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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