Adaptation finance: Climate Finance Fundamentals

What are the links between adaptation finance and official development assistance and what multilateral adaptation finance instruments that have disbursed up to date? This brief looks at these issues and examines five main multilateral adaptation finance instruments that have disbursed.

Key findings:

There have been several recently published estimates of financial needs for adaptation. A World Bank study in 2010 estimates that it will cost $70 – $100 billion each year (at 2005 prices) to adapt to climate change between now and 2050. The UNFCCC secretariat has estimated that additional investments and financial flows of $60-182 billion for adaptation are needed globally in 2030: of these, $28-67 billion are needed in developing countries. Overall, there is divergence between the cost estimates of the World Bank on one side and those from the African Group, G77, and Oxfam on the other. Each has its own interests in supporting different estimates and with it a differing role for public versus private financing: the World Bank, representing its donor shareholders, tends to estimate lower values overall and a larger role for the private sector, whereas other groups, taking the viewpoint of potential recipients, tend to estimate higher values with a larger share of it coming from public sources.

There is a close relationship between adaptation and development. The impacts of climate change threaten the sustainability of many development programmes, for example health problems exacerbated by climate risks such as the lack of drinking water. In turn, sustainable development can reduce vulnerability to climate change, because vulnerability depends on factors linked to development. Adaptation activities are therefore often regarded as synonymous with development activities and key to good development practice.

Five main multilateral adaptation finance instruments that have disbursed funds to-date are: the Least Developed Countries Fund (LDCF); the Special Climate Change Fund (SCCF); the Strategic Priority on Adaptation (SPA); the Pilot Program for Climate Resilience (PPCR); and the Adaptation Fund (AF). A high level of fragmentation among these and other funds represents one of the most urgent shortcomings of the international architecture. The lack of consolidation of funding streams at the international level is reflected in a weak consolidation at the national level in recipient countries. This prevents countries from creating synergies between adaptation goals and other development priorities; and hinders the assessment of developed countries’ compliance with their financial commitments. Another issue to consider is the scale of adaptation funding delivered to-date. Just looking at dedicated climate funds, mitigation activities currently represent 82% of total climate finance, with adaptation representing only 8% ($587 million). This is very much less than the estimated needs and runs counter to the balanced allocation between mitigation and adaptation called for in the Copenhagen Accord.

The public nature of the environment makes public funding sources for adaptation indispensable. Public funds provide the basis for encouraging the private sector, individuals and civil society to invest in adaptation projects. They also need to secure investment in necessary adaptation projects deemed ‘unprofitable’ by the private sector. Having said that, there is an important role for private finance to help scale up the quantum of finance and so address the present shortfall in adaptation funding. A major limitation of private sector finance is that it is concentrated in a small number of high growth countries.

Summary