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The Climate Finance Carousel, G7 Pushes Public-Private Climate Disaster Insurance, and More

A look at how Reuters' climate finance investigation tallies with adaptation financing data

AI-generated via DALL-E

Today in Climate Proof:





How the Rich World is Making Bank on Climate Finance

Climate finance has a fairness problem. Rich countries, those most responsible for causing global warming thanks to their historic greenhouse gas emissions, are supposed to be paying to protect developing nations from the worst ravages of climate change, as per the Paris Climate Agreement and subsequent international negotiations.

However, a recent Reuters report claims that these same wealthy nations are benefiting directly from the finance they extend to those on the climate frontlines.

The basic contours of the Reuters exposé will be familiar to those immersed in the climate finance space. The vast majority of climate finance provided by rich countries, including the US, Japan, France, and Germany, has come in the form of market-rate loans, meaning the lenders stand to reap millions in interest repayments.

This is as true of adaptation financing as it is for mitigation. The Climate Policy Initiative’s recent State and Trends in Climate Adaptation report found that market-rate debt made up 59% of adaptation financing in 2021-2022, and low-cost debt another 21%. In contrast, grants — which do not have to be repaid —made up just 17% of the total.

Average Annual Adaptation Finance Flows by Instrument (US$bn, 2021–2022)

Morgan Richmond, a manager at CPI who leads its workstream on adaptation and resilience, cites this trend on tomorrow’s edition of the Climate Proofers podcast: “The challenge of more market-rate debt for adaptation investment is I think a flag, and something that we are really conscious of and thinking about in tracking — and then also in supporting structuring of financial instruments to try and change the picture,” she says.

What the Reuters report also highlights — which may be a surprise to some — is that even concessional finance, meaning grants which do not have to be repaid, can also be mechanisms for funneling cash back to donor countries. The publication found US$10.6bn in grants from 24 countries and the European Union (EU) obliged recipients to “hire companies, nonprofits or public agencies from specific nations — usually the donor — to do the work or provide materials.”

Now in some circumstances such conditions make sense. Take the example of a country that does not have the resources or expertise to implement the projects being financed. But at other times, such restrictions stop funds flowing to local companies and nonprofits that could use them to become better at climate-proofing activities on their own.

The developed world financing agencies contacted by Reuters argue there’s nothing nefarious about how they are structuring climate finance. Representatives said loan structures help them deploy more capital than they could via grants, and that by providing market-rate debt to some countries, they can allocate more grants to the lowest-income recipients. 

I can also see the logic of applying conditions to grants and loans that favor donor countries. Development finance is a political hot potato, and often polls poorly among western democracies. Understandably, taxpayers in wealthy nations are adverse to seeing public funds spent overseas rather than at home. By structuring grants and loans so that some benefits come back, it's perhaps easier for the rich world to “sell” climate finance to domestic populations and fractious political coalitions alike.

However, there’s a balance to be struck. Poor countries that are already paying to clean up after climate shocks do not want to be spending more on debt repayments than on domestic adaptation activities. The danger is that climate loans actually end up reducing these countries’ capacity to protect themselves from extreme weather and chronic physical risks. 

G7 Promotes Public-Private Insurance for Climate Shocks

Here’s a little nugget from the Group of Seven (G7) finance ministers and central bank governors’ latest communiqué: public-private insurance solutions to climate disasters are about to be in vogue.

The communiqué, from last week’s meeting in Stresa, Italy, acknowledges that the “natural catastrophe insurance protection gap” is impairing G7 countries’ ability to bounce back from climate shocks. Remember, natural disasters incurred US$280bn of economic losses in 2023 worldwide of which only 40% were insured, according to Swiss Re. (Though of course most of these uninsured losses were in the developing world, not the G7).

Among viable measures to increase insurance coverage, multi-stakeholder collaboration could take the form of public-private natural catastrophe insurance schemes involving relevant information and data sharing, risk-sharing as well as public and private financing.

To narrow this gap, the G7 ministers welcomed the High-Level Framework for Public-Private Insurance Programmes against Natural Hazards, which aims to facilitate the establishment of public-private insurance programmes (PPIPs). Such partnerships leverage the relative strengths of the public and private sectors to extend and reinforce insurance coverage.

For example, governments can offer de-risking capital, and open access to public data and information that can help private re/insurers assess risks and craft appropriate disaster insurance policies. “If well designed, PPIPs can address affordability issues or gaps in coverage for highly exposed policyholders and promote solidarity in responding to natural hazard risks across regions”, the High-Level Framework reads.

Yes, as it stands the framework is but a “step-by-step guide” that describes how PPIPs can be developed for disaster risk finance. Still, it reveals an appetite among the world’s richest nations to address what is fast becoming the biggest risk to global climate resilience — the inability of the private insurance industry to absorb climate shocks in a hotter, more volatile, world.

California Budget Cuts Animate Case for Climate Resilience Bond

California Governor Gavin Newsom has worked hard to burnish his image as a climate champion. Earlier this month, he even spoke at The Vatican’s conference on climate resilience and innovation. However, his latest budget maneuvers may result in too little money being put into much-needed climate adaptation and resilience initiatives. 

The fiscal situation in the Golden State is fraught. After years of surpluses, California now has to contend with an estimated US$56bn budget deficit over the next two years. Earlier this month, Newsom put forward a revised budget proposal aimed at plugging this hole, which can be summarized in three words: cuts, cuts, cuts.

The proposal would reduce government spending by some US$33bn. Plenty of climate-proofing spending programs have been earmarked for a trim. Among other things, the proposal would cut US$438mn from “watershed climate resilience programs”, US$110mn from the “Extreme Heat and Community Resilience Program”, and US$75mn from the Regional Climate Resilience Program, among others.

Overall, the cost-saving measures would reduce climate spending by 17% from the US$54bn promised in 2022 as part of Newsom’s California Climate Commitment.

The budget cuts have injected urgency into the debate over a mooted climate bond, which State Senator Ben Allen said last year would secure funding for climate resilience “[b]eyond the annual budgetary ebb and flow.” The bond, which could fund around US$10bn of climate adaptation and resilience activity, would have to be approved by statewide ballot in November. Governor Newsom has yet to come out for or against the bond, saying only that his office is “maintaining a posture of engagement” at a recent press conference.

There are two main risks involved in supporting the climate bond from Newsom’s standpoint. One, the vote to approve could fail, which would be a political embarrassment. Two, the bond would add to the Golden State’s already substantial debt pile, and reduce its bond-issuing capacity for other state priorities.

Still, the lobby in favor of putting the climate bond to the ballot is strong. Over 160 organizations back the issuance as part of the Climate Bond Now campaign.

For now, Newsom is hedging his bets while his latest proposal percolates through the body politic. But he’ll have to choose a side sooner rather than later.

Other Stuff

Small (Island) States, Big Ambitions 

Today marks the kickoff of the fourth International Conference on Small Island Developing States (SIDS4), a summit of 57 countries on the frontlines of climate change.

Climate resilience and adaptation are high on the agenda. Islands in the Caribbean alone are estimated to spend US$22bn each year by 2050 dealing with climate impacts if adaptation measures aren’t implemented. That’s an amount equal to 10% of the region’s current GDP.

Going into the conference, the plan is to push climate resilience investments and debt relief into the spotlight ahead of this year’s United Nations (UN) Climate Change Conference (COP29). The Antigua and Barbuda Agenda for SIDS (ABAS) proposes a dedicated SIDS Debt Sustainability Support Service to address debt vulnerability, for example through “state-contingent” instruments that enable governments to spend on climate-proofing investments. 

The ABAS also calls for the mainstreaming of disaster risk reduction, through the provision of financial and technical assistance and the allocation of pre-disaster financing to build climate resilience, among other things.

At the UN level, ABAS wants the SIDS to support “action on adaptation” by lobbying for the operationalization and implementation of the UAE Framework for Global Climate Resilience, which in turn is supposed to facilitate the UN’s global goal on adaptation.

“The ABAS is our chance to make real and tangible progress. It is practical, it is actionable, and it is transformative. It aims to ensure that we can chart the course toward resilient prosperity,” said Paul Chet Greene, Minister of Foreign Affairs, Immigration and Trade for Antigua and Barbuda, at a press conference today. “This means building infrastructure that can withstand climate impacts, diversify our economies to reduce vulnerability, finding sustainable ways to manage our debt, and improve health care systems to handle pandemics better,” he added.

Going Local: The EU Mission on Adaptation

The SIDS aren’t the only ones convening on climate adaptation. Last week, European policymakers and climate experts gathered at a forum of the EU Mission on Adaptation to Climate Change. The Mission exists to help EU regions, cities, and local authorities build climate resilience by expanding their understanding of climate risks, devising strategies to deal with climate shocks, and deploying “on the ground” adaptation and resilience solutions.

The forum followed the publication of an activity report laying out the Mission’s efforts to date. This includes the publication of a manual on engaging EU citizens and other stakeholders in climate adaptation. Without public buy-in, policymakers risk imposing adaptation plans that lack popular support or are misunderstood by those they are trying to protect. Tools like citizen assemblies and other deliberative processes can “help decision-makers and other stakeholders to better understand how citizens perceive the main challenges and required actions to build climate resilience”, the manual reads.

Kit England, senior climate adaptation specialist at Paul Watkiss Associates, was one attendee of the forum, and had this to say on LinkedIn:

“What was notable was the change in language and tone. There was a much stronger emphasis on urgency from the European Commission, with more concrete language on the problems and solutions, and a recognition of adaptation as a strategic competitiveness opportunity for Europe.”

Next on the EU Mission’s agenda is the disbursement of some €124mn (US$135mn) for adaptation projects granted via an amendment to the 2023-24 Horizon Europe Work Programme. The Mission has also released a “tools database” to support local governments on their adaptation journeys.

Other Stuff

New Satellite to Explore Climate Impact of Clouds

What role do clouds pay in amplifying (or dampening) climate change? A new satellite hopes to find out.

EarthCARE (Earth Cloud Aerosol and Radiation Explorer), a collaboration between the European Space Agency and Japan’s JAXA space agency, is due to launch tomorrow from California’s Vandenberg base. Its purpose is to shed light on how clouds and aerosols regulate the Earth’s climate. 

While clouds trap infrared radiation reflected from the Earth, thereby contributing to warming, they also reflect solar energy back into space, potentially helping to cool the planet, too. EarthCARE, with its complement of four sensors, will observe how heat energy interacts with clouds and dust in the atmosphere and help scientists figure out what they do to Earth’s radiation balance. 

The findings could help improve existing climate models, thereby furnishing us with potentially more accurate predictions on climate impacts — which in turn could lead to better adaptation policies.

EarthCARE has a three-year mission. It will orbit the Earth every 90 minutes 393 kilometers above the planet’s surface. 

Satellite aficionados can watch tomorrow’s launch live here.

Other Stuff

Thanks for reading!

Louie Woodall