TWN Info Service on Climate Change (Nov23/07)
20 November 2023
Third World Network

Widening gap in adaptation finance flows to developing countries

New Delhi, 20 Nov (C. Radhika and B. Indrajit): The latest Adaptation Gap Report 2023 (AGR 2023) by the United Nations Environment Programme (UNEP) has found that while adaptation needs of developing countries are increasing, the current international public climate flows to developing countries are declining, further widening the adaptation finance gap. “Global progress on adaptation is slowing rather than showing the urgently needed acceleration,” the report states.

Released in early Nov this year, the report states that the adaptation finance gap now stands at between US$194 billion and US$366 billion per year. Adaptation finance needs are 10–18 times as great as current international public adaptation finance flows – at least 50% higher than previously estimated; and international public climate finance flows to developing countries “decreased by 15% to US$21.3 billion in 2021 after having increased to US$25.2 billion between 2018 and 2020”, the report states. In contrast, mitigation finance continuously increased over the same period.

According to the report, the gap in adaptation finance is so high that even if the 2021 decision from Glasgow is met, (which urges developed countries to at least double their collective provision of climate finance for adaptation from 2019 levels by 2025), it would still fill only 5-10% of the current gap in adaptation finance needs of developing countries. Further, the report also states that “one out of six countries still does not have a national adaptation planning instrument and more must be done to close the remaining gap”.

Titled ‘The Adaptation Gap Report 2023: Underfinanced. Underprepared. Inadequate investment and planning on climate adaptation leaves world exposed’, the UNEP report provides an assessment of international public climate flows specific to adaptation for the period 2017-2021 to developing countries. The report states that the total adaptation specific finance provided to developing countries between 2017– 2021 was US$ 95 billion, which amounted to less than US$ 30 billion per year.

Needs of developing countries

The report focuses on two main lines of evidence for its analysis: modelled costs of adaptation, and the adaptation needs communicated by developing countries in their Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs). The report states that adaptation finance needs assessed in this report are 50% higher than the previous assessments carried out by UNEP.

Based on modelling analysis, the AGR 2023 estimates the “costs of adaptation for developing countries in this decade at approximately US$215 billion per year (range: US$130 billion to US$415 billion)”. “These adaptation costs are projected to rise significantly by 2050 because of growing climate risks,” the report states.

Further, adaptation finance needed to implement domestic adaptation priorities are estimated to be US$387 billion per year (range: US$101 billion to US$975 billion) in this decade, according to the report. “The estimated new range of US$215 billion to US$387 billion per year is significantly higher than earlier AGR estimates and is equivalent to between 0.6% and 1.0% of all developing countries’ gross domestic product (GDP) combined,” the report states.

Mitigation finance still higher

The report also shed light on the share of finance flows going to mitigation as compared to adaptation between 2017 – 2021. According to the report, the total international public climate finance flows to developing countries stood at US $289 billion. Out of this, 33 % was adaptation specific, while 53 % was directed towards mitigation, and the remaining 14 % for crosscutting purposes.

As mentioned earlier, between 2020-2021, adaptation specific finance decreased by 15%, while mitigation specific finance rose by 5% in the same year. In this context, the report also mentioned Article 9(4) of the Paris Agreement to highlight the importance of maintaining a balance between adaptation and mitigation flows, which states: “The provision of scaled-up financial resources should aim to achieve a balance between adaptation and mitigation…”.

More loans than grants

On instruments of adaptation finance, “the analysis finds that 63% of all adaptation-specific finance between 2017 and 2021 was provided as debt instruments (loans) and 36% as grants”.

Of the total adaptation finance offered as debt instruments, “70% came from multilateral development banks (MDBs), 26% from bilateral providers, 1% by multilateral climate funds (primarily from the Green Climate Fund) and the remaining 2% by other multilateral funds”.

Grant-based finance, states the report, came predominantly from “bilateral sources (61 %), followed by MDBs (25%), multilateral climate funds (13%) and other multilateral funds (1%)”. However, in relation to using debt instruments, the report cautions, “considering the prevalent debt vulnerabilities and limited fiscal capacity in many developing countries, it is improbable that delivering most of the climate finance via traditional debt instruments would be equitable”.

In terms of geographic distribution, the report states that a major share of the grants was directed to Least Developed Countries (LDCs) at 52%, while non-LDCs received only 26% of the grants. Small Island Developing States (SIDS) received 67% of the grants in the total finance committed to them.

The report also states that a “major part of the adaptation finance flows went to low income and lower middle-income countries, while upper middle-income countries received more mitigation finance flows”.

Low disbursement rate

Despite the urgent need to accelerate and scale-up international public adaptation finance to developing countries, these flows have declined since 2020 and international public adaptation finance over the past five years has also suffered from a low disbursement ratio, the report states.

Making a distinction between finance committed and disbursed, the report found that for bilateral providers, 66% of the total committed amount was disbursed by them. This contrasts with the 98% disbursement ratio for development finance by bilateral donors. Disbursement ratios for MDBs and other climate finance funds were not assessed because they do not share information on amounts disbursed in their reporting.

Private sector and adaptation finance flows

The report has provided data on private finance flows specific to adaptation from Organisation of Economic Cooperation and Development (OECD) reports for 2016-2020. This figure stood at USD1.9 billion/year on average. An additional US$0.09 billion/year was provided by philanthropy.

Private sector funding for adaptation was found to be made in the form of ‘internal’ adaptation by large corporations. An example mentioned is an analysis of voluntary public disclosures on climate risk by 1959 companies, which showed that 68 % of the companies report on implementation of adaptation activities.

Additionally, adaptation flows from the private sector were also found to be driven by existing funds provided by financial institutions for adaptation activities, for instance by providing technology, services, and products.

Some of the barriers that limited private sector’s contribution to adaptation relate to lack of data on country level climate risk and vulnerability. The report also notes that private sector investments tend to go to areas with low risk-return rations and where private interests are addressed more than public interests.

Solutions offered

The report states that narrowing the adaptation finance gap would be of particular importance because of the high benefits that investments in adaptation can offer in terms of reducing climate risks and improving equity and climate justice. Left unchecked however, increasing climate risks will inevitably lead to more climate-related losses and damages, the report states.

The report also adds that bridging the adaptation finance gap “requires more international, domestic and private finance, ideally a reform of the global financial architecture and better international cooperation”.

This report identifies seven ways to bridge the adaptation financing gap. These include increasing international public adaptation finance; effective domestic expenditure on adaptation by way of increasing and improving budget tagging and tracking; mobilizing private-sector investments; remittances by migrants to their home countries which often contribute significantly to GDP; increasing finance tailored to small and medium-sized enterprises since they comprise the bulk of the private sector in many developing countries; reform of the global financial architecture; and implementation of Article 2.1(c) of the Paris Agreement on making finance flows consistent with a pathway towards low-carbon and climate-resilient development.

The report cautions though that “neither domestic expenditures nor private finance flows are likely to bridge the adaptation finance gap alone, especially in low-income countries including LDCs and SIDS, and there are important equity issues related to using these flows to fill the gap in these countries”.

On increasing international adaptation finance, the report states that while doubling adaptation finance would still not meet the growing adaptation finance gap, Parties must address the gap in the ongoing negotiations on the New Collective Quantified Goal on climate finance (NCQG) for the post-2025 period.

“First, the (NCQG) goal could increase significantly. While the technical expert dialogue is still discussing the elements required to make informed discussions on the quantum of the goal, a correction for inflation would already increase the target from US$100 billion per year to US$139 billion per year. Second, the new collective quantified goal on climate finance should ‘take into account’ the needs and priorities of developing countries, which could be translated into a larger share of the finance going towards adaptation or a subgoal on adaptation.”

On reforming the global financial architecture, the report mentions the Bretton-Woods architecture (which includes institutions such as the International Monetary Fund (IMF), World Bank and World Trade Organization) and states that these institutions were originally designed for the post-World War II era. “After the global financial crisis of 2009 and the COVID-19 pandemic, it has become evident that this system is no longer fit to address today’s global challenges. This architecture, together with other financing institutions such as MDBs, holds a large and unused potential for helping developing countries to tackle twenty-first century problems, including adaptation,” the report states.