Carbon credits can be used by poor farmers to obtain climate insurance

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Carbon credits for farmers can help uninsured farmers get good weather coverage says Jan Stockhausen, Chief Legal Architect at Etherisk

Climate change is intensifying global weather disasters, and while it affects everyone, these unstable conditions affect some people much more than others.

Between 2010 and 2020, 15 times more people died from floods, droughts and storms in the world’s most vulnerable regions than in other parts of the world. These areas included parts of Africa, South Asia, and Central and South America.

Smallholder farmers are a particularly vulnerable group to environmental devastation. For these farmers, a single prolonged drought is enough to kill an entire crop and plunge a small farm into cyclical debt and financial instability.

The twin forces of climate change and poverty create a trap for this community. Ironically, the agricultural industry is one of the world’s largest producers of CO2 contributors, and many agricultural practices, such as those used in rice cultivation, emit large amounts of methane.

One solution that could solve this two-sided problem is an incentive system that rewards small farmers for adopting climate-friendly practices with carbon credits. Carbon credits could then be used to pay climate insurance premiums, creating a cycle of risk mitigation for vulnerable farmers, while encouraging sustainable farming practices.

As our climate continues to deteriorate, adopting such solutions will become increasingly essential to protect the livelihoods of billions of people around the world.

Insurance Accessibility Issues

Insurance is a tool that mitigates risk, but from now on it’s a tool of the rich. Traditional insurance is not accessible to 3.8 billion people in the world; when a person must choose between paying for food and paying to prevent potential risks, the choice is clear.

This economic disparity has led to the rise of inclusive insurance, which covers groups underserved by the traditional insurance market. Inclusive insurance can offer protection to smallholder farmers against the worst effects of climate change. But it faces two main obstacles that prevent its widespread adoption: the inherent distrust of insurance; and affordability issues.

First, many farmers are discouraged from taking out a policy because of previous bad experiences with insurers. The process is generally inefficient; policies move slowly, laden with complex and questionable payouts.

Second, providing inclusive insurance is expensive. The labor-intensive administrative process of investigating insurance claims on remote farms is costly, and small farms cannot afford high premiums. For this reason, inclusive insurance must operate on a tight budget, making it an undesirable market for traditional providers.

Decentralization and automation: propelling inclusive insurance

Blockchain technology offers a simplified solution to the bureaucratic and budgetary pitfalls of the traditional insurance model. Blockchain-backed insurance relies on smart contracts, coding that executes “if this, then that” orders. This automates the insurance claims process to dramatically reduce costs and improve efficiency.

To illustrate this point, imagine the following case: A small farmer takes out decentralized solidarity insurance. During the season, they experience severe climate-induced drought, with a lack of rainfall severely affecting the yield of their crops. Local satellite data automatically triggers the terms of the insurance policy smart contract as soon as they recognize a lack of rain within pre-agreed parameters. No adjuster needs to investigate this claim – saving the supplier money – and the farmer receives a fast, fair and accurate claim payment.

The standalone nature of blockchain insurance also enhances the consumer experience, eliminating the need for the farmer to contact the insurance provider to make a claim, which can be a daunting process. More unique than that, however, is the transparency of the blockchain ledger.

This aspect of technology builds trust and empowers smallholder farmers by giving them access to information such as weather data. Since farmers can actively verify weather data themselves, they can take a more active approach to managing their risks. Additionally, smart contracts can reduce policy costs and times significantly more than traditional technology in the space: the Climate Finance Lab estimated that blockchain technology could reduce the cost of issuing a policy by 41 % and the cost of the corresponding premium by 30% while reducing payment terms from three months to just one week.

Carbon Credits: offering a green alternative for financing insurance premiums

While inclusive insurance on the blockchain solves efficiency issues, carbon credits offer farmers a way to afford this form of insurance. Carbon credits are certificates created on the basis of emission reductions or carbon sequestration. Organizations that are net emitters can purchase these credits to offset the carbon emissions they produce and become carbon neutral.

Helping smallholder farmers access carbon credits is an innovative method that can encourage green farming practices and farming methods. These methods range from adopting new irrigation tactics that prevent organic matter from decomposing and releasing gas, to using seeds designed to lock carbon into the soil. Farmers are unlikely to adopt new practices when faced with increasing climate risks and threats to their livelihoods. Therefore, granting carbon credits to farmers gives them the security to try more environmentally friendly methods.

Carbon credits: revolutionizing climate resilience tools for smallholder farmers

By combining these measures, we can use a farmer’s carbon credits to cover their inclusive insurance premiums. This simultaneously solves logistical and affordability issues. The model encourages farmers to reduce their emissions while protecting them against the disastrous effects of climate change on their crops.

It also opens smallholders’ access to green finance markets, where smallholders and the agricultural sector in general are currently very underserved. It is a virtuous and cyclical reward system that can act as an important tool to ease pressure on the most vulnerable while spreading the adoption of climate-smart agriculture.

As climate change intensifies, those most vulnerable to its impacts cannot afford to wait for a quick fix or gradual economic and societal transitions. Smallholder farmers make up 84% of the world’s 570 million farmers, doing all they can to support smallholders, a massive global cause with far-reaching effects.

We must use all the tools we currently have, including decentralized inclusive insurance and token financing of carbon credits, to bring economic relief and stability to the millions of people most affected by climate crises.

About the Author

Jan Stockhausen is Chief Legal Architect at Etherisc, the open-source, decentralized insurance protocol and ecosystem that aims to make insurance fair and accessible.

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