Leveraging financial instruments for sustainable food systems

  • From
    CGIAR Initiative on Low-Emission Food Systems
  • Published on
    04.03.24
  • Impact Area

Share this to :

By Amahnui George Amenchwi, Wattel Cor and Augusto Castro Nunez

The global food system is at a crossroads, facing the challenge of feeding a growing population while mitigating climate change. Scaling solutions for food system transformation is crucial to address the urgent challenges of climate change, food security, and sustainability.

Finance is an essential ingredient of any scaling strategy for climate action. Within the framework of the CGIAR Low Emission Food System Initiative (Mitigate+), researchers explored how financial instruments can drive the transition towards lower-emission food systems, offering insights from cases in Kenya, Colombia, Vietnam, and China. The research found a collection of six (green finance, blended finance, carbon credits, payments for ecosystem services, tax incentives and re-purposed agricultural subsidies) financial instruments and examined their potential for transforming sustainable agri-food systems in Colombia, Kenya, Vietnam, and China.

Green finance

Green finance refers to those financial investments made into projects and initiatives to accrue positive benefits to the environment. Green bonds are generally issued by large corporations, banks, governments, and supranational organizations.

East Asia and the Pacific are the regions that issue the most green bonds. Globally, China’s green bonds account for the fourth largest, with US$59 billion in 2021. Colombia’s green bond market remains relatively small with issuance of around US$ 1 billion by the end of 2021. Green bond markets in Sub-Saharan Africa (SSA) and South Asia are still in nascent stages, with Kenya’s issuance standing at US$ 58 million and Vietnam’s at US$ 227 million.

Blended finance

Blended finance (BF) is a financial instrument that combines public, philanthropic, and private capital sources with the aim of leveraging the strengths of each source of capital and reducing risks for private investors, while unlocking private capital to achieve development objectives at scale. BF is often used to leverage private capital and to fill the gap between the cost of the project and the amount of public funds available.

Generally, BF agreements involve a combination of debt, equity, and/or grant financing. In Kenya, BF actors include the International Fund for Agricultural Development, the private sector, Alliance for a Green and Revolution in Africa and the government, using instruments such as concessional loans, credit guarantees and technical assistance to target actors such as smallholder farmers, small farmer co-operatives, and agricultural input suppliers. In Vietnam, international financial institutions are using concessional loans in the waste sector. In Colombia, BF actors are Vision Amazonia and the Sustainable Productive Transformation Instrument who are applying tools such as concessional loans and interest rate reduction.

Carbon credits

Carbon credits are a variety of certified ways to reduce greenhouse gas emissions that can be purchased by companies or countries on carbon markets. These credits help them offset their carbon taxes, meet legal requirements for emission reduction, or fulfill their voluntary commitments to reduce their carbon footprint. Most carbon emission rights are traded at compulsory governmental emission trading systems (ETS), while smaller quantities are traded on voluntary markets.

Colombia has a significant voluntary carbon market, and her annual voluntary market comprises about US$ 106 million carbon taxes (2022). In Kenya, the agriculture, forestry and other land use sector is considered a main source of carbon, and many projects have been issuing carbon credits since 2014 using the Clean Development Mechanism. Carbon credits in Vietnam are being explored, but not yet operational.

Payments for ecosystem services (PES)

PES schemes compensate farmers for maintaining or enhancing ecosystem services. PES are usually made to people managing natural resources, such as farmers, forest owners or conservationists, and NGO’s, paid from public and private sources.

In Colombia, there have been nine different REDD+ projects targeting forest and land use for carbon sequestration. These projects (ongoing or ended since 2008), have covered about 11.6 million hectares. In Kenya, there have been 4 watershed PES projects, active or in development since 2008. In addition to this, there have been 24 different REDD+ projects ongoing or ended since 1998, covering about 2.8m hectares. In Vietnam, since 2008, there have been 9 different REDD+ projects ongoing or ended, covering 0.7 million hectares of land and one watershed PES project in development.

Tax incentives

Tax incentives are ways to give certain activities or industries better tax treatment than what’s typically given to other businesses.

In Colombia for example, tax credits on the carbon tax are offered to fossil energy companies investing in projects that contribute to environmental conservation and sustainable development. These incentives encourage businesses to align their activities with sustainability goals, fostering a greener food system.

Re-purposed agricultural subsidies

Re-purposed agricultural subsidies are the reorientation of the current level of agricultural support to farmers, agri-food companies, input and equipment companies and consumers to deliver better economic, environmental, social, nutritional and climate outcomes.

Agricultural support can include price and trade incentives as well as subsidies and other forms of fiscal support. Repurposing refers to the reduction of agricultural producer support measures that are inefficient, unsustainable and/or inequitable, to replace them with measures that are the opposite. In our focus countries, agricultural support is mostly given through price and trade incentives, and to a lesser extent through subsidies.

China moved radically from negative support in the 1980s, in the order of minus 30 percent to minus 40 percent of the total agricultural production value, towards positive support in the 2010s around 20 percent. More recently, China is making first steps towards “greening” this support, aiming to reduce the use of chemical fertilizers and pesticides and to recycle agricultural waste resources (e.g. straw). In Colombia, Kenya, and Vietnam, such a reorientation is not (yet) taking place, except for some greening of taxes in Colombia. The re-orientation of agricultural subsidies towards sustainability goals is a politically sensitive topic, but the examples from China and Colombia show that promising steps can be made when there is political commitment from the highest levels.

Conclusion

Financial instruments can play a crucial role in accelerating the transition towards low-emission food systems. By harnessing green finance, BF, carbon credits, PES, tax incentives, and re-purposed agricultural subsidies, countries can promote sustainable food system practices at scale. These mechanisms can not only be applied to mitigate climate change but also to enhance biodiversity, improve resilience, and ensure food security. The main challenge lies in making financial instruments accessible for the relevant projects and target groups on the ground. As we strive for a sustainable future, leveraging financial instruments will be paramount in creating a more resilient and environmentally friendly food system for all.

See more information the CGIAR Initiative on Low-Emission Food Systems here 

Photo credit: Orlando from Pixabay

 

Share this to :