Financing Resilience

One major constraint on building more-resilient local and national institutions has been the limited funds available. The costs of adapting to climate change are huge: while accurate calculations are difficult, the World Bank estimates the amount at between $10 billion and $40 billion annually for "climate-proofing" investments in developing countries. This estimate has been criticized, however, for failing to take into account several additional factors, such as climate-proofing existing supplies of natural and physical capital where no new investment was planned, financing new investments specifically to deal with climate change, and the adaptation costs faced by households and communities. Taking these into account, Oxfam recently put the figure at over $50 billion annually.36

Currently, funding for adaptation falls woefully short of these figures. There are two main avenues for financing resilience in developing countries: formal climate change financing mechanisms under the United Nations Framework Convention on Climate Change (UNFCCC) and various national mechanisms for official development assistance (ODA).

Funding for adaptation under the UNFCCC is currently disseminated through four funding streams: the Least Developed Countries Fund (LDCF), established to help developing countries prepare and implement National Adaptation Programmes of Action; the Special Climate Change Fund (SCCF), intended to support a number of climate change activities such as mitigation and technology transfer, but with adaptation as a top priority; the Global Environment Facility (GEF) Trust Fund's Strategic Priority for Adaptation (SPA), which pilots operational approaches to adaptation; and the Adaptation Fund (AF), which under the Kyoto Protocol is intended to help developing countries carry out "concrete" adaptation activities.37

The LDCF, SCCF, and Trust Fund are relatively small funds based on voluntary pledges and contributions from donors. All three are managed by the GEF, the primary financial mechanism used by the UNFCCC. The LDCF and SCCF only amount to around $114 million in received allocations. The GEF Trust Fund SPA contains $50 million to support adaptation pilot projects. The Adaptation Fund of the Kyoto Protocol is financed by a 2-percent levy on transactions in the Clean Development Mechanism (CDM), the market-based initiative under the protocol that allows countries with greenhouse gas

Building Resilience reduction targets to generate emission "credits" from projects that offset emissions in developing countries and produce sustainable development benefits. The Adaptation Fund has the potential to generate by far the largest amount of funds for adaptation; the revenue generated from the CDM levy alone is projected to be between $160 million and $950 million. There is also talk of applying the levy to international air travel, which could generate $4-10 billion annually.38

The funds managed by the GEF have been heavily criticized for failing to meet the needs of vulnerable developing countries. These nations have expressed concern over difficulties in getting funds for adaptation through the GEF due to burdensome criteria for reporting, additionality, and co-financing, which most vulnerable developing countries simply do not have the capacity to meet. In addition, while international adaptation efforts have delivered some information, resources, and capacity building support, they have yet to facilitate significant on-the-ground implementation, technology development or access, or the establishment of robust national institutions to carry the adaptation agenda forward.39

The Adaptation Fund is the most promising financing vehicle, not only because it has the potential to generate the greatest amount of money but also because of its unique governance structure, decided upon at the Conference of the Parties to the UNFCCC in Bali in 2007. The fund is not managed by the GEF. It has its own independent board with representation from the five U.N. regions as well as special seats for least developed countries and small island developing states. The GEF provides secretariat services on an interim basis. Further, countries can make submissions for funding directly to the Adaptation Fund as opposed to going through designated implementing agencies (as is the case with the GEF funds), and governments can also designate their own implementing agencies (such as NGOs) to make funding submissions. It is hoped that this governance structure will minimize problems of accessibility and increase the effectiveness of climate change financing for adaptation. In addition, the fund is designed to fund concrete adaptation action on the ground, which has the potential to contribute significantly to building resilience. However, funding through the Adaptation Fund is not yet operational, and even when it is it will still fall short of meeting the full finance costs of adaptation.

A second option for funding resilience building is through existing ODA financing. Given the close relationship between development objectives and building climate change resilience, funding adaptation this way might appear to make sense: sustainable development reduces vulnerability to climate change, while resilience-building activities often contribute to the broader goals of sustainable development. Reaching the Millennium Development Goals, for example— reducing poverty, improving living conditions in urban and rural settlements, providing general education and health services, and providing access to financing, markets, and technologies—will improve the livelihoods of the most vulnerable and in turn improve their resilience regarding climate change. A recent analysis of ODA activities reported by members of the Organisation for Economic Co-operation and Development found that more than 60 percent of development assistance could be relevant to building adaptive capacity and facilitating adaptation. To date, bilateral programs have committed more than $110 million to more than 50 adaptation projects in 29 countries.40

Although ODA contributions can complement UNFCCC actions on adaptation, they cannot be seen as a means of "plugging

Building Resilience the gap" in adaptation financing. Fundamentally, the responsibility for helping the most vulnerable countries cope with the impacts of climate change ought to be in addition to existing aid commitments. Industrial-country financing for adaptation should be based on the "polluter pays principle," which attributes the costs of pollution abatement to polluters without subsidy, pointing toward responsibility-based rather than burden-based criteria. As highlighted by Oxfam, ActionAid, and many other NGOs advocating for greater UNFCCC funding for adaptation, these monies should not be donated to poor countries as "aid" but are owed as compensation from high-emissions countries to those that are most vulnerable to the impacts of climate change. So although there is clearly a role for development institutions in enhancing adaptive capacity, responsibility for adaptation does not lie with these institutions, particularly when it may compete with other development objectives in partner countries.41

At the same time, however, there is certainly room for complementarities. The UNFCCC explicitly provides support for adaptation to climate change rather than climatic variability. In climate negotiations, the distinction is important, informing political questions regarding costs and burden sharing. Yet building resilience through development can address a much broader range of factors contributing to vulnerability on the ground than targeted climate change interventions alone. Further, development assistance can invest in capacity building in partner countries in order to facilitate UNFCCC-financed activities. For example, donors are well positioned to strengthen national capacity, while development practitioners and disaster risk reduction practitioners have a wealth of experience in dealing with reducing vulnerability to climate hazards and extremes at local, subna-

tional, and national scales.42

ODA can therefore be used to add value to the formal UNFCCC mechanisms through development that contributes to resilience. But regardless of development investments in resilience building, funding through the UNFCCC must be scaled up significantly, and existing funding needs to be more accessible, in order to come close to meeting the huge challenge of building climate change resilience in vulnerable developing countries.

The responsibility for helping the most vulnerable countries cope with the impacts of climate change ought to be in addition to existing aid commitments.

At the country level, there is a need to think carefully about the delivery mechanisms for this funding. Experience with adaptation funding under the UNFCCC has shown that national institutional responsibilities for adaptation are unclear and sometimes competing. With the proliferation of bilateral, multidonor, and convention funds, it is vital to avoid duplication of efforts and to ensure consistency in approach.43

One solution that is currently being piloted in Bangladesh is the development of a country-owned multidonor trust fund to receive all funding for adaptation from different national and multilateral climate change funds. This fund was launched in London in September 2008 and will consist of contributions from the Bangladeshi, British, Danish, and Dutch governments as well as from the World Bank. It is hoped that this framework will significantly reduce transaction costs for global and bilateral funds and could pave the way for large flows of money in the future, while ensuring proper institutional structures, governance, management, and targeting of

Building Resilience funds at the national level. The scale and scope of the fund are currently under discussion, but it is hoped that the fund would be accessible to government agencies, NGOs, and the private companies that design and implement climate change mitigation and adaptation projects.44

It is also important that the institutions and agencies that channel funds to vulnerable people on the ground are given careful consideration. The role of government institutions is clearly vital, and mainstreaming adaptation through existing national, sectoral, and local development plans is one way to build the resilience of government institutions and services, and, by extension, of the people who use them. However, this is not always appropriate—for example, under weak governments or in situations where local government capacity and accountability are flawed. In such circumstances, building resilience through NGOs and private institutions may be more appropriate.

Early NGO efforts to enhance resilience of vulnerable communities have proved promising, but they have also been limited in scale and scope where they have not been closely linked to and supported by governmental plans and institutions. Another avenue that is receiving increasing attention is the private sector, particularly in relation to technology transfer and insurance schemes. One example is index-based insurance, still in the formative stages, which is intended to facilitate adaptation by farmers by discouraging risk-averse behavior. Crops are insured against weather patterns rather than crop losses, which also reduces perverse incentives to underproduce.

The social enterprise BASIX has been piloting an index-based insurance program in India, which initially has grown from 230 customers to around 12,000 in 2006-07. However, an early review of this program shows that it has not fulfilled expectations for encouraging adaptive strategies of poor and vulnerable farmers. One reason is the high cost of the product (5-12 percent of the value insured), which reduces the coverage that clients can afford. The vast majority of clients insure only their inputs, not the projected value of their crops. Coverage is therefore not sufficient to encourage risk-taking. Further, reinsurers are increasing prices on these policies because of growing climate change concerns, putting the product even further out of the reach of many potential customers.45 The private sector may produce some options for financing resilience building, but these have so far been shown to be limited, particularly for enabling adaptation by the most vulnerable. Therefore attention is currently best focused on improving the capacity of existing local institutions that have knowledge and a history of working with the most vulnerable, in order to lessen gaps between local and national processes and to ensure that financial resources reach those who can use them best. This requires the involvement of local groups and civil society organizations with the knowledge and capacity to act, as well as a willingness among governments to work with lower-income groups.46

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