Climate adaptation is also resource and capital-intensive, which means there is a need for huge capital mobilization to meet the funding needs for climate adaptation.

Climate Adaptation: We need novel solutions to protect our safety net for the future

Climate adaptation is urgent

Even if the world can stop all GHG emissions with immediate effect, the impacts of climate change would pester humanity for decades due to the volume of gases already emitted. The IPCC has predicted that the world has at best a 50% chance of limiting global warming to a 1.5°C temperature rise this century. Hence, a renewed focus is necessary to exponentially ramp up our game to adapt. The UNEP Adaptation Gap Report 2021 has yet again underscored that climate impacts continue to outpace our attempts to adapt to them, and the costs of adaptation may hit USD 280-500 billion per year by 2050 for developing countries alone. Climate Policy Initiative (CPI) report on climate finance tracking suggests that climate adaptation financing flow was only $56 billion in 2020. Although it increased from $14 billion in 2011, a huge gap persists between the funding required and mobilization. The recently published Nationally Determined Contribution (NDCs) and National Adaptation Plans (NAPs) of most of the developing countries unequivocally indicate that the financial costs for adaptation are tracing a consistently rising trajectory. This data necessitates a meticulous stocktake of the dynamically increasing costs of adaptation and associated financial needs. 

It is unique to each region

Unlike climate mitigation, climate adaptation is tailor-made for a specific location. Climate adaptive measures could be building a resilient infrastructure capable of withstanding climate-related extreme weather events such as floods and cyclones for some regions. It could be developing drought-resistant crops and redesigning communication systems for other regions. Hence, it should not be viewed from climate mitigation.

Developing countries and small island developing states (SIDS) are more vulnerable to the physical impacts of climate change due to geographical locations – long coastline, rivers, high population density, and reliance on monsoon for agriculture. Limited fiscal space and low per capita income are making the countries ill-afford climate adaptation infrastructure. 

Financing is tricky for climate adaptation

Climate adaptation is also resource and capital-intensive, which means there is a need for huge capital mobilization to meet the funding needs for climate adaptation. Unlike climate mitigation projects, most climate adaptation projects are not purely commercial as they do not generate cash flows, so they do not serve private investors’ interests. Hence, climate adaptation infrastructures are expected to be publicly financed and owned by the public sector. As the participation of private financers is limited and there is a need to create a novel structure to attract financing from the private sector. 

International climate finance should pay more attention to climate adaptation finance

Financing to date has fallen short of annual estimated adaptation needs.  International climate finance is used mostly in climate mitigation – 34% went to climate adaptation (~$28.6 billion in 2020). Other estimates are less flattering. According to the UN, adaptation constitutes around just 21% of total public finance towards climate action. An exhaustive analysis of climate finance flows found that adaptation remained just 8.4% of total climate finance in 2020.  Developing countries already need $70 billion per year to cover adaptation costs and will need $140 billion–$300 billion in 2030. Most of the climate finance is also going to middle-income countries, not the poorest, most vulnerable countries

Additional support will be needed to help countries manage vulnerabilities and build resilience to climate change.  For several SIDS, without grant-based access to raising finance, meeting the cost of climate adaptation will be extremely challenging. For example, 

Pacific Island Countries (PICs) need about 9% percent of GDP annually on average for climate adaptation investments under a “risk-intolerant” strategy aimed at building coastal protection infrastructure (IMF, 2021). But for other developing countries, climate adaptation actions could be lower but significant. 

These countries do not have the financial wherewithal to invest from their current account given the significant amount of capital required for climate adaptation. They can raise new public debt. Ironically, most developing and SIDS have reached levels of public debt that are so high, they are not in a position to raise more public financing. Those that can raise public debt run the risk of being burdened with tight repayment obligations while adhering to stringent terms and conditions. For example, multilateral finance needs sovereign guarantees for the public debt even if the borrower is a local government. 

Here international climate finance can play an important role. Multilateral financing organizations can actively partner with national/provincial/local governments, financial regulators, and the private sector, with a special focus on emerging economies. The condition for a sovereign guarantee for provincial and local debt must be loosened up. The cost of debt should be lower and long-term that allowing provincial and local governments to pay back the loan over a long period. Investing in and paying for resilience and prevention upfront can help avoid much greater damages and costs in the future, thereby enabling the provinces to pay back. 

The ‘Debt for nature swap’ financial mechanism can also be explored. Instead of nature, countries are conditioned to invest in climate adaptation for forgiveness. Another important source of financing is the Resilience and Sustainability Trust (RST) set up by the International Monetary Fund (IMF). The trust’s objective is to support vulnerable and low- to middle-income countries in building their economies’ climate and pandemic resilient. It is important to note that climate adaptation finance and development have a close resemblance. 

Private sector participation

It is not only households in climate risk regions that are facing these risks, even corporates having movable and immovable assets are facing these risks. While moving assets from a risky zone (vulnerable to floods, sea level rise, cyclones, drought, etc.) to a less risky zone, could be expensive, immovable assets can be stranded if steps are not taken to make the location resilient enough to withstand these risks. Similarly, households also lose their assets too. Even financiers exposed to those corporates and households can face credit and equity risk. 

In this context, they have a natural benefit from climate adaptation. The local government can tax corporations based on the value of their assets in the region and tax households based on property sizes. The additional tax proceeds will be invested in climate-resilient infrastructure that protects the assets of corporates and households located in those regions. It will be a win-win situation for the corporates and households as they do not need to spend capital on building new assets in other places and facing stranded assets risks. Banks and Institutional investors can be engaged to build climate-adaptive assets at a lower cost. They can protect their financial assets against the physical risk of climate change as their customer, households and corporates, are better prepared to mitigate these risks. 

Labanya Prakash Jena is the Regional Climate Finance Adviser Indo-Pacific Region at Commonwealth Secretariat. He is also a CFA Charter holder. Besides, he is a Doctoral Scholar at XLRI, Jamshedpur. He is a prolific writer on climate change, sustainability, and finance.

Prasad Ashok Thakur is a CIMO scholar. His work in digital-agriculture, clean energy, public finance, international relations and electric-mobility has received several awards & recognitions. He is an alumnus of the Indian Institute of Management Ahmedabad, Indian Institute of Technology Bombay, and Aalto University (Finland).

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