March 30, 2019

Financing regional and local adaptation to climate change in Europe: in search of a compelling case

Oil on canvas paper, 2010 (21 x 28 cm)

 

Local adaptation to climate change includes interconnected actions that become more concrete and costly when they get closer to the local level. To some extent, it is possible to shift to new adaptation targets commitments and expenditures that have been already planned; however adaptation measures often need additional finance. In Europe, the demand for adaptation finance remains largely unmet, and public funds alone are insufficient.

 

Since the Paris agreement (2015), the international community calls for a funding approach consistent to the target of low emissions and a climate-resilient development path. However, the only financial mechanisms set up, support developing countries, “leaving the others behind”.

 

For EU countries, EU funds are the primary source of finance for adaptation. The Union sees investment in climate action as a priority in its expenditure. In line with the EU 2020 Strategy, it earmarks to climate change 20% of its Multiannual Financial Framework (MFF), i.e. the global financial planning tool for EU expenditure on thematic areas, over 5 to 7 years. In the next 2021-2027 programming period, the EU Commission (EC) has asked to increase such share to 25%. This would mean introducing financial instruments for mitigation and adaptation that should mobilise and disburse funds for the purpose.

 

The 2014-2020 MFF intends to mainstream climate change across policies and EU funds on cohesion, energy, transportation, research & innovation, farming, external relations. Consequently, the whole EU financial system can finance sectoral measures consistent to the EU mitigation and adaptation targets.

 

All EU funding for adaptation managed by the EC ground on funds jointly managed with States and regions, funds managed directly be the EC, and on initiatives by other European institutions, such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

 

The former make up for more than 76%, of the EU budget for territorial development in shared management by countries and regions across Europe through five structural funds (known as ESI). They mainly implement the EU regional policy, addressing regional disparities in income, wealth and opportunities. They also support (in the field of cohesion) a transition to a low carbon economy for all sectors, adaptation to climate change, risk prevention and management, and prioritize climate action in transport and environmental investments. The EC adopts a Common Strategic Framework (CSF) to help States and Regions in programming and setting clear investment priorities on using ESI funds, in compliance with the 20% threshold set by the MFF.

 

The EU funding schemes directly managed by the EC and other institutions are also suitable to fund climate adaptation, even though they mobilize a smaller amount of resources. They fund cross-cutting actions including cooperation among EU regions and innovation in territorial policies, agriculture, governance and adaptation projects, research. The Natural Capital Financing Facility (NCFF), funded under the EU LIFE Program, sets targets in the fields of adaptation, biodiversity, and natural capital conservation, managed through EIB. On research, Climate-KIC is a wide public-private partnership focused on climate change where institutions, universities and companies join forces.

 

For most EU regions, funding programs for climate action are available from the EIB and the Connecting Europe Facility (CEF), funding infrastructural networks in Europe and committed to spend 60% of its budget on environment and climate components.

 

In 2018, the EIB invested 18 billion euros on climate projects (16.1 in EU, of which 1.2 on adaptation). EIB is already committed to spending 25% of its budget on mitigation and adaptation projects (in 2018 the share was higher than 29%), with a target of 35% by 2020.

 

All the actions financed by the Bank have to mainstream adaptation and be part of a climate-friendly portfolio. In particular, before any formal disbursement for project development (usually infrastructures), the EIB ask the beneficiaries to develop a climate-risk analysis, identify adaptation options on the project level, include the operational measures for mitigating climate risks in the funding agreement, plan a monitoring system to check the effectiveness of the financed project. The EIB Climate Strategy aims at strengthening the impact of climate finance, increasing climate change resilience, and further integrating climate change considerations across all of the Bank’s standards, methods and processes.

 

The EU Urban Agenda addresses the challenges for urban centres through partnerships of EU organisations, national governments, local authorities and NGOs. It promotes actions for improving laws and regulations, easing the access to EU funds for Cities, and increasing knowledge for better urban policies.

 

Adapting cities to climate change is a priority for the EU urban agenda, whose Action Plan (2018) sets up principles for defining and revising legislation, instruments and initiatives on urban adaptation.

 

Funding local adaptation requires mobilizing resources at the local level and from the private sector. Public spending is the basis on which private finance can be leveraged, and additional or existing sources combined and reframed towards adaptation goals. On the sub-national and urban level, there is a demand for financial instruments for adaptation (e.g. green bonds) based on private capital (e.g. citizens, companies, Foundations, etc.) or marketed by commercial and investment banks (guarantee funds and loans for adaptation projects), eventually supported by public institutions and funding (including EU) as a guarantee.

 

In general, adaptation actions should address almost all sectors. They attract private and public finance, based on their ability to deliver economic, social and environmental benefits (the latter categories matter for public investors). The impossibility to benchmark adaptation investment against alternative investment options makes it unattractive to most investors.

 

The cross-cutting and incremental nature of adaptation (often measures enter wider policies or amend projects and plans having different aims, e.g. when construction rules for residential buildings or transport infrastructures have to be changed), coupled with the difficulty in assessing the adaptive capacity achieved after specific measures have been implemented, makes the benefits of good adaptation scarcely visible and does not highlight the financial gains from such measures (e.g. lower costs or increased benefits, for which subjects).

 

 

Financial markets still lack appropriate metrics for translating in monetary terms the increase in resilience derived from adaptation investment. Its impact on the economic bottom-line of organisations opting for investment in adaptation (e.g. companies, cities, etc.) is unclear. Returns on effective adaptation are difficult to pay, which does not allow collecting a critical amount of private finance that could increase territorial resilience.

 

 

We need a “business case” for adaptation investments, and a method shared with the financial sector for measuring the incremental benefits of adaptation investment, and transforming them in monetary quantities and indices easier to understand for financial intermediaries.

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About Luca Cetara

Luca Cetara

Researcher at Eurac Research, Bolzano since 2004, Luca mainly focuses on environmental and development policies for mountain areas inside and outside Europe. He regularly cooperates with the Italian Ministry for the Environment and the Alpine Convention, and has been working with national institutions and international organisations (e.g. UN Environment, OECD, FAO, UN ECE) on environmental topics and the economics/environment interface. His research focuses on economic and territorial policies for climate change and its impacts, adaptation, disaster risk reduction, finance for nature conservation, market instruments for sustainable development, and CSR. Member to international Boards on green economy and climate change, he lectures in University courses (e.g. IUAV, Venice; University of Camerino; University of Milan; University of Chieti-Pescara; European School of Economics-Chichester University) and chairs international conferences and workshops.

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