Working Group II: Impacts, Adaptation and Vulnerability

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8.6. Issues that are Related to Funding for Adaptation

Although some discussion of adaptation appears in virtually all chapters of the WGII report, Chapter 18 addresses core concepts and considerations. It states that key factors affecting the adaptive capacity of a region or country include economic resources, technology, information and skills, infrastructure, and institutions; it notes that there is considerable variability among countries with regard to their ability to adapt to climate change. However, Chapter 18 does not address specifics of how adaptation is likely to be funded in developed and developing countries or how the need to fund adaptation will affect the financial services sector.

Chapter 18 also states that adaptive actions are most likely to be implemented when they are components of or changes to existing resource management or development programs (see World Bank, 1999). Klein (1998) has suggested that investments for adaptation should essentially be incremental to projects justified for other reasons, where a project has value even if climate change were not to occur. When the impact of climate change is uncertain, this is probably the best way to proceed. The financial sector would then play its traditional role, and financial institutional arrangements would be the same as for present-day investments in infrastructure. However, when projections of climate are more certain and/or when the assets exposed are of high value or when many people are at risk, dedicated additional climate change adaptation investments may be required and special funding arrangements may be developed. In these situations, new climate change-related financing schemes may emerge whereby funds are generated through fees on emissions of greenhouse gases or fees on trading of greenhouse gases. The Clean Development Mechanism developed in the framework of the Kyoto Protocol is an example of the development of such a financing arrangement. Such arrangements could generate new roles for the financial sector.

An example of early cost estimates of measures meant to protect people and properties against the risk of increasing rainfall, increasing river run-off, and sea-level rise, using an integral approach, is the white paper of The Netherlands National Committee on Water Management. This white paper projects the additional cost of water management in The Netherlands, taking into account climate change and long-term land subsidence and land-use changes. The paper concludes that a budget of approximately US$2.5 billion is required for investments until 2015 and an additional US$8 billion for the 2015-2050 period to maintain adequate safety levels for people and property (Netherlands National Committee on Water Management, 2000).

Developing countries seeking to adapt in a timely manner face major needs, including availability of capital and access to technology. Given the present state of knowledge, many actions for adaptation are likely to be integrated with and incremental to projects that already are occurring for other reasons. The World Bank (1999) states that "there is no case to be made for ‘stand-alone' projects on adaptation to climate change." It also has noted that projects for adaptation should be designed as incremental to projects that are justified for economic development purposes. However, providing financing for projects in developing countries is a complex matter. Even for projects for which the risks and expected returns are commensurate with the requirements of the financial markets, matching investors that have available funds with projects seeking funding is by no means easy. Most simplistically, this process involves linking investors with projects via appropriate sets of institutional and financial intermediaries. The ability to do this successfully depends, in part, on the level of development of financial markets and the financial services sector in the country where the project will be implemented (World Bank, 1997b).

However, returns that can be expected from many prospective projects are not sufficient for investors to assume the risks that they believe are inherent in any individual project. This complicates the process further. If such projects are going to be funded, some creative modification must be made to bring each project's risk/return profile in line with the requirements of the financial markets. Unfortunately, there is no straightforward, standardized means for identifying and implementing needed changes. The process is guided in part by the principle that risks should be assumed by the party best able to manage them (IFC, 1996).

This need for financial resources for adaptation in developing countries is addressed in the UNFCCC (or "Convention") and the Kyoto Protocol. The Convention explicitly states that:

  • All Parties have responsibilities to make and implement plans for adapting to any human-induced climate change.
  • The developed countries shall assist developing countries in meeting the costs of adapting to any adverse effects of such climate change.3

Both accords also address this notion more generally in identifying potential actions to aid developing countries, including provision of "environmentally sound" technology.4 In addition, the Protocol indicates that a portion of the proceeds from Clean Development Mechanism (CDM) projects is to be used to meet the needs of "particularly vulnerable" Parties for Adaptation5 (UNFCCC, 1992, 1997). Taken together, provisions in these two accords provide new sources of public sector funding for developing countries to implement adaptation measures.

The Global Environment Facility (GEF), as the main focus of financial commitments under the Convention thus far, has been the institutional mechanism for this funding. GEF projects provide financial models for promoting technology diffusion in developing countries, with some projects designed to mobilize private-sector financing (UNFCCC, 1999). However, GEF activity generally has not addressed the adaptation elements of the Convention. This lack of activity is driven by internal requirements that GEF projects have global benefits, as well as directives that such funding should cover only planning activities that are associated with adaptation (Yamin, 1998). Caribbean Planning for Adaptation to Climate Change is one example of a GEF project that is addressing adaptation. This US$6.3 million project is focusing largely on planning and capacity-building needs for addressing adaptation in the Caribbean (GEF, 1998).

However, there are still many issues to be addressed in connection with both the Convention and the Protocol (Werksman, 1998; Yamin, 1998). Differing interpretations of various provisions of the accords remain.

For example, detailed provisions of the CDM have yet to be worked out, including those related to adaptation funding. One key issue is the size of the "set-aside" from CDM projects that is dedicated to funding adaptation. If this set-aside is too large, it will make otherwise viable mitigation projects uneconomic and serve as a disincentive to undertake projects. This would be counterproductive to the creation of a viable source of funding for adaptation. There also have been no decisions on how these "set-aside" funds would be allocated to adaptation projects. They could be used to fully fund projects or leveraged to simply supplement other sources of funding. Any resulting allocation will be driven by more technical and financial elements of the merits of alternative projects, as well as political considerations of equity and fairness. As a result, it may be some time before any of these provisions can produce a viable source of funding for adaptation. An overview and analysis of the literature on climate change policies and equity appears in Banuri et al. (1996). Linnerooth-Bayer and Amendola (2000) propose that subsidized risk transfer can be an efficient and equitable way for industrialized countries to assume partial responsibility for increasing disaster losses in developing countries. Review of the literature indicates that understanding of adaptation and the financial resources involved is still in its early stages. As knowledge grows, the potential role(s) for the financial sector will become clearer.

Box 8-4. Case Study: Bangladesh Flooding 1998

Bangladesh witnessed 35 cyclones from 1960 to 1991 (Haider et al., 1991) and seven major floods from 1974 to 1998 (Matin, 1998). The flood of 1998 is considered to be one of the worst natural disasters experienced by the country in the 20th century. It occurred from July 12 to September 14, a duration of 65 days (Choudhury, 1998). The flood affected about 100,000 km2 (68% of the country's geographical area). The numbers of affected families and population were more than 5,700,000 and 30,900,000, respectively (Choudhury, 1998). The flood caused 918 fatalities and disease among 242,500 people. Approximately 1.3 Mha of standing crops were fully or partially damaged. Total economic losses amounted to US$3.3 billion (8% of GDP, 1998 value), according to a study by Choudhury et al. (1999). The study also shows that there is a wide discrepancy between its estimates and estimates by other agencies, which is mainly a result of coverage error.

Generally, victims have to depend on their own resources to rehabilitate themselves. During the emergency period, however, the government and NGOs mobilized considerable financial resources to provide relief in the form of food, clothing, and building materials.

To reduce the damage from natural catastrophes, planned activities by the government and NGOs (national and international) include construction of an adequate number of cyclone shelters, embankments, and other shelters in coastal areas, especially in the offshore islands.

With regard to insurance against such calamities, there is not much available except for the large industries and the commercial sector. Flood victims were paid US$27.7 million as compensation by the insurance companies, of which about 70% went to large industrial units. There was virtually no insurance coverage for losses in the agricultural sector. Losses incurred by shrimp farms and water transports, however, received sizeable compensation by the insurance systems, according to government sources (Choudhury et al., 1999).

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