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Agriculture is under pressure to increase production, reduce its environmental impact and eliminate its dependence on public subsidy.

Many farming businesses are operating at the limit of their profitability, often to the detriment of soil health, water quality and biodiversity.

Farmers are in a unique position to restore and protect the natural environment, but there is no commercial basis for the provision of natural services from farmland.

This report sets out a mechanism for establishing natural markets to bring new income streams into farming, supporting a fundamentally different approach to land use.

The costs of degrading important ecosystem services are high and increasing.There are many places where natural markets could play a useful role but the crippling cost of floods and water treatment, along with the growing body of evidence around cost effective natural engineered solutions, means flood prevention and cleaning up water is a good place to start.

We calculate the cost of floods and treatment for water pollution to be £2,373 million a year, equivalent to £24 million a year for each of the one hundred water catchments in England.

According to this analysis, a land management scheme delivering natural filtration and flood risk management ought to have many potential customers, to who it could offer a lower cost way of managing exposure to flood and water quality problems.We believe there could be a considerable market in avoiding these costs.

There are a number of reasons why this market does not currently exist. Payments for ecosystem services (PES) pilots, run by the Department for Environment, Food and Rural Affairs (Defra), have identified a number of non-financial barriers to creating an effective payment mechanism.These include economic challenges, such as ensuring a fair contribution is made by those who benefit and that payment rewards additional service delivery, rather than preventing bad practice.There are also the practical challenges of establishing hydrological and ecological standards for natural engineering and developing contracts that enable counterparties to specify standards of service delivery and define its limits.

The Natural Infrastructure Scheme

To respond to these challenges, we propose a new payment mechanism, the Natural Infrastructure Scheme (NIS).The NIS is an area based market in avoided costs, delivering environmental improvements by bringing together groups of land managers to sell ecosystem services to groups of beneficiaries. It is a multi-buyer multi-seller consortium contract for large scale interventions in the upper reaches of a catchment.

On the seller side, this would involve enough land managers in a catchment to ensure the effectiveness of their offer. On the buyer side, this would include all the major institutional beneficiaries of flood mitigation and improved water quality.

Prospectus designers would work with the land managers to identify the most efficient and effective natural engineering options, market the proposals to buyers and broker the contract that would increase income for landowners and reduce costs for downstream beneficiaries.

Download the report here.