Financing crop insurance to cover climate-induced damages of smallholder farmers based on travellers footprint and the social cost of carbon
Smallholder farmers are one of the most climate vulnerable communities and in the same time they play a crucial role in terms of global food security. Often, they do not have the resources and knowledge to adapt to the negative effects of climate change. Even one single event of flood or drought can destroying their whole basis of livelihood and make them fall into the vicious cycle of poverty.
To overcome this problem, we propose a climate finance mechanism in which the air travellers compensate smallholder farmers for climate-induced damages by providing crop insurance. The compensation is based on the air traveller’s carbon footprint and the social cost of carbon in agriculture which is a metric of the expected economic damages from CO2 emissions. Our solution is based on the recent scientific publications on social cost of carbon in agriculture and at our knowledge it would be the first project of its kind.
In the globalised world, air travel is unavoidable to many people in the world. So instead of stigmatising the air travel, we provide an opportunity of climate justice so that the air travelers can help the vulnerable farmers become more resilient by helping to recover faster after disastrous weather events. Moreover, taking part in the compensation will make air travelers more aware of the effect and impact of carbon footprint on the environment, people and economy.
What concrete idea do you propose?
We propose a innovative climate finance mechanism in which the air travelers compensate smallholder farmers for climate-induced damages by providing crop insurance. The financing mechanism works as follows:
i) Air travelers pay a compensation based on their personal carbon foot print and the social cost of carbon in agriculture, which is equivalent to US$8.5 ton-1CO2(Moore, et al., 2017).
ii) The generated compensation fund is used for providing a crop insurance to smallholder farmers in a developing country against damages from extreme weather events,
iii) When the crops get damaged by weather related events the farmers get compensations, which protect them against livelihood crisis and help them to recover faster from climate disasters such as drought and flood.
Our proposal is based on the latest scientific publications from 2017 – 2019 on social cost of carbon and the current global policy and strategy. Based on our information, if implemented it would be the first such compensation program worldwide.
Example: Anna Müllerfrom Switzerland goes for a holiday in Nepal. Her economy class flight from Zurich to Kathmandu (via Abu Dhabi) and back will contribute to 2 tons of CO2. The airlines she travelled with has provided an opportunity to compensate her carbon footprint (social cost of carbon in agriculture) and she pays US$18.5. The money is then used to pay for crop insurance for Bhagwati Mahato, a rice farmer in south of Nepal. She has a 0.5 ha rice field with an output value of US$ 500.The compensation fund will contribute to the payment of insurance premium of US$25 (fair premium @ 5% of sum insured). If her rice harvest (her staple food) gets destroyed by droughts or flood, she would not have to sell her assets, use her savings or take loan for her daily needs. A simple compensation which is less than 2% of Anna’s flight cost can provide a food security a whole smallholder family for a whole year.
Why climate insurance?
Insurance is the typical risk sharing/alleviating instrument (Climate-ADAPT, 2015 )and is promoted as an economic instrument within climate adaptation Climate insurance can protect farmers from permanent damage caused by weather events.
Furthermore, insurance is an efficient way to compensate the victims of the climate change because it only compensates those farmers who have been directly affected by the weather-related events. Scientists have found that human-caused climate change has altered the likelihood or severity of an extreme weather event in 78% of the cases studied (CarbonBrief, 2019).
The loss ratio (proportion of claims paid to premiums earned) in crop insurance is on average 75% (Mahul & Stutley, 2010) i.e. only up to 25% of the costs is incurred for insurance design, administration, distribution and claims assessment. This cost efficiency is higher than many of the climate change mitigation projects.
Climate insurance is not a standalone solution and ClimateRe has proposed climate insurance as one of component of the holistic solution comprising of climate change adaptation of cultivation and value chain development (https://www.climatecolab.org/contests/2017/absorbing-climate-impacts/c/proposal/1334418). ClimateRe is working in promotion of rice value chain development and climate friendly rice production, however, not all the risk can be mitigated through those measures. So climate insurance is proposed as a cover for residual climate risks that cannot be mitigated or avoided..
Why social cost of carbon in agriculture?
Global social cost of carbon is US$417 per ton CO2, which is the total expected economic damages (Ricke, et al., 2018). Compensation of that amount is not economically feasible nor desired and thus we have chosen a sector which is extremely vulnerable to climate change and affect in this sector can threaten the global food security and also give rise to unwanted consequences such as economic downturn, health problems, mass migration and increase in crime. The total social cost of carbon in agriculture of US$8.5 per ton CO2is affordable and acceptable by many. Providing an opportunity to compensate a part of social cost of carbon is the first step towards climate justice.
Why smallholder farmers?
Smallholder farmers are being disproportionately affected by the climate change. The low adaptive capacity, dependence of rain-fed crops, location in marginal landscapes, and high reliance on climate change susceptible ecosystem goods and services are the critical reasons behind extreme vulnerability of those farmers (Donatti, et al., 2019). Moreover, the increased frequency and intensity of extreme weather events, such as droughts, floods and storms, in the recent decades are causing serious damages in the crop production affecting the smallholder farmer’s subsistence and income. Climate change is not only affecting the livelihood of the farmers but also threatening the global economy and food security. Small farms are one of the biggest workforce in our planet and they also play a crucial role in global food security providing more than 70% of world’s food.
Although smallholder farmers are critical contributor to our world, they usually occupy bottom of social and economic pyramid and struggles to fulfil their daily needs. These farmers also usually lack liquidity to pay for the crop insurance nor bear responsibility for climate change, and thus compensating the farmers is a fair climate deal.
Why aviation sector?
Aviation emissions make up about 2.5% of global emissions and they are rising quickly and can be as much as 27% of the global carbon budget by 2050 (CarbonBrief, 2016). Aviation is a facing a paradox, they have to significantly reduce their CO2contribution but are also responsible to address the rapid grown in demand. Air travel raises major climate justice issues because most of flights are taken by a very small number of people (mostly on upper bracket of economic condition) while the backlash from the climate change is faced by the marginal people from developing countries. By linking aviation expenditure – which will tend to be focused on the wealthiest – to funding for adaptation in the most climate-vulnerable places, could make a big step forward to addressing climate justice issues (IEEP, 2019).
Why not only to focus on climate change mitigation?
Climate change is already happening! No mitigation effort applied today, no matter how stringent, can prevent the consequences of the climate change in the next few decades due to the time lag of the effects (Climate policy info hub, 2019). So it is necessary to carry out climate change adaptation in parallel with mitigation.
CarbonBrief, 2016. Analysis: Aviation could consume a quarter of 1.5C carbon budget by 2050. [Online]
Available at: https://www.carbonbrief.org/aviation-consume-quarter-carbon-budget
[Accessed 27 October 2019].
CarbonBrief, 2019. Mapped: How climate change affects extreme weather around the world. [Online]
Available at: https://www.carbonbrief.org/mapped-how-climate-change-affects-extreme-weather-around-the-world
[Accessed 28 October 2019].
Climate policy info hub, 2019. Mitigation: Co-Benefits and Interlinkages to Adaptation. [Online]
Available at: https://climatepolicyinfohub.eu/mitigation-co-benefits-and-interlinkages-adaptation
[Accessed 28 October 2019].
Climate-ADAPT, 2015. Financial tools for risk management (2015). [Online]
Available at: https://climate-adapt.eea.europa.eu/metadata/adaptation-options/financial-tools-for-risk-management
[Accessed 28 October 2019].
Donatti, C. I. et al., 2019. Vulnerability of smallholder farmers to climate change in Central America and Mexico: current knowledge and research gaps. Climate and Development, 11(3), p. 264 – 286.
European Commission , 2018. Using insurance in adaptation to climate change, Luxembourg: European Commission.
IEEP, 2019. Linking aviation emissions to climate justice. [Online]
Available at: https://ieep.eu/news/linking-aviation-emissions-to-climate-justice
[Accessed 27 October 2019].
Mahul, O. & Stutley, C. J., 2010. Government Support to Agricultural Insurance – Challenges and Options for Developing Countries, Washington DC: The World Bank.
Moore, F. C., Baldos, U., Hertel, T. & Diaz, D., 2017. New science of climate change impacts on agriculture implies higher social cost of carbon. Nature Communications volume , Volume 8.
Ricke, K., Drouet, L., Caldeira, K. & Tavoni, M., 2018. Country-level social cost of carbon. Nature Climate Change, Volume 8, p. 895 – 900.
Who will take these actions?
- ClimateRe: ClimateRe is acting as an insurance broker who is responsible for project coordination, the micro-insurance scheme development and quality assurance of the projects. ClimateRe has strong technical knowledge on climate change and insurance. Furthermore, the NGO has good understanding of both North and South situation, needs, and culture which will be crucial for the successful implementation. ClimateRe is currently workingon insurance scheme in Nepal. (https://www.climatecolab.org/contests/2017/absorbing-climate-impacts/c/proposal/1334418), in which climate insurance is an integral part. The strong synergy between the proposed project and the on-going project will help to intensify the impact of the project.
- Aviation company: The aviation company will promote the compensation program and they will be the main contact point for the air passengers who are interesting in compensating the social cost of carbon from their flights.
- Flight passengers: Flight passengers will compensate the social cost of their carbon footprint.
- Farmer cooperatives: They play a central role in ClimateRe concept. In Nepal, agriculture micro-insurances are mainly managed in an informal manner via cooperatives. In our case, it will be formalized and they will manage community insurance scheme.
- Farmers: Smallholder rice farmers are the targeted beneficiaries of the project. The farmers are directly involved in operation and maintenance of climate risk measures (e.g. building and maintaining irrigation channel, training other farmers etc.), and operation and maintenance of market measures (e.g. running rice or flour mills, packaging of rice etc.).
- Insurance companies: Insurance companies are the insurance license holder and risk carrier. The insurance company will work with ClimateRe and the cooperatives to provide a group risk insurance scheme.
- District agriculture knowledge center, Nepal: Department of Agriculture bears overall responsibility for the agricultural growth and the development of agriculture sector. The government’s local agriculture office will collaborate and facilitate the project implementation. They will also provide premium subsidies to the agriculture insurance.
- Nepal insurance board: Insurance Board is a regulatory agency which has the mandate to systemize, regulate, develop and regulate insurance business. The developed insurance products have to be approved by insurance board.
What impact will these actions have on sustainability within Travel & Mobility?
Air travelers are able to compensate their social cost of carbon in agriculture.
Offsetting carbon footprint is well-established and easily accessible to anyone who wants to compensate their footprint. It is a common practice and has been adopted by many companies and organizations and even by some individuals. Undoubtedly climate change mitigation is crucial, however, the outcome of current mitigation practices will only be visible in few decades. Climate change is already happening and we need to take necessary steps now. Our proposal will allow the passengers to compensate their social cost of carbon in agriculture.
Air travelers become more aware on the impact of flying.
Taking part in the compensation will make the air travelers learn the effect and impact of carbon footprint on the environment, people and economy. The awareness helps the air travelers to pick an eco-friendly route e.g. less stopovers or choose a climate-friendly airline and not only focus on the price of ticket.
Air travelers can be a part of solution
In today’s globalized world, flying is unavoidable to many people. Traveling for work, to join conferences, to study abroad, to meet families and friends, or simply to take a break is a norm in today’s lifestyle. Instead of blaming the air travelers or making them feel guilty, our proposal will allow them to be part of a solution.
Air travelers can provide climate justice
Smallholder farmers are disproportionately affected by climate change, although their contribution to GHG emissions is quite low. For example, the average footprint of a Nepalese in 0.3 tons while that for a Swiss is 4.7 tons i.e. more than 15 times higher. Our proposal provides an opportunity of climate justice so that the air travelers can help the vulnerable farmers become more resilient by helping to recover faster after disastrous weather events.
About the team members
The authors, Juna Shrestha and Benjamin Huber, are the co-founders of ClimateRe.
ClimateRe, founded in 2015, is a social enterprise based in Switzerland. The vision of the company is a climate resilient society where every person has equitable access to knowledge, technology and finance, enabling them to adequately deal with climate risks. ClimateRe promotes and facilitates innovate risk management approaches and develop appropriate insurance solutions to strengthen the resilience of climate vulnerable communities. To reach sustainable balance between nature and human system we collaborate with research institutes, corporate, government and civil society. ClimateRe has developed a holistic concept including adaptive agriculture, value chain and crop insurance. The ClimateRe concept was selected by the Jury as winning proposal in 2018 Climate Colab Contest.
Dr Juna Shresthahas worked for several years in development sectors in Nepal, her home country. Currently, she lives in Switzerland and uses her network in Europe and Asia to develop projects tailored to local needs. Her academic background is in environmental sciences and has a PhD from ETH Zurich. She will be the main in-charge of the project and will be responsible for project planning, implementation, and reporting.
Dr Benjamin Huberis currently developing micro-insurance schemes coupled to the value chain and climate change adaptation measures. He is a geologist and did his PhD within the climate geology group at ETH Zurich. He has been working for several years in the insurance sector in different positions including product development, consulting and corporate responsibility. Benjamin will be responsible for insurance designing and partner management.
For the project implementation we will get advisory support from:
Dr. Thomas Griesser: Co-founder of ClimateRe and an actuary in an insurance company.
Prem Gurung: Agronomist