Costs of Adaptation to Climate Change: Some Preliminary Estimates

Access to Adaptation Finance: Building Capacity for SEAN-CC Focal Points on Access to Funds for Climate Change Adaptation InitiativesBangkok, Thailand, 24-26 June 2013Session 3 – Initiating Adaptation Practices

Charles RodgersAsian Development BankManila, Philippines

OverviewThe wide-ranging adverse impacts of climate change create substantial risks to activities and investments aimed at reducing poverty and supporting sustainable and inclusive economic growth in Asia and the Pacific. It will also add significantly to the costs of achieving these goals, although by how much we do not yet know. This presentation will examine a number of ways in which climate change imposes additional costs on development investments. Preliminary estimates are presented for some of these costs, based on the recent project-level experience of the Asian Development Bank.

Contents

1. Defining Adaptation Finance 2. Aggregate Estimates of Adaptation Costs 3. Disaggregated Costs of Adaptation, with

Case Studies4. Joint MDB Approach to Adaptation Cost

Estimation5. Summary Observations

1. What Is Climate Finance?According to the UNFCCC:• Article 4.3: Provision of new and additional financial

resources to meet the agreed full incremental costs of implementing commitments under the Convention taking into account the need for adequacy and predictability in the flow of funds

• Article 4.4: Assist the developing country Parties that are particularly vulnerable to the adverse effects of climate change in meeting costs of adaptation to those adverse effects.

• Article 11: Defines the financial mechanism under the Convention; operation entrusted to existing international entity/entities bilateral, regional and other multilateral channels.

Development or Adaptation?Addressing Drivers of

VulnerabilityBuilding Response

CapacityManaging Climate

RisksConfronting

Climate Change

Vulnerability Focus Impacts Focus

Enabling human development: actions that reduce poverty and vulnerability; increase capability and coping capacity: •Livelihood diversification•Literacy and education•Women’s rights•Community health•Food security•Water supply, sanitation

Robust systems for problem solving: actions that build institutional, technical and planning capacity:

•Natural resources management•Weather data collection, forecasting•Disaster early warning systems•Communications systems

Climate risk management: actions that incorporate climate information into decision-making to reduce risks:•Climate proofing projects•Disaster response planning•Drought-resistant crops; cropping systems•Robust, adaptive technologies

Addressing climate change impacts: actions that target specific, anticipated impacts outside of historical experience:•Relocation due to sea level rise (SLR)•Coastal defenses from SLR•Managing Glacial Lake Outburst Floods (GLOF)•Extra storage to capture glacial melt

From McGray et al. (2007) Weathering the Storm

Traditional Development FundingNew, Additional Adaptation Funding

2. Aggregate Estimates of Costs of Adaptation• Many studies have used integrated assessment

models to estimate the impacts of climate change under “Business as Usual” (BAU) assumptions, and the cost to mitigate these impacts.

• For example, the Stern Report (2006) estimated that BAU climate change will reduce welfare by an amount equivalent to a reduction in consumption per head of between 5% and 20%.

• The Report estimates that the annual costs of stabilizing at around 550ppm CO2e are likely to be around 1% of global GDP by 2050, with a range from –1% (net gains) to +3.5% of GDP.

• These estimates are highly aggregated, and do not provide estimates of the costs of adaptation.

0 20 40 60 80 100 120 140 160 180

Global

DevelopingCountries

billion $ in 2030

Agriculture

Water

Human Health

Coastal zones

Infrastructure

Source: UNFCCC, 2007 (higher range of estimates)

Annual Costs of Adaptation: UNFCCC 2007

Annual Costs of Adaptation: WB 2010

Affected Region Wet Scenario Dry Scenario

$ B % $ B %

Developing World 89.6 76.7

Asia and Pacific 39.8 36.5

Infrastructure 29.5 32.9% 13.5 17.6%

Coastal Zones 30.1 33.6% 29.6 38.6%

Water Supply, Flood Protection 13.7 15.3% 19.2 25.0%

Ag, Forest, Fisheries 7.6 8.5% 7.6 9.9%

Health 2 2.2% 1.6 2.1%

Extreme Events 6.7 7.5% 6.5 8.5%

World Bank (2010) The Costs to Developing Countries of Adapting to Climate Change: New Methods and Estimates (available on WB website)

Costs per year to 2050, Billions $ US (2005); no discounting

• For lower income (ADF) countries in Asia and Pacific, water sector share of total costs ranged from 26% (wet) to 45% (dry)

• These estimates do not include the “adaptation deficit”

• Costs of risk screening, impact & vulnerability assessment and adaptation planning

• Costs of “climate-proofing” investments (modifying materials, designs, processes; altering locations, …)

• Costs of managing residual risks (reserves, contingency credit, insurance, …)

• Costs of addressing the “adaptation deficit” – adapting to today’s climate variability (an aspect of development)

• Costs of building societal resilience (education, health & nutrition, social capital, income diversification and savings, …)

• Costs of regional public goods: climate projections, disaster risk mapping, disaster early warning systems, …

3. Climate Change Adaptation Costs Disaggregated

Costs of risk screening, impact & vulnerability assessment and adaptation planning

• In ADB’s experience, comprehensive climate impact and vulnerability assessment can cost $50,000 - $500,000, with typical values around $100,000

• Desk studies (using published literature on regional, sectoral climate risks) will be less expensive, but may be insufficient for large, complex or high-risk projects

• Developing custom climate change projections or scenarios will increase cost significantly ($50k - $100k)

• Utilizing sectoral impact models (e.g., hydrologic, agronomic simulation models) will also increase costs

• Engaging specialized consultants (e.g., climate modeling specialists) will increase costs, but improve credibility

Costs of “Climate-Proofing” Investments

Climate proofing – a shorthand term for identifying risks to a development project, or any other specified natural or human asset, as a consequence of climate variability and change, and ensuring that those risks are reduced to acceptable levels through long-lasting and environmentally sound, economically viable, andsocially acceptable changes implemented at one or more of the following stages in the project cycle: planning, design, construction, operation, and decommissioning. (ADB, 2006)

Case Study: Avatiu Port Development Project

The investment project:Rehabilitation and expansion of Avatiu Port, primary port facility for the Cook Islands. To climate-proof the project against sea level rise (SLR): •Replace wharf structure with design more resistant to wave action•Reinforce wharf to allow raising when required by SLR

The baseline project finance is $23.8 million, with an additional grant of $800,000 for climate proofing, representing around 3% of total project costs

Photo credit Rick Pollom

Case Study: Cambodia Rural Roads Improvement Project

The investment project ($67 million): Improve rural connectivity to national and provincial road networksApproach to climate-proofing:•engineering design adjustments (increasing drainage, adjusting materials, raising road elevation in flood-prone areas)•capacity building •climate change vulnerability maps to influence transport sector planning•ecosystem-based adaptation strategies

Climate–proofing costs were $5.4 million (Nordic Development Fund), or around 8% of total project costs

Case Study: Central Mekong Delta Region Connectivity Project

The proposed project: Improve connectivity in the Mekong Delta region by extending highway from HCMC to Mekong Delta:1.Two cable stayed bridges to replace current ferry services (combined length of 5.4km);2.25-km associated highway link between the two bridgesDetailed climate change impact and vulnerability study conducted by ICEM ($170,000), including:•Downscaled climate projections•Hydrologic, hydraulic modeling

P1% baseline conditions

P1% CC conditions

Recommendations of Study: Two primary concerns were identified:1.Bridge clearances would be impacted by combination of sea level rise, upstream flooding; complicating navigation by largest traffic2.Connector roads might over-top during largest (1%) floods, leading to erosion of road embankments and scour of road foundationsIn consideration of the costs of addressing risks:•Navigation clearance, though impinged by larger (P5%) events, was determined to be sufficient to allow passage of most vessels – no modification to bridge design required•The design height for embankments should be raised by 0.6m to reflect climate change impacts on flooding, adding $4.5 m to project costs (less than 1% of baseline finance)

Case Study: Pilot Program for Climate Resilience (PPCR)

• PPCR: Adaptation window of the Strategic Climate Fund (SCF) of the Climate Investment Funds (CIF). PPCR are country-led, build on National Adaptation Programs of Action (NAPA) or equivalent; and strategically aligned with other donor funded activities

• Approach: integrating climate resilience considerations into national development planning and implementation consistent with poverty reduction and sustainable development goals

• Objective: to provide incentives for scaled-up action; initiate transformational change

• Investments: (i) technical assistance to integrate climate resilience into national and sectoral development plans; (ii) public and private sector investments addressing climate resilience

Case Study: PPCRProject PPCR

(mil. $)Baseline Finance

Total Finance

PPCR %

Cambodia: Climate Proofing Roads 17.0 62.1 79.1 21.5Bangladesh: Coastal Climate Resilient Infrastructure

30.6 120.0 150.6 20.3

Cambodia: Climate Proofing Infrastructure

10.0 38.5 48.5 20.6

Cambodia: Enhancement of Flood and Drought Management

10.0 38.0 48.0 20.8

Cambodia: Climate Proofing of Agriculture 10.0 80.5 90.5 11.0Cambodia: Promoting Climate Resilient Agriculture, Forestry and Water Supply

8.0 220.4 28.4 28.2

Cambodia: Flood-Resilient Infrastructure 10.0 37.0 47.0 21.3Bangladesh: Coastal Town Infrastructure Improvement

40.4 76.0 116.4 34.7

Cambodia: Climate Risk Management of Small and Medium Scale Irrigation

14.0 63.0 77.0 18.2

Sum all projects 150.0 535.5 685.5 21.9

Costs of Managing Residual Risks

High severity

Low severity

High frequency Low frequency

Reserves / Calamity Funds (potentially insurance backed)

Contingent credit

Insurance / Reinsurance

Catastrophe bonds & other Insurance Linked Securities

International Donor Assistance

Once in 3-5 years

Once in 10-15 years

Once in 15-20 years

Once in 75-100 years

Once in 25-50 years

Expected return period

Risk retention

Risk transfer

Costs of addressing the “adaptation deficit”

Source: ADB and ADB Institute (2009): Infrastructure for a Seamless Asia.

Costs of Building Societal Resilience Costs of building societal resilience encompass e.g.: •investments in poverty reduction•income and livelihood diversification•health programmes•reducing land degradation•reforestation programmes•new varieties of crops or farming techniques•effective early warning systemsThese costs are difficult to estimate, since most resilience-building activities are not easily distinguished from developmentBut, estimates suggest that adapting to climate change might increase the cost of achieving the Millennium Development Goals in Africa by up to 40%* * Fankhauser and Schmidt-Traub (2011): From Adaptation to Climate-Resilient Development: The Costs of Climate-Proofing the Millennium Development Goals in Africa

4. Joint MDB Approach for Adaptation Finance

The joint MDB approach for adaptation finance reporting is based on the following principles: It is purpose, context and activity based: A project activity must fulfil three design process criteria for finance to be reported. It must:

•Include a statement of purpose or intent to address or improve climate resilience;•Set out a context of climate vulnerability (climate data, exposure and sensitivity);•Link project activities directly to the context of climate vulnerability.

Joint MDB Report on Approach to Adaptation Finance (July 2012) – draft for comment

Joint MDB Approach to Adaptation FinanceAddressing Current

Drivers of Vulnerability

Building Resilience to Current, Future

Climate Risks

Incorporating Climate Risks into

Investments

Incorporating Climate Risks into

Development Plans, Policies

Traditional Development Funding New and Additional Adaptation Funding

When designed to support poor countries or communities exposed to climate risk:

•investments in poverty reduction•income and livelihood diversification•health programmes

• Reducing land degradation

• reforestation programmes

• new varieties of crops or farming techniques

• investment in adaptation products and services

• effective early warning systems

Especially for infrastructure with a long lifespan: •energy generation and supply•Airports•Ports•water storage infrastructure•major roads, bridges, railways and other transport corridors

• local and national planning

• health system policies

• water allocation programs/policies

• education programs/policies

• support for research including climate information, agriculture, health

MDB Adaptation Finance According to the Joint Approach, 2011 (USD millions)

Some Concluding Observations• Thee are many areas in which climate change is likely to

increase the costs of inclusive, sustainable development• The “best” recent estimates suggest aggregate cost to Asia and

the Pacific of around $50 bn/year; excluding additional disaster losses associated with changing climate (can’t be quantified)

• At project level, climate proofing costs may be substantial, with indicative costs of 5% to 15% of baseline finance

• High quality impact and vulnerability assessment, including economic evaluation of adaptation options, will help to manage risks while controlling costs

• The true costs of adaptation to climate change are elusive, as such concepts as “new and additional financial resources” and “agreed full incremental costs” are difficult to apply

• In particular, blurring of distinction between “adaptation” and ”development” with implications for access to finance

Looking forward to the discussion!

crodgers@adb.org

More information and literature available at:

http://www.adb.org

A menu of climate-proofing decisions:

Type 1:Invest Now

Type 2:Be ready and invest later if

needed

Type 3:Do nothing and

invest later if needed

Important determinants:

High Probability that investment will be needed Low

Inflexible Nature of flexibility Very Flexible

28

Adaptation Assessment: 3 Approaches

• It is not always necessary to act now; although it is important to assess now!