Financing Large-Scale Mitigation by Smallholder Farmers: What Roles for Public Climate Finance?

Lucy Kenyanito,Miriam Vorlaufer,Brian Sing'Ora,Suzanne Van Dijk,Samuel Ndonga,Andreas Wilkes,Charles Odhong'

doi:10.3389/fsufs.2019.00003

Abstract

There is increasing interest in accessing climate finance to support low-emission, climate resilient agricultural development, but little is understood about how climate finance can be deployed to catalyse large-scale adoption of mitigation practices by smallholder farmers. This study assesses the potential roles of public climate finance in enabling smallholder farmers in Kenya’s dairy sector to adopt low-emission farming practices. Drawing on multiple studies conducted as part of the design of a nationally appropriate mitigation action for the Kenyan dairy sector, it examines financing needs, institutional arrangements for channelling climate finance, and appropriate financial instruments. The study finds that financially profitable investments can be made by dairy farmers, but credit financing on commercial terms is not viable for dairy farmers lacking off-farm income sources. Dairy farmers make little use of formal financial institutions for several reasons, and while financial institutions have a strong interest in increasing their finance to the dairy sector, they face a variety of capacity constraints. Climate finance may have roles to play in strengthening linkages between dairy farmers and financial institutions, building capacities of different actors in the dairy and finance sectors, and enabling both farmers and financial institutions to manage risks. Concessional loans, credit guarantee funds and grants are all relevant financial instruments. If agriculture is to attract climate finance in support of large-scale mitigation action, a diversified, demand-responsive approach to financial innovation is required that engages different types of financial institution to support access to both savings and credit services tailored to the varied needs of men and women dairy farmers and the dairy value chain actors they work with.

Highlights

Agricultural production contributed about 14.5% of global emissions between 2000 and 2010 (i.e., 5.0–5.8 Gt CO2eq per year), more than half of which is from livestock emission sources (Smith et al, 2014; Tubiello et al, 2014)
Feasible interest rates (i.e., 8–12%) are lower than the interest rates on many available credit products provided by formal financial institutions, which ranged between 10 and 16% for loans from Savings and Credit Cooperatives (SACCOs) and 10–24% for FIs at the time of the ex post investment assessment
This study suggests that, financially viable investments can be made in Kenya’s dairy sector, provision of climate finance through existing formal financial institutions at market rates would not be likely to reach a large number of dairy farmers and enable widescale adoption of low-emission dairy farming practices

Summary

Introduction

Agricultural production contributed about 14.5% of global emissions between 2000 and 2010 (i.e., 5.0–5.8 Gt CO2eq per year), more than half of which is from livestock emission sources (Smith et al, 2014; Tubiello et al, 2014). Greenhouse gas (GHG) emissions from livestock production are projected to increase significantly (Popp et al, 2010; Bajželj et al, 2014; Tubiello et al, 2014). The GHG intensity of livestock production (i.e., GHG emissions per unit of livestock product) has been declining (Caro et al, 2014), mainly due to productivity increases. There is potential for further reductions in GHG intensity of livestock production through adoption of practices that increase livestock productivity and sequester carbon in livestock production systems (Gerber et al, 2013; Herrero et al, 2016; Mottet et al, 2017). Promotion of productivity-enhancing mitigation measures will require financial support, in particular to make upfront investments in adopting improved practices (Lipper et al, 2014)

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Conclusion