Pond with algae

Nutrient Neutrality Neutralised?

Nutrient neutrality has been in the political crosshairs since its inception and I have written previously about the fragility of the marketplace Nutrient neutrality: Are developments with outline consent caught by the requirements?.

Developers see it as a time consuming barrier to new houses which don’t contribute as much nutrient pollution as other sectors. Environmentalists regard it as a useful tool which ensures that new development does not contribute to an already significant pollution problem. Offering a solution are those involved in the private market for nutrient credits generated by taking land out of agricultural production.

Developers assert that 100,000 new homes are currently being held up by the requirement for nutrient neutrality and this is borne out by the experience of our residential development team. Others have argued that this statistic does not take account of the maturity of the private nutrient credit market which was becoming established.

In support of those assertions, a number of stakeholders, including the National Trust, CPRE and the Woodland Trust, co-signed an open letter to Rishi Sunak on 20 July 2023 which explained that over 70,000 homes have existing mitigation measures in place or in the pipeline. What will happen to those private credit deals which are agreed or in the process of being agreed, or the schemes created by numerous local planning authorities?

Notwithstanding that, the concerns of the developers seem to have been listened to as amendments to the Levelling Up and Regeneration Bill (“LURB”) have been proposed which will remove nutrient neutrality as a planning consideration if the Bill is approved by Parliament. The report stage of the Bill is to be concluded in the next fortnight, during which these amendments will be debated and voted upon.

A number of questions arise:

  1. What is changing?
  2. How will those changes affect existing private credit deals?
  3. What should developers and landowners do in the light of this announcement?
  4. How will the problem of nutrient pollution now be tackled?

What is changing?

The Government amendments to the LURB tabled on 29 August will change the Habitats Regulations so that nutrient pollution from housing developments will no longer be part of the planning process.

New clauses will be inserted into the Conservation of Habitats and Species Regulations 2017 (“Habitats Regulations“) which will require a local planning authority to assume that nutrients in urban waste water will not affect any relevant protected site. Those changes will only apply to developments where the wastewater is treated by a wastewater treatment works or private treatment system regulated by an Environmental Permit.

These changes are made possible by a new clause in the LURB at 159A which gives the Secretary of State wide powers to publish regulations which “may make any provision the Secretary of State considers appropriate” about the operation of any “relevant enactment.” That definition includes any domestic legislation or retained direct EU legislation relating to the environment so the winds of change may strengthen.

As a result, an appropriate assessment under the Council Directive 92/43/EEC on the Conservation of Natural Habitats and Wild Flora and Fauna (“EU Habitats Directive”) will no longer be required.

The amendments will have to reverse the current position, established in C G Fry v Secretary of State [2023], where the High Court determined that the relevant provisions of the Habitats Directive remain part of UK law due to the European Union (Withdrawal) Act 2018 (“Withdrawal Act 2018“).

How will those changes affect existing private credit deals?

The LURB amendments include a provision that the amended section 159 will come into force on “such day as the Secretary of State may by regulations appoint.” This is in contrast to the vast majority of the remainder of the LURB which becomes law on the day of Royal Assent or within 2 months of that date. A reasonable punt at a date of Royal Assent might be sometime in October which would suggest that we won’t see any regulations implementing these changes until some time in 2024 at the earliest.

Given the likely delay in publication of the necessary implementing regulations, the parties to any existing private credit deals may well decide just to carry on as the opportunity cost of trying to extract themselves may be too great. The likelihood is that those already involved in deals have developments which are ripe for commencement and as such may as well proceed. This may be because the cost of the credits has already been factored in or that reneging on deals will bring forth legal costs, loss of deposits and potential reputational issues.

In addition, the reality is that although the medium for compliance may have changed the cost will remain. The GOV.UK announcement 100,000 more homes to be built via reform of defective EU laws – GOV.UK (www.gov.uk) confirms that it “intends to work with the house building industry to ensure that larger developers make an appropriate and fair contribution to this scheme….” which perhaps indicates that this announcement is better news for the small and medium sized developers. In any event, there will be a cost associated with nutrient pollution and whether that is met through a private credit, Nutrient Mitigation Scheme Credit or through funding capital works as part of a Protected Site Strategy will be determined by the cost of each option.

The Michelmores Natural Capital Team have completed numerous private credit deals and those were already being influenced by the auction results of the Nutrient Mitigation Scheme Auctions in the Tees Valley Catchment. Those realised prices form a floor in the market and although that market is catchment specific once the Nutrient Mitigation Scheme is rolled out more widely (pump primed by £280 million of promised funding) then that pricing effect will similarly ripple outwards.

It follows that the market for private credits will likely remain providing they are priced competitively alongside the other mitigation options. They remain a useful turn key solution for developers who are naturally focussed on the business of building houses. It is then a question of land management economics as to whether it is worth landowners entering into such schemes or catchment approaches and nature based solutions .

What should developers and landowners do in the light of this announcement?

This is a difficult question to answer at this early stage. We still have to wait for the comments of the House of Lords and any possible changes they propose. The immediate effect of the announcement is to increase the levels of uncertainty and that will not change until we see the secondary legislation that is authorised by the LURB.

I have been asked whether such a change in policy can be challenged. There is quite a lot in that question but essentially the Government will be seeking to change domestic legislation to ensure that nutrient neutrality is no longer part of the planning process.

Brexit has made these changes possible as nutrient neutrality is a creation of European law with the Habitats Regulations transposing the requirements of the EU Habitats Directive.

Since Brexit, domestic legislation derived from EU law, such as the Habitats Regulations, continues to have effect pursuant to section 2(1) of the Withdrawal Act 2018. Similarly, the pre-Brexit case law of the CJEU lives on in relation to the interpretation of EU law.

The LURB amendments will amend the Habitats Regulations and will have to get through Parliament to become law. If that process is completed lawfully then the Government will only be susceptible to Judicial Review if they make decisions in respect of that new legislation which are wrong or unreasonable.

During this period of continued uncertainty, developers (and landowners with their own development aspirations) who wish to bring forward projects may conclude that securing private credit deals is the best option. This is an alternative to speculating on political outcomes and whether or not the new regime is a more cost effective solution than the existing one.

The Government suggests a variety of alternative strategies to tackle the problem, including increased funding for Natural England’s Nutrient Mitigation Scheme and the use of catchment scale schemes and Protected Site Strategies, meaning there will still be an important role for landowners in providing nutrient mitigation solutions if the amendments become law.

How will the problem of nutrient pollution now be tackled?

The Government has announced a package of measures to combat the problem of nutrient pollution including the expansion of the Nutrient Mitigation Scheme as set out above and the implementation of Protected Site Strategies.

Water companies are also being encouraged to actively consider nature based solutions to treat wastewater as well as the statutory 2030 upgrades. A catchment permitting approach will be allowed so water companies will be judged on the collective performance of all wastewater treatment plants. This would, in theory, allow some wastewater treatment plants to discharge at levels above the accepted limit if other plants were over achieving.

The GOV.UK announcement refers to £225 million of funding to reduce runoff from agriculture which will be policed by 4,000 inspections each year to ensure water pollution is minimised.

The LURB amendments will have no effect beyond 2030 which is the deadline for the upgrading of wastewater treatment works in designated catchment areas. My back of an envelope calculations estimate that if those upgrades are achieved then the requirement for nutrient credits would roughly halve. The pressure is on the water industry to improve infrastructure but funding has also been made available to enable other sectors to reduce their impact on protected sites.

The Government have previously stated that they intend to “crowd in” private schemes rather than crowd them out and allowing the private credit market to be one of the mitigation solutions would achieve that goal.

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