park authority as per other Peatland ACTION projects.
• Not be the result of statutory or contractual restoration requirements for other projects or contracts.
• Be undertaken on land that 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*.

 

* To be eligible for a Carbon Contract, the total value of the Peatland ACTION grant sought, and credits contracted must be less than if the project had received the maximum level of public grant. This is to ensure that value for money is ensured for public funds. This will take into account the net present value (the value today of future cash flows) of transactions that may take place many years in the future.

Assessment Process

This will be undertaken by NatureScot and will align with the NatureScot Peatland ACTION fund assessment process.

Eligible projects are scored according to the information provided through the NatureScot Peatland ACTION funding application, and the information provided in the Carbon Contracts section of the application including intervention rate, and the overall number of credits contracted. 

Applications that offer the greatest value for money for public funds will receive a higher score – with scope for variations within the level of public grant sought, and the number of credits contracted. 

Offer process

We will inform applicants of the outcome of their application in early 2026. Successful projects will then formally enter into a legal agreement with Scottish Government, with sales of Peatland Carbon Units taking place as each vintage matures as outlined above. 

Where possible, there is a desire to test the process on a diverse range of landownership models, geographical locations, financial structures and delivery models. This may be taken into consideration when assessing applications.

Contact us for further Information

If you are considering applying for the Carbon Contracts pilot and have specific questions, contact: [email protected]