This document discusses climate finance for agriculture and livelihoods. It outlines several key points: 1) Upfront public financing is needed to reduce investment risks and leverage private capital for smallholder agriculture projects due to long timeframes for returns. 2) Projects must provide both short and long-term benefits to farmers through activities that improve productivity, incomes and resilience. 3) Developing local institutional capacity, secure land tenure, and addressing other barriers are important for ensuring equitable distribution of benefits to farmers.

1. Climate Finance for Agriculture
and Livelihoods
Kristi Foster & Henry Neufeldt
Climate Change Science Domain
World Agroforestry Centre (ICRAF)
July 3, 2013

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. = 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. P.Casier (CGIAR)
Neil Palmer (CIAT)

5. But…
But…
Neil Palmer (CIAT) Neil Palmer (CIAT)
Neil Palmer (CIAT)
P.Casier (CGIAR)

6. Climate finance - driving a shift to sustainable agriculture
Mitigation finance ● Adaptation finance ● Public & private sector finance
to support sustainable development, adaptation and mitigation
epSos.de

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. Most biocarbon projects occur in the forestry sector
REDD+
Reducing Emissions from
Deforestation and Forest
Degradation
K.Foster (ICRAF)

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. 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. 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. ‘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. Carbon Payments vs. ‘Co-benefits’
Photo: blogs.phoenixnewtimes.com
Carbon is the real co-benefit
C
• Poles
• Timber
• Fuelwood
• Fruit
$ $$$
Income-generating potential

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. 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. 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. 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. 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

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. • 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. 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. 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. 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. 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. Making the link
Ruby Gold
Smallholder
Farmers
Global-level
Finance
Left to right: IRRI, Ruby Gold, pixagraphic

26. Private Investment in Sustainable Land Management
A Global Perspective

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. 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. Building Institutions
Daniel Fleming
Finance
Farmers
Formal Market
Community-based
organizations
Informal
market
Project
implementer

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. 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. • 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. P. Casier (CGIAR)
Thank you!
Policy Brief: Climate Finance for Agriculture and Livelihoods

34. References
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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
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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. 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.

36. References
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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
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Copenhagen. Available online at: www.ccafs.cgiar.org/resources
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Streck C, Burns D, Guimaraes L. 2012. Incentives and benefits for climate change mitigation for smallholder farmers. CCAFS Report
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www.ccafs.cgiar.org/resources
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