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Food Systems Finance Advantage: Climate Smart Public Support - Martien van Nieuwkoop Agriculture Global Practice at the World Bank
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This presentation addresses options to make public support for to agriculture climate smart. The presentation was held by Martien van Nieuwkoop, Director of Agriculture Global Practice at the World Bank at the Food Systems Finance Advantage event, part of the Agriculture Advantage 2.0 series at COP24.
CCAFS | CGIAR Research Program on Climate Change, Agriculture and Food Security
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Food Systems Finance Advantage: Climate Smart Public Support - Martien van Nieuwkoop Agriculture Global Practice at the World Bank
- Unlocking the potential of $570bn per year in public support for positive climate outcomes. Keynote Martien van Nieuwkoop Director, Agriculture, World Bank December 11th, 2018 MAKING PUBLIC SUPPORT TO AGRICULTURE CLIMATE SMART
- 1 THE GLOBAL FOOOD SYSTEM – A REMINDER The Good News: • Steady progress in production growth (approx. 2.3% p.a. total and 0.6% p.a. per capita.) • Real price decreases over the past 50 years • Chronic hunger cut by 20% since 1990-92 The Bad News: • 2 billion people undernourished and malnourished • 2 billion people overweight/obese • 70% use of freshwater resources • 1/3 of earth’s soils have been degraded • 1/3 of global agricultural production lost or wasted • 25% of global GHG emissions (inclusive of land use changes)
- Production Payments 22% Input Subsidies 10%Public Goods 16% Market Price Support 52% Two forms of public support have the most distortive potential: • Coupled subsidies (i.e., tied to inputs or outputs): fertilizer subsidies, in particular, have contributed to the overuse of nitrogen fertilizer globally resulting in high GHG emissions and other environmental problems; • Price support, which encourages over-production of certain commodities and inefficient use of limited natural resources, and in some notable cases encourage land use conversion Public Support to Agriculture by Category (2015-17) 2 Public Finance: Aligning Incentives for Adoption of Climate Smart Agriculture Options Environmental Purposes 1% Total: US$ 570 billion per year Equivalent to 28% of Agriculture Sector Value Added
- Public Finance: Increases over past 15 years were concentrated in Non-OECD countries and primarily in the form of market price support and payments tied to inputs or outputs 3 Key Trends: • Excluding public goods, support for producers increased from $255 billion in 2000-02 to $480 billion in 2015-17 • Most of this increase happened in non-OECD countries, with largest increase was in China, increasing 16x • US and EU are more balanced in the types of support they provide, others mostly provide market price support and input subsidies (most distortionary forms of subsidies) 0 50 100 150 200 250 OECD Non-OECDUS$,Billions Non-commodity criteria Miscellaneous payments Direct payments, decoupled Direct payments, coupled Payments for inputs Commodity support Comparison of Public Support by Category between OECD & NON-OECD (2015-17)
- 4 THE GLOBAL FOOOD SYSTEM – THE CHALLENGE
- Case Study: Lessons from CAP Reform in the EU Trends in the Common Agricultural Policy (CAP) 2014-2020: • Shift toward flexible support for rural development • Market price support reduced from 92% in 1986-88 to 27% between to 2015-17 • Over the same period, fertilizer use and emissions have declined – while yields have kept growing CAP and CSA: • The principle objective of 2013 CAP reform was sustainable management of natural resources and climate action • To be achieved via combination of conservation compliance, greening requirements & inclusion of conservation into rural development spending • To date only a small portion of rural development funds are explicitly deployed for climate outcomes 0 20 40 60 80 100 120 140 160 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Billions Market support Input based Area based, production required Decoupled Non-current area based, production required Miscellaneous Non-commodity criteria based EU CAP reforms: improved environmental outcomes without yield loss: N2O emissions from fertilizers dropped 17% yet yields increased 28%
- Case Study Brazil: Strong Innovation Overview: • Annual Support: US $6 billion for price support (over last 10 years) – equivalent to 10% of agriculture value added • About 1/3 of support 2016 tied to environmental compliance laws or other public goods (2016). • Expanded crop insurance program offering 35-45% subsidies: Subsidy ceilings led to limited participation from large- scale farms - Only 3.6% of agricultural production covered by insurance Innovative Forms of Public Support Combining Carrot and Stick “Carrot”: ABC Program • Low interest loans for farmers implementing CSA • Emphasis on restoration of degraded pastures and increased pasture/forest rotations. • Program aims to rehabilitate 15 million ha of degraded pastures, increase area under zero tillage from 25 to 33 million ha and to reduce GHG emissions by 160 million t of CO2 equivalent per year by 2020 “Stick”: Amazon Loan Conditionalities • Access to credit conditional on compliance with environmental laws in Amazon biome. • US$ 1.4 bn in credits denied by Government between 2008-11. • Results: Policy effective at reducing deforestation by cattle ranchers, but somewhat less effective for reducing deforestation by crop farmers.
- Public Finance: Emerging Lessons on How to Redirect Public Support 7 Lessons: • A larger share of resources should be shifted towards investment (e.g. into rural development programs; agricultural innovation systems; strengthening of knowledge and advisory services) • Farm support should be coupled to a prohibition of further land clearing. • Support could be combined with new legal requirements to avoid leakage and moral hazard. • Programs should prioritize innovative adaptation and mitigation strategies. • Incentive programs should offer graduated payments for higher performance.
- OUR ANALYSIS: CSA PROFILES In 2017/18 we financed CSA investments generating over US$ 2bn in Climate Change Co-Benefits. WB Is Scaling Up Climate Smart Agriculture We work with clients to better understand CSA challenges and identify investments.
- Operational Commitments Underpinning CSA Mainstreaming Climate & Disaster Risk Screening GHG Accounting Shadow Price of Carbon Climate Finance Tracking (Co-Benefits) Identify projects’ exposure to climate and disaster risks Ex-Ante determination of gross and net GHG emissions Accounting for carbon externalities in economic analysis Determine projects’ share of climate finance by identifying adaptation and mitigation Co- Benefits RISKS EMISSIONS VALUATION FINANCE World Bank 2025 Climate Change Commitments: Additional tools and approaches being developed We require all projects to complete four Climate Change related processes:
- The Maximizing Finance for Development (MFD) Approach Maximize development resources by deploying a systematic framework (“Cascade”) to identify opportunities to facilitate private sector investment. The redirection of public agriculture support, eliminating allocative and technical inefficiencies, will provide better incentives for private sector investments in CSA. THE CASCADE APPROACH IN AGRICULTURAL VALUE CHAINS
- 11 SMART Punjab Program for Results: Comprehensive Reform of the Agriculture Policy Framework The SMART Program For Results (P4R) of US$ 300 Million • Punjab region plays key role in national agriculture, relies on increasingly scarce groundwater resources • Despite being supported by very high levels of price support, agricultural growth has been minimal in recent years, even dipping into negative territory for the first time in history. • Program finances a package of policy reforms, investments and institutional strengthening to support economic growth, resilience and inclusiveness. Key Result Areas: • Increased productivity crop and livestock smallholder farmers (incl. an overhaul of the Ag research & extension system) • Increased value added (private investments in farm and non-farm MSMEs) • Improved resilience (to climate change and natural disasters), includes: • Disbursement Linked Indicator (DLI) on the share of investment classified as CSA • Improving farmers’ resilience through a crop insurance program, improvements in irrigation maintenance and water service delivery
- 12 Framework for Agriculture and Rural Transformation Smart Market Reforms • Wheat market reform • Irrigation reform: Governance and pricing • Agriculture and livestock markets and price policies • Agriculture inputs and finance: Fertilizer, seed, vaccine & semen production, etc. re-directed towards Smart Public Investments and Incentives • Technology and infrastructure (e.g. drip irrigation, silos) for High-Value Agriculture (HVA) • Re-focusing of agricultural innovation • Competitive agriculture research grants • Support to agribusiness (value adding) • Skills development • Crop insurance • Climate-smart agriculture • Smart subsidies for fertilizer, seed, finance, laser land leveling, drip irrigation, switching to oil seed crops etc. PKR 52 bn / year
- THANK YOU Martien van Nieuwkoop Director, Agriculture, World Bank MvNieuwkoop@worldbank.org Take a look at our recent publications!
Editor's Notes
- Support for Public Goods: About $90 billion) and Only 1 % ($4 billion) specifically for environmental benefits (conservation, land retirement, etc.). Input subsidies lead to technical inefficiencies, e.g. overuse of fertilizers causing nitrous oxide emissions and groundwater pollution Production payments could encourage land expansion, resulting in GHG emissions that could have been avoided Market price support lead to allocative inefficiencies; compounding vulnerabilities to climate change
- Trend is towards more agriculture support programs with distorting effects. Largest increase in non-OECD countries. Particularly for market price support, which is particularly distorting.
- This increase in public support for agriculture is not aligned with the challenges of the global food system that lay ahead.
- But changes in agriculture support programs are happening, for instance in the EU, where these is a big shift towards decoupling support from production decisions. This has resulted in lower fertilizer applications, reducing N2O emissions, while at the same time yields have increased by 28%. So, the good news is that negative externalities are being addressed. But at the same time, the full potential of unlocking positive externalities has not yet fully deployed, as only a small portion of support is directly linked to positive climate outcomes.
- In this respect, Brazil’s experience is worth mentioning as it aims to tie support to agriculture with positive climate outcomes under its ABC program which provided a mix of carrots and sticks. Background: Brazil has made impressive efforts in recent years toward CSA. Suffering large-scale deforestation of the Amazon region, some of Brazil’s recent agricultural support reforms directly address CSA environmental goals by employing conditionality and compliance to increase production efficiency and to avoid and manage agricultural land expansion. Insurance background: Since 2006, Brazil has expanded a crop insurance program that offers 35-45% subsidies for premium payments. Brazil’s dominant large-scale farms have had limited participation because subsidy ceilings ($7,550 for livestock and $22,650 for crops). As a result, insurance covered only 3.6% of the country’s agricultural production measured by value in 2014 and subsidy levels were down to $126 million. (Ministry of Agriculture, Livestock and Food Supply 2016) Brazil Emissions Challenges: Largest source of emissions is deforestation tied to agricultural expansion (mostly for low intensity cattle ranching), which generated 57% of emissions - averaged 2.3 million ha annually from 1990-2010. ½ of emissions from agricultural production (excluding deforestation) are from enteric methane. ABC Program Background: The ABC Plan is a credit initiative providing low-interest loans to farmers implementing CSA practices including no-till agriculture, the restoration of degraded pasture, the planting of commercial forests, biological nitrogen fixation, treatment of animal waste and the integration of crops, livestock and forest. It aims to rehabilitate 15 million ha of degraded pastures, increase area under zero tillage from 25 to 33 million ha and to reduce ghg emissions by 160 million t of CO2 equivalent per year by 2020. Initial uptake was slow but accelerated recently, with more than US$ 4 bn in loans allocated. Amazon Loan Conditionality: Policy to deny subsidized government credit to producers in the Amazon biome who could not demonstrate compliance with agricultural laws. From 2008 to 2011, the Brazilian government denied $1.4 billion in credits as a result of this policy. A rigorous study demonstrated that this policy was effective in reducing deforestation by cattle ranchers, but was less effective for reducing deforestation by crop farmers. (Assunção, Juliano et al. 2016). Unfortunately, a later study suggested that this policy has been less effective at reducing deforestation on registered properties. In addition to a general lack of enforcement, the policy’s satellite monitoring systems cannot identify clearings less than 10 hectares. As a result, farmers did not fear loss of credit for low-level clearing. (Azevedo et al. 2017) This subsequent study, however, appears to apply to small-scaling, additional clearing on existing farmers rather than massive clearing of entirely new farms, and improvements in monitoring offer the potential to improve the effectiveness on these farms as well.
- Emerging lessons, Support should shift to public investments, particularly R&D and extension. Currently only US$30 billion/year in public spending on plant breeding and US$4 billion in private funding. More effective extension is critical as a big barrier to adoption to CSA is lack of knowledge as flagged in the paper on Bringing the Concept of CSA to Life that the Bank is also launching during the COP. Support should be explicitly tied to positive environmental or climate outcomes, including an element of conditionality. Support should be structured to provide incentives towards improving performance over time and fostering innovation.
- CSA Profiles & Investment Plans: CSA Profiles provide an initial stocktaking of the national CSA context. The Series is growing rapidly, now covering 30 countries and growing. CSIPs build on profiles to identify specific investments using a combination of robust decision making, quantitative and qualitative methods. CSA is not rocket science. Insights gained: Many opportunities for Triple-Win Solutions. But absence of silver bullet and need for tailored solutions pose challenges to rapid roll-out and scale-up. Co-Benefit figures: Each investment had a positive return on economic investment for farmers indicating the profitability of CSA for farmers. Strong focus on extension services and knowledge transfer. Investments included at scale CSA projects including a US$500 Million investment in Bangladesh’s livestock sector and $420 Million in financing for a Climate Resilient Agriculture in India.
- Overall PDO & Summary: PDO: To increase the productivity of crop and livestock farmers, improve their climate resilience, and foster agribusiness development in Punjab. The SMART Punjab PforR supports the implementation of a coherent package of policy reforms, institutional change, and reorientation of public resources toward productive public investments and smart subsidies. Specific key reforms include a shift from universal to targeted agricultural input subsidies through an E-voucher scheme for smallholders, modernization of wheat marketing by phasing out public wheat procurement, reducing strategic wheat reserves from more than 4 million to not more than 2 million metric tons (MT), removing distortions in output markets for crops and livestock products, and reforming provincial crop and livestock research. SMART Punjab will also improve the financial sustainability and efficient use of irrigation systems, promote agribusiness, and improve the resilience of producers by designing and implementing a crop insurance system, which could potentially leverage access to production credit. CSA DLI: Context: In SMART Punjab, the CSA DLI is part of a set of three DLIs that together measure progress towards the third Results Area in SMART that has to do with improving farmers’ resilience through introducing a crop insurance program, improvement of M&R in irrigation, and increased public investments in CSA. Philosophy behind CSA DLI: enhancing public sector investment in CSA would help farmers adopting new technologies and approaches and lower potential yield losses caused by climate change. Measurement: by tracking the percentage of the allocation of agriculture in the so-called Annual Development Plan (ADP which is the GoPunjab’s investment budget) meant for CSA schemes. CSA definition used: “Agriculture that sustainably increases productivity, enhances resilience (adaptation), reduces/removes greenhouse gasses (mitigation) where possible, and enhances achievement of national food security and national development goals.” Expected Results: Mitigating Economic Loss Through CSA: Projections report an average of AgGDP loss of about 5% across different climate change scenarios – per year If, by the end of year 5 of SMART Punjab, CSA is adopted on 20% of cropland and could mitigate 50% of that loss, that would mean 0.2*0.5*5% = 0.5% AgGDP loss avoided (equivalent to about US$200 million). Job Protection Roughly 41,000 jobs would avoid being lost if CSA practices are adopted.
- Package provides for triple-win benefits, this is not only about better environment or climate outcomes. Political economy: package of reforms; each individual reform has winners and losers, overall results can cancel winners and losers. Mitigation benefits associated with the package could provide sound rationale for climate financing, e.g. allowing GCF to go at scale.
- Participants can take a picture of the QR code using a QR Code reader app or updated iOS phone – it will take them to our AG GP CSA Page where they can find the publications
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