Download vulnerability reduction credits

Using a Market Mechanism
to Incentivize Climate
Adaptation Projects
Karl Schultz; Roland Mader; Linus Adler; Brendan Tapley
The Higher Ground Foundation
SUMMARY
IMPACTS ASSESSMENT
ABOUT THE HIGHER GROUND FOUNDATION
Prioritizing investments in the face of uncertainty is a core function of markets.
Unfortunately, while “leveraging private finance” is a common line, the adaptation
finance debate is thin on substance regarding how markets could contribute to
developing, funding and executing climate adaptation projects.
Economies are structured around certain climatic conditions, so it is not surprising
that changes in climate have significant impact on economic activity.
The Higher Ground Foundation (Higher Ground) is the joint effort of a multidisciplinary team of experts and entrepreneurs, with a proven track record of
professional accomplishments and business successes. Both foundations and
private companies may play a number of important roles in Higher Ground adopting VRCs as a quality assurance instrument for donations; purchasing VRCs
to offset its emissions; becoming a leader in development of climate adaptation
projects; and supporting efforts to assess the schemes scaling up to tackle the
daunting challenges in financing adaptation - just as a few examples.
Assessment of Impacts from the Top Down
GCM: AR2
Most approaches proposed to fund and mobilize the trillions of dollars needed for
developing countries to adapt to climate change are “top down” with resources
assumed to be sourced from treasuries or other direct taxation measures. This calls
into question if funding will suffice. Another challenge is that projects supported
to date often don’t present robust metrics that quantify how much they reduce
climate vulnerability.
The authors suggest an alternative: the formation of a market in “vulnerability
reduction credits” (VRCs). This approach demands robust measures to prove,
post hoc, vulnerability reduction, it offers potential to raise an order of magnitude’s
greater funding than overseas development assistance, and opens up opportunities
for communities and businesses to create bottom-up solutions, cost effectively,
transparently, and sustainably. With appropriate regulation, the market price
of VRCs becomes a valuable means of prioritizing adaptation interventions.
This poster defines and explores demand for VRCs, and considers approaches to
appropriately award credits in asset-poor, vulnerability-high regions. It also discusses
how The Higher Ground Foundation is creating a voluntary market in VRCs.
INTRODUCTION
Disillusionment is rife with the post-Kyoto process owing to limited and delayed
commitments from participating countries, and lowered expectations of achieving
emission reductions resulting in a “safe landing” for the climate.
2010-2012
European Commission (2009)
2010-2015
2010-2020
2020
‘3-4
13-30
World Bank (2006)
‘9-41
Stern Review (2006)
‘4-37
UNDP HDR (2007)
2030
83-105
UNFCCC (2007)
28-67
World Bank EACC (2010)
70-100
Project Catalyst (2009)
G77+ China (2009)
13-25
200-400
African Group (2009)
Oxfam (2007)
IIED (2009)
>67
>50
no specific figure cited
Even assuming good progress in reducing emissions, most studies show that
between US$50 and US$300 billion per year is required for developing countries to
adapt to climate change. The challenges in raising these funds are daunting. There
are very few approaches on the table that seem likely to adequately identify, deploy,
and incentivize sustainable adaptation. Instead there are proposals for top-down,
payment-first funds and a hazy call to “leverage private finance”.
VULNERABILITY REDUCTION CREDITS
To incentivize investment, the authors propose the creation of the Vulnerability
Reduction Credit (VRC). VRCs are, in essence, a new currency for a public good
and are awarded over time after demonstrating sustained delivery of vulnerability
reduction. Features of this currency include clear baseline and monitoring regimes
and a review and governance system that encourages transparency, accountability,
and innovation. At its heart, the VRC demands accountability for project results,
by demanding measurable climate-specific vulnerability reduction, and rewards
projects with VRCs only after they have proven results for a period.
PRECIS RCM Run
Historic Climate
Increased Evapotranspiration
/ Less Rainfall
Baseline Evapotranspiration
and Rainfall
Subject Expert Assessment
Reduced Ag. Production
and Deforestation
Status Quo Agriculture
The Higher Ground Foundation is introducing a market-based mechanism to
finance climate change adaptation projects in developing countries through
“vulnerability reduction credits” (VRCs). Adaptation projects would generate VRCs,
allowing countries in the developed world to offset their current and past emissions
by financing adaptation projects in the developing world, in fact creating a currency
for a public good with possible demand beyond offsetting historic emissions.
Thus the call for supporting climate adaptation in developing countries can be
met in a flexible, efficient, and bottom-up project-level approach.
What do we need?
CLIMATE DAMAGE
Support from reputable organizations to fund and develop Higher Ground and
its mission and set up a voluntary climate vulnerability reduction market.
Economic structures also determine the extent to which different populations
are vulnerable to climate change. Research has shown that overall the poor in
developing countries are the most vulnerable to climate change. And so the
opportunity for vulnerability reduction should be large in developing countries.
Yet there is a challenge: in financial terms poor communities do not have the level
of assets of productivity that could be protected compared to richer communities.
Taken at face value, if projects are assessed and prioritized solely based on the level
of monetized assets protected, then projects that reduce the vulnerability of assetrich communities would be favoured over asset-poor communities with the same or
higher levels of vulnerability. Furthermore, poorer communities generally lack the
very assets that afford them higher levels of resiliency.
This would seem perverse when aggregate human needs such as shelter, food
security, and health are much greater in developing countries. There is therefore
a need to consider alternative methodologies for ‘asset’ valuation that can more
suitably value social, economic and environmental assets in developing countries,
enabling us to set meaningful ‘baseline’ valuations that underpin meaningful
climate vulnerability and damage estimates.
ADJUSTING VRC ISSUANCES FOR
DEVELOPMENT LEVELS:
SUPPRESSED DEMAND AND MINIMUM
SERVICE LEVELS
For further information, contact us at: [email protected]
Or visit: www.thehighergroundfoundation.org
CREATING A VOLUNTARY MARKET
AND DEMAND FOR VRCs
For any new market or product, proof of concept is needed, especially in a voluntary
setting. Does the product deliver what it promises? The best proof of concept
is a working and easily replicable set of pilot projects that go through the VRC
assessment for registration and issuance. Such a pilot project should be:
- transparent: full disclosure of mechanics;
- simple: easy to understand;
- replicable: experience transferable to other projects; &
- fully integrated: covers each aspect of the entire project cycle.
As noted above, in a voluntary setting the demand has to be created, not forced
upon market participants. Therefore, a pilot project is a very effective, even
necessary communication tool to create and stimulate demand.
CREATING DEMAND FOR VRCs
Suppressed Demand Baselines have particular relevance in developing countries,
where basic needs are not being met. The idea of crediting future increases in
demand, where it is currently being suppressed, has a basis in Clean Development
Mechanism (CDM) emission reduction crediting rules and may be applied for VRCs.
In the CDM, the minimum service level is a baseline of emissions where minimum
human needs such as basic energy services (including lighting, cooking and
drinking water supplies) are met. A Suppressed Demand Baseline is appropriate
when basic energy services are below the “minimum service level” at the time
of implementation of the CDM project activity.
Market mechanisms very much rely upon the demand sources. Supply will follow
as soon as there is either a sufficiently high price signal for companies to be able
to expect a profitable business within such market or the market fulfils a need
not satisfied before. With climate changes expected to increase in intensity,
one emerging and recognized need is to climate-proof our lives. Businesses and
individuals need to climate-proof their operations, assets, and living standards.
And those that do not have the funds to climate-proof their lives, such as
vulnerable communities in developing countries, need the assistance to do so.
Demand Source
Buyers
Project monitoring and evaluation tool
Foundations, funding bodies, development
and governmental aid schemes
Traded credit
CSR conscious companies, zero emission
companies, tracking of corporate or
individual donations
Retired credit
Same as “traded credit”
Supply chain security
Multinational corporations
Consumer products
Consumer product companies, retailers
and consumers
WHAT IS A VULNERABILITY REDUCTION CREDIT?
Measure for International Treaty Obligations
Governments
Governments
In order to incentivise investment, Higher Ground proposes the creation of the
VRC, a credit based on the degree to which assets or productivity endangered by
climate change are protected. Similar to carbon credits, which are a vehicle for
climate mitigation investment, VRCs can stimulate investment in climate
change adaptation.
International Climate Fund/National Climate
Reserve currency
Rating instrument
(government, corporate)
Governments, corporations
Government planning/cost : benefit tool
Governments
Investment parameter
Investors, corporations, funds
Insurance tool
Insurance companies, insurance buyers
Real Estate
Preservation agencies (e.g. UNESCO),
insurance buyers
A VRC is defined here as a unit of climate vulnerability reduction crediting with
a nominal value of 50 Euros. For a particular project, the number of VRCs issued
would be a function of the avoided impact cost (vulnerability) of such project,
i.e.: Number of VRCs = Avoided impact costs of a project / EUR50.
Efficient vulnerability reduction projects would then be characterized by a market
value of the VRC of below EUR50, matching the return expectations of a project
developer/investor in the vulnerability reduction project and the “impact versus
cost” expectations of credit buyers.
ASSESSING LOCAL AND REGIONAL CLIMATE CHANGE
Most global climate change models predict widespread changes over the next
century under expected warming of at least 1.5 degrees Centigrade. The overall
expected effects are established through runs of global general circulation (GCM)
models, which, though their resolution limit remains above the regional level.
In order to obtain climate data of sufficient resolution for project-level assessments,
regional climate models (RCMs) – operating at scales below the grid minimum
resolution of GCMs – must be called upon.
Relevant local factors and interactions include the following:
- terrain relief (wind speeds and precipitation patterns);
- water bodies or glacial features (regional and local temperatures,
wind speeds and precipitation); &
- uneven sea level rise.
Regional Climate Modeling of Maximum Temperatures: Bhutan
We can borrow this “minimum service level” concept and apply it to climate
adaptation if assets in developing countries, such as irrigation, storm drainage,
or building standards, are below a minimum service level to withstand climate
impacts. This effectively makes investment in vulnerable communities look more
attractive, and by doing so, puts them on a more equal footing with countries
(and communities) already operating at that minimum service level.
One way to define a minimum service level might be through gross national income.
Other measures, such as the Human Development Index, may provide a broader
perspective on a community’s resilience to climate change, but may be too involved,
or expensive, to quantify at the community level for VRC project registration.
Public donors such as governments with financial commitments to support
adaptation projects may use VRCs as a monitoring and verification tool, and they
could use the VRCs to strengthen the sustainability of the projects they support.
Or donors could buy VRCs, just as several governments buy carbon emission
reduction credits under the Clean Development Mechanism. Governments would
thus stimulate a much larger market supporting adaptation projects and incentivize
innovation by entrepreneurs, technology providers, and local communities.
The adoption of a universal “minimum service level” factor for all vulnerable
communities seeking VRC registration would serve as a baseline point from which
to measure and compare the monetary benefit of a project. It allows us to compare
the value of projects and issuance of VRCs in a fair way, by enabling us to quantify
the ‘vulnerability reduction’ of projects. The minimum service level is therefore a
major assumption – but a very useful one when it comes to measuring the climate
vulnerability reduction from specific projects.
PROOF OF CONCEPT OF A VOLUNTARY MARKET
While some private sector actors already invest to a limited extent in climate
adaptation projects for asset protection, supply chain management, or corporate
social responsibility motivations, there is no explicit market yet for privately
financing climate adaptation projects to meet international targets such as the
Cancun Accord’s target of financing $100 billion for climate activity, including
“a balance” for adaptation, in developing countries.
Any VRC market supported by a regulating or governing body - a compliance driven
market - will take years to introduce, negotiate, and implement. Hence, the only way
to act swiftly is to create a voluntary market. But this also means that both supply
and demand of VRCs will have to be sourced based on “carrots” rather than “sticks.”
HIGHER GROUND FOUNDATION POLL
WHY WOULD PRIVATE COMPANIES IN DEVELOPED COUNTRIES PAY FOR
CLIMATE ADAPTATION INTERVENTIONS IN DEVELOPING COUNTRIES?
Response
VALIDATION – RELIABILITY OF REGIONAL
CLIMATE MODELS
For the purposes of supporting VRC project crediting there must be general, practical
minimum standards of predictive capability and verifiability. Ultimately, uncertainty
cannot be eliminated, but project development should be driven with a reasonable
sense of confidence that at least the effect of an intervention has the appropriate
direction. For instance, crop substitutions planned to address anticipated
climate changes should be appropriate, meaning in practice that the direction of
temperature and rainfall changes must be known within a confidence interval. The
track record of experience with regional climate modelling and validation show that
high confidence levels have been established during a variety of model runs for
many regions and climate outputs. [1]
In a voluntary market, demand is set depending on the value provided by
vulnerability reduction to creators and buyers of VRCs. Higher Ground has
conducted informal polls of adaptation experts on several social network sites
that hint that Corporate Social Responsibility and Supply Chain Risk Reduction
may be leading motives for supporting VRC generating adaptation projects.
Responses
%
Corporate Social Responsibility
32
38%
Supply Chain Risk Reduction
28
33%
Market Risk Reduction
11
12%
First Mover Advantage in Adaptation
11
12%
Other
1
1%
Own (company) Asset Protection*
1
1%
Poll underway in February 2012, from LinkedIn Sites as of 21 February (responses by 21 February = 84 ):
- AdaptAbility Climate Adaptation Network (59 responses)
- Adaptation Learning (5 responses)
- Climate Adaptation Lab (3 responses)
- Climate Change and Sustainability (3 responses)
- Climate-Eval: Evaluation of Climate Change and Development (13 responses)
- The Voluntary Carbon Market Network (2 responses)
* Added to two surveys based on initial feedback replacing “other” with “Own (company) Asset Protection”, N= 7)
CONCLUSIONS
Higher Ground’s approach effectively solves for many of the challenges faced
in formulating effective adaptation policies:
- Leveraging adequate funds;
- Ensuring funds go for climate vulnerability reduction;
- Creating incentives for private sector finance and innovation;
- Identifying effective, clear, climate protection projects;
- Identifying robust baselines for monitoring and verification of projects; &
- Ensuring sustainability of vulnerability reduction measures.
Evidence-based, learn-by-doing piloting of the outlined approach is an
important next step in realizing a vibrant, sustainable market mechanism
to address climate adaptation.
REFERENCES
See, for example Hydrological Research Center INFORM:
http://www.hrc-lab.org/projects/projectpdfs/INFORM_REPORTS/FINAL_PHASE_I/
HRC%20Technical%20Report%20No.%205%20-%20Chapter%203.pdf
[1]
www.thehighergroundfoundation.org