FINANCING ADAPTATION TO CLIMATE CHANGE IN AGRICULTURE: LESSONS FOR DEVELOPING ECONOMIES

FINANCING ADAPTATION TO CLIMATE CHANGE IN AGRICULTURE:

LESSONS FOR DEVELOPING ECONOMIES

Proceedings of 26th Annual Conference of Farm Management Association of Nigeria

held at Michael Okpara University of Agriculture, Umudike. Abia State, Nigeria pp154-158

Etowa, Egbe Bassey

Department of Agricultural Economics, University of Nigeria, Nsukka.

Email: [email protected]. Phone: +2348030833896;

Odo, Caroline Ogbonne

Department of Agricultural Economics,

Michael Okpara University of Agriculture, Umudike, Nigeria.

Email: [email protected]. Phone: +2348037910956

&

Ebe, Felix Commercial Agriculture, Enugu State

ABSTRACT

Climate change is a frontline issue in global development debates. While the developed world

takes the lead in mitigation of climate change, adaptation is inevitable in developing countries

agriculture, where the impact of climate variability is already alarming. However, the adaptive

capacities of these developing economies need to be steered up through appropriate financing

which are highlighted in this paper. The paper draws attention to the need for holistic policies

that simultaneously address investments in adaptation to climate change and productivity in

agriculture. Emphasis was made on the fact that although co-benefits or synergies often emanate

from such policies, tradeoffs may also result.

KEY WORDS: Finance, Climate Change, Adaptation, Agricultural Productivity

1.0 PREAMBLE

Alteration in climate over time, either due to natural phenomenon or as a result of human activity

can be referred to as climate change. Globally, concern is at present centred on climate change

emanating from human activity, such as burning of fossil fuels, clearing of forests, etc which

constitute principal sources of greenhouse gas emissions (Bouwer and Aerts, n.d). Adaptation to

climate change involves tackling the consequences of climate change, it defers from climate

change mitigation which deals with handling the causes of climate change. Adaptation to climate

change could also include taking advantage of any beneficial effects that the change may bring.

Various types of adaptation can be distinguished, including;

anticipatory and reactive adaptation,

private and public adaptation, and

autonomous and planned adaptation.

It can involve: building adaptive capacity (creating information and conditions that enable

adaptation actions to take place) or delivering adaptation actions (taking actions that will help to

reduce vulnerability to climate risks or exploit opportunities). Adaptation is usually a longer-term

livelihood activity and is a continuous process where results are sustained. It uses resources

efficiently and sustainably, involves planning, combining new and old strategies and knowledge,

and is focused on finding alternatives.

Adaptation has become the most pressing needs of developing countries to adapt to climate

change. This is because of the eminent difficult conditions of developing countries created by

already changed global climate. For example, climate change affects agriculture by altering yields

and changing areas where crops can be grown. Economics of Adaptation to Climate

Change (EACC) study shows that changes in temperature and precipitation will significantly hurt

crop yields and production and developing countries fare worse for almost all crops compared to

developed countries (United Nations Framework Convention on Climate Change (UNFCCC),

2007).

Consequently, adaptation should be paramount in developing countries‟ response because of their

existing structures that require development to lessen the extreme consequences of climate

change. Mitigation would be given a second place because less advanced nations produce

relatively small emissions (compared with advanced countries) and have only meagre resources

for direct fight (Shout-Africa, 2011).

2.1 SHOULD DEVELOPING COUNTRIES INVEST IN AGRICULTURAL

ADAPTATION TO CLIMATE CHANGE?

Countries in Sub-Saharan Africa (SSA) are particularly vulnerable to climate change impacts

because of their limited capacity to adapt. There are new conditions in agriculture, there are

droughts and food security is threatened. So it is important to address those issues and help those

countries. The international community faces great challenges in the coming decades including

reining in global climate change, ensuring food security for the growing population, and

promoting sustainable development. Changes in agricultural sector are essential to meeting these

challenges. Agriculture provides the main source of livelihood for the poor in developing

countries, and improving agricultural productivity is critical to achieving food security as well as

most of the targets specified under the Millennium Development Goals (Rosegrant et al. 2006 in:

Enete & Taofeek, 2010). Agriculture also contributes a significant share (14 percent) of

greenhouse gas (GHG) emissions, more if related land-use change (particularly deforestation) is

included (WRI 2010 in Bryan et al, 2011). At the same time, long-term changes in average

temperatures, precipitation, and climate variability threaten agricultural production, food security,

and the livelihoods of the poor. Adaptation to climate change will be essential to ensure food

security and protect the livelihoods of poor farmers.

Howbeit, many cheap and simple opportunities to reduce vulnerability may be available. A

central question is whether adaptation in other planning and development processes amounts to

the most efficient use of limited financial means by these development processes. It appears,

though, that opportunities costing little or nothing allow for the inclusion of adaptation objectives

in development processes. Evaluations of the benefits of adaptation projects need to be conducted

to highlight the advantages of, and to justify investments in, the integration of such projects into

development processes (Bryan et al, 2011).

2.2 FINANCING ADAPTATION TO CLIMATE CHANGE IN AGRICULTURE

If adaptation is seen as a development drive or more so, a response to sustainable development

then the role of finance cannot be over emphasised in the process. Meanwhile, there is a serious

funding shortfall between the finance needed by developing countries for adaptation and the

amount available. For example, increases in investments to increase agricultural productivity,

including agricultural research, improvements in irrigation efficiency and expansion of irrigated

area, and rural road construction can compensate for much of the effects of climate change on

calorie availability and child malnutrition. These costs were estimated to be in the range of

US$7.1–7.3 billion annually (constant 2000 dollars) for direct agriculture and related investments

(public agricultural research and development, irrigation efficiency and expansion, and rural

roads) (Nelson et al, 2010). Furthermore, as farmers cope with changes in productivity brought

about because of climate change, production levels are altered and trade flows are changed. There

are clearly costs associated with these adjustments. Farmers must alter production practices, buy

new seeds, and perhaps change capital equipment.

Due to the forgoing issues, adaptation finance remains a central issue in United Nations

Framework Convention on Climate Change (UNFCCC) climate negotiations. More so, the Bali

Action Plan adopted at the 2007 United Nations Climate Change Conference calls for developed

countries to allocate “adequate, predictable, and sustainable financial resources and new and

additional resources, including official and concessional funding for developing country parties”

to help them adapt to climate change (Enete and Amusa, 2010). In spite of the many efforts

already made by developing countries, in many cases external support will be required to meet

adaptation needs. Although there are several sources, the potential for financing adaptation

activities using all of the funds is more limited. This is because many of them are related and

overlap. There are many other controversial issues in the current debate on adaptation financing.

They revolve not only around the amounts required, the sources of funding and the delivery

mechanisms, but also around the moral and legal framing of adaptation financing.

In 2001 COP7 established three funds to support adaptation activities in developing countries: the

Least Developed Countries Fund and the Special Climate Change Fund under the UNFCCC, and

the Adaptation Fund under the Kyoto Protocol (Zimela, 2011). The two funds under the UNFCCC

are operational and managed by the Global Environment Facility (GEF), as is the Strategic

Priority “Piloting an Operational Approach to Adaptation”, which the GEF established under its

Trust Fund. The operational GEF funds provide funding to eligible countries to meet the

additional costs of adaptation.

With regard to least developed countries, UNFCCC adaptation funds could support a considerable

proportion of adaptation measures (UNFCC, 2007). This will happen if simplified rules were put

in place that would, for instance, allow full funding of projects. However, The UNFCCC agrees to

cover the full incremental costs, or the costs that lead to global environmental benefits, but not

those that result in local benefits, which is particularly the case for adaptation (Nelson et al, 2010).

Since the UNFCCC will only meet incremental costs, basic funding will have to come from other

sources, mostly development banks, other conventions, ODA and domestic savings. Another

option is to define simplified funding rules for meeting part or all of the adaptation costs in

developing countries (Gupta and Dorland, 2003 in UNFCC, 2007) and to make sure that the

measures being funded also have other environmental benefits (Huq, 2003 in World Bank, 2010).

This could lead to links with other conventions and funds operated by the GEF. It could be

opportune for developing countries to agree on partial funding only, rather than using complicated

incremental cost calculations. ODA and GEF funds intersect with UNFCCC funds, especially

when developed countries consider their UNFCCC contribution to be ODA.

Foreign Direct Investment (FDI) is a major source but the probability of influencing adaptation

aspects will remain low as long as the national policies of recipient countries do not make disaster

risk management or climate adaptation a prerequisite for FDI. The European Union and other

Annex I Parties tend to describe bilateral or multilateral funding as catalytic and complementary

only to domestic and private funding by developing countries, whereas developing countries view

adaptation funding as compensation for harm imposed on them. It is a universal ethical principle

that it is wrong to harm others (or risk harming them) for one‟s own gain, and that one owes

compensation if one does such harm (Klein and Persson, 2008).

Public finance can be considered as the most important source for funding physical adaptation

measures in most developing countries, as currently, government budgets cover most of the

investments, such as in general infrastructure. However, public finance is unlikely to ensure

sufficient resources for adaptation in developing countries for two

reasons:

First, because the effects of climate change cannot be precisely predicted, neither

can the costs of adapting to these effects, so any amount agreed now will prove

inadequate if costs are higher than predicted.

Second, any finance-generating measures introduced as taxes of some kind are

subject to market volatility and therefore ultimately unpredictable in scale.

As a result, additional finance for adaptation may still be required which calls for a public-private

partnership. There are the potential for governments and financial institutions to issue „climate

bonds‟ in order to raise new finance from the private sector to support climate change measures.

Bonds are an investment product used widely by both the public and private sectors to raise

capital to fund major projects or be used for lending. Large institutional investors such as pension

funds, insurance companies and banks commonly purchase bonds as a key, low-risk component of

their investment portfolio. International finance institutions active in climate financing already

issue bonds in the capital markets to generate new finance for climate-related lending activities as

a supplement to their public funds.

Supporting adaptation through equity may otherwise be difficult and the economic benefits may

accrue to the wider community and not to the adaptation project itself. Howbeit, many adaptation

activities, particularly some projects in agriculture might be suitable for equity financing.

Although, viable lending requires that the recipient has access to a revenue stream that can repay

the loan, debt can still support a much wider range of activities than equity (African Development

Bank (ADB), 2012). In the case of adaptation actions initiated privately, for example a farmer

deciding to switch crops or upgrade an irrigation system, potential borrowers in developing

countries could be much smaller (in financial capacity) than private finance institutions are

accustomed to. In such cases, private finance can instead provide credit lines to local finance

institutions, including microfinance institutions (Bouwer and Aerts, n.d). Amongst poorer

communities, the borrower‟s creditworthiness is likely to be the major limiting factor. Private

finance could conceivably be delivered at concessional rates („soft loans‟) in cases where

investors are seeking social and/or environmental outcomes as well as financial outcomes

(Zimela, 2011).

Economists have viewed that private finance for developing countries could be challenged by the

fact that it will not be distributed evenly, but instead heavily concentrated in large emerging

economies and resource rich countries. More so, Bouwer and Aerts (n.d) adduced two major

challenges requiring urgent solution in private sector funding of adaptation projects in developing

nations. These the considerably less awareness of opportunities associated with funding

adaptation and the perception that adaptation is difficult to support with commercial finance

2.3 FINANCING ADAPTATION AND PRODUCTIVITY IN AGRICULTURE:

SYNERGIES VERSUS TRADEOFFS

Success of adaptation in developing countries relies strongly on broader development progress.

When adaptation is limited to responses specific to climate change, it neglects the fact that

vulnerability to climate change does not emerge in isolation. For example, it may help to provide

a rural household that grows a particular subsistence crop with a more drought-resistant variety,

but a more robust and comprehensive adaptation strategy would seek to improve food security

through a set of coordinated measures that include agricultural extension, crop diversification,

integrated pest management and rainwater harvesting. In addition, a poor rural household is more

likely to use these options if it has a literate family member, if it has access to investment capital

through local financial institutions, if it enjoys relatively intact social networks, and if it can hold

policymakers accountable. In other words, it takes more than narrow, climate focused measures to

build adaptive capacity. A recent study by McGray et al. (2007) in Bryan et al (2011) confirmed

this view. It reviewed more than 100 initiatives labelled as adaptation in developing countries and

found that in practice there is little difference between these adaptation initiatives and what can be

considered good development. The difference lies more in the definition of the problem and the

setting of priorities than in the implementation of solutions. The study presented adaptation as a

continuum, ranging from more narrowly defined activities aimed specifically at addressing

impacts of climate change, to building response capacity and addressing the drivers of

vulnerability

Table 1: Losses due to Climate Change without and with Adaptation.

Gross Losses without

Adaptation

Net Losses with

Adaptation

Net benefits of

Adaptation

NCAR CSIRO NCAR CSIRO NCAR CSIRO

(1) (2) (3) (4) (5) (6)

Present value@5%,

$million 103.9 212.4 4.5 5.4 99.4 207.0

Annualised equivalent, 5.9 12.1 0.3 0.3 5.6 11.8

$million per year

Loss/benefit as % of

baseline GDP 0.6 1.3 0.0 0.0 0.6 1.3

Source: World Bank (2010)

The expenditures on adaptation for agriculture are clearly justified as the ratio of their benefits to

the costs that are incurred is much greater than 1. It is assumed that adaptation measures are only

implemented in a particular region when or if the resulting reduction in the expected value of

economic losses due to climate change exceeds the annualized cost of the adaptation measures.

This is a simple cost-benefit test designed to optimize the timing of expenditures on adaptation.

These are exemplified in two Scenarios of World Bank findings depicted in table 1 above. This

showed that the net benefits of adaptations far exceed its net losses.

Adaptation not only is needed to increase the resilience of poor farmers to the threat of climate

change, but it also offers co-benefits in terms of agricultural productivity. That is, many of the

same practices that increase resilience to climate change also increase agricultural productivity (as

seen in table 2 below). However, there may also be tradeoffs between increasing farm

productivity and adaptation to climate change. Maximizing the synergies and reducing the

tradeoffs implicit in various land management practices affecting crop and livestock production,

requires a more holistic view of agricultural adaptation, productivity and foods security

implications.

Adaptation projects sometimes have tradeoffs with respect to agricultural productivity in the short

term before long-term benefits can be reaped. For example, leaving crop residues on the field

provides benefits in terms of crop yields and climate change resilience, through improved soil

fertility; however, studies have shown that where residues are used as a feed supplement, there is

a tradeoffs with livestock production. Improved crop rotation and fallowing also involve short-

term decreases in production due to decreases in cropping intensity. Weeding and waterlogging

are the potential tradeoffs of reduced tillage, and production gains from this practice are minimal

over the short term.

Other tradeoffs include the costs and risks involved in the restoration of degraded soils, in

particular the short-term costs of labor and nutrients, while yields tend to improve only in the

medium to long term. Moreover, in the short term, agroforestry practices can also displace some

cropland without providing additional benefits, at least during the establishment period. Poor

subsistence farmers may not be willing or able to accept the short-term losses associated with

some of these practices despite the long-term benefits.

Table 2: Synergies and tradeoffs between productivity and climate change adaptation

Management practice Productivity impacts Climate adaptation benefits

Improved crop varieties or types

(early-maturing, drought

resistant, etc.)

Increased crop yield and reduced

yield variability

Increased resilience against

climate change, particularly

increases in climate variability

(prolonged periods of drought,

seasonal shifts in rainfall, and

the like)

Changing planting dates Reduced likelihood of crop failure Maintained production

under changing rainfall

patterns, such as changes in

the timing of rains or erratic

rainfall patterns

Improved crop/fallow

rotation/rotation with legumes

Increased soil fertility and yields

over the medium to long term due to

nitrogen fixing in soils; short-term

losses due to reduced cropping

intensity

Improved soil fertility and

water holding capacity

increases resilience to climate

change

Use of cover crops Increased yields due to erosion

control and reduced nutrient

leaching; potential tradeoff due to

less grazing area in mixed crop–

livestock systems

Improved soil fertility and

water holding capacity

increases resilience to climate

change

Agroforestry Greater yields on adjacent cropland

due to improved rainwater

management and reduced erosion

Increased resilience to climate

change due to improved soil

conditions and water

management; benefits in terms

of livelihood diversification

Irrigation and water harvesting Higher yields, greater intensity of

land use

Reduced production variability

and greater climate resilience

when systems are well

designed and maintained

Rotational grazing Higher yields due to greater forage

availability and quality; potential

short-term tradeoff in terms of

numbers of livestock supported

Increased forage availability

over the long term, providing

greater climate resilience

Revegetation Improved yields over the medium to

long run; improved yields on

adjacent cropland due to reduced soil

and water erosion

Reduced variability due to

reduced soil and water erosion

Derived from: Bryan et al (2011)

It is important to note that the benefits and tradeoffs discussed above are location specific.

Strategies that co-benefits of climate change resilience and high yields in dry areas may not be

appropriate in other locations. For instance, soil bunds constructed to conserve soil moisture in

dry areas would not be appropriate and may in fact increase yield variability in areas with higher

rainfall. Conversely, structures constructed to support drainage in high-rainfall areas, such as

diversion ditches, would not be appropriate in dry areas. Also, while there appear to be many

practices available to farmers that provide synergistic benefits in terms of productivity and

adaptation, the extent to which farmers these adopt these practices will vary based on farm

household characteristics, the biophysical and socioeconomic environment, and the rural services

and incentives associated with the various management practices (Bryan et al, 2011).

3.0 WRAP-UP

Given that tradeoffs may exist, investment to promote adaptation in agriculture that has the

greatest co-benefits in terms of agricultural productivity and climate change resilience should be

prioritised. As recommended in the Bali Action Plan, developed countries should allocate

“adequate, predictable, and sustainable financial resources and new and additional resources,

including official and concessional funding for developing country parties” to help them adapt to

climate change. Developing countries should recognise that sole reliance on adaptation fund from

developed nations could be frustrating as this is fraught by several legal and regulatory

frameworks. Government role is crucial in ensuring that adequate finance is available in

developing countries, especially when not benefiting private flows.

The government and development corporations will also have to create enabling environment to

leverage more private finance. Multilateral and bilateral development banks should reinforce

issuance of generic bonds as a means of raising private finance from capital markets to support

projects that deliver climate change outcomes. Equity and debt, in particular, can be used as an

enabling instrument for both publicly and privately initiated adaptation, including direct project

lending and credit lines to local finance institutions. However, to reach the poor, finance may need

to be delivered in new ways, including through microfinance products.

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