Assessing the Adaptation Fund

For many developing countries, adaptation to climate change is no longer an option. It is becoming an urgent priority. Increasingly, the adverse effects of climate change are threatening progress in areas such as food and water security. Unless such climate impacts are tackled, sustainable development will prove impossible in many places.

Vast funding is needed to rise to these challenges. Investments in “hard” infrastructure are necessary, and so is spending on capacity and institution building, innovation and risk management. According to recent World Bank estimates, $ 70 billion to $ 100 billion will be needed per year on average until 2050, and low-income countries alone will need around $ 26 billion per year.

Accordingly, adaptation money has become a key issue in the negotiations under the UN Framework Convention on Climate Change. Typically, the countries most vulnerable to climate change have only contributed very little to creating the problem. At the same time, they are unable to adapt to climate change as they tend to be quite poor. Many developing countries therefore insist that adaptation financing is compensation for damages and thus quite different from conventional Official Development Assistance.

This perspective is crucial to understanding the Adaptation Fund (AF). It was set up under the UN Framework Convention on Climate Change’s (UNFCCC) Kyoto Protocol to finance tangible adaptation projects and programmes in vulnerable developing countries. It has several specific features that make it stand out among multilateral funds (see box). The AF is particularly important to developing countries. AF assistance is to be based on their needs and priorities as identified in country-driven processes.

Direct access

While the AF’s history goes back to the Marrakesh climate summit of 2001, the Fund’s actual work only began after the Bali climate summit in 2007. In Bali, it was decided that developing countries will have direct access to the AF. Such direct access boosts the ownership of the developing countries. So far, it only exists in the Global Fund to fight HIV/AIDS, Tuberculosis and Malaria (Global Fund).

The AF Board has developed specific direct-access procedures. At the national level, domestic implementing entities are to be accredited. They will basically perform the same tasks as multilateral implementing agencies (World Bank, UNDP etc.) do in international development finance.

In general, donors have more trust in multilateral institutions than in the domestic agencies of developing countries. In the experience of poor countries, however, multilateral agencies often prove to be bottlenecks that slow down the implementation of projects and the disbursement of funds. Therefore, it is hoped that direct access will lead to faster and less complex delivery of resources. Moreover, it should lead to greater country ownership, one of the key objectives of the Paris Declaration on Aid Effectiveness.

Strong fiduciary standards are crucial to credibility of course. The AF Board has defined standards that are believed to balance the needs for strict control on the one hand and manageability on the other.

The AF relies on revenues from the Kyoto Protocol’s Clean Development Mechanism (CDM). There is a levy of two percent on all transactions in the CDM context, and this money flows into the AF. In principle, the Fund is thus financed through emissions trading and does not depend on grants or loans from donor governments.

According to estimates, the AF will contain up to $ 360 million from CER (Certified Emissions Reductions) transactions by 2012. Obviously, this money will not be enough to close the huge funding gaps. More funds will have to be made available. Moreover, the CER market is quite volatile, so the revenue stream is neither as predictable nor as reliable as needed.

The AF Board has therefore invited developed countries to provide additional funds. This year, three countries followed this request, thus expressing their faith in the AF. Spain has already transferred € 45 million, while Germany and Sweden have pledged € 10 million each.

Becoming operational

In the meantime, the AF is moving beyond preparations. In March, Senegal’s Centre de Suivi Ecologique (CSE) became the first accredited domestic implementation entity. In June, the AF Board considered project proposals for the first time, approving four conceptual studies (from Senegal, Pakistan, Nicaragua and the Solomon Islands). In total, these four projects are estimated to cost around $ 22 million. The countries concerned must now submit more detailed proposals, on the basis of which money can be disbursed.

At the same time, the Board rejected four concepts (from Egypt, Mauretania, Mauritius and Turkmenistan). This indicates that the management is serious about ensuring that projects meet the required standards.

This year´s progress, however, also revealed some of the challenges ahead:
– Clearer guidelines are necessary to ensure active and effective involvement of stakeholders at all relevant stages. To date, there is hardly any scope for community-level participation.
– The debate on which countries deserve to be prioritised is still going on. The AF Board has not adopted the compromise in the Copenhagen Accord, according to which Least Developed Countries (LDCs), Small Island Developing States and Africa should be prioritised. Without clear prioritisation, however, the Board will allocate funds only on a first-come-first-serve basis should the volume of proposals that meet its standards overwhelm funding capacity.
– Direct access by developing countries needs to be broadened. So far, the Senegalese proposal was the only one that was submitted directly, and it has several strong points. Its paragraphs on vulnerable communities and stakeholder involvement are quite clear, and the management fee the national agency demands is only half the percentage normally calculated by the World Bank and the UNDP. These facts could indicate that direct access is particularly cost-efficient. On the other hand, the CSE in Senegal is still the only accredited domestic entity, and some developing countries say that accreditation is a too complicated and challenging process. Many governments prefer to go the usual route through multilateral agencies even though direct access was a common demand in the UNFCCC talks.

The greatest challenge, of course, is that the AF’s future after 2012 remains unclear. In recent UNFCCC negotiations, there was more talking about the death of the Kyoto Protocol than about its survival. The USA has not signed the Kyoto Protocol, and other countries (Russia, Canada and Japan, for example) are hesitant to agree to a second commitment period.

This situation does not immediately threaten the existence of the AF, since the Kyoto Protocol will neither expire nor phase out, as a legal study prepared on behalf of the UNFCCC Secretariat has spelled out. However, the AF depends on CDM transactions according to the Kyoto Protocol. Unless rich nations commit to binding targets for reducing emissions, this scheme cannot work out dynamically.

On the other hand, the funding of the AF could be expanded through voluntary or obligatory contributions from developed countries or other donors. A second option would be the implementation of an innovative funding source, which would channel resources into the AF (and maybe other funds), as the LDCs have proposed with their initiative for an International Aviation Passenger for Adaptation Levy (IAPAL). Both alternatives are under debate. However, it is unlikely that the USA will be willing to channel substantial sums into a fund that was born out of the Kyoto Protocol. These issues cannot be resolved by the AF Board, obviously, but have to be dealt with at a higher political level.

Leading by example

In these circumstances, the AF Board must do its best to make the AF perform and convince through results. The better the AF works, the more trust it will earn and the greater the willingness to rely on multilateral funding instruments will become. With more resources, the AF would become able to assist countries on a larger, programmatic scale. There is no doubt that such scaling up is necessary.

Successful implementation of direct access can also contribute to making the AF a strong multilateral body. Moreover, direct access might eventually become the norm rather than the exception in international climate finance. All summed up, the AF has a realistic chance of leading the international community by setting the right examples.