Local carbon offset funds are set up by local authorities to collect and distribute carbon offset payments made by developers as part of their Section 106 agreements.
Resource
Funding mechanism: Local carbon offset funds
Local carbon offset funds are set up by local authorities to collect and distribute carbon offset payments made by developers as part of their Section 106 agreements.
A section 106 agreement is a legally binding agreement or ‘planning obligation’ between a local planning authority and a property owner. It mitigates the impact of a development on the local community, setting out terms binding the developers to provide, facilitate, or fund measures needed for the development to be acceptable in planning terms.
In 2016, the GLA introduced carbon offsetting for all major domestic developments through the London Plan, requiring local authorities to establish local carbon offset funds. Other councils followed suit.
In this model, local authorities would set carbon emissions exceeding Part L of the Building Regulations (e.g., a 35% on-site reduction). Developers falling short of the target would contribute to the local authority’s offset fund. Contributions are based on a set carbon price, with recurring payments made over a set period. In the case of smaller developments, the developer pays a flat fee per unit.
This would require the local authority to set a carbon price and a time frame for payments. An example contribution formula would be:
Carbon offset contribution = Carbon gap (residual tonnes) x Price of carbon (£) x Numbers of yearsAlongside administering the fund collection and allocation, the local authority would also need to identify a suitable range of projects to be funded through the carbon offset fund, which would feature heat pump installations.
- Mayor of London. (2018). Carbon Offset Funds: Greater London Authority guidance for London’s Local Planning Authorities on establishing carbon offset funds.
- Hydrock. (2018). Show me the money! Spending the carbon offset fund.
- Partnering Regeneration Development (PRD). (2023). Making the case for Local Carbon Offset Funds.
- London Borough of Merton. (2023). Section 106 agreements and other planning obligations.
- Arup. (2023). Carbon offsetting in the neighbourhood.
- City of Westminster. (2023). Westminster Carbon Offset Fund Guidance.
- Local Government Information Unit (LGiU). (2022). Carbon offsetting for local authorities: what are they and how do they work.
- RBWM Together. (2024). Carbon Offsetting Fund.
- Modern Building Services (MBS). (2017). Carbon offsetting as a tool to finance energy efficiency improvements.
Case study: Milton Keynes City Council
Overview
Milton Keynes City Council own and operate a Carbon Offset Fund to support carbon reduction projects.
Set up in 2005, it was the first city in the UK to set up a Carbon Offset Fund, setting an example for other local authorities to follow suit thereafter.
Eligible projects include heat pump installations, insulation upgrades and solar panel installations. The fund provides up to 50% match funding to support projects. It is aimed at community groups and public organisations, such as schools, not-for-profit groups and parish councils.
Financials
Developers are required to pay £200 per tonne of annual CO2 emissions into the fund.
The fund has collected £6.3 million since its inception. It has also received 55 enquires since 2022 until 2024, seeking £2.9 million in contributions.
The fund has awarded £470,000, resulting in 12 completed projects (as of August 2024).
- Milton Keynes City Council. (2025). Carbon Offset Fund.
- Milton Keynes City Council. (2023). Community organisations and charities benefit from clean energy grants.
- Milton Keynes City Council. (2024). Executive Report: Carbon Offset Fund.
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