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The Dire State of Adaptation Financing, US Bets on Nature-Based Solutions, and More

New report underlines chasm between adaptation financing supply and demand

AI-generated via DALL-E

Programming Note: The next news round-up will be published on January 8. Happy Holidays!

No Fit State

Here’s a 2024 prediction for you: calls to address the yawning climate adaptation financing gap will start to attract a more attentive audience. In some parts of the world it’s clear what’s at stake is the very survival of societies, especially those hammered by increasingly severe climate shocks. Yet even in those parts less vulnerable to climate change’s physical impacts (namely the global north) the economic disruption and supply chain havoc wreaked by severe weather events elsewhere is starting to bite (see the below on Typhoon Doksuri for fresh evidence).

Growing awareness of the need to climate proof the world should direct capital to adaptation with fresh urgency. There’s a lot of ground to make up for, however, as laid out in the State and Trends in Climate Adaptation Finance 2023 report out of the Climate Policy Initiative and Global Center on Adaptation. Here’s the topline: while global climate finance has doubled in the last two years, the share dedicated to adaptation has waned from 7% in 2019-2020 to 5% in 2021-2022. To meet the colossal needs of adaptation, the inflow of funds to developing nations needs to quadruple. That’s one heck of a mismatch between what’s required and what’s currently trickling in.

Climate Policy Initiative, Global Center for Adaptation “State and Trends in Climate Adaptation Finance 2023”

Nowhere is this more obvious than in Africa, a continent on the frontline of climate change. Despite grand promises made by rich nations on the international stage, the harsh reality is that adaptation finance on this vast continent has ticked up a mere 14% in the last two years compared to 2019-2022. Furthermore, only 36% of the continent’s total climate finance was earmarked for adaptation — a step back from the preceding years.

What’s intriguing is the role of African governments themselves. They’re stepping up, investing more in adaptation themselves than development finance institutions are through bilateral relationships. This underlines a) the paucity of international adaptation flows, b) the recognition by governments that public money is necessary to protect and rebuild climate-ravaged economies.

The report also put current adaptation financing mechanisms under the microscope. CPI analysis finds that market-rate loans made up 59% of average annual adaptation flows in the last two years. In contrast, just 21% came in the form of low-cost debt and 17% as grants. According to OECD data from 2016-2020, 72% of public climate finance were loans, of which three-quarters came with market-level interest rates.

Predominantly relying on debt to fund climate resilience could further strain already fragile economies, a danger highlighted in recent articles by the New York Times and France 24. The latter highlights the injustice of a debt-oriented approach to climate finance, as market-rate loans count towards wealthy nations’ pledges, while increasing the debt distress of low-income countries. Sixty percent of these countries are already at or near debt distress and are forced to spend a greater share of their revenue on debt service rather than crucial adaptation efforts. 

Experts and NGOs like Reclaim Finance advocate for a shift towards concessional financing and grants over market-rate loans to support climate resilience without worsening the debt burden of developing nations. This aligns with the principle that the countries most responsible for climate change should bear the cost, rather than transferring the financial burden to those countries least able to afford it and most impacted by the climate crisis. While innovative approaches like debt-for-climate adaptation swaps offer hope, they remain underused, hampered by intricate negotiations and structural barriers.

The bottom line is clear: the current financial response to climate adaptation, especially in regions like Africa that bear the brunt of climate change, is woefully inadequate. But this isn’t just about pumping more money into the system; it’s about smart, sustainable, and fair allocation of resources.

COP28: Report on the Adaptation Fund

A “fair allocation of resources” is precisely what the UNFCCC’s Adaptation Fund is supposed to ensure. 

The final text on Matters relating to the Adaptation Fund out of COP28 shows that equity in climate adaptation financing is top of mind coming out of Dubai. The paper notes the Fund has approved a Medium-Term Strategy for 2023–2027 emphasizing locally led adaptation efforts, the scaling up of projects, and innovation and knowledge sharing. This strategic focus is pivotal for ensuring that climate adaptation projects are tailored to the real needs of communities on the frontlines of climate change. 

The report also confirms a “resource mobilization target” of US$300 million, marking an effort to diversify funding sources beyond the 17 contributors from the previous year.

Conference of the Parties, “Matters relating to the Adaptation Fund” (December 11)

In addition, the text acknowledges the Fund’s work to date serving vulnerable developing countries and requests that this focus continues. It also calls for increased “gender-responsiveness” of the resources provided by the Fund, so that capital flows take into account the different ways in which climate change impacts men and women, in terms of their overall vulnerability, the distribution of benefits flowing from adaptation responses, and participation in climate response decision-making.

However, the text also makes painfully clear that the Fund lacks the firepower to make a meaningful dent in the adaptation challenge. The Fund had raised US$1.5bn by June 2023, with around US$188mn from 15 contributors pledged in the last year alone. While this signals growing international commitment, some US$148mn pledged in previous years are yet to be delivered. This exposes the “say-do” gap in adaptation financing that continues to hobble international efforts to protect the most vulnerable communities.

US Bets on Nature-based Solutions

The Biden administration is doubling down on nature-based solutions (NBS) to climate change. Last week, the Department of the Interior rolled out new initiatives that promote climate adaptation through NBS, with Assistant Secretary Shannon Estenoz emphasizing their importance when it comes to bolstering the resilience of landscapes, waters, wildlife, and communities against climate change. 

For those not in the know, NBS is the catch-all term for managing and enhancing natural ecosystems to address climate risks and other socio-environmental issues. Think mangrove forests that protect against extreme flooding, or “green firebreaks” that help slow wildfires.

Key to the Interior Department’s latest effort is the launch of the NBS Roadmap, a collaboration with Duke University’s Nicholas Institute for Energy, Environment & Sustainability. This online resource aims to guide both the Interior Department and the general public in implementing nature-based strategies, offering examples from successful projects across the US. 

The Department also pledged to embed NBS in workflows across its bureaus and offices, meaning that it will be providing land managers and decision-makers with guidance on how to use NBS themselves — in the hope that by doing so, the adoption rate for these solutions will tick up.

These announcements show the Department is keen to close the knowledge gap on adaptation-focused NBS. These solutions, generally being cost-effective and less demanding in resources than manufactured alternates, hold great appeal for both public and private stakeholders. Yet, there’s a catch: if not implemented correctly, their effectiveness can be undermined. This is where the NBS Roadmap comes into play — by arming decision-makers with the necessary tools to maximize their benefits.

Typhoon Trouble

Reuters has a thought-provoking report on the fallout from Typhoon Doksuri, which battered China’s coastline this July. The storm caused severe disruptions at major southeast ports, leading to heavy economic losses and highlighting growing climate risks to global supply chains. 

Official estimates placed China’s damages from July and August disasters at US$10 billion, a figure overshadowed by the anticipated cost of rebuilding and climate-proofing, marked by China’s issuance of 1 trillion yuan (US$139 billion) in bonds. The economic aftershocks extended to global shipping routes and supply chains. China’s exports for July were also weaker than expected in part because of the storm’s aftermath. 

Doksuri’s impacts underline the threat increasingly severe extreme weather events can have on critical infrastructure, and how long-tailed their effects can be. Analysts forecast over US$100bn a year in global trade losses due to port infrastructure disruptions from extreme weather. This means reinforcing ports to withstand monster typhoons should pay dividends over time. This being the case, investments in port infrastructure could be the low-hanging fruit that tempt private financial institutions to expand their adaptation financing portfolios.

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