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Part 2 – Financing adaptation and resilience to climate change: what do we need to do?
In Part 1 of this blog, we explained why climate change adaptation is important and how financing for it falls short. In the second part of this blog, we look how a reliable and sustainable source of finance could crowd in private sector investment for climate adaptation.
At present, adaptation and resilience are considered to be the preserve of the public sector, in part because adaptation is typically not profitable enough to attract the private sector. Most adaptation technologies do not generate cash flows or do so only over the long term. For example, it is difficult to turn a profit from planting mangroves to protect a coastline. As a result such projects are difficult to finance through conventional financing instruments such as debt or equity.
The African Development Bank is developing, and piloting, the Adaptation Benefits Mechanism (ABM) to provide cash flow to developers of adaptation projects by paying them for the delivery of Certified Adaptation Benefits (CABs). Under ABM, donors, consumers, funds and philanthropists will sign off-take agreements for CABs which project developers will then use as collateral to raise private sector debt, equity and in-kind contributions. The recipient of the CABs will “redeem” them and receive unique certified data concerning the initial investment, finance leveraged as well as the specific nature of adaptation benefits created and links to the Sustainable Development Goals (SDGs). Host countries will receive similar data and both can report the information under Article 13 of the Paris Agreement on climate change as support given and support received towards genuine adaptation needs.
In many ways the ABM is like the Clean Development Mechanism, with a similar project cycle of approved methodology, validation, registration, monitoring, reporting and verification. However the major difference is that the CABs are not fungible or tradable. Parties do not have adaptation targets under the Paris Agreement, therefore there is no need to compare and count adaptation “units”. Instead, parties report the funds contributed and funds mobilized against the $100 billion goal. This difference radically alters the way in which project developers will approach the mechanism and should encourage projects based on adaptation needs rather than maximizing profits.
The Bank is hosting the Interim ABM Executive Committee (EC) and Secretariat. To date, the ABM EC has approved procedures for the drafting and approval of ABM Methodologies and guidelines for the preparation of “Activity Design Documents”. In the next months, the Secretariat will call for Expressions of Interest to join the Roster of Experts to form activity-specific Methodology Panels which will meet virtually and as frequently as appropriate, in order to approve methodologies. The first pilot projects are underway and the Bank is now seeking commitments for contribution to the African Adaptation Benefit Fund to sign off-take agreements with project developers and road test the Adaptation Benefits Offtake Agreement as a funding instrument. At the end of the pilot phase in 2023, the Bank plans to report the progress on the ABM to the UN Framework Convention on Climate Change (UNFCCC) and invite parties to adopt the mechanism under Article 6.8 of the Paris Agreement.
Whether the ABM proves successful or not, the global community needs to address adaptation and resilience to climate change, which is already reversing development gains and pushing communities and economies back into poverty. A failure to adopt adaptation and resilience measures will frustrate global efforts to reach net-zero emissions. By creating demand for Certified Adaptation Benefits, governments can unlock private sector investment to strengthen adaptation. A similar goal was achieved with Certified Emission Reductions under the CDM and it should be feasible with adaptation benefits.