PROJECT SUMMARY

Smallholder Farmers in Developing Nations are amongst the demographics most exposed to the devastating effects of climate change.

The most effective tool to increase their resilience to climate risks is agricultural insurance. It pays out when they lose their crop due to bad weather. Parametric insurance models are particularly cost-effective. They work mainly with satellite data, weather indices and statistical models (rather than claims assessors).

However, globally only about 3% of farmers are insured, mainly because insurance is expensive, intransparent and payouts are too slow.

Etherisc has built an open source software platform that uses blockchain technology to make parametric insurance faster, cheaper and more transparent. Since 2018 we have a strong focus on agricultural insurance for smallholders in developing nations.

In a number of live use cases we were able to show that our technology reduces payout times from the average 120 days after the end of the season to less than a week, with 40% of claims processed within 24 hours after the adverse weather event by mobile payment directly to the farmers’ phone in local currency.

An SMS based tool allowed status updates in real time to share the full transparency of all transactions on the public blockchain, which 80% of farmers used at least once a week and a majority reporting increased trust in the insurance.

Our smart contracts minimized operational overheads and reduced the human processing steps leading to an 80% reduction in operational costs and a 27% increase in coverage amount.

However, operational costs only represent about 80% of the overall premium. The rest is the cost of the actual risk.

But if weather is becoming increasingly volatile, how will insurance for smallholders ever become affordable?

Etherisc is hellbent on helping farmers to unlock an additional source of income from carbon farming activities.

Smallholder farmers are trained to undertake simple carbon farming activities such as agroforestry and the use of biochar.

The CO2 sequestered can be quantified and certified as carbon credits.

When these certificates are sold, participating farmers will receive their share of the revenues, from which a part will be deducted immediately to cover insurance premiums.

This approach could be a real game changer:

We would stop trying to sell large amounts of small ticket policies to farmers who already struggle to afford them. Instead we offer them a tool to earn additional revenues and insurance just comes as part of the offer.

Rather than the farmer, government or NGOs, larger corporations will be paying the premiums. And they are getting something in return: high quality carbon offsets for their net-zero strategies.

We believe corporations would be willing to pay a premium to be part of such a powerful narrative. So this has the potential to finally mobilize significant private sector capital and reduce dependence on public funding.

And the demand and prices on the Voluntary Carbon Markets (VCM) are expected to increase sharply. Why should smallholder farmers not get a share of this?

A beautiful circularity: Those exposed to the effects of climate change are activated to fight it and in return they receive insurance and additional income so that they become more resilient against climate change. We think everyone involved would have something to gain for this approach:

• Farmers increase their resilience to climate shocks and build a financial profile.
• Climate: Several hundred million smallholder farmers worldwide could capture billions of tons of CO2 and make a significant contribution to global climate goals.
• Rural Communities: will enjoy the usual ripple effects in health, food security, hygiene, local infrastructure and education that result from an increase in disposable income.
• Purchasers meet their net zero targets while becoming part of a powerful narrative.
• Insurers and Reinsurers will unlock the demographic of smallholders as a viable customer segment.
• Governments can finally wean off unsustainable subsidy programs.
• NGOs and donors: also gain a lot of efficiency due to the shared data and the audit trail created by our system.
• Web3 Community: We could show how blockchain technology has the power to solve real problems outside the crypto-native space at massive scale with tremendous impact for the financially excluded.

We currently have several opportunities to prove this concept in a pilot to show this model will be financially sustainable and can be scaled.

One particular opportunity in Kenya includes our project partners from an ongoing pilot as well as Coorest and a partner on the ground with many years of experience in training farmers on agroforestry and biochar.

What is currently required is a high profile name to act as the purchaser of some EUR 10k worth of carbon offsets. In addition the overall project costs of the pilot of about EUR 140k would require funding.

DETAILS - CLIMATE RISK RESILIENCE THROUGH CARBON FARMING

Connecting Smallholders to the Carbon Markets to access Crop Insurance

A. Overview - The General Idea

Despite a long track record of innovation in the climate risk and agricultural insurance space, two things remain out of reach: affordability for smallholder farmers and long-term financial sustainability for insurers. Most agricultural insurance programmes today, remain donor-funded or subsidized with low scalability prospects.

We have to face one simple fact: With increasingly volatile weather the net cost of the risk is set to increase and will simply remain too high for smallholders.

At the same time there is an urgent need to activate the populations of the global south to engage in the fight against climate change. As agriculture offers a myriad of opportunities to reduce greenhouse gasses and sequester carbon, it is vital to encourage the millions of smallholder farmers to adopt climate smart agricultural practices.

We wish to tackle these problems by combining 3 elements: the carbon markets, insurance and blockchain technology. Our groundbreaking new concept proposes to offer farmers an additional source of income to increase their resilience against climate risks. Smallholder farmers can undertake simple carbon farming activities such as agroforestry and the use of biochar. Using cutting edge satellite technology, the CO2 sequestered by such activities can be tracked, quantified, verified remotely and eventually certified as carbon offset certificates. When these certificates are sold on the carbon markets, participating farmers will receive their share of the sales revenues, from which a part can be deducted immediately to cover insurance premiums. The end-to-end transactions would be executed and tracked on Etherisc’s blockchain platform.

B. Benefits

Our concept therefore democratizes the carbon markets rather than restricting them to the larger players. Etherisc platform is fully inclusive and allows everyone to participate and receive rewards for the carbon they capture on one single platform, where all digital assets and payments are exchanged in real time. It therefore brings speed, cost-efficiency and transparency to three sectors that have traditionally been slow, inefficient, expensive and intransparent: the carbon markets, smallholder commodity farming and insurance.

Smallholder farmers: This new way of income generation for smallholder farmers will not only improve their livelihoods and increase their resilience to climate shocks, but will also reduce their risk profile to unlock additional financial services such as microcredits. At the same time, agroforestry farming strategies brings about better soil quality, pest and disease resistance, drought resistance, moisture retention and improved biodiversity, which generally leads to reduced climate vulnerability of the farmland.

Global CO2 Reduction & SDGs: With an estimated 270 million smallholder farmers worldwide, bringing such a program to scale using modern remote sensing satellite technologies could capture billions of tons of CO2 from the atmosphere and make a significant contribution to global CO2 reduction targets as well as SDGs 01 (No Poverty), 02 (Zero Hunger), 08 (Decent Work and Economic Growth), 12 (Responsible Consumption and Production), 13 (Climate Action), 15 (Life on Land), and 17 (Partnerships to achieve the Goal).

Rural farming communities: This additional revenue source for rural farming communities will not only contribute to their financial resilience, but will also show the known ripple effects in health, food security, hygiene, local infrastructure and education that result from an increase in disposable income. This will lead to the empowerment of the lives and livelihoods of entire communities of those who are most vulnerable to the effects of climate change.

Carbon Offset Purchasers: Due to these additional social benefits, purchasing the carbon offsets from such a program will first of all become a very attractive strategy of meeting their net zero targets for large corporations, and will also become a central element of their CSR and branding strategy.

Insurers and Reinsurers: For insurers and reinsurers, the additional revenue available to pay realistic premiums will unlock the demographic of smallholder farming communities in developing nations as a viable customer segment. Other stakeholders in the insurance value chain such as brokers and tech service providers no longer need to slice up premiums into ever-reducing margins, at the expense of the farmer. Governments: Effective protection to their citizens and mitigation of disaster relief costs and phasing out unsustainable subsidy programs for agricultural insurance, all while contributing to net-zero targets.

NGOs: By using blockchain and smart contracts precise, targeted and conditional micropayments become possible. It also brings speed, cost-efficiency and transparency to three sectors that have traditionally been slow, inefficient, expensive and intransparent: the carbon markets, smallholder commodity farming and insurance. Keeping in mind the importance of accurate reporting and audit trails, NGOs, donors and government entities that provide funding and assistance in this field also have a lot to gain from this technology. Eventually, we will even open up directly to the end consumer.

Our concept therefore democratizes the carbon markets and allows everyone to participate and receive rewards for the carbon they capture, while previously only larger players with the initial capital to pay for the administrative overheads of traditional certifications had access.

C. Piloting the Concept

We have identified an opportunity to pilot this groundbreaking new approach to generating carbon offsets and providing access to insurance in Kenya, where we can bring together a number of relevant stakeholders to pilot this groundbreaking new approach in Kenya.

D. The Stakeholders

The farmer is at the center of this project. Farmers are offered participation in the carbon farming and they are the ones who will be executing the climate smart farming strategies that will generate nature-based carbon offsets which will bring the revenue to make their communities more resilient to climate risks and pay for agricultural insurance.

Role: A group of ca. 100 farmer families is already onboarded with Coorest and have been trained on carbon farming strategies, some of these families are already generating CCO2 Tokens under Coorest’s standard. All the onboarded families are participating in agroforestry and dispose of mobile phones and mobile payment wallets (MPESA), which will allow them to onboard individually on Etherisc’s platform in the same way we are already onboarding farmers with Acre Africa elsewhere in Kenya.

A Dutch Organisation with boots on the ground can activate the first participating farmers based on their local presence from the communities of smallholders that they are already working with. They have been providing the necessary training on the relevant agroforestry practices. The organisation has been active in Kenya for over 15 years and is developing a community hub. It already has 10 years of experience in developing reforestation activities in Kenya and in 2021 started cooperating with UNEP and FAO and was able to increase the number of farmers by 175% growing tens of thousands of trees.

Role: A total of 64 farmer families with 32 hectares could be activated to participate in this pilot. These families have already been trained and are actively carbon farming, some already under CCO2 Standard. They would share the relevant mobile numbers of the participating farmers, so that the trees located on their fields that are absorbing the CO2 from the atmosphere and their representations as NFTs (NFTrees) on the blockchain and the CCO2 Tokens that are generated by them can all be linked to the individual farmer who owns them through GeoJson files that map everything on Coorest’s platform. This will allow the platform to:

• channel the payment for the carbon offsets that were generated by the trees directly to the mobile payment wallets of the farmers that own the land on which they located,
• Deduct a small amount for their respective insurance premium from such payments,
• channel any insurance payouts directly to the mobile payment wallets of the farmers that own the land in case there is too much or too little moisture.
• direct communication with the farmers by USSD/SMS through Etheirsc’s platform.

Acre Africa: is the locally licensed insurance intermediary with over 4M farmers insured to date. They offer Agriculture risk mitigation services that include; insurance product design, insurance distribution, blockchain based risk monitoring and claims management (integrated on Etheric’s GIF) with a very strong insurance and reinsurance support network to secure the necessary capital backing. Moreover, they manage an on-the-ground distribution network of local “village champions” that deliver training, extension services and risk mitigation solutions to farmers. Acre shares the vision of increasing their farmers’ resilience with additional income from carbon farming activities. Their backing from a pan-African reinsurer Zep-Re, Syngenta Foundation for Sustainable Agriculture and Grameen Foundation offers the potential for significant scaling up farmer onboarding after a first pilot.

Role: Acre configures ratings for the agriculture insurance product underwritten by their insurance partner, which covers the relevant crops farmed by the group of farmers in the program (primarily maize, beans, sorghum and green grams). Acre would then distribute the individual covers to the participating farmers. Based on their phone numbers, and location of the farm their policies would be individually monitored in real time. A USSD menu could be used to communicate with farmers. The necessary insurance products are already integrated on Etherisc’s platform from the work with Acre in previous seasons, which use a trigger based on a soil moisture index.

Some of the farmers currently insured by Acre are already practicing agroforestry and could be onboarded next to add scale. Acre is also working on other programs relating to reforestation projects, which would be a rapid scale up path in Africa.

Etherisc has created and maintains the open-source tech platform based on blockchain technology (Generic Insurance Framework or “GIF”). It allows end-to-end automation and processing of insurance policies and all payment flows. Etherisc has been working successfully together with Acre Africa for 3 years as well as with other insurers like Lemonade, Pula, WFP and ARC in Kenya and elsewhere with over 90k farmers insured on Etherisc’s platform by 2023.

Role: Etherisc will provide the necessary technical services to ensure all actors collaborate seamlessly to onboard and integrate their data and services. The insurance product will run on Etherisc’s platform. The insurance products for the mentioned corps are already configured on the platform. The data sources that monitor the soil moisture information and trigger the policy according to the parametric index are already integrated. Payment channels are integrated through API to manage all payment flows for premiums and payouts. Revenue shares from the sale of carbon offsets could be paid through the same channels. When the concept goes to scale post-pilot, Etherisc’s platform can also deduct smaller platform fees from the carbon revenues and channel payments to all stakeholders providing the individual services.

Coorest is the first blockchain-based, certified carbon compensation provider. Coorest’s smart contracts use satellite data from Floodlight to validate the generation of new tokens to make carbon compensation transparent and accountable. Coorest’s $CCO2 tokens are issued under its own recognized and audited carbon standard and can be traded or burnt to compensate emissions against a proof of carbon compensation certificate (PoCC). Coorest’s platform is equipped with a payment gateway (on-/off-ramp) for credit card payments to minimize friction of purchase transactions. Coorest also has an existing customer base of purchasers. (Note: Coorest’s NFTrees initiative links non-fungible tokens (NFTs) to real-world trees, which generate $CCO2 tokens at a predetermined rate each year representing the carbon their real-life counterparts removed from the atmosphere. The holders of NFTrees will start collecting $CCO2 once a tree is planted.)

Role: Some of the participating families are already onboarded with Coorest as a group and monitoring of their CO2 sequestration is ongoing. The resulting CCO2 tokens are transferred automatically and in real time by the smart contracts on Coorest's platform, while deducting the respective fees. All necessary data sources and payment channels are already integrated. What remains to be done is onboard additional farmers to generate CCO2 and to connect the carbon sequestration data to the payment flows on Etherisc’s platform, as it will be crucial to show that the farmers receive exactly the share of revenues that relates to the CCO2 Tokens that the trees on their land have generated. Coorest's platform will provide a powerful tool for reporting meticulously about all the data that went into the creation of the carbon offsets.

Coorest has an existing partner that takes care of data collection and analysis. They use satellite data to track and monitor biomass for ESG investing and are able to provide data to confirm the exact amount of CO2 sequestered. The data is sent to blockchains through a network of oracles.

Role: Coorest has already integrated the data sources from their partner and has an ongoing business relationship with them. The trees situated on the land of the additional farmer families in Kenya that will be onboarded already, will need to be added to the monitoring by their partner. Etherisc’s team also has an existing working relationship with them from ongoing work on a proof of concept.

Another partner provides 'oracle networks', data feeds securing data sources for use by smart contracts on a blockchain. All actors are already integrated with that provider.

Role: Coorest's platform already receives the MRV data from the satelites through these oracles.

Blockchain: All smart contracts could be deployed on Ethereum or any other EVM-compatible blockchain. All actors are already integrated with several such blockchains, some of which already have shown strong dedication to carbon neutrality and leaving a minimal carbon footprint based on proof of stake.

Role: We hoping to discuss the possibility of financial support from the blockchain where such a pilot will be deployed. Gas fees need to be discussed as this needs to work for the context of smallholder farmers. It would be immensely useful, if Ethereum could support the project from a tech development and/or from a PR point of view as well.

Buyer of the carbon credits is offered a way to offset their own carbon footprint by purchasing the $CCO2 tokens generated in the project as part of their net-zero strategy. As an added value to their carbon credit purchase they find themselves at the center of a powerful narrative on reducing carbon emissions while uplifting and protecting entire communities as part of CSR and ESG strategy.

Role: This is the key partner that still needs to be identified. This would be the party that purchases the CCO2 Tokens that the participating farmers have generated before the start of the pilot and receives these tokens in a wallet. By doing so the purchaser essentially funds the entire program. (With 32 ha producing around 6 eCO2t per hectare per year and a price per ton of EUR 75.00, we expect a total sales price of around EUR 15k.) We would offer these for sale in bulk at the best price that can be agreed with the purchaser. The premium for the group policy that needs to be paid to Acre will need to come out of the purchase price. Therefore, we need to negotiate a price with the purchaser that still leaves a significant revenue to the farmers that is in line with their expectations.

E. Potential for Scale and added Functionalities

The concept, as well as the platform itself, are a key step towards future innovations:

Once built, the open-source approach of Coorest and Etherisc ensures that the platform can also be easily replicated and deployed in other markets, in relation to different mitigation activities (AWD irrigation for rice farming, biochar, mangrove and wetland restoration etc.) by Etherisc/Coorest and/or other teams with a different set of partners on similar projects for the best possible scale.

The demand and price on the Voluntary Carbon Markets (VCM) alone (!) for additional high quality carbon offsets from similar programs are expected to increase sharply. The number of companies setting net-zero targets is increasing exponentially (and tripled from 2019 to 2020 alone from 500 to 1,565). Therefore, some estimations project further growth by at least 3-4 times until 2030 - some estimations predicting growth to a total market value of USD 50B.

Partnerships could be built to offer insurance to farmers who are already adopting agroforestry strategies (like in the Acorn or Nespresso initiatives for example) to make them more resilient.

All project stakeholders have extensive networks access to suitable scaling partners and private investors like development focused governmental and non-governmental agencies, insurance and reinsurance companies. Larger multinational food processing companies looking to offset their own carbon emissions in their own supply chain (while stabilizing supply by protecting their producers and uplifting their livelihoods) will be an obvious group of purchasers to target. There are many actors in the Carbon Markets who are looking to Web3 technologies, to improve transparency and to solve other shortcomings of the traditional carbon markets, such as the EU, Gold Standard, Verra, Climate Action Data Trust and Climate Warehouse.

Some believe that because of the obvious technological benefits there is a fair probability that the carbon markets could be one of the first industry sectors where blockchain technology will be breakthrough into the mainstream.

F. Impact and learnings

The 64 farmer families with ca. 32 hectares could over 40 tCO2e per year.

These numbers would be sufficient to prove the concept in a live pilot before the approach can be scaled as mentioned above.

Assuming an average 0.25 hectares per farm and a sales price of approx. USD 75.00, each family would receive an additional income of USD 112.50 per year. Once we are able to onboarded Acre’s farmers, we can add an estimated 30,000 farmers to these numbers, each with an average field size of about 1 hectare, which would start to generate some interesting scale, i.e. 180,000 tCO2e and an additional annual revenue of USD 450.00 per farmer per year.

The following SDGs would be positively impacted by the initiative:

SDG 1 - No Poverty: Carbon credits increase their income and help to lift farmers out of poverty. Insurance avoids farmers falling under the poverty line in case of extreme weather events that wipe out their season’s harvest.

SDG 2 - Zero Hunger: More disposable income means more purchasing power to cover daily needs. Insurance payments replace homegrown food of subsistence farmers.

SDG 5 - Gender Equality: 60% of smallholder farmers are women and the majority of policyholders are women.

SDG 8 - Decent Work and Economic Growth: Diversified farming income (crop and carbon) becomes more reliable/stable and insurance allows for taking entrepreneurial risks and credit to stimulate growth.

SDG 10 - Reduced Inequalities: Financial services become more inclusive, climate risks are not born solely by farmers and carbon markets are democratized.

SDG 11 - Sustainable Cities and Communities: Entire communities can flourish based on the increase of disposable income of the farmers.

SDG 12 - Responsible Consumption and Production: Farmers are producing in a climate smart way sequesters carbon and farms are becoming less exposed to natural risks.

SDG 13 - Climate Action: Effects of climate change are mitigated and farmers' resilience is increased as adaptation to climate risks.

SDG 15 - Life on Land: Carbon farming activities halt desertification and land degradation and improve soil quality, pest and disease resistance, drought resistance, moisture retention and biodiversity.

SDG 17 - Partnerships for the Goals: The project will bring together a multitude of actors to promote these goals.

How blockchain technology adds value:

• Ability to transact targeted, precise and conditional micropayments due to use of smart contracts
• Reduction of operational costs (previous projects have shown 80% reduction),
• Streamlining processes and acceleration of claims cycles (previous projects have shown reduction from 120 days to 24 hours - 5 days)
• Full traceability of all data of carbon mitigation activities by individual farmers
• Democratization of access of smallholder farmers to VCM
• Provide real-time accurate reporting and audit trails for all stakeholders, particularly funders and investors

G. Consortium’s proposal and ask

Timeline: Depending on how fast information on locations and crops is shared and depending on how fast we can find funding and a purchaser, we might be able to roll out a live pilot for the short rain season starting in September 2023. Ideally we would run the pilot for several seasons. Once set up additional seasons of operation should not increase the costs significantly.

Total funding of USD 143,000. A high-level breakdown is as follows:

• Project management (Etherisc Impact) USD 15,000
• Technical platform development and integration (Etherisc GmbH) USD 15,000
• Actuarial Development and policy management (Risk Model Customization,monitoring and claims) (Acre Africa) USD 20,000
• Technical development (Coorest) USD15,000 Measurement, registration and verification (Floodlight) USD15,000
• On the ground project development (64 farmers) USD45,000
• Travel USD 11,000
• Impact evaluation USD 5,000 or in-kind Technical assistance, testing & farmer capacity building USD 2,000 or in-kind

H. Potential Scaling Partners:

All project stakeholders have extensive networks in the relevant spaces that will make it easy to attract further partners, grant funding and eventually investment.

A few avenues we are currently exploring:

• private organizations are already doing similar work - orgnisations with access to larger groups of farmers
• offtakes and food processing companies, also as purchasers of carbon credits.
• Development focused governmental and non-governmental agencies
• international organisations that are rolling out their own insurance programs (several showed interest in this approach).
• WFP and its partners have a huge interest in risk mitigation and disaster risk financing mechanisms
• Insurance and reinsurance companies covering agricultural and climate related risks.
• actors in the web3 space also have a keen interest in climate risk mitigation including offsetting their own carbon footprint such as Ethereum Foundation, Polygon, Binance, Chainlink and Celo all of which we know and have worked with.
• actors in the Carbon Markets who are looking to Web3 technologies, to improve transparency