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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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