Not for the carbon: re-thinking climate finance for farmers

With temperatures rising and warming expected to continue or accelerate in many parts of the developing world, smallholder farmers face increasing challenges on environmental and economic fronts. Climate finance – public- and private sector-sourced finance to support climate change mitigation and adaptation initiatives – has the potential to drive a shift to low-carbon, climate-resilient and sustainable agricultural practices. Yet making this finance work for the rural smallholders is no mean feat. Fortunately, when it comes to climate finance, Dr. Henry Neufeldt, leader of the Global Research Project on Climate Change at the World Agroforestry Centre (ICRAF), isn’t thinking small. His vision is an integrated and robust system that extends from smallholder farmers all the way to public and private funding at the global level. “We want to build evidence of a climate finance architecture which connects farmers to global carbon and other climate finance initiatives, to people who are interested in investing in land and doing the right thing.” This was the vision that brought together five diverse panelists representing public and private finance and civil society in a Roundtable Session entitled Climate finance for agriculture and livelihoods as part of Landscapes and Livelihoods Day. Led by ICRAF in partnership with CARE International and the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS), the session looked at the challenges faced in delivering the benefits of carbon finance to farmers and discussed how many and diverse climate finance projects could be combined to reduce risks and costs and attract investments. Neufeldt said an analysis of seven large-scale biocarbon projects in East Africa indicated that to work for smallholder farmers: 1) Upfront public-sector funding is essential. Unlike carbon projects in the forestry sector, agricultural projects must combat low initial carbon stocks and very high project costs. “That’s basically two thirds of the whole project during which we have debt. No private investor is going to invest directly in that kind of a project,” Neufeldt pointed out, stressing the need for public sector funding to bridge this initial barrier. 2) ‘Co-benefits’ are more important than carbon. With droughts, floods and food insecurity knocking at the door, farmers will not be motivated simply by the mitigation benefit. 3) Building the connection between farmers and carbon projects is key. Neufeldt described a value chain to be constructed between farmers and the carbon market to address the disconnect between individual farmers and carbon projects. Within this infrastructure, Community Based Organizations (CBOs) act as intermediaries between farmers and the project implementers, who can then engage directly with the carbon market. “Building this kind of value chain will enable individual farmers to go and speak with the marketplace.” “Farmers aren’t doing it for the carbon and they aren’t doing it for the mitigation; they only invest in carbon projects because they recognize that clear benefits for their livelihoods and food security arise from these projects,” Neufeldt explained. These co-benefits include everything from increased agricultural productivity as a result of increased soil fertility and reduced erosion, to reduced labour of collecting firewood, to income from the sale of tree products. The result is not only improved livelihoods and food security for farmers, but consequently greater resilience in the face of climate change. An important part of this picture is long-term investment of project implementers; by building on pre-existing relationships, it is possible to both smooth technical implementation and avoid high project costs. “You can’t just parachute into an area and believe that a carbon project will work,” said Neufeldt. Phil Franks, CARE International’s Poverty, Environment and Climate Change Network Coordinator, used numbers to illustrate the role of carbon finance in climate smart agriculture. Based on the Sustainable Agriculture in a Changing Climate (SACC) project, he shocked the audience with the following statistics, which showed that money cannot be a motivator for farmers to participate in carbon markets: The project's break-even point is estimated at year 15, even under optimistic scenarios. Farmers will likely receive 55 dollars each over the project's 25 year lifespan - or $3 per year. Direct income from the sale of building poles and timber during the lifespan of the project is estimated at more than 50 times the value of any carbon income to the farmers. According to Franks, another major issue is that of carbon accounting. Conforming to technical specifications that regulate planting, spacing, thinning and harvesting – common in most current carbon accounting methodologies – “…is  a long way from the reality of poor farmers in the world of increasing uncertainty and risk, in particular climate risk.” Not only does this approach make it easy for farmers to fall out of technical specification and thereby lose income, it fails to count any additional trees farmers plant that don’t fit within regulations.   “Agroforestry is building assets and that’s great from a resilience point of view, but farmers need the flexibility to be able to cash in these assets, “ he said. “If you want to optimize for smallholder farmers, you have to empower them to make those decisions and not tie their hands with complex technical specifications.” Franks emphasized the need to extend carbon projects over longer time periods to capture synergies between productivity, climate resilience and carbon sequestration. At a landscape scale, he pointed out, carbon finance can make a significant contribution to climate smart approaches to smallholder agriculture. Rahel Diro of Columbia University addressed another piece of the climate finance puzzle with the issue of adaptation insurance. She explained that increasing productivity requires farmers to take substantial risks and that index agriculture insurance can reduce these risks, thereby “unlocking the productive potential of farmers.” Rather than being centred around crop damage, index insurance is based on a weather index such as rainfall. According to Diro, this is precisely what makes it better suited to smallholder farmers than traditional insurance. Despite being a relatively new innovation, success stories involving index insurance already exist. Diro pointed to a project led by Oxfam America in northern Ethiopia which has gone from 200 to 18,000 farmers since 2009, with approximately 12,000 farmers currently receiving insurance payouts. The project takes a holistic risk management approach, using insurance only to cover residual risk that isn’t addressed by risk reduction activities such as agroforestry and water harvesting. Furthermore, it allows farmers to work on risk reduction activities (e.g. building water harvesting structures, planting trees and grasses) in exchange for insurance vouchers, thereby overcoming the issue of affordability. In moving forward, Diro emphasized that insurance must focus on unlocking productivity. “Whether it is for a rich farmer or for a poor farmer, unless it targets productivity, it’s not going to be beneficial.” Moreover, “index insurance should be a last piece in a holistic risk management approach. It’s not a silver bullet.” Lou Munden of The Munden Project turned the conversation to the global level, weighing in on the private finance side. Munden’s company has developed a securitization system that integrates smallholder agriculture, called Inari, to be trialed next year. He feels the key to Inari’s approach is leveraging risk across a wide range of investments spanning countries, landscapes and land use activities in to provide long term, low cost credit to producers, with better returns to investors. Matthew Wyatt, head of the Climate and Environment Department at the UK Department for International Development (DFID), argued that the billions of dollars committed to addressing climate change are in fact reaching countries in need, but that the journey from cheque to farm takes time. Instead, the real question is “how are we going to make [public] finance work as hard as we possibly can?” Wyatt highlighted the need to integrate adaptation finance with other available financing to avoid duplication, and the need to be more innovative with climate finance. “We need to be really careful that we’re subsidizing only to the point that makes the whole thing viable financially,” he emphasized. With the floor open for discussion, ICRAF’s Director General, Tony Simons, said the lack of robust metrics for adaptation indicators was an important barrier to public- and private-sector investment. “We can measure productivity, we can measure sequestration, we can measure reducing emissions...How can we measure adaptation? How can we unequivocally say that this landscape or this farming practice or this farm is better adapted than the other?” he posed. However, these metrics do exist. Recent research based on a project in western Kenya showed that involvement in agroforestry practices for only four years reduced food insecurity due to a drought and a flood by 25 percent. Neufeldt described the need to sell biocarbon projects as a package containing innovative agricultural practices for increased productivity and long-term returns from fruits, fodder and fuel. “By selling this package together with insurance against a default, we can leverage a lot of investment and develop a system that can help farmers uplift their livelihoods. The system must have many different actors, including researchers, NGOs, development organizations, public- and private-sector investors, and involve farmers fully in decision-making.”   --------- Agriculture, Landscapes and Livelihoods Day was held on December 3, 2012, alongside the 18th United Nations Climate Change Conference (UNFCCC COP18) in Doha, Qatar. Related Stories: What is needed to take climate finance to scale? Navigating Finance for the Farmer Related Links: Reducing subsistence farmers’ vulnerability to climate change: evaluating the potential contributions of agroforestry in western Kenya Making climate-smart agriculture work for the poor Helping smallholder farmers mitigate climate change  Sustainable Agriculture in a Changing Climate (SACC) Project Horn of Africa Risk Transfer for Adaptation (HARITA) The Munden Project