Sunday, February 19, 2012

Carbon Markets Unlikely to Benefit Africa’s Smallholder Farmers

Climate change poses daunting challenges to Africa’s smallholder farmers. High frequency of extreme events like floods, droughts and changes in rainfall patterns converge to make food production an uncertain and risky enterprise. Adaptation to climate change is therefore a central preoccupation of farmers, scholars, policy makers and politicians.

The climate change and livelihood crisis comes at a time when significant global financial resources are flowing to Africa with an audacious goal of eliminating hunger and malnutrition through increasing agricultural productivity.

To simultaneously address the need for more finance to boost agricultural productivity and adapt Africa’s farming systems to climate change, the World Bank and others are leading proponents of soil carbon credits. The World Bank argues that the creation of a market for soil carbon credits can leverage additional private sector resource to enhance smallholder farm productivity while addressing the impacts of climate change.

The central idea is that if smallholder farmers can store carbon in the soil and if the carbon can be measured and valued, it can be traded on the international market. More recently, Reducing Emission from Deforestation and Degradation (REDD) has emerged as a crucial building block for a post-2012 climate change adaptation/mitigation policy regime. Advocates of REDD believe it presents a tremendous opportunity to simultaneously sequester carbon and reduce rural poverty, while sustaining vital ecosystem services as well as enhancing resilience to climate change.

I argue that carbon markets and the associated financial benefits for smallholder African farmers will remain elusive and intangible unless: there is an international binding agreement on CO2 emission reductions post Kyoto 2012 that guarantees a large and stable compliance market for soil carbon; and, existing voluntary soil carbon projects deliver equitable benefits and at low transaction costs.

Given the extremely weak commitments to emission reduction by industrialized countries, there is likely going to be very little international demand for carbon credits in the foreseeable future. Moreover, the two mechanisms under the Kyoto Protocol – Joint Implementation and Clean Development Mechanism (CDM) – do not accommodate credits generated through soil carbon sequestration. Similarly, the European Emissions Trading Scheme (EU-ETS) does not include trading of soil carbon credits.

Confidence in a second commitment period for the Kyoto Protocol after December 2012 is underwhelming. The United States, Bangladesh, Canada, Ghana, Mexico and Sweden have reached an agreement to start a program to reduce emissions from soot (black carbon), methane and hydrofluorocarbons. Without compliance markets that mandate CO2 emission reductions thus creating a critical mass of buyers that allow soil carbon credits to be traded, the efforts of the World Bank, FAO and IFPRI hope voluntary markets will generate sufficient capital flows to improve agricultural productivity and household wellbeing.

The World Bank through its BioCarbon Fund is promoting the Kenya Agricultural Carbon Project in western Kenya. This project is an invaluable case study on the value proposition of carbon markets for Africa’s smallholder farmers. At full implementation the project will enlist 60,000 farmers on 45,000 hectares over 20 years. It is esti¬mated the project will generate a total of 1.2 million metric tons of CO2, from which 60 percent will be discounted to account for impermanence and methodological and estimation uncer¬tainties.

Assuming the World Bank pays $4/tCO2 and a sequestration rate of 1.4 tCO2 per hectare per year, each participating farmer will earn $1.19 per year. Despite the miniscule revenue to participating farmers, the World Bank’s faith remains indomitable. The dominant view in the World Bank is that exclusion of soil carbon emission offset credits from the Kyoto Protocol compliance market denies smallholder farmers in Africa from accessing lucrative emerging carbon markets.

However, as currently structured soil carbon markets and associated benefits do not support the real needs of Africa’s smallholder farmers – enhancing resilience of smallholder agricultural systems, increasing agricultural productivity and improving household income.

Africa’s smallholder farmers will find carbon markets especially unattractive because:
1. Soil carbon sequestration requires farmers to commit to a particular land use practice, which could “lock in” farmers and undermine adaptive capacity in response to climate change or economic opportunities that favor alternative land use;
2. A majority of smallholder farms have severe fertility constraints and cannot sequester large quantities of carbon; hence carbon revenue receipts will be very low. Moreover, Soil carbon is heavily discounted to account for impermanence at a rate of 60 %, further reducing revenue receipts;

The proponents of soil carbon markets must evaluate the opportunity cost of diverting scarce resources to creating soil carbon markets for which market demand is very weak and revenue receipts for Africa’s smallholder farmers are miniscule. The needs of Africa’s smallholder farmers will be better served by channeling global resources and focus on:
1. Improving access to high quality agricultural extension services, including improved access to weather and climate information;
2. Improving access to high quality seeds and fertilizers;
3. Enhancing technology transfer for appropriate mechanization and improved irrigation techniques;
4. Improving access to financial services for rural women including agricultural risk insurance services;
5. Supporting small and medium enterprises for value addition to agricultural produce and diversification of rural livelihoods.

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