IN-DEPTH: The Adaptation Fund from Kyoto to Paris

The Adaptation Fund was established in 2001 at COP7 in Marrakech as a financial institution of the Kyoto Protocol, to help developing countries in managing the adverse impacts of climate change.

Fifteen years later the Adaptation Fund was again on the table of UNFCCC climate talks in Marrakech, this time at COP22. The discussions focused on whether the new Paris framework should inherit the Fund from its bruised and ready-for-retirement predecessor. At COP22 countries decided that the Adaptation Fund should serve the Paris Agreement but procedures and guidelines to make it happen are far from being settled. Countries and UNFCCC bodies (especially the APA, the Ad Hoc Working Group on the Paris Agreement) will start discussing the matter at the next intersessional climate talks in Bonn this May and final decisions are expected in 2018, together with the overarching rulebook to make the Paris deal operational.

The Adaptation Fund presents some key features that help better highlight the issues at stake. First, the governance. The majority of the 16 members of the Fund’s governing body (the Adaptation Fund Board) represent developing countries, with specific representation given to Small Island Developing States and Least Developed Country Parties to the Kyoto Protocol. At COP22 the Global Environment Facility and the World Bank were renewed respectively as the interim secretariat and the interim trustee until 2020. Second, the approach. The Adaptation Fund adopted a direct access model, a pioneering approach for that time which allows it to manage the financing in direct partnership with accredited institutions based in the developing countries where projects and programs are implemented. Apart from case-specific difficulties, this approach has shown good potential for reducing the costs and complexities of accessing funds, better targeting local adaptation needs and strengthening national ownership and capacity building. Later on, the direct access model has inspired the design of other climate finance institutions such as the Green Climate Fund, created by UNFCCC in 2010. Third, the scale. The Adaptation Fund finances relatively small projects and programmes ranging from less than USD1 million to about USD 10 million. For comparison, more than two thirds of projects financed by the Green Climate Fund range from USD 10 to 250 million.

Last but not least, the source of financing. The primary revenue source of the Adaptation Fund is a 2 percent share of proceeds levied from projects registered under Kyoto’s Clean Development Mechanism (CDM). This peculiar feature is among the major challenges of the Fund, as the heavily oversupplied market of Certified Emission Reductions (CERs) has progressively shrunk in volume and value, with the price of CERs steadily floating below EUR 1 per tonne since 2013 (from EUR20/t in 2008). In the past years, the resulting revenue crunch has been partially covered by contributions from donor countries. For instance, in 2016 the Fund achieved and surpassed its resource mobilization target of USD80 million thanks to contributions by Germany, Sweden, Belgium and Italy. By combining CDM revenues and donors contributions, the Fund succeeded in committing over USD350 million in 55 adaptation and resilience projects in several developing countries since 2010 (see map).

Adaptation Fund Projects: Total Amount Approved as of March 2017

 

Nonetheless, uncertainties over how the Fund will provide adequate funding in the next years remain, as donor contributions are limited and unpredictable, while the CDM market is likely to stay at the current level until replaced by the yet-to-be-defined market mechanism of the Paris Agreement (ex. Art 6). At the latest meeting in Marrakech, the Conference of Parties to the Kyoto Protocol expressed concern about “issues related to the sustainability, adequacy and predictability of funding for the Adaptation Fund based on the current uncertainty on the prices of certified emission reductions” and highlighted a funding gap of USD 3 million for projects in the active pipeline.

On the other side, the need for adaptation and resilience measures is urgent and growing. According to the 2016 Adaptation Finance Gap Report, developing countries already face an adaptation finance gap, with current adaptation costs likely to be at least 2 to 3 times higher than international public finance for adaptation. In the future, the total adaptation finance should be 6 to 13 times greater than international public finance today.

The next few years will be crucial for the Adaptation Fund to redesign its financing process and successfully navigate the transition from the Kyoto system to the new Paris framework. Several options to meet the Fund’s financing needs have been recently examined by the NewClimate Institute and Germanwatch, considering among others the potential revenues from international aviation emission offsets, voluntary carbon markets, national emission trading schemes or carbon taxes. According to the study, all the options can be pursued without substantial technical limitations, but the lack of political willingness can compromise the feasibility of some scenarios.

In fact the future of the Adaptation Fund also depends on thorny diplomatic balances. For instance, developing countries have strongly defended the higher level of autonomy in managing resources acknowledged through the Fund, as well as its possibility of directing finance to smaller projects which often fall outside the working range of bigger climate finance institutions. On the other side, the proliferation of financial bodies with similar goals and competing for resources may turn out to be counterproductive. At the latest meeting in Bonn in mid-March, the Adaptation Fund Board disclosed being aware of this potential threat, announcing concrete steps to enhance complementarity and coherence between the Adaptation Fund and Green Climate Fund. Finally, it is still unclear how the U-turn of the new US administration on national and international climate policy will impact the shaping of the Paris framework, and of its relative instruments.

 

This article was first published on ICCG’s International Climate Policy Magazine n. 45.

(Image: Hurricane Sandy Causes Heavy Rains and Floods in Haiti. Photo credit: UN Photo/Logan Abassi)