76530 JANUARY 2012 ABOUT THE AUTHOR More Than Just Hot Air: JOHANNES WOELCKE is a Senior Economist at the Carbon Market Access and Climate-Smart World Bank’s Agriculture and Rural Development Unit in the Agriculture for Smallholder Farmers Africa Region. He joined the Bank in 2004 as a Young Professional. Johannes is the The Kenya Agricultural Carbon Project is breaking new ground in designing focal point for Climate Change and implementing climate finance projects in the agricultural sector. The and Agriculture in the Africa Region. project is regarded as an innovative example for climate-smart agriculture within and outside the World Bank. For the first time, while increasing ADDITIONAL CONTRIBUTORS The author would like to thank productivity and enhancing resilience to climate change, smallholder farmers Ellysar Baroudy (Senior Carbon Finance Specialist, ENVCF), in Africa will receive payments for greenhouse gas mitigation based on Neeta Hooda (Senior Carbon sustainable agricultural land management. Quantification of carbon Finance Specialist, ENVCF), and Timm Tennigkeit (Consultant, sequestration is monitored based on a newly developed carbon accounting Unique Forestry and Land Use GmbH) for their input in methodology. This SmartLesson describes the key factors to take into shaping this SmartLesson. consideration when facilitating the adoption of climate-smart agricultural practices and access to carbon markets for smallholder farmers. APPROVING MANAGER Karen Mcconnell Brooks, Sector Manager, AFTAR (Agriculture and Rural Development Unit, Africa Background Region). The objective of the Kenya Agricultural Carbon Project is to increase crop yields and to enhance small farmers’ abilities to respond to change and variability in climate. As a co- benefit adoption of sustainable agricultural land management (SALM) practices leads to carbon sequestration and thereby greenhouse gas mitigation. Smallholder farmers will be able to access carbon markets and receive additional revenue streams by selling the carbon sequestered. The project is being implemented by a Swedish nongovernmental organization (NGO) called Vi questions of farmers. The ViA extension staff Agroforestry (ViA), in collaboration with 60,000 are building capacity on a wide range of smallholder farmers on approximately 45,000 aspects related to sustainable agricultural hectares in Western Kenya. The project is production, marketing, and development of located on highly degraded land dominated by farm enterprises. Farmers can select from a mixed cropping systems, mainly for subsistence wide range of SALM practices that they would farming. Average farm size is less than 1 hectare, like to adopt, including mulching, composting, and farmers have clear ownership rights to the crop residue management, agroforestry land. Prior to the advent of the project, systems, and manure management. The NGO few improved agricultural practices and is working with registered farmer groups with technologies were used, and the resulting whom they sign contracts that detail the decline in soil fertility led to low crop yields. rights and obligations of both parties with respect to service provision and carbon The project developer provides advisory revenues. ViA is sells the emission reductions services that respond to the specific needs and to the BioCarbon Fund of the World Bank on SMARTLESSONS — JANUARY 2012 1 and is based on the first carbon accounting methodology for sustainable agricultural land management. While scientifically rigorous, the methodology aims for cost- effective monitoring of emission reductions (ERs) in order to minimize the transaction costs and maximize the benefits for farmers. Lessons Learned Lesson 1: “Get the priorities right� — focus project design on smallholder farmers’ interests; first come increased crop yields and food security, and then carbon sequestration. Although the success of carbon finance operations is usually measured by the amount of ERs delivered, an agricultural carbon project should focus on increasing crop yields as a priority. Farmers will only adopt and maintain practices if they realize increases in productivity and incomes. The project team should also not attempt to convince the project developer and farmers to change priorities, since this would create false expectations with respect to the amount of carbon revenues that can be earned. Ex-ante economic and financial analysis of the Kenya Agricultural Carbon Project clearly indicates that the amount of carbon revenues are expected to be small in comparison to revenues from increased crop yields. While farmers’ focus is to achieve increased crop yields under changing climatic conditions, they simultaneously provide an environmental service in the form of carbon sequestration. This environmental behalf of the farmer groups. Once payments are made by the Bank (after project validation by an independent third party), almost all revenues will be used to benefit the smallholder farmers, partly in the form of direct payments and partly through the financing of advisory services. The details of the terms and conditions of the sales of emission reductions have been specified in the ERPA (Emission Reduction Purchase Agreement) that was signed between the BioCarbon Fund and the ViA in November 2010. A key innovative element of the carbon finance project is the MRV (measurement, reporting, verification) system to track the amount of emission reductions generated by the project. The MRV system is being implemented by the NGO 2 SMARTLESSONS — JANUARY 2012 service should be rewarded and carbon revenues can Lesson 3: “Carefully select project developer� — strong constitute an attractive co-benefit for smallholder farmers. extension systems, innovativeness, interest to learn, and technical and financial capacity are key. The amount of carbon revenues that a project could generate should be clearly communicated in the early Agricultural carbon projects put high demand on the stages. In the case of the Kenya project, the Bank Team project developer, particularly since this approach is still in communicated the level of expected carbon revenues right its infancy. A project developer needs to be very innovative, at the inception, and the project developer then flexible, and willing to spend sufficient resources on the communicated these aspects to the beneficiaries. complex technical nature of carbon finance operations. The entity should be interested in learning those aspects Lesson 2: “Monitor transaction cost� — MRV systems thoroughly, in particular how to make them operational. should be cost-effective and user-friendly. Requirements for project approval and verification of ERs under the existing frameworks can be a rather long process. Carbon payments are relatively small in comparison to the Adequate time is required to allow the project developer benefits of increased crop yields, particularly given the and farmers to become familiar with the concept and the current prices paid for ERs from agricultural land implications of participating in a project of this nature. The management. However, they can be an interesting project developer should be made aware of those additional incentive to transition agricultural production implications from the very beginning. systems until higher productivity levels are reached and soil carbon pools are filled. Therefore, the transaction costs of Currently, the Bank is limiting its support of carbon finance the additional activities needed to sell the ERs, mainly the operations to technical assistance and the purchase of ERs. MRV system, need to be contained. To the extent possible, This implies that the project entity requires strong financial a project should build on existing carbon accounting support from other sources for implementing the project. methodologies and integrate the MRV system into the The most important aspect, however, is that the project existing monitoring and evaluation (M&E) system of a developer should have a strong and demand-driven project. In general, the project should build on the existing advisory system in place. Without a well established advisory institutional structure of the project developer and avoid system, adoption and maintenance of practices leading to a the creation of new structures for the carbon component sustainable increase of crop yields and carbon sequestration only. Working with farmer groups instead of with individual will not happen. Therefore, selection of the project farmers is essential to cost-efficiency. developer is of utmost importance, which in the case of the Kenyan project included the following steps: i) a pre- feasibility assessment of the carbon sequestration potential in Kenya’s agricultural sector; (ii) a workshop plus a public call for project ideas to identify technically sound and financially viable mitigation activities; and (iii) an in-depth capacity assessment of short-listed project developers and their project ideas and coaching support to enable them to develop a realistic and high-quality proposal. Lesson 4: “Technical assistance and capacity building are key to project success� — providing smallholder farmer access to carbon revenues requires special technical expertise. The Bank Task Team should be ready to spend time and resources to dig into a new technical subject area. If one of SMARTLESSONS — JANUARY 2012 3 the objectives is to actually facilitate the flow of carbon revenues to smallholder farmers, MRV issues need to be dealt with thoroughly. Technical expertise from outside the Bank should be tapped into, since the Bank does not have the human resources to address the issues in necessary depth. Therefore, additional financial resources need to be identified early on to provide first-class and practical implementation-focused technical assistance. In this project, additional Trust Fund resources were mobilized. Another promising option — also with respect to scaling-up — would be to link such activities an excuse, given the importance of learning with Bank-supported investment operations. by doing and the need for exploring practices Further, contract only consultants who have and solutions for climate-smart agriculture on actually worked on MRV issues related to the one hand, while finding mechanisms for land management projects, ideally an rewarding small-scale farmers for the provision agricultural carbon project. Otherwise, one of environmental services on the other hand. runs the risk of supporting an academic exercise with no operational relevance to the The SALM carbon accounting methodology project. At the same time, however, it is crucial has been developed as part of the project and that capacity for generating ERs for market has been approved by the Verified Carbon access is transferred systematically to in- Standard (VCS). The methodology is in the country institutions. public domain and can be used for similar projects, thereby lowering transaction costs Lesson 5: “Focus on areas with high significantly. More technical work needs to be agricultural potential� — Carbon undertaken and innovative approaches sequestration potential is higher in areas explored to further reduce transaction costs with high biomass growth. for MRV (without compromising on the accuracy of the system). If the objective is to design a project that leads to actual carbon payments to farmers, it should We also need to “connect the dots� for more focus on areas with high agricultural potential. effective work on the ground. The Kenya The amount of emission reductions generated Agricultural Carbon Project is adding by a carbon finance project based on adoption knowledge and evidence at different levels. It of SALM practices is mainly determined by the is being used as a good practice example for actual biomass yield and how the residues are capacity building of interested project treated. Biomass yields increase with favorable developers in East Africa — an effort agro-ecological conditions. While there is supported by the World Bank Institute. certainly a huge potential for sustainable land ViAgroforestry and the World Bank have been management projects in less favorable continuously informing a wide range of conditions focusing primarily on adaptation, interested stakeholders, including Civil Society which can also lead to carbon sequestration, Organizations, Government officials within the number of generated ERs might not justify and outside Kenya, national and international a carbon finance transaction. research organizations, private sector and DISCLAIMER development partners, about the project SmartLessons is an awards Conclusion concept and its progress. Public awareness program to share lessons learned in development-oriented advisory raising and consultations are an important services and investment The ERPA of the Kenya Agricultural Carbon element of further scaling-up climate-smart operations. The findings, Project was signed in November 2010, and agriculture in Africa and other regions. The interpretations, and conclusions project validation is scheduled for the first project also serves as the basis of technical expressed in this paper are those half of 2012. Farmers have started to adopt assistance on “Readiness for Climate-Smart of the author(s) and do not necessarily reflect the views of IFC SALM practices, and the MRV system is being Agriculture� in Kenya supported by the or its partner organizations, the implemented. The intensive preparation Danish Ministry of Foreign Affairs, which aims Executive Directors of The World phase and the first year of implementation to mainstream climate change considerations Bank or the governments they have provided important lessons which are in Kenya’s agricultural development strategy represent. IFC does not assume any responsibility for the broadly applicable, independent from region, and programs. Further, the project is informing completeness or accuracy of the country, or specifics of project design. the integration of climate-smart agriculture information contained in this Obviously, the more farmers are included and into the Comprehensive Africa Agriculture document. Please see the terms the more diverse the farming systems, the Development Program (CAADP), with the and conditions at www.ifc.org/ more complex the technical dimension potential of scaling up climate change aspects smartlessons or contact the program at smartlessons@ifc.org. becomes. However, complexity should not be in investment plans and operations. 4 SMARTLESSONS — JANUARY 2012