Climate Finance for Agriculture and Livelihoods

Kristi Foster & Henry NeufeldtClimate Change Science DomainWorld Agroforestry Centre (ICRAF)

July 3, 2013

Road Map• OVERVIEW

• PROJECTS ON THE GROUND- Biocarbon (Mitigation) - Ensuring Farmer Benefits- Credit/Insurance (Adaptation)

• GLOBAL FINANCE STRUCTURE- Private Investment- The Public Domain

• BUILDING INSTITUTIONS

• KEY MESSAGES

= roughly 15 - 25 % of total global anthropogenic emissions of greenhouse gases

(Vermeulen et al. 2012)

Agriculture + agriculture-driven land conversion contributes 7.3 - 12.7 GtCO2e globally per year

Photo: Jane Boyles

Smallholder farmers are

vulnerable to climate change,

climate variability and shocks

Neil Palmer (CIAT)

P.Casier (CGIAR)

P.Casier (CGIAR)

Neil Palmer (CIAT)

But…

But…

Neil Palmer (CIAT) Neil Palmer (CIAT)

Neil Palmer (CIAT)

P.Casier (CGIAR)

Climate finance - driving a shift to sustainable agricultureMitigation finance ● Adaptation finance ● Public & private sector finance to support sustainable development, adaptation and mitigation

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Biocarbon Projects & Mitigation Finance Looking Beyond Carbon in Biocarbon Projects

BIOCARBON PROJECTS Sequester/conserve carbon in forests, agricultural systems & other landscapes

MITIGATION FINANCESupports activities that reduce GHG emissions or increase sequestration• includes market- and funds-based

carbon finance• Has evolved over the past 10 years

Charlie_Pye-Smith (ICRAF)

Most biocarbon projects occur in the forestry sector

REDD+Reducing Emissions from Deforestation and Forest

Degradation

K.Foster (ICRAF)

What have we learned from carbon projects so far?

• Volume & timing of carbon revenues depends on project type- AFOLU ≠ REDD+- AFOLU projects can take up to 16 years to reach break-even points

Potential Solution: Public-private partnerships (PPPs). By pooling finance and skills, PPPs can share risks, provide loans and credit, or deliver training and hence encourage investment (Streck et al. 2012)

• Public funding up-front is critical for agricultural projects- Negative NPVs for projects targeting smallholders in the Sahel (Luedeling and Neufeldt 2012)- Investors are deterred by the high risk and delayed returns

Ensuring Benefits for Farmers

• Constraints faced by farmers: high costs of adoption, poor local institutional capacity, insecure land tenure, risks associated with investment in new practices

• Carbon projects must overcome these barriers and secure short-and long-term benefits for farmers

Neil Palmer (CIAT)

for the carbon

• Hypothetical carbon projects, Sahel: farmer NPV between US$36-$71 for smallholder farmers at a carbon price of US$20 /tCO2e (Luedeling and Neufeldt 2012)

• Sustaining Agriculture in a Changing Climate (SACC) Project, Kenya:farmers’ expected carbon revenue is only US$77 over 25 years based on a carbon price of $8/tCO2e

• N’hambita Community Carbon Project, Mozambique:With carbon revenue paid in the first 7 years assuming a project lifespan of 100 years, carbon has only a minor impact on incomes (Jindal et al. 2012; Palmer and Silber 2012)

NOT

‘Co-benefits’

• Increased productivity

• Income diversification

• Improved health

• Fuel & timber

• Reduced labour• Ecosystem Services (erosion control,

improved water and nutrient efficiency, etc.)

• Increased food security

>> Reduced vulnerabilityTop: Charlie Pye-Smith (ICRAF)Bottom: Valter_Ziantoni (ICRAF)

Carbon Payments vs. ‘Co-benefits’

Photo: blogs.phoenixnewtimes.com

Carbon is the real co-benefit

C• Poles• Timber• Fuelwood• Fruit

$ $$$

Income-generating potential

Sustaining Agriculture in a Changing Climate (SACC) Project

Up-front public sector finance is needed to reduce the investment risk associated with smallholder agricultural projects, overcome the initial investment gap and leverage private capital towards sustainable agriculture

Photo: Walter Ziantoni (ICRAF)

Farmers’ income from fuelwood, poles &

timber expected to be at least

50X greater than carbon

revenue (US$3850 vs. US$77 over 25 years)

N’hambita Community Carbon Project

• Carbon payments estimated at US$209 - $1047 /ha at US$6.72/tCO2 vs. total revenues from tree cash crops estimated at US$31,728 - $97,125 /ha

• Cash crop systems can continue to provide significant income benefits to farmers after carbon payments cease

From Palmer and Silber 2012

Households in Ethiopia’s highlands could obtain net discounted revenues of US$532 - $2,342 in 15 years from agroforestry practices using minimal land and without any carbon payment (Duguma 2013)

Daniel Tiveau (CIFOR)

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In the Maradi and Zinder Regions of Niger, non-carbon benefits are motivating the establishment of large-scale

parklands, increasing gross annual income by about 18 to 24 % (Sendzimir et al. 2011; Haglund et al. 2011)

Local Institutional Capacity is Key

From the farmers’ perspective: • Partnering with strong, well-

established groups

From the project perspective: • Having strong relationships in place

between NGOs and local communities and building on existing projects

• Working with pre-existing groups of farmers

• Shifting governance to local communities and partnering with other institutions or projects

Shames et al. 2012a; Shames et al. 2012b; Gosset and Neufeldt 2013Top: Matt Cavanagh (FracturedPixel)Bottom: Sonny Abesamis (avrene)

Land Tenure

Unclear or insecure land tenure can:

• Prevent farmers from receiving carbon revenue• Lead to conflict within local communities• Lead to inequitable benefits for

women/marginalized groups• Allow government agencies/other interests to

claim lands• Dissuade potential investors due to risks

Shames et al. 2012a, Havemann 2012, Baroudy E, Hooda N. 2012

Neil Palmer (CIAT)

http://www.newwinechurch.com

Microfinance & Poverty Traps

Iramba District, Tanzania:Smallholders who received microcredit produced 31.8 bags of sunflower and maize /acre compared to 17.7 bags for those that did not. 61.2% of credit beneficiaries had easy access to markets compared to 24.5% of non credit beneficiaries (Girabi and Mwakaje 2013)

Piura, Peru:It’s estimated that credit constraints lower the value of output /ha by 26% (Guirkinger and Boucher 2008)

• Investment barriers prevent farmers from adopting higher-yield activities

• Climatic shocks can destroy productive assets or force households to sell them

• Risk-averse households may choose low-return practices over riskier, higher-return enterprises

Access to finance can help farmers overcome barriers and protect against risk

Chronic Poverty

• High transaction costs• Asymmetric information• High exposure to correlated natural disaster risks and potentially catastrophic losses for lenders• Poor infrastructure / distribution challenges• Fluctuations in prices for agricultural products

The solution? Linking microcredit with index insurance (e.g. Skees and Barnett 2006; Guirkinger and Boucher 2008)

The challenges with rural agriculture

Francesco Fiondella (CGIAR Climate)

Weather Index Insurance for Climate Change Adaptation

Advantages• Low transaction costs• Not susceptible to adverse selection• Not susceptible to moral hazard• Simple to administer • Objective

P.Casier (CGIAR Climate)

Improved management practices = a precondition for index insurance

Weather Index Insurance - Challenges

• Affordability. Poor farmers are often a) cash constrained and unable to make upfront payment for premiums; and b) financially illiterate, requiring financial education and training • Supply. Poor farmers generally are not attractive markets for insurers as the premium per farmer is very low

• Data. Weather data is the key input variable, yet poor data infrastructure often exists in remote agricultural areas or fails to capture local weather variations

• Capacity. There is a considerable human and material capacity gap for expansion of the product to cover multiple weather risks and agricultural products

Basis risk. Index insurance pays out when a climate-related indicator passes a threshold, independent of whether real losses have occurred, meaning that farmers’ vulnerability might not be reduced

Weather index insurance should be considered as one component of a holistic risk management mechanisms that covers multiple risk types

Agricultural Lending: Potential Synergies

MFICarbon Project

Sketch by Aiden Jones

Option 1) Providing funding to the project (microcredit)Option 2) Benefit distribution via MFI

Werneck 2012But: Project developers must

provide clear incentives

aWeather Index-based Insurance in ActionThe Horn of Africa Risk Transfer for Adaptation (HARITA)

• Enables smallholder farmers to strengthen food and income security through risk reduction, drought insurance, credit and savings

• Scaled up from 200 to nearly 19,000 households since inception, with over 12,000 farmers receiving insurance payouts due to 2012 drought conditions

Oxfam-America 2012a,b,c; Oxfam-America 2010

The R4 Rural Resilience Initiative to scale up the model across Ethiopia, Senegal + other countries over the next 3 years

Making the link

Ruby Gold

Smallholder Farmers

Global-level Finance

Left to right: IRRI, Ruby Gold, pixagraphic

Private Investment in Sustainable Land Management A Global Perspective

The Munden Project - Inari

Constraints: high risk, small scales, diversity in agriculture- credit that restricts farmers’ flexibility

Risk reduction through diversification- Investment across a wide range of countries, landscapes, farm types, crop cycles and sizes >> reduces risk >> capital at lower interest rates and longer maturities + high rate of return and smooth cash flows

Enabling producers- 3 key advantages: lower payment amounts to investors, longer maturity credit and a flexible payment schedule

The Public Domain – Smart Investment

• Clear roles and due diligence• Integration of adaptation and mitigation finance with other

finance for developing countries to avoid parallel programs and overlaps

• Subsidizing only to the point of financial viability• Investment by multilateral banks (e.g. World Bank), regional

development banks and other international financial institutions in a networked finance platform could reduce interest rates sufficiently to leverage private investment

Building Institutions

Daniel Fleming

Finance

Farmers

Formal Market

Community-based organizationsInformal

market

Project implementer

Key Messages

Public and private investment

• Up-front public sector finance is needed to reduce the investment risk associated with smallholder agricultural projects, overcome the initial investment gap and leverage private capital towards sustainable agriculture

Photo: Ecoagriculture Partners

• Investment in smallholder agriculture should take a holistic approach, focusing on the issues of food security and livelihoods and foster mitigation as a co-benefit

Building local institutional capacity• Building on local development institutions,

engaging with pre-existing groups of farmers, strengthening the capacity of community-based organizations and securing land tenure can ensure that project benefits reach farmers and are distributed equitably

Key Messages

Improving Index Insurance Schemes• Focus should be placed on the development of pro-poor insurance markets,

addressing affordability for poor farmers, building human resource capacity, increasing awareness about insurance and using far-reaching, efficient distribution channels

Photo: Wendy Stone (ICRAF)

• Using a networked financing approach that combines many and diverse investments in land can overcome the high risk associated with smallholder farmers and drive investment to promote sustainable practices on a large scale

• Scientifically robust research frameworks are needed to quantify how management practices can reduce climate risk and attract investment in climate change adaptation projects

Key Messages

Research Gap

P. Casier (CGIAR)

Thank you!

Policy Brief: Climate Finance for Agriculture and Livelihoods

References

Baroudy E, Hooda N. 2012. Sustainable land management and carbon finance. In: E Wollenberg, A Nihart, M Tapio-Biström, M Grieg-Gran, eds. 2012. Climate change mitigation and agriculture. Abingdon: Earthscan, p. 123-130.

Duguma LA. 2013. Financial analysis of agroforestry land uses and its implications for smallholder farmers livelihood improvement in Ethiopia. Agroforestry Systems 87:217–231.

Girabi F, Mwakaje AEG. 2013. Impact of microfinance on smallholder farm productivity in Tanzania: the case of Iramba District. Asian Economic and Financial Review 3(2): 227-242.

Gosset L, Neufeldt H. 2012. Pro-poor Biocarbon Projects in Eastern Africa: Economic and Institutional Lessons. Paper prepared for the International Workshop Institutions for Inclusive Climate-Smart Agriculture, Nairobi, Kenya, September 10-13, 2012.

Guirkinger C, Boucher SR 2008. Credit constraints and productivity in Peruvian agriculture. Agricultural Economics 39: 295-308.

Haglund E, Ndjeunga J, Snook L, Pasternak D. 2011. Dry land tree management for improved household livelihoods: farmer managed natural regeneration in Niger. Journal of Environmental Management 92:1696–1705.

Havemann T. 2012. Financing mitigation in smallholder agricultural systems. In: E Wollenberg, A Nihart, M Tapio-Biström, M Grieg-Gran, eds. 2012. Climate change mitigation and agriculture. Abingdon: Earthscan, p. 131-143.

Jindal R, Kerr JM, Carter S. 2012. Reducing Poverty Through Carbon Forestry? Impacts of the N’hambita Community Carbon Project in Mozambique. World Development 40:2123–2135.

References

Luedeling E, Neufeldt H. 2012. Carbon sequestration potential of parkland agroforestry in the Sahel. Climate Change 115: 443–461.

Oxfam-America. 2012a. R4 Rural Resilience Initiative Quarterly Report July – September 2012. Oxfam-America Inc., Boston. Available online at: http://www.oxfamamerica.org/publications/r4-rural-resilience-initiative-3

Oxfam America. 2012b . Largest Weather Index Insurance Payout for Small Scale African Farmers Triggered by Satellite Technology. Oxfam America Press Room. Boston. Available online at: http://www.oxfamamerica.org/press/pressreleases/largest-weather-index-insurance-payout-for-small-scale-african-farmers-triggered-by-satellite-technology

Oxfam America. 2012c. R4 Rural Resilience Initiative: Five Year Plan. Oxfam America Inc., Boston. Available online at: http://www.oxfamamerica.org/publications/r4-rural-resilience-initiative

Oxfam America. 2010. Horn of Africa Risk Transfer for Adaptation HARITA project report: November 2007 – December 2009. Oxfam America Inc., Boston. Available online at: http://www.oxfamamerica.org/publications/harita-project-report-nov07-dec09

Palmer C, Silber T. 2012. Trade-offs between carbon sequestration and rural incomes in the N’hambita Community Carbon Project, Mozambique. Land Use Policy 29:83–93.

Sendzimir J, Reij CP, Magnuszewski P. 2011. Rebuilding Resilience in the Sahel : Regreening in the Maradi and Zinder Regions of Niger. Ecology and Society 16:1.

References

Shames S, Buck LE, Scherr SJ. 2012a. Reducing costs and improving benefits in smallholder agricultural carbon projects. In: E Wollenberg, A Nihart, M Tapio-Biström, M Grieg-Gran, eds. 2012. Climate change mitigation and agriculture. Abingdon: Earthscan, p. 69-77.

Shames S, Wollenberg E, Buck LE, Kristjanson P, Masiga M, Biryahaho B. 2012b. Institutional innovations in African smallholder carbon projects. CCAFS Report no. 8. CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS), Copenhagen. Available online at: www.ccafs.cgiar.org/resources

Skees J, Barnett BJ. 2006. Enhancing microfinance using index-based risk transfer products. Agricultural Finance Review: 235-250.

Streck C, Burns D, Guimaraes L. 2012. Incentives and benefits for climate change mitigation for smallholder farmers. CCAFS Report no. 7. CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS), Copenhagen. Available online at: www.ccafs.cgiar.org/resources

Vermeulen SJ, Campbell BM, Ingram JSI. 2012. Climate change and food systems. Annual Review of Environment and Resources 37:195-222.

Werneck, F. 2012. The potential for microfinance as a channel for carbon payments. In: E Wollenberg, A Nihart, M Tapio- Biström, M Grieg-Gran, eds. 2012. Climate change mitigation and agriculture. Abingdon: Earthscan, p. 159- 169.