Climate Finance or Development Finance?
What makes an investment a climate change adaptation rather than a development project is not always a straightforward question.
What makes an investment a climate change adaptation project rather than a development project?
The Green Climate Fund (GCF) is the flagship climate fund under the UN Framework Convention on Climate Change, which has committed roughly $600 million to date to climate change adaptation projects. Recently, some GCF board members have expressed concern that these projects have not showed sufficient value toward climate adaptation above the usual development objectives.
The GCF is not meant to be a development agency that finances standard development projects. It was set up as a key channel for the aspirational $100 billion of annual climate finance for mitigation and adaptation in developing countries by 2020. Specifically, this funding should be “new and additional” to existing sources such as development aid.
But disentangling adaptation from development is not straightforward. Being “climate-resilient” has a lot in common with being “developed” – and by some measures the two are well correlated.
In addition, development and resilience are emergent properties of many of the same underlying factors and systems such as institutions, infrastructure, resources, and geography. They are not easy to construct, replicate, or indeed disentangle from one other.
As such, investments to support development may support climate adaptation too. Better infrastructure may generate local income, while also protecting against climate-related disasters. Social programs like cash transfers can improve not just people’s health and income, but also their climate resilience by providing better safety nets and adaptability.
For funds like the GCF, there may be at least two ways to disentangle adaptation and development for project financing.
In the (more conservative) incremental approach, projects are assessed by their individual elements. Only the elements that would not otherwise appear in a “standard” development project are considered adaptation and thus suitable for climate finance.
To make the case for adaptation, the project proponent would need to factor future climate risks into project design, and demonstrate how the selected adaptations are truly additional and cost-effective.
This works well for infrastructure projects, where adaptations typically comprise additions or changes to projects with clear and measurable costs (e.g. raising a bridge, strengthening materials, changing a project location). Multilateral development banks mostly rely on this model to tally their projects’ contributions to adaptation.
But the incremental approach has weaknesses.
First, it’s not well suited to non-structural social development or financial intermediary projects, where it is harder to compare against a “standard” development project or the expenditures are uncertain. Second, in some projects the costs of incremental adaptations may be small and the approach may end up underselling the real benefits to climate resilience. Third, as our collective experience with adaptation increases, its costs are likely to fall, thereby decreasing the scope of climate finance opportunities.
Alternatively, the comprehensive approach looks for adaptation as part of the project’s underlying intent and outcomes, rather than its individual components. It focuses on the rationale and benefits of the project, particularly its impacts to climate resilience and ability to shift behaviors or investments.
Project proponents must demonstrate how the project overall is primarily motivated to address climate risks, or specifically targeted to climate vulnerable communities. This is good for non-structural projects, and helps broaden the scope of climate financing.
However, the comprehensive approach is subject to a more discretionary and subjective assessment process, including the decision on what share of the project is adaptation.
A good example of a “comprehensive” adaptation project is this ADB project that supports fairly standard improvements in flood protection, water supply, and irrigation infrastructure in Tajikistan. But uniquely, during project preparation, beneficiary communities were prioritized based on their vulnerability and exposure to climate risks, and the engineering designs considered likely future climate impacts. That enabled the project to be fully financed by the Climate Investment Funds under the Pilot Program for Climate Resilience.
As countries ramp up their activities towards their Paris Agreement targets and adaptation objectives, the flows of international climate finance will likely increase. Climate funds like the GCF want to achieve the most adaptation benefit from their limited funds, and they seem poised to take a harder line on what they consider adaptation – and thereby worthy of their support.
In doing so, they will be judging whether and how adaptation should be disentangled from development. It will be interesting to see how this debate evolves.