15 Climate Finance for Agriculture and Livelihoods … › media › 57a08a3e...Case Study: Lessons Learned from Western Kenya Launched in September 2010, the Sustainable Agriculture

Climate Finance for Agriculture and Livelihoods

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Farmers working in the field, Kabaune Village (Giaki), Kenya

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This brief addresses the major challenges and opportunities to financing climate change mitigation and adaptation pathways for smallholder farmers in developing nations. It underlines the need for an innovative and integrated approach to climate finance that can connect rural farmers to public and private finance at the global level. Lastly, it provides recommendations for future actions that can meet adaptation, development and mitigation aims.

Key messages

• Up-frontpublicsectorfinancewillbenecessarytoreducetheinvestmentriskassociatedwithsmallholderagriculturalprojects,overcometheinitialinvestmentgapandleverageprivatecapitaltowardssustainableagriculture.

• Buildinguponpre-existinglocaldevelopmentinstitutions,strengtheningthecapacityofcommunity-basedorganizationsandsecuringlandtenurecanensurethatprojectbenefitsreachfarmersandaredistributedequitably,increasingprojectsuccess.

• Investmentinsmallholderagricultureshouldtakeaholisticapproach,focusingontheissuesoffoodsecurityandlivelihoodsandfostermitigationasaco-benefit.

• Toincreasetheeffectivenessofrecentclimatechangeadaptationschemes,focusshouldbeplacedonkeyareassuchasthedevelopmentofpro-poorinsurancemarkets,addressingissuesofaffordabilityforpoorfarmers,buildinghumanresourcecapacityandusingfar-reaching,efficientdistributionchannels.

• Usinganetworkedfinancingapproachthatcombinesmanyanddiverseinvestmentsinlandcanovercomethehighriskassociatedwithsmallholderfarmersanddriveinvestmenttopromotesustainablepracticesonalargescale.

• Scientificallyrobustresearchframeworksareneededtoquantifyhowmanagementpracticescanreduceclimateriskandattractinvestmentinclimatechangeadaptationprojects.

Introduction

Amajorchallengeofthe21stcenturyistohelpdevelopingnationsundergoashifttolow-carbon,climate-resilientandsustainableagriculturalpathways.Farmingpracticesexistthatshouldenablepoorsmallholderfarmerstoadapttoclimatechange,increaseagriculturalproductivityandimprovetheirfoodsecurityandlivelihoods,whilesimultaneouslycontributingtoclimatechangemitigationthroughcarbonsequestration.1

Despitesharinglittleresponsibilityforglobalwarming,smallholderfarmersindevelopingnationsarethegroupmostvulnerabletoclimatechangeandwilldisproportionatelysufferfromitseffects.Globalfinancewillbenecessarytoenhancefarmers’resiliencetoincreasingclimatevariabilityandshocksandinsurancemechanismsforadaptationarealreadybeingexplored.

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The volume and timing of carbon revenues depends on project type. Twoexamplesofcarbonfinanceinclude:ReducingEmissionsfromDeforestationandForestDegradation(REDD+)andAgriculture,ForestryandLandUse(AFOLU).WhileREDD+schemescanachievesignificantreductionofemissionsintheinitialyearsandbeginsellingcarboncreditsearlyintheproject’slifespan,AFOLUprojectscantakeupto16yearstoreachbreak-evenpoints.3

Public funding up-front is critical for agricultural projects. Atcurrentcarbonprices,financingagriculturalbiocarbonprojectsfromthesaleofcarboncreditsaloneisnotfinanciallyviable.2,3,4

NetPresentValues(NPVs)forprojectstargetingsmallholderfarmersintheSahelareestimatedtobenegativeatcurrentcarbonprices,meaningthattheprojectswouldnotbeworthundertakingfinancially.Evenathighcarbonprices(aboveUS$10-15perMgCO2-eq),theseprojectsarelikelytorunatthemarginofprofitability.4Tobefinanciallyviabletoprojectdevelopers,projectsthereforeneedtosecurehighlevelsofup-frontfundinginordertoovercomeinitialcosts.

Up-frontfundingcouldbeachievedbysecuringfundingfromdonorsduringtheprojectplanningphaseandagreeingonaselectnumberofex-antecreditstobebought.2However,becauseinternationalinvestorsaredeterredbythehighriskinbiocarbonprojectsandfewprivatelenderswillwait15yearsormoreforareturnoninvestment,theseprojectsrelyheavilyonpublicsectorsupport.Withoutpublicfunding,mostagriculturalbiocarbonprojectsarenotfinanciallyviable.

Climatefinancehasthepotentialtodrivethistransitiontosustainableagriculturepracticesthatmeetmitigation,adaptationanddevelopmentaims.Itcomprisesbothmitigationandadaptationfinance,andpublicandprivatesectorfinancetosupportsustainabledevelopment,reducedclimateriskandthereductionofgreenhousegasesfromtheatmosphere.Thisbriefexaminestheconstraintsandopportunitiestofinancingmitigationandadaptationthroughprivate-publicinvestment.Itsfocusesontheneedforclimatefinancetoaddressmitigationandadaptationinintegratedways,usingaseriesofcasestudiestohighlightlessonslearnedandfutureneeds.

MITIGATION FINANCE – LOOKING BEYOND CARBON IN BIOCARBON PROJECTS

Mitigationfinancesupportsactivitiesthatreducegreenhousegasemissionsorincreasesequestration.Itincludesmarket-andfunds-basedcarbonfinance,bothofwhichhaveevolvedoverthepast10yearsandshowconsiderablesophistication.Inthespecificcaseofbiocarbonprojects,whichsequesterorconservecarboninforests,agriculturalsystemsandotherlandscapes,mostpaymentschemeshavebeendevelopedintheforestrysector.Intheagriculturalsectorbiocarbonprojectsarebeginningtoemerge,butarestilllimitedinnumber.Arecentanalysisofsevenpro-poorbiocarbonprojectsinEasternAfricaoutlinedseverallessonsfromprojectexperiences.2

Public-private partnerships are one potential solution. Combiningpublicandprivatefinanceintheformofpublic-privatepartnerships(PPPs)isonestrategyforbridgingthefinancinggap.PPPconsistsofacontractbetweenapublicagencyandoneormoreprivatecompaniestodeliverapublicserviceorproject.Bypoolingfinanceandskills,PPPscansharerisks,provideloansandcredit,ordelivertrainingandhenceencourageinvestment.5Privatesectorinvestorswhowouldotherwisebedeterredbyhighriskorlowinvestmentreturns,arethusmorelikelytoinvest.5

Ensuring Benefits for Farmers

Afundamentalprerequisiteforthesuccessofcarbonprojectsistheirabilitytoprovideimmediateandclearbenefitstofarmers.Farmersfaceconstraintsonfinancial,institutionalandlegalfronts,includinghighcostsofinitialadoption,poorlocalinstitutionalcapacity,insecurelandtenureandsignificantrisksassociatedwithinvestmentinnewpractices.6Carbonprojectsmustovercomethesebarriersandsecurebenefitsforfarmersinboththeshort-andlong-term.

Not for the carbon Carbonpaymentsareinsufficientforthelong-termsuccessofcarbonprojects.2ModelsimulationsofcarbonprojectsintheSahelshowthatfarmerNPV,ortheperceivedsumofrevenueover25years,wouldbebetweenUS$36andUS$71forsmallholderfarmersatacarbonpriceofUS$20perMgCO2-eq,assumingadiscountrateof12%.Atamorerealisticdiscountrateof40%,NPVswouldrangefromUS$0.54toUS$28.00.4Whilecarbonfinanceperseoffersfewbenefitstofarmers,itisnecessarytofundprojectsbypayingforhighestablishmentandmaintenancecosts.

Sincecarbonpaymentsaregenerallynotsufficienttoencouragefarmerstojointheseprojects,thenon-monetarybenefitsfromimprovedpracticesarethereal

keystoprojectsuccess.Theselivelihoodbenefitsincludeincreasedproductivityofannualcrops;incomefrompoles,timberandothermarketabletreeproducts;improvedfamilyhealthfromtreefruits;availabilityoffuelandfirewood;reducedlabour;erosioncontrol;soilfertility;andimprovedwaterandnutrientefficiency.Manyofsuchbenefitsservetobothimprovefarmers’foodsecurityandreducetheirvulnerabilitytoclimatevariabilityandchange.

Local institutional capacity is key Thesuccessandefficiencyofacarbonprojectoftenhingesonthecommunicationandtrustthatexistsamongthedifferentplayers.6Smallholdercommunityprojectsbenefitfromstrongcommunitygroupssincetheycanimprovecommunication,communityparticipationandtheprovisionofextensionservices.7Fromthefarmers’perspective,partneringwithstrong,well-establishedgroupsthatunderstandlocalconditionscanensurethattheirneedsareconsideredthroughoutprojectdevelopmentandimplementation,andthattheyhaveaccesstoprojectbenefits.6

Fromaprojectperspective,havingstrongrelationshipsinplacebetweenNGOsandlocalcommunitiesandbuildingonexistingprojectscanaccelerateprojectestablishmentandlowerinitialinvestmentandtransactioncosts.7Workingwithpre-existinggroupsoffarmerscansavedeveloperstimeandmoneythatwouldotherwisebenecessarytoestablishcriticalrelationships.6Shiftinggovernancetolocalcommunitiesandpartneringwith

otherinstitutionsorprojectscanalsohelpincreaseprojectviabilityandreducehighstaffandadministrativecosts.2

Securing tenure can ensure farmer benefits Unclearorinsecurelandtenurecanpreventfarmersfromreceivingbenefitsforpracticesthatsequestercarbon.Inadditiontodenyingsmallholdersaccesstofinancing,tenureissuescanleadtoconflictwithinlocalcommunitiesoverwhoownscarbonrights.8Inmanycases,womenandothermarginalizedgroupsorpopulationsmaynotreceiveanequitableshareofcarbonrevenuewhereitis

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provisioned.6Oncefinancialpotentialisrealizedonalandscape,suchasinthecaseofrestoredlands,projectsalsoruntheriskthatgovernmentagenciesandotherlargeinterestswillclaimlandswheretenureisnotsecure.6Furthermore,potentialinvestorsincarbonprojectsmaybedissuadedbytherisksassociatedwithuncleartenure6,9orexpectshorterreturnsontheirinvestments.8Involvinglocalcommunitymembersinthedevelopmentofsystemstosecuretenureanddistributebenefitscanpromoteequityandpreventtenureconflicts.10

Case Study: Lessons Learned from Western Kenya LaunchedinSeptember2010,theSustainableAgricultureinaChangingClimate(SACC)projectinwesternKenyafocusesonsupportingadoptionbysmallholderfarmersofagroforestrypracticesthatincreasefarmproductivity,sequestercarbonandbuildresiliencetoclimatechange.Originallyframedasacarbonproject,SACCisnowevolvingintoanapproachthatputsprimaryemphasisonfarmproductionandclimatechangeadaptation,withmitigationregardedasanadditionalbenefit.Theprojectaimstoreach50,000farmerswithin10years.AcrossallelementsoftheSACCprojectanditslearningagenda,particularemphasisisgiventothepotentialbenefits,costsandriskstowomenandothermarginalizedand/orvulnerablesocialgroups.

Whiletheprojectisonlyinitsinitialstages,severalkeylessonsstandoutsofar:

• Farmers’incomefromtreeproductsalone(fuelwood,poles,timber)duringthelifeoftheprojectisexpectedtobeatleast50timesgreaterthancarbonrevenue,whichisestimatedatonlyUS$77over25years.Inaddition,farmersreceiveindirectbenefitsfromreducedlabourtocollectfirewood,soilimprovement,etc.

• FinancingtheSACCprojectfromcarboncreditsaloneisnotviable;insteadthisinitiativeandothersimilarprojectswillrequireacombinationofcarbonandotherfinancing.Consideringthefullrangeofsocio-economicbenefitscangreatlyincreasetheoverallreturnoninvestment.

• Carbonaccountingmethodologiesthatarepoorlysuitedtotherealitiesofsmallholderfarmingsystems–whichrequireflexibilityinplanting,managementandharvesting–cancompromiseoutcomesforfarmers,increasedrop-outratesandfailtocapturesubstantialvolumesofcarbonsequestration.

• Culturalnormscanconstrainwomen’sparticipationindecision-makingandaccesstoprojectbenefits;measuresshouldbetakentoenhancetheparticipationof,andbenefitstowomen.

INSURANCE FOR CLIMATE CHANGE ADAPTATION

Investinginsustainableagriculturalpracticespresentsaformidablebarriertosmallholderfarmerswholackaccesstocreditandinformation,havehighpersonaldiscountratesandtendtoavoidrisks.11Akeycomponentofadaptationistoreduceclimaterisksufficientlysothatfarmerscantakeachanceoninvestment.Accesstoaffordableriskmitigationinstruments,suchascroporindexinsurance,canencouragefarmerstoinvestinsustainableagriculture,thusachievingmitigationaimsandincreasingtheirresilience.8,11

Weatherindexinsurance,whichcoversweatherriskssuchasdroughtsorfloods,isoneadaptationmeasurethatshouldprotectruralfarmersfromclimaterisk,allowingthemtousehigh-riskbuthigherproductioncropvarieties.Comparedtotraditionalinsurance,weatherindexinsurancehaslowtransactioncosts,isverysimpletoadministerandisobjective.Whiletraditionalcropinsuranceiscentredarounddamagetocrops,indexinsuranceisbasedonweatherpatternssuchasrainfall.Thisbypassesthecostofassessingfarmdamageandremovesanyincentiveforfarmerstoneglecttheirfarmsinordertoreceivepayouts.However,severalchallengesremainintheexpansionofweatherindexinsurancetomanageclimatechallenges:

• Affordability.Poorfarmersareoftena)cashconstrainedandunabletomakeupfrontpaymentfortheinsurancepremium;andb)financiallyilliterate,requiringfinancialeducationandtrainingforsuccessfuluptake.

• Supply.Poorfarmersgenerallyarenotattractivemarketsforinsurersasthepremiumperfarmerisverylow.

• Data.Weatherdataisthekeyinputvariable,yetpoordatainfrastructureoftenexistsinremoteagriculturalareasorfailstocapturelocalweathervariations.

• Capacity.Thereisaconsiderablehumanandmaterialcapacitygapforexpansionoftheproducttocovermultipleweatherrisksandagriculturalproducts.

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• Basisrisk.Indexinsurancepaysoutwhenaclimate-relatedindicatorpassesathreshold,independentofwhetherreallosseshaveoccurred,meaningthatfarmers’vulnerabilitymightnotbereduced.

Whileindexinsuranceisanimportantinnovation,itisnotacomprehensiveproductandcannoteliminateallrisks.Itshouldbeconsideredasonecomponentofaholisticriskmanagementmechanismthatcoversmultiplerisktypes,andshouldfocus

onenablingfarmerstoadoptnewpracticesthatcansubstantiallyincreasetheirproductivityandincome.Incorporatingacomplementaryriskreductionmechanismincombinationwiththerisktransfer(indexinsurance)hasbeenproventobeasuccessfulstrategyinachievingscale.Inaddition,deliverythroughexistinginstitutionalframeworksanddistributionchannelshasbeenkeytosuccessfulimplementation.

PRIVATE INVESTMENT IN SUSTAINABLE LAND MANAGEMENT: A GLOBAL PERSPECTIVE

Withinthecurrentglobalfinancialsystem,investmentinsustainableagricultureisconstrainedbythehighlevelsofrisk,small-scalesanddiversityofmanyagriculturalpractices.Creditrarelyreachesfarmersindevelopingcountries,orimposestermsofinvestmentthatlimitfarmers’flexibilityandrestrictthemtomaximizingshort-termproduction.Apublic-privateinvestmentmodeldevelopedbytheMundenProjectandpartners,calledInari,proposesanetworkedfinancingapproachtodeliverinvestmentsinsustainableagricultureandforestrythatcanovercomethesebarriersanddrivesustainabilityatlargerscales.

Risk reduction through diversification. Byinvestinginsustainablepracticesacrossawiderangeofcountries,landscapes,farmtypes,cropcyclesandsizes,inboththedevelopedanddevelopingworld,theInarisystemreducestheriskfromanysingleproject.Thisriskreductioncanprovidecapitalatlowerinterestratesandlongermaturities,whileofferinginvestorsahighrateofreturnandsmoothcashflows.

Enabling producers. Inari’sdiverseportfoliooffersthreekeyadvantagestoproducers:lowerpaymentamountstoinvestors,

longermaturitycreditandaflexiblepaymentschedulethatallowsfarmerstoadjustthesizeandtimingoftheirpaymentsdependingontheyear.Together,thesebenefitsgivefarmerstheflexibilitytoadoptpracticesthatrequirestart-uptimeordonotcashflowaspredictably,toinvestinimprovingorexpandingtheiroperations,andtoinnovate.

TheMundenProjecthasdevelopedatrialmodelthatwillbetestedin2013.

THE PUBLIC DOMAIN

• Publicinvestmenthasanimportantroletoplayinfinancingsustainableagriculture,providedthatitisdoneintelligently.Smartpublicinvestmentshouldincludeclearrolesandduediligence,integratingadaptationandmitigationfinancewithotherfinancefordevelopingcountriestoavoidparallelprogrammesandoverlaps,andsubsidizingonlytothepointoffinancialviability.Investmentbymultilateralbanks(e.g.WorldBank),regionaldevelopmentbanksandotherinternationalfinancialinstitutionsinanetworkedfinanceplatformcouldalsoreduceinterestratessufficientlytoleverageprivateinvestment.

Weather Index-based Insurance in Action

TheHornofAfricaRiskTransferforAdaptation(HARITA)programmeinEthiopiaisanexampleofasuccessfulweatherindex-basedinsurancemechanism.LaunchedbyOxfamAmericaandtheReliefSocietyofTigray,togetherwithEthiopianfarmersandseveralotherlocalandinternationalpartnersin2009,theprogrammeenablessmallholderfarmerstostrengthentheirfoodandincomesecuritythroughacombinationofriskreduction,droughtinsurance,creditandsavings.12Theprojecthasscaledupfrom200tonearly19,000householdssinceitsinception12,with2012droughtconditionsresultinginover12,000farmersreceivinginsurancepayouts.13

Figure 1. Within the HARITA approach, insurance is integrated with an existing government safety net programme, which provides farmers with cash or food for work. 2Payouts occur when weather index is triggered.15

HARITAtakesaholisticriskmanagementapproach,usinginsurancetocomplementriskreductionactivitiessuchascomposting,small-scalewaterharvestingandimprovedagriculturalpractices.14Toovercometheissueofaffordability,itallowsthepooresthouseholdstoexchangelabouronriskreductionactivitiestopayforinsurancethroughaninnovative“insurance-for-work”programme.12Farmersareorganizedintovillagesavingsgroupswheretheysaveandborrowfromthepoolaspertheirbylaws.Inaddition,farmershaveaccesstocreditforincomegeneratingactivitiesthroughalocalcooperative.Furthermore,HARITAactivelyengagescommunitiesinprojectdesign,usingateamofpeer-electedmembersandfocusgroupdiscussionstoprovidecommunityfeedbackandsuggestions.14BuildingonHARITA’ssuccess,OxfamAmericaandtheUNWorldFoodProgrammehavelaunchedtheR4RuralResilienceInitiative,whichwillscaleupthemodelacrossEthiopia,Senegalandotherdevelopingcountriesoverthenextthreeyears.12

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RECOMMENDATIONSResearch gaps

• Attractinginvestmentinclimatechangeadaptationprojectswillrequirethedevelopmentofmetricsforadaptationandadaptivecapacitythataredistinguishablefromdevelopmentindicators.Forexample,justifyingpublicinvestmentrequiresshowingaddedvalueoverofficialdevelopmentassistance(ODA).Demonstratingadaptivecapacitywillrequirescientificallyrobustresearchframeworksthatquantifyhowmanagementpracticescanincreaseresiliencetoclimatevariabilityandshocksacrosstemporalandspatialscales.

• Thereisaneedtotestdifferentmonitoring,reportingandverification(MRV)systemsforevaluatingcarbonstocksinlandscapes,suchascomparinginventorieswithremotesensingestimatesincalculatingtreebiomass.AkeyaspectisreducingthecomplexityandcostofMRVinlinewithtreatingmitigationasaco-benefitratherthanprimarygoal,andfunds-basedcarbonfinancethatisnotoffset-based.

Adaptation insurance

• Indexinsuranceisatitsearlystagesandcouldbenefitfrom:developmentofsustainableinsurancemarketsthataddresstheriskmanagementneedsoflowincomehouseholds;increasingaffordabilitybyprovidingdifferentpaymentmechanismsforpoorfarmers;increasingawarenessabouttheroleandbenefitsofinsurance;buildinghumanresourcecapacitytominimizebasisriskandenhanceeffectiveness;usingremote-sensingtechnologiesandsatelliteweatherdata;andencouraginginsurancecompaniestoprovideinsuranceproductsthroughdistributionchannelsthathaveextensiveoutreach.

• Indexinsuranceshouldbeconsideredasonecomponentofaholisticriskmanagementmechanism,andshouldfocusonenablingfarmerstoadoptnewpractices.Incorporatingacomplementaryriskreductionmechanismincombinationwiththerisktransfercanhelpcovermultiplerisktypes.

Improving local institutional capacity• Buildinguponpreviousdevelopmentwork,

engagingwithpre-existinggroupsoffarmers,securinglandtenureandempoweringfarmersonthegroundbystrengtheningthecapacityofcommunity-basedorganizationscanensurethatbenefitsreachfarmersandaredistributedequitably,thusincreasingprojectsuccess.Developingextensionservicesandoptionstailoredtothespecificneedsandconstraintsofthepoorwillbecriticaltomaximizingparticipationofpoorerfarmers.

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Can Climate-Smart Agriculture Make Insurance Affordable?

ResearchconductedinNyandoDistrictofwesternKenyahasshownthatfarmersarecurrentlyunabletocopewithclimate-relatedstressesinasustainableway,oftenresortingtocopingstrategiesthataredetrimentalinthelong-term.Farmersinterviewedidentifiedimprovingtheirgeneralstandardoflivingasthemosteffectivewaytoadapt.Agroforestrycanreducefarmers’foodinsecurity,andhencereduceclimaterisk,inanumberofways,including:improvingfarmproductivity,increasingenvironmentalsustainability,increasinghouseholdwealth,providingopportunitiesforincomediversificationandprovidingseveralspecificcopingstrategiesinthefaceofdroughtsandfloods.16Animportantareaforresearchiswhethersellingindexinsurancesincombinationwithimprovedmanagementpracticescouldreducepremiumsduetothelowerclimaterisk.

Public and private investment

• Publicsectorfinancewillbenecessarytoreducetheinvestmentriskassociatedwithsmallholderprojects,bridgetheup-frontfundinggapandattractprivateinvestmentinsustainableagriculture.

• Investmentinsmallholdersustainableagricultureshouldtakeaholisticapproachbyfocusingontheissuesoffoodsecurityandlivelihoods,andregardingmitigationasaco-benefit.

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Related Publications

1. WollenbergE,HigmanS,Seeberg-ElverfeldtC,NeelyC,

Tapio-BiströmM-L,NeufeldtH.2012.Helpingsmallholder

farmersmitigateclimatechange.CCAFSPolicyBriefno.5.

CGIARResearchProgramonClimateChange,Agriculture

andFoodSecurity(CCAFS),Copenhagen.Availableonline

at:http://ccafs.cgiar.org/node/413

Citation:FosterK,NeufeldtH,FranksP,DiroR,MundenL,AnandM,WollenbergE.2013.ClimateFinanceforAgricultureandLivelihoods.ICRAFPolicyBrief15.Nairobi,Kenya.WorldAgroforestryCentre(ICRAF).