Box 172 Adaptation practices in the financial sector

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Financial mechanisms can contribute to climate change adaptation. The insurance sector - especially property, health and crop insurance - can efficiently spread risks and reduce the financial hardships linked to extreme events. Financial markets can internalise information on climate risks and help transfer adaptation and risk-reduction incentives to communities and individuals (ABI, 2004), while capital markets and transfer mechanisms can alleviate financial constraints to the implementation of adaptation measures. To date, most adaptation practices have been observed in the insurance sector. As a result of climate change, demand for insurance products is expected to increase, while climate change impacts could also reduce insurability and threaten insurance schemes (ABI, 2004; Dlugolecki and Lafeld, 2005; Mills et al., 2005; Valverde and Andrews, 2006). While these market signals can play a role in transferring adaptation incentives to individuals, reduced insurance coverage can, at the same time, impose significant economic and social costs. To increase their capacity in facing climate variability and change, insurers have developed more comprehensive or accessible information tools, e.g., risk assessment tools in the Czech Republic, France, Germany and the United Kingdom (CEA, 2006). They have also fostered risk prevention through: (i) implementing and strengthening building standards, (ii) planning risk prevention measures and developing best practices, and (iii) raising awareness of policyholders and public authorities (ABI, 2004; CEA, 2006; Mills and Lecomte, 2006). In the longer term, climate change may also induce insurers to adopt forward-looking pricing methods in order to maintain insurability (ABI, 2004; Loster, 2005).

There are now also examples of adaptation measures being put in place that take into account scenarios of future climate change and associated impacts. This is particularly the case for long-lived infrastructure which may be exposed to climate change impacts over its lifespan or, in cases, where business-as-usual activities would irreversibly constrain future adaptation to the impacts of climate change. Early examples where climate change scenarios have already been incorporated in infrastructure design include the Confederation Bridge in Canada and the Deer Island sewage treatment plant in Boston harbour in the United States. The Confederation Bridge is a 13 km bridge between Prince Edward Island and the mainland. The bridge provides a navigation channel for ocean-going vessels with vertical clearance of about 50 m (McKenzie and Parlee, 2003). Sea-level rise was recognised as a principal concern during the design process and the bridge was built one metre higher than currently required to accommodate sea-level rise over its hundred-year lifespan (Lee, 2000). In the case of the Deer Island sewage facility, the design called for raw sewage collected from communities onshore to be pumped under Boston harbour and then up to the treatment plant on Deer Island. After waste treatment, the effluent would be discharged into the harbour through a downhill pipe. Design engineers were concerned that sea-level rise would necessitate the construction of a protective wall around the plant, which would then require installation of expensive pumping equipment to transport the effluent over the wall (Easterling et al., 2004). To avoid such a future cost the designers decided to keep the treatment plant at a higher elevation, and the facility was completed in 1998. Other examples where ongoing planning is considering scenarios of climate change in project design are the Konkan Railway in western India (Shukla et al., 2004); a coastal highway in Micronesia (ADB, 2005); the Copenhagen Metro in Denmark (Fenger, 2000); and the Thames Barrier in the United Kingdom (Dawson et al., 2005; Hall et al., 2006).

A majority of examples of infrastructure-related adaptation measures relate primarily to the implications of sea-level rise. In this context, the Qinghai-Tibet Railway is an exception. The railway crosses the Tibetan Plateau with about a thousand kilometres of the railway at least 13,000 feet (4,000 m) above sea level. Five hundred kilometres of the railway rests on permafrost, with roughly half of it 'high temperature permafrost' which is only 1 to 2°C below freezing. The railway line would affect the permafrost layer, which will also be impacted by thawing as a result of rising temperatures, thus in turn affecting the stability of the railway line. To reduce these risks, design engineers have put in place a combination of insulation and cooling systems to minimise the amount of heat absorbed by the permafrost (Brown, 2005).

In addition to specific infrastructure projects, there are now also examples where climate change scenarios are being considered in more comprehensive risk management policies and plans. Efforts are underway to integrate adaptation to current and future climate within the Environmental Impact Assessment (EIA) procedures of several countries in the Caribbean (Vergara, 2006), as well as Canada (Lee, 2000). A number of other policy initiatives have also been put in place within OECD countries that take future climate change (particularly sea-level rise) into account (Moser, 2005; Gagnon-Lebrun and Agrawala, 2006). In the Netherlands, for example, the Technical Advisory Committee on Water Defence recommended the design of new engineering works with a long lifetime, such as storm surge barriers and dams, to take a 50 cm sea-level rise into account (Government of the Netherlands, 1997). Climate change is explicitly taken into consideration in the National Water Management Plan (NWMP) of Bangladesh, which was set up to guide the implementation of the National Water Policy. It recognises climate change as a determining factor for future water supply and demand, as well as coastal erosion due to sea-level rise and increased tidal range (OECD, 2003a).

There are now also examples of consideration of climate change as part of comprehensive risk management strategies at the city, regional and national level. France, Finland and the United Kingdom have developed national strategies and frameworks to adapt to climate change (MMM, 2005; ONERC, 2005; DEFRA, 2006). At the city level, meanwhile, climate change scenarios are being considered by New York City as part of the review of its water supply system. Changes in temperature and precipitation, sea-level rise, and extreme events have been identified as important parameters for water supply impacts and adaptation in the New York region (Rosenzweig and Solecki, 2001). A nine-step adaptation assessment procedure has now been developed (Rosenzweig et al., 2007). A key feature of these procedures is explicit consideration of several climate variables, uncertainties associated with climate change projections, and time horizons for different adaptation responses. Adaptations can be divided into managerial, infrastructure, and policy categories and assessed in terms of time frame (immediate, interim, long-term) and in terms of the capital cycle for different types of infrastructure. As an example of adaptation measures that have been examined, a managerial adaptation that can be implemented quickly is a tightening of water regulations in the event of more frequent droughts. Also under examination are longer-term infrastructure adaptations such as the construction of flood-walls around low-lying wastewater treatment plants to protect against sea-level rise and higher storm surges.

17.2.3 Assessment of adaptation costs and benefits

The literature on adaptation costs and benefits remains quite limited and fragmented in terms of sectoral and regional coverage. Adaptation costs are usually expressed in monetary terms, while benefits are typically quantified in terms of avoided climate impacts, and expressed in monetary as well as non-monetary terms (e.g., changes in yield, welfare, population exposed to risk). There is a small methodological literature on the assessment of costs and benefits in the context of climate change adaptation (Fankhauser, 1996; Smith, 1997; Fankhauser et al., 1998; Callaway, 2004; Toman, 2006). In addition there are a number of case studies that look at adaptation options for particular sectors (e.g., Shaw et al., 2000, for sea-level rise); or particular countries (e.g., Smith et al., 1998, for Bangladesh; World Bank, 2000, for Fiji and Kiribati; Dore and Burton, 2001, for Canada).

Much of the literature on adaptation costs and benefits is focused on sea-level rise (e.g., Fankhauser, 1995a; Yohe and

Schlesinger, 1998; Nicholls and Tol, 2006) and agriculture (e.g., Rosenzweig and Parry, 1994; Adams et al., 2003; Reilly et al., 2003). Adaptation costs and benefits have also been assessed in a more limited manner for energy demand (e.g., Morrison and Mendelsohn, 1999; Sailor and Pavlova, 2003; Mansur et al., 2005), water resource management (e.g., Kirshen et al., 2004), and transportation infrastructure (e.g., Dore and Burton, 2001). In terms of regional coverage, there has been a focus on the United States and other OECD countries (e.g., Fankhauser, 1995a; Yohe et al., 1996; Mansur et al., 2005; Franco and Sanstad, 2006), although there is now a growing literature for developing countries also (e.g., Butt et al., 2005; Callaway et al., 2006; Nicholls and Tol, 2006).

172.3.1 Sectoral and regional estimates

The literature on costs and benefits of adaptation to sea-level rise is relatively extensive. Fankhauser (1995a) used comparative static optimisation to examine the trade-offs between investment in coastal protection and the value of land loss from sea-level rise. The resulting optimal levels of coastal protection were shown to significantly reduce the total costs of sea-level rise across OECD countries. The results also highlighted that the optimal level of coastal protection would vary considerably both within and across regions, based on the value of land at risk. Fankhauser (1995a) concluded that almost 100% of coastal cities and harbours in OECD countries should be protected, while the optimal protection for beaches and open coasts would vary between 50 and 80%. Results of Yohe and Schlesinger (1998) show that total (adjustment and residual land loss) costs of sea-level rise could be reduced by around 20 to 50% for the U.S. coastline if the real estate market prices adjusted efficiently as land is submerged. Nicholls and Tol (2006) estimate optimal levels of coastal protection under IPCC Special Report on Emissions Scenarios (SRES; Nakicenovic and Swart, 2000) A1FI, A2, B1, and B2 scenarios. They conclude that, with the exception of certain Pacific Small Island States, coastal protection investments were a very small percentage of gross domestic product (GDP) for the 15 most-affected countries by 2080 (Table 17.2).

Ng and Mendelsohn (2005) use a dynamic framework to optimise for coastal protection, with a decadal reassessment of the protection required. It was estimated that, over the period 2000 to 2100, the present value of coastal protection costs for Singapore would be between US$1 and 3.08 million (a very small share of GDP), for a 0.49 and 0.86 m sea-level rise. A limitation of these studies is that they only look at gradual sea-level rise and do not generally consider issues such as the implications of storm surges on optimal coastal protection. In a study of the Boston metropolitan area Kirshen et al. (2004) include the implications of storm surges on sea-level rise damages and optimal levels of coastal protection under various development and sea-level rise scenarios. Kirshen et al. (2004) conclude that under 60 cm sea-level rise 'floodproofing' measures (such as elevation of living spaces) were superior to coastal protection measures (such as seawalls, bulkheads, and revetments). Meanwhile, coastal protection was found to be optimal under one-metre sea-level rise. Another limitation of sea-level rise costing studies is their sensitivity to (land and structural) endowment values which are highly uncertain at more aggregate levels. A global assessment by Darwin and Tol (2001) showed that uncertainties surrounding endowment values could lead to a 17% difference in coastal protection, a 36% difference in amount of land protected, and a 36% difference in direct cost globally. A further factor increasing uncertainty in costs is the social and political acceptability of adaptation options. Tol et al. (2003) show that the benefits of adaptation options for ameliorating increased river flood risk in the Netherlands could be up to US$20 million /yr in 2050. But they conclude that implementation of these options requires significant institutional and political reform, representing a significant barrier to implanting least-cost solutions.

Adaptation studies looking at the agricultural sector considered autonomous farm level adaptation and many also looked at adaptation effects through market and international trade (Darwin et al., 1995; Winters et al., 1998; Yates and Street, 1998; Adams et al., 2003; Butt et al., 2005). The literature mainly reports on adaptation benefits, usually expressed in terms of increases in yield or welfare, or decreases in the number of people at risk of hunger. Adaptation costs, meanwhile, were generally not considered in early studies (Rosenzweig and Parry, 1994; Yates and Street, 1998), but are usually included in recent studies (Mizina et al., 1999; Adams et al., 2003; Reilly et al., 2003; Njie et al., 2006). Rosenzweig and Parry (1994) and Darwin et al. (1995) estimated residual climate change impacts to be minimal at the global level, mainly due to the significant benefits from adaptation. However, large inter and intra-regional variations were reported. In particular, for many countries located in tropical regions, the potential benefits of low-cost adaptation measures such as changes in planting dates, crop mixes, and cultivars are not expected to be sufficient to offset the significant climate change damages (Rosenzweig and Parry, 1994; Butt et al., 2005).

Table 17.2. Sea-level rise protection costs in 2080 as a percentage of GDP for most-affected countries under the four SRES world scenarios (A1FI, A2, B1, B2)

Protection costs (%GDP) for the 2080s

SRES scenarios

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