The power of “farmer friendly” financial incentives to deliver climate smart agriculture: a critical data gap

It is well documented that small-scale farmers in the developing world can achieve impressive local successes despite their poverty and acute vulnerability to climate change by adopting proven “climate smart” technologies. Specifically, they can greatly increase farm production despite growing climate change impacts while also helping mitigate global climate change. The critical challenge is to address the barriers to scaling up these local successes.

This view is increasingly widespread, although linking agricultural production and climate resilience objectives with carbon sequestration objectives is not without its critics. Some fear that emphasising these “win–win outcomes” could have adverse impacts on farmers, notably that commodifying carbon could lead to weakening farmers' rights to and control over their land. We are more optimistic about the potential for win–win outcomes across diverse landscapes, based on the numerous documented local successes. The outstanding questions involve the scope for ensuring that these outcomes consistently benefit local communities and for scaling up local successes to a majority of vulnerable farmers. We believe these objectives will remain elusive unless new cost-effective delivery mechanisms can be found. We posit an innovative but untested solution to address this challenge, and call for empirical research to examine its potential.

We start from the premise that while current approaches can deliver local successes, they are ill-suited to scaling up successes due to their high costs per beneficiary, creating a need for a “slimmed down” delivery formula, ideally one that simultaneously benefits those providing finance. We hypothesise that “farmer friendly” financial incentives could address this gap, delivering rapid scaling up of climate smart innovations across small-scale farming communities at an affordable cost.

At present, financial incentives for farmers to adopt these innovations are offered primarily via the carbon market, for instance, via community forestry projects. Yet existing schemes offer farmers poor terms and only achieve successful outcomes by providing support services that are not replicable at scale. The danger is that halting early experiences could discredit climate finance initiatives that create financial incentives for small-scale farmers before their potential has been explored, causing a golden opportunity to be missed. Fresh research is urgently needed to establish whether “farmer friendly” financial incentives offer a viable solution.

We focus on the need for proof of concept, and stop short of discussing institutional requirements to implement this solution. Needless to say, we appreciate that the scope for win–win outcomes is limited, but contend this potential remains largely untapped due to the current structure of climate change initiatives involving small-scale farmers.

1. A need for efficiency and new opportunities

Poverty and climate change are among the great challenges of our time, particularly affecting the world's two billion small-scale farmers (IFAD 2011a). Over one billion people are already food insecure, a large majority of whom are small-scale farmers eking out a marginal existence from their lands, primarily in Sub-Saharan Africa and South Asia (GHR 2009; IFAD 2012). These communities are also the single group most vulnerable to climate change (Biagini et al. 2011; World Bank 2011c). This follows because climate change impacts such as erratic rainfall and extreme weather events – which have become increasingly apparent over the past few years (Pande and Akermann 2009; Ringler et al. 2011; Twinomugisha 2011) – create huge problems for communities with minimal savings or fallback options whose livelihoods rely directly on ambient rainfall.

Unfortunately, financial crises such as the one that has been unfolding since 2008 can have adverse impacts on developing countries (EC 2009; AfDB 2012). Notably, they raise worrying questions about possible limits to the scale and sustainability of financial flows to the developing world (Carls 2012; OECD 2012). The simple reality is that complex issues such as climate change and the environment are sliding down the policy agenda in donor nations in favour of more immediate concerns such as public finances and employment (FT 2012). These constraints on donor finance hit at precisely the same moment that other financial flows to the developing world are also under increasing strain, notably remittances and foreign direct investment (AfDB 2012).

This reality creates an urgent need to identify new ways to help small-scale farmers, ones that maximise benefits for vulnerable, marginalised communities while minimising net costs to donors. Two broad options for delivering these gains are finding more efficient means of spending donor funds and engaging the private sector in ways that deliver clear benefits to communities (Morel and Delbosc 2012).

2. Climate finance as a golden opportunity for small-scale farmers

While climate change brings daunting new threats to small-scale farmers, it also creates potentially pivotal opportunities for them (e.g. Bryan et al. 2009; OECD 2009; UNDP 2011; World Bank 2011b; Kahiluoto et al. 2012;). Specifically, it creates opportunities to address at scale the food insecurity and climate vulnerability plaguing these communities, rather than just in isolated target communities. These opportunities stem from two key facts: (1) climate change induces societal responses that promise large new flows of “climate finance” to the developing world, coupled with political will to support innovative actions, and (2) diverse proven climate smart innovations for these communities have been identified, ones that can – under favourable conditions – address climate change threats while also delivering direct benefits to communities.

Climate change induces societal responses on two levels, namely via mitigation and adaptation actions. Mitigation involves combating climate change by reducing greenhouse gas emissions into the atmosphere or enhancing carbon “sinks” via carbon sequestration (IPCC 2007). Adaptation involves adjusting to climatic changes in order to moderate potential damages, take advantage of new opportunities and cope with any adverse effects (IPCC 2007). Many adaptation options involve building climate resilience, or moving beyond simple coping strategies and towards achieving longer term development in spite of climate change (Dodman et al. 2009). Both adaptation and mitigation are relevant to small-scale farmers, since farmers' actions can either help deliver these outcomes or exacerbate climate change and peoples' vulnerability to it.

Adaptation and mitigation both promise potentially large new financial flows to the developing world. The existing international commitment for climate finance flows to the developing world are for “Fast Start” funding of $10 billion per year from 2010 and 2012, rising to $100 billion per year by 2020 (World Bank 2012b), yet it is useful to unpack these headline figures.

Adaptation needs for developing countries are estimated at $70–100 billion per annum between now and 2050 (World Bank 2012a), yet the scale of allocated adaptation finance flows to date are incommensurate with the scale of need (Nakhooda et al. 2011). For instance, Anthony Nyong from the African Development Bank said that adaptation needs for Sub-Saharan Africa were approximately 2% of GDP ($22–31 billion per annum till 2015, then $52–68 billion to 2030), yet cumulative adaptation finance flows to Africa between 2003 and 2010 total just $500 million (Raman 2012).

Mitigation initiatives developed for the carbon market – which captures private finance in exchange for mitigation services – already total $176 billion per annum (Kossoy and Guigon 2012), yet will need to grow much larger if globally agreed mitigation targets are to be met. Only $3.9 billion of this mitigation involves the developing world, but this is already significant. Moreover, new mitigation funds for developing countries have also been mooted under Nationally Appropriate Mitigation Action schemes and the New Market Mechanism (NMM). In total, mitigation flows to developing countries could total $140–175 billion per annum between now and 2030 (World Bank 2012a). These flows are difficult to predict, but demonstrating the scope for stronger mutual benefits is arguably the best way to ensure they are large and sustained.

With both adaptation and mitigation, the justification for large-scale and sustained funding is strong. Adaptation finance is based on the clear moral obligation of those principally responsible for climate change towards those who suffer most from its effects, coupled with their capability to pay for these damages (Oxfam International 2010). Small-scale farmers in least developed countries are widely recognised as the group most vulnerable to climate change and hence most deserving of adaptation spending (e.g. Biagini et al. 2011). Some also argue that by reducing “human insecurity” among marginalised groups, adaptation spending can minimise threats to industrialised nations from phenomena like refugee flows, extremism and famine (Morton 2008; Heinrigs 2011; Sayne 2011; Evans 2012), although more research is needed into such effects (Persson 2011). Mitigation finance lessens climate change impacts on global society, and small-scale farmers potentially have a comparative advantage in providing this service (as discussed below), creating donor and private sector interest in making mitigation investments that can be harnessed to benefit farmers.

3. Do financial incentives created by the carbon market offer particular hope for these farmers?

It has been suggested that small-scale farmers could play a major role in the carbon market, thus helping to combat global warming while simultaneously doubling crop yields (WAC 2010). The premise is that the financial incentives created by this market could catalyse a widespread transition to climate smart agriculture. Based on experience from carbon projects to date, climate smart practices help mitigate climate change while also delivering diverse benefits to participating communities, including lower production costs, higher crop productivity, greater climate resilience and new income sources (Smith and Scherr 2003; Tennigkeit et al. 2010).

The climate change threat is already great. The global community cannot further delay decisive action to tackle it if we wish to limit the global average temperature increase to 2°C and avoid the most damaging effects of global warming, given the potentially catastrophic consequences associated with our current trajectory towards a rise of between 3.5 and 6°C (IEA 2011). Due to the acute vulnerability to climate change of small-scale farmers, adaptation measures for these communities are imperative, notably ones that build resilience to climate change impacts. Without strong adaptation measures, food security and poverty alleviation objectives simply cannot be reached or sustained (World Bank 2011c).

It is estimated that small-scale farmers could remove 50 billion tonnes of carbon dioxide from the atmosphere over the next 50 years – about one-third of the world's carbon reduction challenge over this period (WAC 2010). Others have suggested that the potential of small-scale farmers to deliver mitigation services could be higher still (Lal 2009). This mitigation involves reducing greenhouse gas emissions – agriculture currently emits 14% of the global total while deforestation (much of it linked to agriculture) emits an additional 17% – and sequestering carbon dioxide via measures such as restoring degraded soils and planting trees (IPCC 2007). Such mitigation could also be relatively cheap (Nelson 2009), notably on marginal lands where opportunity costs are comparatively low (Wunder 2007). In short, vulnerable farmers may often live in poverty, but they could be powerful partners in the struggle against climate change. Wherever “win–win” outcomes are possible, benefits to donor countries and poor communities can be achieved simultaneously, provided that delivering community benefits is made a priority of mitigation investments.

It is difficult to estimate the total value of these potential future mitigation services because this depends on the market price of carbon credits. For projects involving agro-ecosystems or forests, the de facto price of credits to date has often been the price set by the World Bank's BioCarbon Fund, which has typically paid qualifying projects $4 per credit, or tonne of CO₂ equivalent (IFCA 2011). At $4/tonne, this mitigation would represent $200 billion, while at a plausible future price of $50/tonne (IEA 2011), it would be over $2 trillion. As for the value of doubling yields, that too is large but difficult to estimate. One billion hectares of farmland in the developing world is said to be suitable for mitigation activities such as planting trees in association with field crops and clean energy (Sulzberger 2008), while five billion hectares of rangelands are suitable for improved rangeland management (Gonzales-Estrada et al. 2008).

Several a priori observations suggest this optimism regarding the potential significance of financial incentives for small-scale farmers is justified. One is the existence of proven climate smart innovations that promise multiple benefits but whose adoption is currently very limited due to barriers to adoption, as discussed below. Another is the poverty of these farmers coupled with the ominous threat they face from climate change impacts, which should make them receptive to viable new options. A third is the fact that these communities could have a comparative advantage in delivering mitigation services due to their low opportunity costs, as noted above.

Financial incentives may be needed just to make it possible for small-scale farmers to adopt climate smart innovations. Without such incentives, farmers might struggle to meet the costs associated with adopting these innovations. This follows because the cost–benefit profile of climate smart innovations typically involves clear net benefits, but in the form of significant initial costs coupled with gradually rising but stable benefit streams (Branca et al. 2011). These incentives might also help farmers find ways to overcome other barriers to adopting climate smart practices, such as innovation risk, missing technical information or access to needed inputs.

The idea that society's response to climate change presents major new opportunities for both small-scale farmers and the global community is tantalising, but is it realistic? If it were, wouldn't such solutions already be widely implemented? Isn't the carbon market controversial and troubled, rather than offering mutually beneficial solutions and addressing major world problems? And isn't adaptation finance more rhetoric than reality to date?

These are fair questions. So what do we know already, and what don't we know?

4. What we know: local successes are possible

Critically, we know that local successes are possible, since “points of light” where technological innovations deliver dramatic gains and hopeful outcomes for small-scale farming communities are observed across the developing world.

One subset of these local successes involves climate smart innovations, which are of particular interest nowadays given the climate change threats that have become apparent in many small-scale farming communities over the past few years. Climate smart agricultural practices are defined as those that can raise farm productivity while also delivering climate change objectives, namely mitigating climate change itself and building communities' resilience to climatic changes (Gledhill et al. 2012b; Pye-Smith 2011). Since they can simultaneously deliver multiple benefits – higher productivity, greater resilience of production and climate change mitigation services – these practices may be said to deliver “win–win” (e.g., CARE 2010) or “win–win–win” outcomes (e.g. Oxfam International 2009; World Bank 2011a). Win–win outcomes mean that mitigation can be delivered without trade-offs in terms of local welfare, but rather while simultaneously delivering welfare gains to communities, provided interventions are appropriately designed (World Bank 2012d). Initiatives that promise these three wins are also known as ‘climate compatible development’ (Mitchell and Maxwell 2010).

Diverse technologies are reported to deliver these outcomes. Within agriculture, sustainable land management (SLM) practices are an especially important set of technologies given the challenges created by poverty, environmental degradation and climate change. According to the UN Earth Summit of 1992, these practices involve managing natural resources such as soils, water, plants and animals to meet human needs while simultaneously ensuring the long-term productive potential of these resources and maintaining their environmental functions (FAO 2012). Via active and integrated management of natural resources, SLM practices can rehabilitate degraded lands, including their vegetation and soils (Lal 1997; IFAD 2011b; Pretty 2011) and their hydrology (World Bank 2010; Yitbarek et al. 2010). For instance, they can increase water availability to plants by controlling runoff and erosion, increasing rainfall infiltration, reducing evaporation and increasing soil water-holding capacity (Branca et al. 2011).

Some have called for SLM practices based on productivity considerations alone, i.e. without considering climate change impacts. For instance, a comprehensive intergovernmental assessment of world agriculture recently concluded that a decisive shift towards use of these practices was needed to address production concerns, since these practices can reverse the widespread land degradation that undermines farm productivity while also minimising input costs (IAASTD 2009). Yet the climate change threat reinforces this call, since farmers are particularly vulnerable to its impacts and these same practices can address climate change objectives.

A major review of empirical evidence on the use of SLM practices on small-scale farms in developing countries was conducted in 2011 under the aegis of two international research initiatives – Climate Change Agriculture and Food Security (CCAFS) and Mitigation of Climate Change in Agriculture (MICCA) (Branca et al. 2011). The goal of this survey was to critically assess the potential of these technologies to deliver “win–win” outcomes in these communities. Based on findings from many hundreds of projects, it found strong evidence that these practices consistently deliver higher, more resilient production and climate change mitigation.

Technologies included in this review and their estimated production effects are listed in Table 1. Other technologies believed to hold promise for delivering “win–win” outcomes in these communities include improved rangeland management and clean energy technologies such as solar ovens and fuel-efficient biomass stoves, yet such options were beyond the scope of this review.

Table 1. Average crop yield and mitigation effects of innovations, relative to conventional agriculture (Branca et al. 2011).

Technology type	Innovations examined	Average % increase in crop yields		Average mitigation potential (tCO2e/ha/year)
		Drier areas	Humid areas	Drier areas	Humid areas
Agronomy	Improved seed varieties, crop rotation, intercropping, cover crops	116	122	0.39	0.98
Fertilisation	Organic fertiliser, efficient use of nitrogen fertiliser	72	118	0.33	0.62
Tillage and residue management	Conservation tillage, incorporation of crop residues	122	55	0.35	0.72
Water management	Irrigation, bunds, terracing, contouring, water harvesting	92	164	1.14	1.14
Agroforestry	Intercropping crops and trees, live fencing	81	61	0.35	0.72

Crop production was found to have roughly doubled across practices and sites despite growing climate change impacts, while significant mitigation effects were also observed. Mitigation effects were larger in humid areas and productivity benefits were higher in drier areas. The authors concluded that even in drier areas, implementing these practices at scale could deliver globally significant mitigation benefits, yet realising this potential would require tailoring mechanisms to these circumstances.

Findings on production gains focused exclusively on crop yields, yet other production benefits of these practices can be large. For instance, agroforestry practices can raise crop production by increasing soil organic matter content, reducing soil erosion and improving the local microclimate (WOCAT 2011). Yet these practices can also deliver valuable products such as fruit, wood and livestock fodder, though such benefits were neglected by these data.

Regionally, local benefits of climate smart actions were strongest in Sub-Saharan Africa, with all practices consistently registering over 100% increases in cereal yields. Suggested explanations for such high potential gains include farmers' limited access to purchased inputs and their tendency to cultivate marginal lands that are highly susceptible to degradation (Henao and Baanante 2006), making them particularly receptive to practices that rehabilitate these lands.

Despite these strong overall trends, findings varied with factors such as soil type and local climate. Other factors that undoubtedly influenced performance, such as local institutions and governance, were not considered by this review. Meanwhile, the review found a few cases of insignificant or adverse yield effects. The authors suggest this implies these practices give strong yield effects across diverse agro-ecologies and farming systems, but an alternative possibility is that adverse cases are less likely to be published, though the authors found no evidence of this.

In sum, numerous climate smart practices have been proven across diverse contexts within developing world agriculture. While these options may not be a panacea, existing case study evidence suggests that they can deliver solid “win–win” outcomes across diverse settings. Moreover, these options may particularly benefit poorer households, who often work marginal lands and typically have only limited access to purchased farm inputs, and tend to provide solutions that are sustainable over time (Branca et al. 2011). Such hopeful outcomes are far from certain. Yet they seem quite plausible based on the available evidence.

5. What else do we and don't we know?

By providing multiple benefits over time, climate smart innovations can also offer excellent value for money to donors, governments or other investors. Ensuring value for money is an increasingly important priority for donors (e.g. DFID 2011). Two recent analyses from Malawi and Ethiopia show the types of benefit–cost ratios that can be obtained by well-designed projects to foster SLM practices by small-scale farmers. Both projects examined were found to deliver benefit–cost ratios well above 10:1, which powerfully justified these investments, even though neither analysis included the mitigation services generated by these innovations (Yitbarek et al. 2010; Venton and Siedenburg 2011).

We also know that adoption of these practices by farmers has been relatively low globally, despite the multiple benefits they promise (FAO 2010). That is, successful local innovations have not disseminated readily. Better understanding of this failure is imperative, since these innovations appear to offer a genuine opportunity to small-scale farmers in a situation where they face grave threats and have few options. Specifically, better understanding is needed of barriers to adopting these technologies and the various costs and benefits faced by farmers (Branca et al. 2011; Gledhill et al. 2012a). Our proposed response to this need is to empirically assess the efficacy of “farmer friendly” financial incentives, based on the premise that this could in many cases be the limiting factor. Competing theories also exist, such as seeing the process of farmer learning as the main constraint to farmer adoption of these innovations (Millar and Connell 2011).

Since these climate smart innovations give several distinct “wins,” initiatives to deliver them can fall under several different headings. Namely, these innovations can be delivered via either mitigation or adaptation initiatives or conventional development efforts. That is, “win–win” outcomes can be delivered via initiatives targeting any one of the wins delivered. The present paper focuses on mitigation benefits due to the scope this offers for mobilising fresh finance flows and quantifying financial payments to farmers, yet all three of these “wins” are critical.

Clearly, hopeful outcomes are possible, ones which address both poverty reduction and climate change objectives, and climate finance could potentially be used to deliver them. So what don't we know?

If local successes are possible yet not widely observed, the critical policy question is how best to deliver these climate smart outcomes. Notably, can these outcomes be scaled up widely at reasonable cost, such that reaching a majority of vulnerable small-scale farmers is feasible given the levels of donor funding realistically available?

One could argue this is not possible, since it has not been achieved despite 50 years of international development, nor in the past several years since climate finance began targeting small-scale farmers. Notably, we do not know whether the bold new claims by some regarding scaling up local successes via climate finance are realistic. Based on past experience, one might conclude that transformative outcomes for small-scale farmers are only possible if substantial resources are concentrated on a small area, even though this model is clearly not scalable.

Yet the reality is that some basic strategies for scaling up local successes have not yet been tried, so we simply do not know whether or not they would work.

6. The potential of “farmer friendly” financial incentives as a critical data gap

One potentially key option that has not yet been tried involves providing “farmer friendly” financial incentives to small-scale farmers to catalyse their adoption of climate smart innovations by helping them overcome key barriers to adoption. Examples of common barriers to these innovations include significant initial investments in labour or learning, benefit streams that only develop gradually, and uncertainty about outcomes due to unfamiliarity and a changing context (e.g. Barrett et al. 2002; Branca et al. 2011; Gledhill et al. 2012b). Other barriers to technology adoption that may be less affected by improved financial incentives are problems with infrastructure or governance (Kahiluoto et al. 2012).

We define “farmer friendly” incentives as payments to farmers on terms that fit with the challenges they face. These payments have (1) sufficient value to generate meaningful revenues, (2) the flexibility to encompass a range of activities implemented in locally appropriate ways and (3) timing that addresses the costs and risks faced by farmers.

The fact that this option remains unexamined creates data gaps on two levels, namely vis-à-vis (1) the catalytic power of financial incentives as a means to induce farmers to adopt “climate smart” innovations, including the limitations of this incentive effect and (2) the impacts of the resulting innovations across different sectors of the local community. Before discussing these gaps, let us first consider why this option remains unexplored and why this is a problem.

To our knowledge, no existing projects to foster climate smart innovations by small-scale farmers create financial incentives for farmers on a “farmer friendly” basis. That is, this option has not yet been tried in policy and practice vis-à-vis poverty reduction, adaptation or mitigation. Each of these three cases is considered in turn.

Climate smart innovations such as those listed above are often neglected or de-emphasised by agricultural growth or poverty reduction initiatives for small-scale farmers, which typically focus instead on Green Revolution technologies such as improved seeds, chemical inputs and irrigation (IAASTD 2009). Such technologies can secure impressive productivity gains under favourable conditions, but are not well-targeted to poorer farmers with limited access to purchased inputs. While some Green Revolution technologies foster adaptation to climate change (e.g. drought-tolerant seed varieties), others reduce climate resilience (e.g. reliance on chemical fertilisers, monocropping). These technologies may also fail to deliver mitigation gains, since they neither minimise greenhouse gas emissions from soils nor build up carbon stocks in soils and vegetation, though they could reduce pressure on forests.

Initiatives branded as “climate change adaptation” are in their infancy, so little data are available on their impacts or effectiveness in small-scale farming communities. Fortunately, initiatives falling under other headings have sometimes delivered strong adaptation outcomes, thus creating a body of evidence of adaptation successes on which to build. Early work on adaptation initiatives does not focus on employing financial incentives as a delivery strategy. Instead, these initiatives typically focus on information provision and capacity building to support the adaptation efforts of communities. Nonetheless, these initiatives could potentially include such incentives, particularly if it were found that these were a cost-effective means of building the resilience of vulnerable communities.

By contrast, mitigation initiatives in small-scale farming communities have been underway for years. These initiatives have promised to deliver sustainable development benefits to participating communities, with varying degrees of success. They typically provide financial payments to communities in exchange for mitigation services delivered to the wider world via the carbon market. Yet to date, the terms on offer in these “carbon offset” projects and programmes have typically been marginal for both project developers (Siedenburg et al. 2012) and participating farmers.

In a recent survey of carbon projects involving small-scale farmers in Africa, carbon payments to farmers were found to vary with how the project was structured, yet in all cases payments were very low compared to the implementation costs facing farmers. For instance, the International Small Group Tree Planting Programme (TIST) in Kenya paid farmers USD 0.02 per tree annually, regardless of measured sequestration. In the Vi Agroforestry project, it was estimated that the average farmer would receive USD 2.47 per year in carbon revenues, based on carbon delivered (Shames et al. 2012). Similarly, the Kenya Agricultural Carbon project is thought to provide participating farmers an average of just $1/ha/year (IATP 2011) for the mitigation services they provide.

While the carbon payments currently paid to small-scale farmers are low, projects also typically deliver services to farmers, such as agricultural extension, establishing farmers' groups and gender-focused activities (Shames et al. 2012). Such services can benefit farmers, thus helping ensure their participation in projects.

Carbon payments are low due to the current structure of the carbon market, notably the high transactions costs that must be paid to get a carbon project or programme approved – typically $150,000 or more (World Bank 2012c) – coupled with the relatively low prices paid for carbon credits, with $10 currently paid under the EU's Emissions Trading Scheme (Ecosystem Marketplace 2012) and other markets often paying significantly less. Simply put, the revenues received for carbon credits produced by these projects are modest and must first be used to meet the costs of market access, which can leave little to distribute among the farmers who actually generate these credits.

Besides failing to create significant financial incentives, a second gap in carbon project experience is that existing initiatives tend to emphasise only one or two technologies defined by prescriptive methodologies, rather than the full range of mitigation options potentially available to farmers. This is due to the stringent methodological practices that must be followed for communities to access the carbon market, which encourages standardised practices following a predefined formula, e.g. one tree species grown in a particular way.

In saying that existing carbon projects do not provide “farmer friendly” financial incentives, we certainly do not mean to belittle these initiatives, many of which have great merit. We also fully appreciate the very real constraints that prevent these initiatives from being “farmer friendly”. We simply wish to observe that payment schemes such as these – with low farm-gate prices and rigid terms – would be unlikely to elicit a strong adoption response from farmers if they didn't also offer supplementary measures such as sustained technical support and capacity building. Simply put, such incentives on their own are unlikely to be compelling to farmers, even if they are poor.

The catalytic power of financial incentives for small-scale farmers thus remains untested in a fundamental sense. Specifically, we don't know the potential of such incentives to deliver livelihood benefits to vulnerable farmers and mitigation services to the global community.

7. Why this data gap is critical

The lack of evidence on how small-scale farmers would respond to “farmer friendly” financial incentives to adopt climate smart innovations is a critical data gap for three related reasons.

1.	Clearly, the model used by existing carbon projects works, namely combining low payments with the provision of diverse services. This model can deliver local successes and demonstrate exciting solutions by catalysing climate smart innovations. Yet it is difficult to see how this model could ever be scaled up widely due to the high costs per beneficiary of delivering support services. A cost-effective alternative approach is needed that could potentially reach large numbers of small-scale farmers.
2.	There are reasons to believe that the financial incentives available to small-scale farmers for participating in the carbon market could shift dramatically in the coming years. Ongoing carbon market reforms aim to reduce the transactions costs faced by initiatives targeting these communities, such as standardised baselines and programme of activities schemes (Siedenburg et al. 2012). Lower transactions costs would mean that a higher proportion of carbon revenues could be paid to farmers. At the same time, some key voices suggest that carbon prices are likely to rise rapidly in the next few years. For instance, the International Energy Agency (IEA) recently stressed the need for a higher carbon prices to foster low-carbon development, calling on governments to take steps to ensure a price of $50 per tonne (IEA 2011), while others have also called for a $50 carbon price (MIT 2012). The IEA has also said that carbon credits will have to be trading at $90–$120 per ton by 2035 in order to avoid disastrous climate change (IEA 2010). Credits from initiatives that deliver strong co-benefits to small-scale farmers should be particularly attractive to the voluntary carbon market, given the premium paid for credits from “charismatic carbon” projects with a compelling narrative. Credits originating from exotic locations where projects could have major beneficial impacts are in greatest demand and command the highest prices. Examples include projects involving forest conservation or dissemination of improved cookstoves to small-scale farmers, particularly in Africa. Buyers consistently demand such credits, with one supplier recently saying that his firm could have sold these “a billion times over” (Ecosystem Marketplace 2011).
3.	Finally, while there are grounds for optimism regarding the potential of financial incentives to foster cost-effective and rapid scaling up of climate smart innovations among small-scale farmers, the failure to demonstrate this potential vividly within the next few years could lead to this opportunity being missed. Specifically, a delivery mechanism with great promise to address three problems of epic proportions could remain unexplored. How might this happen?

The danger is that key actors such as prospective project advocates, investors and donors could become disillusioned with carbon projects and programmes, and with the wider prospect of using financial incentives to catalyse climate smart innovations by small-scale farmers. Such disillusionment is already spreading rapidly within Africa, due to the daunting carbon market access criteria coupled with the low prices currently paid for any carbon credits generated. It is exacerbated by the chilling rhetoric of some leading NGOs regarding carbon market initiatives involving these communities, such as ActionAid's forceful assertion that agricultural carbon initiatives harm the poor (ActionAid 2011). Such work neglects the fact that these initiatives often deliver powerful benefits to local communities and misses the opportunity for constructive engagement – for instance, by ensuring that project design criteria require strong community benefits – with its key effect being to cast grave doubts on these initiatives.

In the absence of compelling successes with using financial incentives to catalyse climate smart innovations by farmers, these factors could progressively derail efforts to harness this potential. The end result could be that donors allocate their funds elsewhere, while private sector actors lose interest in engaging with small-scale farmers. Thus, a potentially powerful option to scale up climate smart innovations across small-scale farming communities could remain unexplored.

8. Needed research: simulations of plausible future “farmer friendly” incentives

While the power of financial incentives to motivate action is universally recognised, we do not know how effective they are at catalysing adoption of climate smart innovations by small-scale farmers.

Key data gaps following from this limited existing experience include both the catalytic power of financial incentives and their diverse impacts on communities, namely:

•	Do financial incentives for climate smart actions elicit a strong response from small-scale farmers, fostering rapid adoption of these innovations?
•	Can they do so in the absence of other types of support (e.g. capacity building, technical assistance, access to credit)? If so, what levels of financial incentives are needed to achieve this?
•	Which barriers to adoption of climate smart innovations can and cannot be overcome using financial incentives?
•	What are the beneficial and adverse effects of the resulting innovations for participating communities? Notably, what are their equity effects, gender effects and implications for the sustainability of livelihoods? Do some local groups struggle to access these incentives, and hence lose out? If so, why does this occur?

As discussed above, we do not have answers to these various questions because they involve scenarios that go beyond the bounds of current practice within climate finance, notably current practice vis-à-vis creating financial incentives for farmers. As such, the answers to these questions cannot simply be gleaned from observations of existing projects and programmes.

Answers can only be obtained via applied research, for instance, by launching a set of village-based simulations in selected farming communities – where significant financial incentives are created for local people for a predetermined period of time across a range of activity types – then observing farmers' responses. Such research would provide hard evidence of the power – and limits – of “farmer friendly” financial incentives within these communities.

In sum, proven climate smart innovations that deliver “win–win” outcomes exist for vulnerable small-scale farming communities, raising the question of how these innovations might be scaled up to reach a majority of communities in need at an affordable cost. Creating “farmer friendly” financial incentives for small-scale farmers represents a hopeful option for achieving this aim. This has not yet been tried, however, leaving a critical data gap regarding this basic policy relevant question. As yet, there are no grounds for losing faith in this prospect. But work is urgently needed to critically assess its promise to ensure that a potentially golden opportunity is not missed.

Figure 1. Small-scale farmers facing climate change under differing policy scenarios.