Price Collapse Threatens Climate Adaptation

Prices of carbon credits are at a record low. This has led to a bottleneck in the work of a new fund that would help poor countries adapt to climate change. Now the fund’s incoming chairman asks Norwegian authorities for assistance to the most vulnerable.

The Adaptation Fund was established to finance projects in developing countries that are particularly vulnerable to climate change. The fund has two main sources – an agreed percentage of the sales of carbon credits and voluntary contributions from countries that support climate change adaptation.

But with the economic crisis in many countries, the demand for carbon credits has fallen. Prices of allowances has dropped to record lows and capital that would finance the Adaptation Fund has dwindled drastically. The Fund’s newly elected chairman, Hans Olav Ibrekk, says Norway and other donors must now get on the path to provide help to those who are most vulnerable to climate change.

Funds for adaptation are directed to the most vulnerable countries. Examples of initiatives have been:

• planting mangrove forests along coastlines as protection against sea-level rise
• establishing early warning systems for flood risk
• developing new seed varieties that can withstand drought and higher temperatures

Over the past two years, the Adaptation Fund has allocated more than $ 165 million for specific projects in 25 countries. But because the price of allowances has fallen from almost $ 30 to well below one dollar in a few years, the fund is struggling with financing and its revenues are nearly wiped out.

“Without voluntary contributions the fund’s activities will stop completely. Given the economic situation in key donor countries, this will be very challenging”, says chairman of the fund HO Ibrekk, to Bistandsaktuelt.

Prestige

Adaptation Fund is financed primarily through the sale of carbon credits, known as CERs (Certified Emission Reductions). A two percent share of the proceeds from the sale are directed to the fund that sells them on the open market. So far, the fund has sold CERs for $ 188 million. However, according to World Bank estimates, the fund will only generate up to $ 25 million annually until 2020 if prices do not pick up.

The fund can also receive voluntary contributions and has thus far received $ 135 million from, among others, Sweden, Spain, Germany and the United Kingdom. Norway has so far not contributed, apart from a small initial administrative contribution.

“Norway and the world community has put a lot of prestige on curbing climate change. Climate change is increasing the burden on the poorest because they are hardest hit by natural disasters, desert expansion, and rising sea levels. In some parts of the world, climate change has already contributed to worsening food security, access to water and the spread of diseases”, Ibrekk says.

He said the international community has an obligation to help the most vulnerable countries, particularly because adaptation to climate change will require significant resources in addition to those already required to achieve international development goals.

Norway provides major climate funding, primarily to emission reduction measures through forest, energy and climate change initiatives. However, the direct focus on adaptation is small, in the order of 15% of efforts.

“Norway should increase support for adaptation and work more actively to turn parts of development cooperation in a climate adaptation direction. This means direct contribution to adaptation mechanisms and a stronger and clearer focus on measures that help to reduce communities’ vulnerability and strengthening their resilience to climate change. If we reach the goal of a balanced distribution of support for emissions reduction and adaptation measures adopted in Copenhagen then Norway and other donors could increase their contributions to climate change in coming years”, Ibrekk encourages.

Problematic

The price level of emission shows that it is problematic that market mechanisms are the basis of the fund’s assets, according to the chairman.

“The market is good when it works, but bad when it does not work. Today there are too many allowances and too little demand. This, together with the overall development of the world economy has caused the allowance prices to reach their current low. The example from the Adaptation Fund shows that earmarked market-based schemes have inherent weaknesses”, he said.

Ibrekk works in his regular job as the technical director of the government’s energy and climate initiative Energy +. As chairman of an international fund, as well as Norwegian official, he has a delicate position as he now must turn to the Norwegian authorities with a plea for donations.

“The Adaptation Fund was established with an innovative financing mechanism. Resources for adaptation come from the taxation of developing countries’ efforts to reduce greenhouse gas emissions. In reality, the funding mechanism should be based on the taxation of emissions, i.e. ‘the bad’ and not the taxation of a good.”

Ibrekk believes that other financial instruments should be sought to help the poorest countries in the face of climate change.

“Taxation of emissions, an international carbon tax or auctioning of emission allowances, where part of this revenue is used to adapt to climate change, could be a relevant option. Otherwise you should get major funding from public sources”, says Ibrekk emphasizing that it is very difficult to get the private sector to support adaptation beyond measures they will implement to protect their own investments.

In Copenhagen, countries agreed to make $ 100 million available annually to developing countries by 2020 for climate action – balanced between mitigation and adaptation.

“The question ahead is how much of that should go to adaptation and how much will go to emissions reductions. It is far easier to bring in private resources to reduce emissions than to engage them in adaptation. This suggests that a relatively larger proportion of the public climate funding should go to adaptation”, Ibrekk suggests.

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Published: 4 February 2013
Original version can be viewed here