Climate Finance, Climate Talks, COP23 - Fiji & Bonn

Climate finance negotiations and game theory: how a green equilibrium could not be achieved (Part 2)

This article is divided in 3 parts. Read the 1st part here and the 3rd part here.
This article is written by Solène Dengler.

Adaptation fund: a weak deal for loss & damage?

According to recent estimates, the costs of adapting to climate change could reach 280-500$ billion per year until 2050 while total bilateral and multilateral funding in developing countries reached 22.5$ billion in 2014. The Fund has been in operation since 2017, has allocated 462 million dollars to 70 adaptation programmes in 58 countries and had a fundraising target of 80 million dollars for 2017 that was surpassed. The numbers speak for themselves, representing a very small fraction of the amount needed for adaptation and loss and damage worldwide, which is often explained by the nature of the fund and the lack of orientation towards scalability of projects.

During side events, it was clearly stated that it is very difficult still for the private sector to find a business case for investment in adaptation and that this should be resolved. But there was also a raising awareness of the benefits to act given the risk of stranded assets and also the development co-benefits of adaptation are substantial, so that a link to the SDGs can further investment in this area.

Financing localised and concrete adaptation projects

Views diverged between groups of countries how the funding gap for adaptation should be calculated, with developing countries wishing a two year planning horizon for fundraising targets based on submitted projects for enhanced sustainability, adequacy and predictability of funding for the fund, while developed countries generally wanted shorter timeframes based on approved projects.

Hopes were high for adaptation finance given the Fidji presidency and the clear need to scale it up as impacts of climate change are already being felt, particularly in small island states. On the last day of COP23, it was agreed that the adaptation fund “shall” serve the Paris agreement under certain conditions.

The deal seems to have favoured latter countries and it seems that the function of the Adaptation Fund will remain to deliver localised, concrete adaptation projects to create models that can be scaled by other funds. It seems therefore that the Adaptation Fund will have to be linked with the Green Climate Fund, insurance and resilience private finance as well as complemented by loss and damage finance for which nothing concrete was agreed at COP23 (and still seems unlikely for COP24).

Source: Climate funds update, http://www.climatefundsupdate.org/themes

During informal discussions with experts during the COP, we found that the adaptation fund would be promoted further as a political issue for developing countries, probably at the expense of a clear loss and damage agreement this time. This happened to be the case and was stated by many as a main drawback of this COP led by a small island state. The adaptation fund was never conceived to fund economically viable projects as it was funded through donations and only 2% of CDM projects were channelled through the adaptation fund. It was clear during negotiations that the lack of agreement on article 6 and other items clearly prevented a better outcome for the Adaptation Fund and most probably for loss and damage.

What seems clear from game theory experiments and theories is that to achieve a green, Pareto-superior equilibrium in stag-hunt-like games where uncertainty plays a key role and there are two possible outcomes, one of which (“hare”) would be catastrophic for the planet, trust needs to be build.

For adaptation and loss and damage finance, it seems that the hare outcome in the game was achieved this time.

 

About the author: Solène Dengler is CliMates’ Empowerment Team co-director. She was previously involved in research projects such as financing small-scale energy projects, climate migration in Alaska, or the Youth on the Move project. She now works as a consultant for the World Bank in Vienna, on a program on sustainable urban development and governance in South-East Europe.

References:
http://www.climatefinancelandscape.org/
http://www.climatefundsupdate.org/listing/adaptation-fund
http://www.wri.org/events/2017/05/report-launch-future-funds
http://www.oecd.org/env/cc/financing.htm
http://unfccc.int/meetings/bonn_nov_2017/in-session/items/10494.php
www.businessinsider.com/global-financial-assets-2015-2
https://www.carbonbrief.org/cop23-key-outcomes-agreed-un-climate-talks-bonn
https://www.carbonbrief.org/mapped-where-multilateral-climate-funds-spend-their-money
https://cop23.unfccc.int/news/insuresilience-to-provide-the-poor-with-more-financial-protection-against-climate-risks
https://www.theguardian.com/science/blog/2016/apr/13/can-game-theory-help-solve-the-problem-of-climate-change
http://carbon-price.com/climate/game-theory
  1. Mielke and G. A. Steudle (2017), “Green investment and coordination failure: An investors’ perspective”. GCF Working Paper No. 1/2017.
https://simpolproject.eu/2017/06/15/green-investment-a-game-theoretic-view/
Climate Finance: Theory And Practice, Markandya Anil,Galarraga Ibon,Rubbelke Dirk T G 2017

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