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Climate Finance for Agriculture and Livelihoods


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Climate Finance for Agriculture and Livelihoods

  1. 1. Climate Finance for Agriculture and Livelihoods Kristi Foster & Henry Neufeldt Climate Change Science Domain World Agroforestry Centre (ICRAF) July 3, 2013
  2. 2. 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
  3. 3. = 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
  4. 4. P.Casier (CGIAR) Neil Palmer (CIAT)
  5. 5. But… But… Neil Palmer (CIAT) Neil Palmer (CIAT) Neil Palmer (CIAT) P.Casier (CGIAR)
  6. 6. Climate finance - driving a shift to sustainable agriculture Mitigation finance ● Adaptation finance ● Public & private sector finance to support sustainable development, adaptation and mitigation
  7. 7. Biocarbon Projects & Mitigation Finance Looking Beyond Carbon in Biocarbon Projects BIOCARBON PROJECTS Sequester/conserve carbon in forests, agricultural systems & other landscapes MITIGATION FINANCE Supports 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)
  8. 8. Most biocarbon projects occur in the forestry sector REDD+ Reducing Emissions from Deforestation and Forest Degradation K.Foster (ICRAF)
  9. 9. 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
  10. 10. 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)
  11. 11. 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)
  12. 12. ‘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)
  13. 13. Carbon Payments vs. ‘Co-benefits’ Photo: Carbon is the real co-benefit C • Poles • Timber • Fuelwood • Fruit $ $$$ Income-generating potential
  14. 14. 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)
  15. 15. 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
  16. 16. 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) Sdds fghfh 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)
  17. 17. 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)
  18. 18. 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)
  19. 19. 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
  20. 20. • 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)
  21. 21. 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
  22. 22. 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
  23. 23. Agricultural Lending: Potential Synergies MFI Carbon Project Sketch by Aiden Jones Option 1) Providing funding to the project (microcredit) Option 2) Benefit distribution via MFI Werneck 2012
  24. 24. a Weather Index-based Insurance in Action The 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
  25. 25. Making the link Ruby Gold Smallholder Farmers Global-level Finance Left to right: IRRI, Ruby Gold, pixagraphic
  26. 26. Private Investment in Sustainable Land Management A Global Perspective
  27. 27. 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
  28. 28. 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
  29. 29. Building Institutions Daniel Fleming Finance Farmers Formal Market Community-based organizations Informal market Project implementer
  30. 30. 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
  31. 31. 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)
  32. 32. • 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
  33. 33. P. Casier (CGIAR) Thank you! Policy Brief: Climate Finance for Agriculture and Livelihoods
  34. 34. 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.
  35. 35. 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: 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: 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: Oxfam America. 2010. Horn of Africa Risk Transfer for Adaptation HARITA project report: November 2007 – December 2009. Oxfam America Inc., Boston. Available online at: 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.
  36. 36. 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: 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: 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.