Innovations for a climate resilient sustainable agricultural sector

Climate change, and as a result increasing climate variability, is a multidimensional problem impacting social, economic, and environmental values. Practical and affordable adaptation solutions are urgently needed to help farmers cope with the impacts of increasing climate variability through the adoption of management practices that reduce climate-related (including financial) risk (Mushtaq et al. 2018). These include both diversifications of income streams to help smooth income variability and ecosystem-based adaptation measures that buffer agricultural systems from the impacts of climate extremes.

Here, an innovative property management solution is presented that allows producers to dedicate areas of land, which may be less profitable and subject to higher agricultural drought risk, to generate revenue from carbon sequestration and environmental/biodiversity credits. The approach would see producers dedicate marginal agricultural areas (e.g., areas that are opportunistically cropped) to more drought-resilient productive uses (e.g. planting of shelter belts), while also creating environmentally beneficial revenue-raising options. Revenue generated through the conversion of marginal land could in turn support drought risk adaptation to protect against financial losses due to climate extremes. This approach minimises conflict between agricultural and environmental outcomes and creates synergies that benefit farmers’ incomes.

A key component of this innovative solution is the opportunity to exchange environmental/biodiversity credits to cover crop risk premiums that protect farmer losses from climate disasters. Depending on the size of relative proportion of land dedicated to crop production and the area dedicated to earning carbon/biodiversity credits, producers could choose to cover different types and magnitudes of risk (e.g. drought, flood, and/or partial to total crop loss). Sold carbon credit units could allow farmers to purchase a range of agricultural insurance types, such as multi-peril insurance cover, yield cover, income protection, and index-based insurance. Of these, index-based insurance may be the most viable option. Index insurance pays the holder of the insurance contract when a certain value on an index (e.g. a percentile of rainfall) is realized (Kath et al. 2018). Index-based insurance is generally cheaper than either yield- or revenue-based insurance because it does not require expensive on-ground assessments and limits moral hazard resulting from information asymmetries or false reporting of losses. The potentially cheaper premiums and reduced moral hazard risks mean that index-based insurance schemes may be relatively easily integrated with our proposed ‘carbon for insurance’ framework, especially in developing countries where index-based insurance schemes are already widespread (Hazell et al. 2010).

More importantly, government could expand existing emissions trading systems by providing enabling conditions (e.g., tax offsets) to encourage farmers to use their marginal land for the purchase of insurance. Fostering the establishment of plantations for carbon storage would reduce carbon dioxide levels to further facilitate the environmental (e.g., increased land dedicated to natural values), economic (e.g. faster production recovery from climate disasters), and social (e.g. reduction of socio-economic hardship of producers impacted by climate disasters) benefits.

Key efficiency drivers of these innovative property management solutions include:

• The opportunity cost of land. Normally, marginal land is not used for productive purposes; however, this approach will allow the use of marginal or surplus land for carbon plantation purposes;
• Timeframe. Timeframe is an important parameter, especially for insurance industries and farmers, since they will engage in long-term contracts; further, access to long-term farm data to verify insurance claims will reduce moral hazard;
• Affordable premiums. Longer-term interaction with the insurance industry will lead to better understanding of climate-related risks, providing the possibly of cheaper/more affordable insurance premiums, and opportunities for sustainable insurance products; and
• Economies of scale: Greater uptake of insurance products will increase the possibility of aggregation by insurance companies, which will enable the sector to reach economically viable scales. This is expected to reduce transaction costs for individual small-scale producers and to reduce barriers to participation in carbon contracts (e.g. plantations). Aggregation can enhance economies of scale, reduce transaction costs and enhance the long-term sustainability of carbon and biodiversity projects

In summary, innovative property management solutions are expected to allow growers to diversify their income streams and smooth year-to-year income variability linked to climate-related risk. These include access to markets that provide financial rewards for increasing vegetative and soil carbon sequestration, and the development and availability of affordable crop insurance to protect financial losses from climate disasters.

References:

Hazell, P. et al. (2010). International Fund for Agricultural Development and World Food Programme.

Kath, J. et al. (2018). Weather and Climate Extremes, 22, 1-9.

Mushtaq, S. et al. (2020). Climatic Change, 161(3), 465-478.