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The Difficulty of Defining Adaptation Finance

This post was co-written with Abigail Ofstedahl, an intern with WRI's Vulnerability and Adaptation Initiative.

While working on tracking adaptation finance for our Adaptation Finance Accountability Initiative project, we often get the question “What is adaptation finance?” or “What counts as adaptation finance?” To our embarrassment, we still don’t have a clear answer to either question, other than “Well… finance that funds efforts to adapt to the impacts of climate change qualifies as adaptation finance.”

We aren’t the only ones who struggle to define the very issue on which we work. Even some of the definitions that the Organisation for Economic Cooperation and Development (OECD) and multilateral development banks are developing do not provide a complete answer to the question of what types of investment are considered to be adaptation finance.

We decided to do some soul-searching on this subject. While it’s still too complicated to provide a cut-and-dry definition of adaptation finance, we identified three common traits surrounding the issue: Adaptation finance is context-specific, dynamic, and not just about finance.

Context-Specific

Because climate change impacts vary a lot from place to place, what could count towards climate change adaptation finance in one country or region does not necessarily count as such in another. For instance, many people think of irrigation projects for agriculture as adaptation-relevant, yet climate change will have varying effects on agriculture outputs across the globe. Some areas are likely to receive less rainfall, so interventions like drought-resistant seeds and water-harvesting are good adaptation practices. In areas that are getting wetter, however, these interventions become a waste of time and resources. Not all irrigation projects can be counted towards adaptation finance, as it depends on the types of interventions and the local context.

This example also shows that adaptation funding is scale-specific. On a global level, investing in research to develop drought-tolerant seeds contributes to adaptation because many regions of the world will experience droughts. But at a national or provincial level, it might be irrelevant or even counter-productive.

Take, for example, India: a country with the seventh-largest landmass in the world and several physio-geographic areas that each face their own, unique climate change impacts. A single national adaptation strategy wouldn’t work. Adaptation strategies need to be tailored accordingly at a sub-national level. For example, adaptation finance to the coastal city of Mumbai will support very different programs than adaptation finance to the drylands of Western Rajasthan.

Dynamic

To complicate matters further, what counts as effective adaptation in a specific context today may no longer count as effective adaptation 25 years from now. Cash crops are a perfect example of this. At the moment, Colombia is one of the Arabica coffee powerhouses of the world, but production is facing challenges. Rainfall patterns are inconsistent, temperatures are rising, and coffee rust is spreading. Farmers have to adapt to these changes quickly in order to maintain coffee bean yields. While planting shade trees and developing new irrigation strategies may help farmers adapt in the short-term and could be counted as adaptation finance, these strategies seem likely to become less effective if current trends continue. In the long-term, farmers will most likely have to adapt by switching crops, moving out of Arabica coffee to alternative cash crops like fruit trees, cocoa, or flowers. What we consider as adaptation – and therefore adaptation finance -- would have to be altered accordingly.

On the other hand, some farmers in West Africa could see an increase their cash crop yields. Climate change is providing farmers in West Africa with the opportunity to grow cashew trees, as increasing temperatures in the region will likely lead to a doubling in the suitable growing area by 2050. In the future, therefore, should planting cashew trees in West Africa count as adaptation?

It’s Not Just About Finance

Adaptation finance is not just about the money, and this is what makes it hard to count. In some cases, there is a direct relationship between climate change and a particular project. For instance, some activities—such as building sea walls—directly confront sea level rise or other impacts that are clearly attributable to climate change. Other activities enhance our understanding of the impacts, such as supporting weather monitoring or modeling climate change effects on crop yields. It is not difficult to argue that funding going to these activities counts as adaptation finance.

Most cases, however, are not as clear. Adaptation is about going beyond business-as-usual and incorporating the possible effects of climate change into the design of an activity. It sounds fairly straightforward, but deciding which part of “beyond business-as-usual” should count towards adaptation finance is difficult to determine. To make this a little easier to understand, an adaptation activity can be broken down into three steps:

  1. Realizing that climate change affects the activity;
  2. Designing the activity taking climate change into account; and
  3. Implementing the activity.

Most believe that step 3, the implementation phase, counts as adaptation. However, the real ‘adaptive step’ is the decision-making and the way in which the activity is designed—namely, steps 1 and 2.

For example, suppose city officials in Mumbai are deciding to retrofit old drainage pipes. In our hypothetical scenario, they can:(A) install business-as-usual size drainage pipes at $3 million, or (B) install larger pipes at $4 million that can better handle the climate change-induced intensification of storm run-off.

Choice B would be similar to carrying out steps 1, 2, and 3 in the figure above. Since decision B is an adaptation activity and A isn’t, should we count the $4 million as adaptation finance, or only the $1 million additional cost of the larger pipes? What if instead of a retrofit, Mumbai installs large pipes into a neighborhood that has never had drainage pipes before? Should we then count the adaptation finance total as $0, or does it still matter that the large pipes were more expensive than other options? Or, for both the retrofit and the new installation, should we count adaptation finance as only the cost of the planning study that determined the best size and location for the pipes, given uncertainties about rainfall? Following this logic, the adaptation finance figure might be quite a bit lower, say, $200,000. Only counting the $200,000 would mean only counting funding going to steps 1 and 2. In this example, we can define adaptation finance in three different ways—broad, incremental, or narrow. The broad definition counts all of the funding going into strategy B as “adaptation funding”—in our example, $4 million. The incremental definition counts only the funding going towards “climate-proofing” activities—upgrading to the larger pipes—which would be $1 million. The narrow definition, on the other hand, only counts funding that goes into the decision-making process, so $200,000. Which definition is most appropriate? And can a single definition apply to all types of adaptation?

This example is still relatively simple. The issue becomes much more complex when trying to assess how much of the funding flowing to socio-economic and other programs that address drivers of vulnerability can be counted as adaptation finance.

Climate Finance and Defining Adaptation

These challenges with defining adaptation finance are especially relevant under the UNFCCC process, where developed nations have committed to mobilize $100 billion by 2020 for climate mitigation and adaptation initiatives. Tracking this finance—and therefore, defining it—is an important aspect of ensuring that these countries follow through on their pledge.

In light of this, contributor countries have an incentive to broaden the definition of adaptation finance because it would allow them to meet their pledges. However, if we want to adequately track climate change adaptation and separate it from business-as-usual development practice, a narrower definition is more appropriate. However, narrowing to the “incremental” definition requires the ability to compare the cost of an “adapted” activity to the cost it would have if it did not take climate change into account. Making this comparison with rigor can sometimes be challenging or costly. This process will increasingly require construction of hypothetical scenarios with which to figure out what an activity “would have cost” in the absence of climate change.

Moreover, the incremental definition may create a perverse incentive for development practitioners not to incorporate adaptation into their day-to-day activities. Really, any sustainable development project that is designed today has to take the impact of climate change into account, and the sooner this becomes part of ordinary budgeting practice, the better. This argues for a definition that would only count adaptation finance activities that address or enhance our understanding of climate impacts and only the decision-making process of activities where adaptation is mainstreamed. This would make tracking adaptation finance easier, but would limit the types of activities that count towards adaptation finance. A key question is whether this would be acceptable to both providers and recipients of adaptation finance. And would it promote the funding of the most effective adaptation activities? So there it is. Months of soul-searching and we still don’t have a clear answer. What we do know, however, is that the real challenge is to integrate climate change adaptation into development decision-making. Making this happen is the real adaptive step.

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