Small producers are central to building global sustainable food systems, but often, financing mechanisms are not suited to their unique needs and contexts.
A case study with 12Tree explored the considerations and tradeoffs to extending carbon financing to small producers cultivating agroforestry systems for cacao and cardamom farming in Alta Verapaz, Guatemala.
The findings point to a number of key takeaways on inclusive financing for small producers and areas for further investigation.
A green sanctuary in the heart of Alta Verapaz, Guatemala, Finca Chimelb hums with the melody of melodious blackbirds and chatter among local laborers. Spanning 4,751 hectares, the farm consists of rolling hills lined with high-value crops, such as cacao, specialty coffee, and cardamom, paired with rubber trees and other tropical hardwoods. Nestled within the farm is 1,300 hectares of primary forest, from which a stream originates and where diverse species dwell.
12Tree invested in Finca Chimelb in 2019, transforming 2,500 hectares of cultivated land or forestry projects into the multi-storied agroforestry cropping systems that exist today. As a $200M investment management firm and operator, 12Tree has been mobilizing institutional investments into projects that combine agriculture and forestry since its inception in 2017. Aiming to deliver long-term value to all stakeholders - investors, farmers, local communities, and consumers - 12Tree combines financial value with benefits to the climate, community, and biodiversity.
Surrounding Finca Chimelb, thousands of small producers also cultivate cacao, coffee, and cardamom in plots of 0.5 - 5 hectares each, alongside subsistence crops and any remaining forested area that was not cut down for cultivation in the decades prior. Though some of these producers work part-time at Finca Chimelb, which employs over 400 local community members, most depend primarily on income from their plots for their livelihoods.
12Tree has been working with Heifer Guatemala and hundreds of these small producers through its ‘nucleus-plasma’ model, which centers around strengthening smallholder farming value chains through a ‘nucleus’ plantation farm. The goal of this project - called the CarCao Forest Project - is to diversify the income of the small producers by strengthening agroforestry systems and value chains of cardamom and cacao, leveraging the expertise at Finca Chimelb.
In 2022, 12Tree found themselves at a crossroads. They had initiated the carbon certification process for Finca Chimelb thorugh Verra's Verified Carbon Standard (VCS) to help finance the investment through high-quality carbon credits. In addition to greenhouse gas benefits, the credits would provide co-benefits to local communities and biodiversity. But could a carbon project be extended to the small producers in the CarCao Forest Project, who were also implementing agroforestry systems for sustainable cacao and cardamom farming? What would the associated opportunities, considerations, and tradeoffs of a carbon project look like for these communities?
Most investors know that the context that small producers operate in is unique, but the implications that this context has for carbon financing are not as evident. Globally, an estimated 500 million smallholder farming households produce roughly 35% of the world’s food supply on just 12% of all agricultural land, while making up a significant portion of the world’s poor who live on less than $2 a day. Small plots of land, fewer resources, dependency on family labor, lack of market access, and lower agricultural productivity are common characteristics of smallholder farming, and all were present among the small producers in Alta Verapaz.
Alta Verapaz has one of the highest rates of food insecurity in Guatemala - almost 81%. A 2021 baseline study of the CarCao Forest Project conducted by 12Tree and Heifer Guatemala found that the small producers face living income gaps of US$829.58 - $3,169.15 per year (equivalent to an 18 - 67% gap), based on their worker status. Over ¾ of the producers were classified as subsistence farmers. Less than 20% were producing a sizable surplus that allowed them to hire labor - most depended on their own labor or labor from family members for cultivation of their crops.
In light of their resource constraints, the CarCao Forest Project provided small producers with free seedlings (of cardamom plants, black pepper plants, cacao trees, guama trees, allspice trees, cedar trees, and mahogany trees), technical assistance to cultivate new agroforestry plots and climate-smart agriculture practices, and commercialization support. If designed well and executed effectively, a carbon offset project could provide the producers with financing to sustain their plots and improve their livelihoods. The agroforestry plots had been planted no more than 2 years ago, providing plenty of time for carbon certification if the producers, 12Tree, and Heifer Guatemala so chose.
In the summer of 2022, I worked with 12Tree and Heifer Guatemala to understand key considerations to a carbon project with the CarCao small producers. We conducted dozens of interviews, focus groups, and site visits with small producers across 7 communities in the project. In parallel, we combed through requirements in Verra’s Verified Carbon Standard (VCS) and paired the requirements with guidance from Terra Global.
Factors shaping the feasibility of generating carbon offsets with small producers
It came as no surprise to us that land tenure was a salient consideration to a carbon project in this context. VCS standards require carbon project proponents to provide documentary evidence establishing project ownership. Though specific ownership requirements are blurry, some sort of legal ownership over land and its resources must be demonstrated to be eligible for a carbon project and to reduce non-permanence risks. Most of the small producers we spoke with lacked any sort of land title - individual or collective - and this posed significant risk.
The costs of a carbon project with small producers can be higher due to the added complexity of working across hundreds of landowners and plots. Thus, total aggregated land area and estimated carbon benefits must be sufficient to justify the cost of measurement, reporting, and verification activities. Though we did not define a minimum number of hectares necessary to justify a carbon project like this one, it was clear that the estimated 300 hectares of eligible land that we identified in the CarCao Forest Project were insufficient.
Alongside total aggregated land area is adoption of sustainable land management practices. Though over 80% of small producers seemed to be planting the seedlings and implementing the agroforestry systems as suggested, adoption of climate-smart agriculture practices with an additional labor or cost component, such as composting and residue management practices, had a much lower adoption rate. We were told anecdotally that 80-90% compliance among small producers is a good target to ensure that the desired carbon benefits are achieved.
An implementing partner who trains, organizes, aggregates, and represents small producers must have sufficient capacity to provide technical assistance, establish processes, manage a monitoring system, and facilitate regular and ongoing communications with the producers. We found that investment was still required to build the implementing partner’s capacity around specific sustainable agriculture practices and monitoring systems for a carbon project.
Finally, community organization and governance are also consequential. A structure must be in place to aggregate small producers and enable decision-making among them, particularly on sharing carbon benefits. An organizational structure was being established in the community as we were running our focus groups, and our conversations hinted at a track record of good governance that could absorb benefit sharing if needed. A legally registered entity that can receive carbon payments from a financial institution and distribute payments to producers must also be established. In our case, the implementing partner in Guatemala could not serve as this entity (due in part to their 501(c)(3) status) and registration for a separate entity was still in process.
Viability of the smallholder carbon opportunity: risks and tradeoffs
We quickly learned that a well-designed smallholder carbon project must extend beyond adherence to carbon standards. There are also distinct risks and tradeoffs to carbon removal and storage in this context that should be considered.
Financial incentives & commercial viability
Just 10% of cultivated land across these communities was dedicated to the new agroforestry plots. When we inquired about this, we learned that producers did not have sufficient savings or land area to give up incremental cash from their existing plots in order to transition to new agroforestry plots, which could generate greater income but only in 3-5 years. The tradeoff between near-term income and longer-term investment for the producers limited potential upside of the carbon project. To tackle this, an upfront financial incentive would likely be required.
As we explored the producers’ land, we also observed unmaintained cardamom plants across numerous plots. Due to a sharp drop in prices for cardamom pods in Guatemala, the producers had stopped maintaining their cardamom plants to generate the basic income that they needed elsewhere. Though carbon payments can serve as a financial incentive, initial estimates for this system (based on current projections of carbon prices) suggested that carbon payments would be small relative to overall farm income, and thus, likely insufficient as the sole incentive for small producers to maintain their agroforestry plots.
This validated to us the importance of coordinated and beneficial offtake for the producers. In the absence of a comparable financial incentive, expected carbon benefits will only be achieved if commercial prices are sufficiently attractive to drive adoption of the sustainable agriculture practices and agroforestry system. But higher commercial prices necessitate higher-quality production and better market access. The producers in the CarCao Forest Project were not yet receiving stable, high prices for their offtake and this created risk to the carbon stocks.
Food security & livelihoods needs
The small producers in the CarCao Forest Project are living significantly below living income level and have limited capacity to absorb negative events that might occur, such as weather-related shocks or crop failures. Food security and income should be prioritized for the producers, however, in some cases activities that generate carbon benefits can jeopardize these outcomes. For example, the new agroforestry system might fail or substituting away from chemical fertilizer can hamper agricultural productivity. As we reflected on these risks for the producers, we believed that we needed to ensure that the systems were supporting the community’s food and livelihoods needs first before locking producers into a medium to long-term carbon project.
Who bears the risk?
There were also heightened risks in the small producers’ context - from lack of water during the dry season to tree branch harvesting, vulnerability to weather-related climate shocks, and potential land displacement. Though key risks to the permanence of carbon stocks are factored into the buffer pool during the design of a carbon project, we found that many risks would still need to be borne by the project operator or an intermediary - as the risks cannot and should not be borne by the small producers. We believed that additional risk mitigation activities (such as resiliency planning or insurance mechanisms) needed to be put in place before we felt comfortable proceeding with a carbon project.
12Tree’s decision & key takeaways for the conservation finance community
Armed with these findings, 12Tree decided not to proceed with a carbon project with the producers at the time. Lack of secure land tenure and limited total aggregated land area were prohibitive factors, while gaps remained in structuring financial incentives, mitigating potential negative impacts on producers, and reducing risks for 12Tree.
But in hopes of helping small producers become long-term climate stewards, 12Tree started working with a local nonprofit in Guatemala that would assist the CarCao producers with securing land rights and channeling more resources into strengthening the linkages between the small producers and Finca Chimelb - with aspirations of a carbon project in the future.
As conservation finance organizations - investors and operators - design smallholder carbon projects, we suggest they consider some of our learnings and further investigate ways to make smallholder carbon projects viable.
*Upfront capital & blended finance: Blending concessional finance from donors or other financial institutions for the early years of a smallholder carbon project can give operators the space to test the agroforestry system, strengthen value chains, and invest in risk mitigation activities. Though 12Tree deployed grant-based capital for the seedlings and technical assistance provided by the CarCao Forest Project, more concessional capital is required to enable a carbon project. A blended approach is crucial to both sufficiently reduce potential negative outcomes for farmers and de-risk the opportunity for institutional investors.
*Cash incentives for farmers: Cash payments can help incentivize producers to transition their plots and maintain their plants, especially in the first few years of a carbon project when the carbon payments are low and the agroforestry system is not yet in production. One approach might be to pay producers a portion of the expected carbon revenue upfront. By smoothing producers' income and reducing their livelihood risks, such incentives can help maximize total project land area and carbon storage per hectare - increasing the upside of a carbon project.
*Commercialization & market access: Carbon financing is not a substitute for improving market access and stable, high prices for producers’ offtake. Investors and operators still need to prioritize strengthening the commercial viability of smallholder production in order to successfully drive greenhouse gas benefits and conservation at the farm level.
A few recent reports both corroborate and extend our findings. TechnoServe’s Carbon Finance for Smallholder Farmers and Agribusinesses: Analytical Briefing on Agroforestry Solutions is one example of a report that identifies similar challenges to smallholder carbon projects, and provides useful guidance on the viability of smallholder agroforestry systems in select countries in Africa by hectares in the project and carbon revenue per tCO2e.