Climate Smart Agriculture Sourcebook

Introducing Climate-Smart Agriculture


Enabling environment for climate-smart agriculture: policies, institutions and finances

Scaling up climate-smart agriculture to trigger the desired transformation in agricultural production systems and food systems requires supportive policies, institutions and financing, that together create an enabling environment for climate-smart agriculture at local, national and international levels. Changes in production that might be expected based on certain climate indicators may not occur due to other factors related to human capital (e.g. level of education, age, ethnicity, gender of producers), economic conditions (e.g. relative prices, input and output market development, credit availability) and the policy environment (Bradshaw et al., 2004; Asfaw et al., 2015; Arslan et al., 2015). The response of agricultural producers to climate change and variability will depend on the socio-economic position of the household. Poor farmers are likely to take measures to ensure their survival, while wealthier farmers make decisions to maximize profits (Ziervogel et al., 2005; Asfaw, Maggio and Lipper, 2016). For this reason, the impacts of climate change are expected to affect different segments of the rural population differently. At the same time, a wide diversity of responses to these impacts can be expected given the differences in the socio-economic characteristics of different households and communities. 

A1-4.1 Role of policies for climate-smart agriculture

Recently, several important international agreements have been reached that will shape national climate-smart agriculture planning and implementation. The 2030 Agenda for Sustainable Development will serve to guide national development plans over the next 15 years. There are three components of the 2030 Agenda for Sustainable Development: the SDGs, which set the global policy framework; the Paris Agreement on climate change; and the Addis Ababa Action Agenda, which identifies the broad set of financial and non-financial means for implementation the agenda. In all of these components, agriculture is prioritized as a crucial sector to ensure that the needs of both the people and the planet are met.

The Paris Agreement recognizes “the fundamental priority of safeguarding food security and ending hunger, and the particular vulnerabilities of food production systems to the adverse effects of climate change”. A series of instruments –NAPAs, NAPs and NAMAs – have been designed under the UNFCCC for linking international climate change contributions (including those made in the INDCs) to concrete national mitigation and adaptation actions. A principle common to all these instruments is that adaptation and mitigation measures should not be considered in isolation from other climate and development goals.

The Sendai Framework for Disaster Risk Reduction (SFDRR) 2015-2030 builds on the experiences of the Hyogo Framework for Action (2005-2015) and recognizes disaster risk reduction as important part of attaining sustainable development and addressing climate change. The Framework addresses climate change as one of the drivers of disaster risk and highlights the fact that linkages with the 2030 Agenda for Sustainable Development and the Paris Agreement represent a unique opportunity “to reduce disaster risk in a meaningful and coherent manner across policies, institutions, goals, indicators and measurement systems for implementation”.

At the national level, making the transition to climate-smart agriculture requires not only strong political commitment but greater coherence, coordination and integration among the various sectors dealing with the drivers that are influencing climate change, agricultural development, and food and nutrition security. In this regard, the development of enabling policies and the promotion of an adequate regulatory and legislative environment is crucial. Increasing policy coherence calls for a systematic assessment of current policies and their intended and unintended effects on the set of development objectives prioritized by a country, including those pertaining to climate-smart agriculture. Public policies, as well as expenditure and planning frameworks, should work toward an integration of new climate-smart agriculture policies and support measures at the national, subnational and local levels. Representatives from the entire range of stakeholder groups involved in all sectors and at all levels need to participate fully in this coordination and integration process. To ensure that the benefits of these activities are shared equally it is important for the process to be gender-inclusive. It is also critical to recognize the value of indigenous knowledge and farming practices, and engage with representatives from indigenous organizations when developing coherent cross-sectoral policy frameworks. Depending on the country, the priority among the climate-smart agriculture objectives may vary. Nevertheless, it is important to identify and enhance synergies between the different policy objectives and address and compensate for trade-offs where necessary. Understanding the local and gender-specific barriers and incentive mechanisms for adoption of climate-smart agricultural production systems is key for designing supportive policies.

The public sector can play a key role in creating an enabling policy and legal environment for climate-smart agriculture, which can permit private sector and civil society stakeholders to make timely, well-informed and efficient decisions related to securing food production, adapting to climate change and reducing and removing greenhouse gases. Many stakeholders, especially smallholder agricultural producers with limited assets will only be inclined and able to take necessary actions if their work is enabled by a coherent climate-smart agriculture policy framework. The transition to climate-smart agriculture requires transcending sectoral and other boundaries and calls for the full integration of climate change issues into the policy-making process at all levels. This means that new institutional structures and alliances among private and public stakeholders in a range of different areas, including policy making, research, extension and financing may be needed.

A1-4.2 The role of institutions

The ability of agricultural producers to adapt to climate change requires that rural communities have access to up-to-date information, inputs (e.g., fertilizers and machinery) and a diverse set of genetic resources for food and agriculture (e.g., locally adapted seeds and planting materials, livestock and fish stocks). Increasing the returns and benefits that agricultural producers derive from their production systems, which is an essential component of climate-smart agriculture, will demand well-functioning and accessible output markets. To accomplish this, innovative approaches to establishing and strengthening formal and informal institutions may be needed to bolster local resilience, support livelihood diversification strategies and reinforce coping strategies. Producers need to have the correct incentives and enabling conditions to make transformations on the ground, which need to be facilitated by institutions and policies. This effort must involve all stakeholders, producers, agro-industrial enterprises, retailers, consumers and public authorities.

A1-4.2.1 Access to information

One of the key constraints to the widespread adoption of climate-smart agriculture concerns the flow of information and knowledge. Information on the range of climate-smart agriculture options, particularly those well suited to local conditions, is often scarce. For example, inadequate information can increase the risk of planting expensive seeds that may not survive or produce poor yields (Ajayi et al., 2007; Franzel et al., 2004; Asfaw, Di Battista and Lipper, 2014; Asfaw et al., 2015). Information available to producers on climate-smart agriculture options that are well adapted to their particular setting is likely to be an important determinant for adoption. Information may come from a number of sources, including government extension programmes, non-governmental organizations and donor programmes.

Based on the abundant evidence that seasonal climate variability plays an important role in the risks faced by producers, it is natural to conclude that the foundation for building adaptive capacity of rural communities is knowledge management. Increasing access to reliable information is crucial to facilitating adaptation as it can improve the decision-making capacities of producers with regard to their farming systems. One key role of institutions is the production and dissemination of knowledge and information, which can range from the impacts of climate change on production and marketing conditions, to the development of regulations and standards. Climate change increases uncertainty. This fact makes it all the more important for agricultural producers to able to respond rapidly and appropriately to unexpected phenomenon, and understand the potential costs of inaction. This situation greatly increases the value of information and the importance of institutions that are engaged in conducting agricultural research, providing extension services, collecting and analysing agricultural production and marketing statistics and disseminating climate-related information (Campbell et al., 2011).

When adopting climate-smart agriculture practices producers must make both short- and long-term decisions about their management plans and the technology they will use. Agricultural extension systems are the main conduit for disseminating the information required to make these decisions. However, problems are often encountered in providing information at a relevant spatial scale and timeframe, communicating this information so that it reaches those who need it most, and promoting the participation of the users of this information in the development of effective information systems (Hansen et al., 2007; Arslan et al., 2015; Asfaw and Lipper, 2016).

A1-4.2.2 Access to micro-finance and insurance

Adopting climate-smart agriculture practices requires that producers make increased investments that extend over a relatively long period of time. McCarthy et al. (2011) have documented the extended transition times needed to realize the benefits of climate-smart agriculture in the terms of productivity or increased resilience. During the transition, the returns to agriculture can be low or negative, and thus some form of financing to support this transition is necessary. This transition cost is likely to be higher for poorer producers, which makes the challenge of delivering the benefits of climate-smart agriculture to those most in need even greater (McCarthy et al. 2011). The capacity of producers to make the required adjustments depends in large part on the existence of policies and institutions that can support their access to credit and insurance. 

The adoption of climate-smart agriculture practices, such as conservation agriculture, encounters most of the traditional constraints that other innovative production practices also face (McCarthy et al., 2011). As with any new methods or technologies, climate-smart agriculture practices may be perceived as a risky investment, as farmers will need to learn new farming methods and typically do not have access to insurance. Credit constraints will also affect adoption, especially when initial investment costs are high and the benefits of the practices are usually realized after around four years. Just how binding cash constraints are is obscured by the fact that many projects promoting climate-smart agriculture practices provide inputs, such as seeds and seedlings, for free, particularly in East and Southern Africa (Franzel et al., 2004; Asfaw, Di Battista and Lipper, 2014; Arslan et al., 2015). Nonetheless, a number of empirical studies have found that wealthier households with greater landholdings are more likely to adopt climate-smart agriculture practices, such as agroforestry. This indicates that cash constraints and opportunity costs of land in the near term are likely to affect producers' decisions to adopt climate-smart agriculture practices (Phiri et al., 2004; Kuntashula et al., 2002; Asfaw and Maggio, 2016b).

A1-4.2.3 Access to agricultural input and output markets

The decisions agricultural producers make about the type of technologies and practices they adopt are determined by their benefits and costs, which are affected by the access these producers have to supplies of inputs and output market chains. Improved market access, which increases the returns on land and labour, is a critical factor for the adoption of new climate-smart agriculture practices. However, many smallholders in vulnerable areas continue to face complex challenges in adoption of climate-smart agriculture practices. There is still limited understanding of how inadequate markets, policies and institutions shape and structure producer incentives and investment decisions. 

Addressing these overlapping constraints requires innovative institutional arrangements and partnerships that improve the local availability and utilization of climate-smart agriculture inputs and create effective market linkages that offer more stable and better prices to producers. Producer organizations have the potential to mitigate the effects of imperfect markets by establishing contractual links to input and output markets and promoting economic coordination in liberalized markets, which can leverage market functions for smallholder farmers (Shiferaw and Hailemariam, 2007). This can be expected to stimulate adoption of climate-smart agriculture practices, which will in turn drive the process of agricultural commercialization in rural areas. 

Realizing the potential of climate-smart agriculture will depend on the ability of institutions to convey market information, coordinate production and marketing functions, define and enforce property rights and contracts and, more critically, mobilize producers to participate in markets and enhance the competitiveness of agro-enterprises. Institutions, which provide multiple functions to markets, can transmit information, mediate transactions, facilitate the transfer and enforcement of property rights and contracts, and manage the degree of competition. These activities provide alternative mechanisms through which market failures in rural areas can be remedied (Shiferaw and Hailemariam, 2007).

A1-4.3 Investments and financing

Agricultural investment is one of the most important and effective strategies for promoting economic growth and reducing poverty in rural areas where the majority of the world’s poor live. Gross domestic product (GDP) growth in agriculture has been shown to be at least twice as effective in reducing poverty as growth originating in other sectors (World Bank, 2008). The regions of the world where hunger and poverty are most widespread today have seen stagnant or declining rates of investment in the agriculture sectors over the past three decades. Eradicating hunger in these regions and increasing food production requires substantial increases in the level of investment in the agriculture sectors. This includes dramatic improvements in the level and quality of national government domestic investment. FAO estimates that an additional investment of USD 83 billion will be needed annually to close the gap between what low- and middle-income countries have invested each year over the last decade and what is needed by 2050. In other words, yearly investment in agriculture needs to rise by more than 50 percent.

These investment requirements are even greater when the need to address the impacts of climate change is taken into consideration (FAO 2010a; Nelson et al., 2010; HLPE, 2012a). However, access to sufficient and adequate finance for the agriculture sector has been a challenge in developing countries for decades. Traditionally, agriculture’s share in the investment portfolios of financial institutions has been small, especially compared to agriculture’s contribution to GDP. Because the agriculture sectors are considered low-profit and high-risk, financiers in most countries limit their exposure, charge higher interest rates, tighten lending criteria, shorten terms and impose onerous lending conditions. They often shy away from lending to agriculture altogether, preferring to seek more stable returns from other sectors of the economy, such as trade, housing and energy. The resulting shortfall in finance has a severe impact on agriculture, including smaller producers and both small- and medium-sized agribusinesses. It must be emphasized however that the major part of investments in agriculture will be made by the private sector, mostly by the producers themselves. In 2014, the private sector, which is the largest source of finance for climate change adaptation and mitigation efforts, contributed approximately 62 percent out of a total of USD 391 billion dollars of finance to address climate change (Buchner et al., 2015). The amount of this private finance that was allocated to the AFOLU sector is unknown. However, the activities funded by public finance can have a strong catalytic effect, encouraging the mainstreaming of climate change mitigation and adaptation responses into other larger sources of agricultural finance, such as domestic government spending and the producer’s own agricultural investments. 

The public sector can play a key role in building an enabling environment, including formulating policies, strengthening institutions and making key investments. Reducing risk and improving resilience is key to enabling private sector stakeholders, especially the more financially vulnerable, to invest. These private sector producers will also need support, particularly during the transition phase towards new systems. Payments for environmental services can play an important role in facilitating this transition (Lipper and Neves, 2011).

Among the needed investments are land management strategies and infrastructure, including local roads and irrigation systems, which are an important source of job creation in rural areas. These public works can be supported by social protection schemes to provide work, food and income to food-insecure people. A report of the High Level Panel of Experts on Food Security and Nutrition (HLPE, 2012b) reviews some of these schemes and concludes that public works programmes have proved to be efficient in dealing with covariate shocks and, if they are well designed, can contribute to improving food security.

Major investments are also needed in research (HLPE, 2012a; Beddington et al., 2012c). To be able to embrace the whole range of issues to be addressed, these investments must be coordinated at the regional and global scale. Increased investment in public research is particularly required in areas where returns on investment cannot immediately benefit the private sector. To address systemic issues related to the development of climate-smart production methods that are specific local needs and conditions, research will have to be closely linked to extension services and be receptive to local knowledge and responsive to the demands articulated by all stakeholders, including small-scale food producers (HLPE, 2012a). In this regard, the transfer of technology will also play an important role. Activities in this area should include the development of the capacities to use the new technology and structured partnerships to ensure that it is suitable adapted to local conditions.