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Finance GreenWatch » 1. BANK » Funding gap stokes interest in market for climate adaptation (AlertNet)

Funding gap stokes interest in market for climate adaptation (AlertNet)

By Megan Rowling:  LONDON (AlertNet) – In southwest India, where farmers have suffered from drought, local development group Samuha is working on ways to boost soil moisture, extend the growing season and introduce new crops that can better survive dry periods.

In mountainous Bhutan, the Tarayana Foundation is exploring how to protect poor, remote communities from landslides which could increase due to heavier rains and melting glaciers, and how to maintain harvests as the temperature rises.

These organisations are partnering with the London-based Higher Ground Foundation in a fledgling effort to put a price on helping people adapt to climate change. The plan is to issue credits for reducing people’s vulnerability to extreme weather and longer-term climate shifts – credits that could be bought, and even traded, by companies and governments.

Karl Schultz, the foundation’s executive chairman, says a market mechanism like this could raise sorely needed funds for adaptation, as well as stimulate innovative ideas and bring in the private sector by creating a revenue stream.

“The lip service the international community and governments pay to leveraging private finance – well, how are you going to do it if you don’t have an upside for business?” Schultz says. “Price discovery is the way that you can get the most bang for your buck, and that’s what we need because there’s not enough money out there in the public realm.”

Rich governments have pledged to mobilise some $100 billion a year by 2020 from public and private sources to help vulnerable countries tackle climate change – balanced between adaptation and low-carbon development. But they have said little about how they will raise the money.

Finance for adaptation so far – mainly from government budgets and a levy on the U.N.-backed carbon market – is paltry compared with the need in developing countries, estimated by the United Nations at $28 billion to $67 billion per year by 2030.

In 2010, official development assistance that supported climate change adaptation was $9.3 billion, although some of it had other purposes too, according to figures from the Organisation for Economic Cooperation and Development (OECD).

But the amounts doled out by international funds set up specifically to back adaptation are much lower, at just under $300 million, according to the Climate Funds Update website.

They include the U.N.’s Adaptation Fund, launched in late 2007. By the end of April this year, it had raised nearly $120 million in donations, mainly from a handful of wealthy governments, and $174 million from a 2 percent levy on the sale of credits for emissions reductions issued by the U.N.’s Clean Development Mechanism (CDM).

But the price of CDM credits – awarded to clean-energy projects in developing nations and purchased by countries and companies to meet emissions caps under the Kyoto Protocol – has plunged in the past year, due to a record issuance in 2011 as demand fell sharply.

This is squeezing the Adaptation Fund’s income, threatening some of the programmes now seeking approval, which range from promoting climate-resilient infrastructure in San Salvador to improving food security in southern Egypt and reducing Mauritanian fishermen’s risk at sea.

“It has pushed us to look into other sources of funding because our project portfolio is growing – there is a lot of interest in the Adaptation Fund… but our resources are limited,” explains Marcia Levaggi, manager of the fund board’s secretariat.

In March, the fund set a target of raising an additional $100 million by the end of 2013, and issued a call for ideas to develop innovative mechanisms to mobilise both public and private money for adaptation.

The Higher Ground Foundation is one organisation that responded, proposing to partner with the fund to create a framework for a market in vulnerability reduction credits.

The Adaptation Fund Board will consider the several submissions it has received at a meeting in June. But, for now, a new income source from a market in credits generated by adaptation projects seems a long way off.

“I think there is growing interest in adaptation from a market perspective,” says Levaggi. “We believe there is some potential but the extent of it is something we need to explore, and we would need to test it.”

In the meantime, the Adaptation Fund is working with the U.N. Foundation to put in place a system to solicit individual donations, which it hopes to launch at the upcoming Rio+20 summit on sustainable development.

It is also considering issuing adaptation certificates for larger contributions, which would be recorded in a public register and could attract companies seeking to demonstrate their environmental credentials. Other options include promissory notes, whereby governments pledge money and pay over a set period, bonds and insurance against extreme weather risks.


Sven Harmeling, head of international climate policy at the Bonn-based advocacy group Germanwatch, says the Adaptation Fund should put its efforts into seeking additional money from government donors in the near term because any adaptation market mechanism would likely take several years of complex preparations.

“It would involve a lot of extra institutional capacity building, regulations and so on before you even leverage one dollar,” he says.

One thorny issue is how to turn adaptation activities into a tradable commodity that can be measured in standardised units and compared across vastly differing contexts. Mitigation efforts, in contrast, can be quantified relatively easily according to the amount of greenhouse gas emissions they reduce.

“Adaptation doesn’t really generate global benefits like mitigation,” explains Åsa Persson, a research fellow with the Stockholm Environment Institute.

She and other experts argue it would not be appropriate to base adaptation credits on the amount of money invested in a project, as that would remove any incentive to ensure positive outcomes for the people struggling with climate change on the ground.

A fairer approach would be to use methods of valuing the negative impacts averted thanks to an adaptation initiative, such as damage to infrastructure and property by floods, declines in agricultural yields, and lives lost or shortened by disasters and climate-linked diseases.

“We are looking now at ‘hard adaptation’ where there’s a change of productivity or a risk to assets, but we hope over time… there will be a whole variety of different interventions finance will be unlocked for,” says the Higher Ground Foundation’s Schultz.

He envisions a system where project developers – who could include private-sector companies, NGOs and even local people – could earn vulnerability reduction credits only once results have been demonstrated and sustained for a period of time.

But Michael Mullan, a climate change economist with the OECD, is concerned that adaptation projects financed by market mechanisms could be more costly to set up and run than those backed by public money.

And SEI’s Persson fears there could be a conflict of interest, as pressure to show rapid success to private funders may not coincide with the longer-term adaptation investments that would most benefit communities.


Demand is another potential stumbling block for adaptation market proponents.

Schultz anticipates a range of customers – from consumers interested in climate-friendly products and governments that need to meet obligations under international agreements or prove their aid works, to companies seeking to shore up their green reputation or protect their supply chains.

“A lot (of businesses) have assets and markets in developing countries vulnerable to climate-related threats like drought and flooding… and so playing a role in helping protect the most vulnerable areas could be quite useful,” he says.

But others believe the only way to create enough demand would be to set mandatory adaptation targets at international, regional or domestic levels which participants could meet by generating or buying adaptation units.

Various criteria could be used to set the targets, such as current or past emissions, per capita incomes or levels of economic development, according to a November paper from Perspectives GmbH, a Swiss-based climate policy consultancy.

But that also raises “the challenge of political debates about the allocation of adaptation commitments and the question of defining priority regions”, it notes.

Given these and other barriers, big questions remain about the logic and ethics of trying to generate adaptation funding from markets.

Some would prefer new direct taxes to support adaptation, such as a levy on international air travel proposed by a group of the world’s least developed countries.

Others think adaptation cannot and should not be turned into a commodity, and would rather focus on making sure the resources available go to the people who need them most.

“They would say that, if there is an issue about how to allocate scarce adaptation funds, then let’s look at the level of economic and social development in general and prioritise poorer countries, because it is impossible to measure adaptation,” explains Persson.

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