Making climate finance work for the rural poor

Session number 5 Room: Al Areen Ballroom 5-6

Key Messages

  • Public and private climate finance is needed that can address mitigation and adaptation in integrated ways through a functional global architecture
  • Financing smallholder climate smart agriculture will require linking international finance with a range of existing credit and insurance institutions and providing innovative mechanisms to reduce risk.
  • In the context of smallholder agriculture, farmer income from carbon finance will rarely be significant but carbon finance may still have an important role to play in financing climate smart agriculture at landscape scale.
  • Smart public subsidies are needed to overcome initial barriers/ establishment costs for carbon financing and engage a minimum threshold of farmers to make carbon finance viable.
  • Working out the metrics of adaptation and adaptive capacity is going to be crucial if agriculture is going to attract private and public funding for climate resilience.

Session Summary

Phil Franks (CARE) on Sustainable Agriculture in a Changing Climate, Western Kenya:

  • Trying to give smallholder farmers access to carbon credits, the SACC project has learned that it takes too long for farmers to accrue too little revenue, and carbon finance for smallholder agriculture is not financially viable without public subsidies to support the upfront cost. But the value other benefits of the approach (e.g. livelihood and food security benefits) can be as high as 50 times the carbon revenue.

Henry Neufeldt, ICRAF, on analysis of 7 large scale biocarbon projects in East Africa

  • The real cost is not MRV but building the connection between the projects and the carbon market. There are high upfront costs which are, initially, unattractive for private investors to take on – hence why public funding is essential to making it happen.
  • Building the connection between markets and farmers requires the empowerment of farmers on the ground through e.g. secure land tenure, long-term investments in relationships with community-based farmer organisations, and building a robust infrastructure that enables the privatization of extension services with a combination of public and private investment.

Rahel Diro, IRI Columbia University, on weather index insurance

  • Weather index insurance unlocks the productive potential of farmers. Farmers need to do extremely well in good years so they are better off in worse years. In good years, they need to take higher risks and need credit to do so. If they are provided with insurance, they can reduce the risk of such investment sufficiently.
  • Weather index based insurance has been around for about a decade, and some success stories are emerging. Unlike traditional insurance, it is based on the rainfall index not on damage to crops – payouts happen if rainfall falls below a certain level. The cost of assessing the damage decreases significantly, and the incentive to neglect land and crops is removed.
  • Such index based insurance has high potential but is no one-fits-all approach, it needs to be one element of holistic risk management to cover multiple types of risk, and it should focus on unlocking productivity of farmers.

Lou Munden, The Munden Project, on Inari

  • Smallholder agriculture is wrongly regarded as permanent welfare case lacking in standardization and scaleability, and profitability. Smallholder agriculture does make money when financed properly. The “Inari” securitization system can provide a compelling degree of diversification that significantly lowers risk if appropriately aggregated and integrated. It attracts capital at lower interest rates and longer maturities Smallholder agriculture has a high return potential that is hidden from view and needs to be provided with investment by the public in aggregation and de-risking.
  • A lot of learning to do to get the right incentive structure for smallholders to participate in the progamme, and build trust in finance that can work for, and not against them. – Otherwise smallholders have all the right reasons to do all the wrong things.

Matthew Wyatt, DFID, on adaptation finance

  • Finance for adaptation needs to be integrated with other finance available to developing countries to avoid overlaps. Innovation and piloting are important in adaptation finance: Climate change requires working with a more conscious attitude to risk, and more innovative ways of financing than many other issues require.
  • Public finance can support farmers as a catalyst in learning new ways to adapt to climate change, take new risks (e.g. through insurance such as Caribbean hazard insurance initiative).
  • The challenge with insurance is that, as climate change hits more and more people, the premiums will inevitably go up, and they will soon become unaffordable. This means coming back to the mitigation ambition which needs to be raised to reduce those impacts.
  • Finance can be catalytic in picking up costs upfront, but it cannot substitute for dysfunctional markets.

The audience raised a variety of questions related to the mitigation and adaptation focus of climate finance, the right combinations of public and private resources to achieve those objectives, and the strategies needed to ensure that climate finance really reaches smallholder farmers and does not enhance the tradeoffs they are already dealing with in trying to make ends meet faced with a variety of stressors. What emerged from the discussion is a need for a robust climate financing architecture that secures and guarantees public and private funding. If this architecture is to finance climate change adaptation, and if climate resilience is to be an effective and attractive investment in agriculture, clear metrics for adaptation and adaptive capacity need to be developed.

World Agroforestry Centre (ICRAF)
CARE International
CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS)

Related links 

Blogs from this session:

Climate funds for farmers just one piece of the puzzle by Rachel Friedman, Ecoagriculture Partners
Not for the carbon: re-thinking climate finance for farmers by Kristi Foster, World Agroforestry Centre (ICRAF)

More session information ↓

Brief synopsis of the issue
Adaptation finance has raised many expectations to deliver benefits to smallholder farmers in developing countries but experience so far has been limited with few direct benefits to farmers. Access to credit and loans are often restricted by high interest rates. Insurance schemes, e.g. crop or index insurances, are in a pilot phase and have yet to prove their effectiveness. Other adaptation funds are currently not operational despite large-scale pledges by donor countries (i.e., $20b/yr from 2012 to reach $100b/yr by 2020).On the other hand, market and funds-based carbon finance has evolved over the past 10 years and shows considerable sophistication, although most payment schemes related to biocarbon have evolved in the forestry sector (e.g., A/R CDM; REDD). Biocarbon projects in the agricultural sector are beginning to emerge, but there are currently only few examples from which to draw conclusions.Different from REDD projects, A/R, and agriculture projects only reach breakeven points after many years and therefore depend on high levels of up-front funding. Since private lenders generally cannot afford such long-term returns on investment, these projects rely heavily on public sector support.Yet, these projects can strongly contribute to development goals because they provide increased income, productivity and profitability through improved soil fertility, crop diversification, tree products, and better management practices, and hence reduce climate risk.  In other words these projects could use carbon finance to support climate-smart agriculture.While little or no carbon income benefits are delivered to the farmers, reducing the need for sophisticated benefit sharing mechanisms, the carbon pays for the high establishment and maintenance costs of these projects and the farmers benefit from livelihoods benefits that are much more significant than carbon income..Combining many and diverse climate finance projects through appropriate programs would significantly reduce the risk of individual projects defaulting and could strongly reduce the interest rates such projects typically show because of the high risks associated to natural resource management of asset-poor smallholder farmers. If lenders of last resort (e.g., WB,  regional development banks) would guarantee investments, interest rates could be comparable to those of projects that would be considered much less risky. Thereby corporate money looking for investments that provide both reasonable rates of return and are pro-poor could be leveraged.

Such an approach requires appropriate nesting of governance structures and institutions ranging from the local to the global scale.

Agenda for this session:

  • Introduction by facilitator (James Kinyangi, CCAFS)
  • Short presentations by the speakers:
    • Phil Franks (CARE) on experiences from SACC project
    • Henry Neufeldt (ICRAF) on governance and finance of biocarbon projects,
    • Rahel Diro (IRI, Columbia University) on index based insurance
    • Lou Munden (Investor) on leveraging private investment across investments in land,
    • Matthew Wyatt (DfID) on public investment in climate finance
  • Guided plenary discussion
  • Wrap up and summary of key points by rapporteur (Agnes Otzelberger, CARE)

Questions to be addressed

  1. What kinds of finance can be mobilized rapidly to meet both climate and development aims?
  2. How can this finance best be delivered and coordinated?
  3. How does climate finance benefit smallholder farmers and what can be done to improve current challenges?
  4. What are key constraints and opportunities to making carbon finance work for poor small-holder farmers
  5. How can we build the necessary institutions and governance structures that will enable large-scale investment in pro-poor NRM?