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Financing and investment

Marcos propicios

Economics of climate-smart investments

There has been a growing movement at international and national levels to adopt and scale up climate-smart agriculture. Pursuing climate-resilient development pathways requires innovative, substantial and long-term agricultural investments that can allow policy makers, producers and other stakeholders in the food and agriculture value chains to assess, promote and adopt climate-smart agricultural approaches and practices. The implementation of climate-smart agriculture approaches that can harness the synergies that exist among activities that deliver adaptation, productivity and food security benefits and that can also lead to reduced greenhouse emissions or increased carbon sequestration, entails additional costs, particularly for up-front financing. 

Many climate-smart agricultural practices are relatively low-cost. They can also deliver multiple benefits in terms of increased production and enhanced climate change adaptation and mitigation, which increases their cost-effectiveness. Estimates on the costs and benefits of adaptation to climate change vary. These variations result from differences in regional coverage, climate change scenarios, methods and models, as well as in the adaptation measures and sectors that are considered and over what timeframe. Despite these differences, results from various global studies suggest that the costs of inaction far outweigh the costs of adaptation to climate change (OECD, 2012; Stern 2014; OECD, 2015). For example, the world’s largest programme for building the resilience of smallholder agricultural producers to climate change, the International Fund for Agricultural Development (IFAD) Adaptation for Smallholder Agriculture Programme (ASAP), will deliver positive returns to investment across a range of climatic scenarios if adoption rates are high. Ex-ante economic analysis shows that, over a 20-year timeframe, the 32 country-level ASAP investments approved since 2010 will generate and redistribute net worth USD 0.44 to 1.63 per dollar invested to smallholder farmers and other project beneficiaries, and generate a mean net present value of USD 6.8 million (IFAD, 2016). These conclusions are consistent with results of other studies that compare the costs of inaction with the costs of adaptation using country-level analyses (Box C4.1).

Box C4.1 Investing in adaptation: the case of Viet Nam’s agriculture 

A case study for Viet Nam shows that the economic costs of climate change are likely to be far higher than the costs of adaptation (World Bank, 2010). Although adaptation interventions will not prevent the economy from suffering losses as a result of climate change, they will significantly reduce their magnitude. Without adaptation, annual agricultural losses due to climate change are projected to be about USD 2 billion. Some losses are likely to be incurred even with adaptation, but they would be limited to about USD 500 million – a reduction of approximately USD 1.5 billion per year. Adaptation would include the farmer’s own adaptation strategies (e.g. changing planting dates and using drought-tolerant or salinity-resistant varieties) and government interventions (e.g. investments in irrigation and increased spending on agricultural research and development). The costs of adaptation, estimated at about USD 160 million annually between 2010–2050, would be a fraction of the savings gained from implementing adaptation actions.

Although there are few systematic studies on the cost of climate change adaptation in agriculture, the evidence suggests overwhelmingly positive cost-benefit balances and justifies making the considerable investments required. The economic case for investing in climate change adaptation in the agriculture sectors becomes even stronger when the investments costs in climate-smart agricultural practices are weighed against the gains in terms of yield increases, improvements in income and livelihoods, the reduction in the number of food insecure, and mitigation co-benefits. Other important co-benefits include the conservation of biodiversity, improved soils and more sustainable water management. Positive economic returns can be demonstrated for multiple practices that build adaptive capacity and reduce the emission intensity of goods derived from crop and livestock production, forestry, and fisheries and aquaculture (Box C4.2).

Box C4.2  Costs and benefits of climate smart agriculture practices

Tropical Agricultural Research and Higher Education Center (CATIE) through its Mesoamerican Agroenvironmental Program (MAP) and the CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS) conducted a cost-benefit analysis (CBA) of 15 agricultural practices in the Trifinio region (a cross-border area between Guatemala, Honduras and El Salvador) and in Matagalpa, Nicaragua. The practices had been initially prioritized based on a qualitative evaluation of their contribution to the three objectives of climate-smart agriculture: improve food security, increase the ability of vulnerable groups to adapt to the impacts of climate change and, where possible, the reduce or remove greenhouse gas emissions. The selected options included climate-smart agroforestry practices (integrated coffee and cocoa production), home gardens, basic grains production and pastures. The economic analysis followed a standard application of CBA that had been adapted for climate-smart agriculture evaluations (Sain et al.,2017).  

The CBA results showed that even though the implementation of most of the climate-smart agriculture practices impose additional costs to producers, these costs are offset by a number of benefits associated with these practices. The main benefits include the additional income generated by new products, greater resilience to negative economic impacts (e.g. falling prices) and greater availability of food for the family. Many of the practices also generate environmental co-benefits, such as the protection of biodiversity, the reduction of soil erosion and increased capture of carbon dioxide.The CBA results indicated that all the climate-smart agriculture practices had a cost-benefit ratio greater than 1 (i.e. the benefits outweighed the costs). In Nicaragua, for example, farmers can increase their cost-benefit ratio from 1.67 to 1.85 by adopting new seeds varieties.  The cultivation of vine crops in home gardens was found to be the most profitable practice in both Nicaragua and Trifinio, with internal rates of return calculated at 178 percent and 141 percent respectively. 

Source: Sellare, 2016.

Adaptation and mitigation in agriculture also involve investments in other critical areas such as, developing an enabling policy framework; strengthening institutional capacities, including the establishment of reliable information and early warning systems; and improving financial, market and extension services. These actions may not make up the major part of the required investment costs for the implementation of NDCs. They can however provide important incentives for changing the behaviour of agricultural producers and other private sector stakeholders in the food value chain, which is critical for making the transformational change towards climate-smart agriculture.