IIEP Blog, Stephen C. Smith, 6 April 2017, Revised and Expanded 9 August 2018
Do we need specialized agencies for climate adaptation and resilience funding and technical assistancesuch as the Green Climate Fund (GCF), or is it sufficient to channel climate-related support through the World Bank and other established mechanisms? Running an agency is expensive so the answer will depend in significant measure on whether there are qualitative differences between climate assistance[1] and traditional development assistance. We can identify several features by which adaptation programs (investments) differ in degree as well as in kind from standard development programs (investments). In discussing these matters with policymakers and lenders at the World Bank and other agencies, I find this remains a live and still-contested issue. Here are my perspectives, having worked on the issue of supporting adaptation in developing countries with high poverty levels for almost a decade.
- There are always interactions between government policy and economic behavior of individuals, households, firms, and other organizations (referred to collectively as economic agents). But addressing this interaction takes on central importance for resilience investments and adaptation responses in ways that remain unconventional as development assistance and investments. Investment and advice in the setting of interactions between government-led policy adaptation (also called planned adaptation), and autonomous adaptation by economic agents is a specialized problem requiring specialized skills.[2]
- For adaptation investments, accounting for both negative and positive spillover effects (or externalities) are of great importance and generally will play a stronger and differentiated role than for conventional development activities. Negative externalities can occur when climate change causes migration into settled areas, and heightens competition for natural resources such as water and opportunities such as jobs. When climate change stresses communities and the response is to increase their exploitation of natural resources, this has negative externalities, including impacts on neighboring communities. One consequence can be an increase in domestic conflict. This highlights a challenging but essential need to maintain balance in governance reform between achieving stronger state capacity, and safeguarding and improving citizen protections; this is of special relevance to adaptation and resilience investments.[3] Even without the threat of violent conflict, the consequence of badly managed interactions can be to slow or even to reverse progress against poverty.
- Autonomous adaptation can also generate positive externalities (positive spillovers) that can be encouraged, notably social learning across neighboring communities; encouraging and augmenting this learning process can result in enhanced productivity of resilience investments. When communities invest in locally beneficial environmental activities such as reforestation and erosion control this can also provide positive benefits downstream (literally down the watershed and figuratively with other spillovers). Such activities and investments rise to a higher priority, and differ in kind from conventional development assistance.
- To accomplish such reforestation and erosion control goals, with or without external investment, in general communities must solve collective action problems (to work together without too much free riding on others’ contributions). As a result, technical assistance and other “soft investments” for communities in establishing institutions and procedures to solve adaptation related collective action problems can create value; such investments differ from most conventional development investments.
- Government responses to climate change (adaptation and resilience more generally) can have direct and indirect international political repercussions that differ in degree and form from most development investments; for example, well-meaning government restrictions on housing (and economic activities in general) in low-lying areas can stimulate international as well as national migration pressures. Assistance (soft investments) in addressing these concerns also differs in degree and form from conventional development finance.
- Deep uncertainty is pervasive in planning resilience investments to a much greater degree than is present in most conventional development investments. (With deep uncertainty we don’t even know the probability distribution of various outcomes, as we would in the face of simple risk; in particular while we may know that some severe outcomes are possible we cannot assess the odds of their occurring.) Correspondingly, related behavioral responses to deep uncertainty also likely differ from those of conventional risk, as do potential solutions.[4]
- For climate change impacts, future disruptions are highly uncertain; but if they occur they are more likely permanent or at least long-term, with future unknown further changes, and very costly to address. Thus, real options are of central importance in adaptation and resilience in ways and to a degree never encountered or addressed in conventional development finance. (A real option is the ability, but not the obligation, to undertake an action with uncertain future benefits through an immediate commitment of current resources.)[5]
- Climate mitigation is a global public good: lower greenhouse gas emissions anywhere leads to less climate impact everywhere. Less obviously, adaptation and resilience may have global (or at least cross-national) public good features because its benefits (or costs, as in the case of maladaptation) can reach across national borders and population groups, to a greater degree than do traditional development investments. Resilience investments that have cross-border – if not global – public goods characteristics might not provide high enough net domestic benefits to be selected on domestic criteria alone. For adaptation, there are also knowledge spillovers for comparably situated countries, for example from one island nation to another; and it is likely that many activities producing such cross-national benefits would not be selected on the basis of purely domestic benefits. It is unusual for development projects to consider cross-border impacts, though in some cases they do and presumably in more cases they could. Finally, special attention may be given to cases is which adaptation and mitigation are complementary activities, that is, when a resilience investment simultaneously benefits both.
- Natural resource use responses can heighten the risk of conflict as well as creating negative spillovers for resource availability for other countries as well as domestically. For example, consider climate change-induced increases in deforestation; this can occur when climate change leads to the need for new farmland or grazing land and farmers clear forests. (In addition, loss of forests directly through drier conditions could have similar effects). Deforestation can harm the ecology of neighboring countries as well as heighten greenhouse gas emissions. Deforestation and other responses such as building dams can also lead to downstream problems. Accounting for risks of spillovers and strategic interactions is also relatively specialized and traditional development banks have limited experience with it either broadly or for the case of climate adaptation.
- More generally, it is highly plausible that domestic (endogenous) environmental damage compounds with global warming induced (exogenous) climate change in ways not addressed in conventional development investments and that may be better addressed through specialized joint provision of knowledge and investment. Meanwhile, climate change increases the vulnerability of the poor and near-poor in new ways and through new channels.[6]
- The complexity of investments and needed innovations in financial instruments may become a constraint on adaptation and resilience financing in ways that differ from most development investments. For resilience, valuation approaches for investment in capabilities for deeply uncertain future shocks are not well understood.
- Building resilience may require investments over a considerable period of time before the intended outcomes are achieved, and this poses possible tensions between building resilience and the urgent need for people, communities, and nations to adapt to current and looming climate impacts now. In the long run, not all adaptation responses are resilience maximizing, and in some cases might decrease long run resilience; an example is pressure to extract more from natural resources and to do so more quickly. Development assistance has less often faced (not taken into account) such compounded problems.
- Another way of framing some of the issues is that conventional assistance is designed to foster positive development, not to respond to development-in-reverse. Although framing it that way may make it sound like a traditional division of “relief vs development” dichotomy, relief is focused on current shocks such as damage from floods, not permanent shifts such as secular drying, deforestation, decreasing water tables, and inundation.
- There are vital and important roles for less specialized agencies in general and multilateral development banks notably the World Bank-IDA in particular. One role is to assist with implementation of projects designed by specialized agencies, as is true for the case of the Pilot Program for Climate Resilience (PPCR). More generally it is good to “let a thousand flowers bloom” in approaches to the problem to help learn what works best, and to tap the substantial development resources of the multilateral development banks and other agencies. But there is a strong case for supporting specialized entities like PPCR and the GCF for supporting and financing adaptation and resilience solutions.
[1]The focus of this blog is exclusively on adaptation/resilience in low income and vulnerable middle income countries, not on mitigation. That is: to respond to the substantial amount of harmful climate change that is inevitable even if the ambitious Paris targets are achieved.
[2]See A.S. Malik and S.C. Smith, “Adaptation to Climate Change in Low-Income Countries: Lessons from Current Research and Needs from Future Research,” Climate Change Economics, 3, 2, 2012
[3]Smith, S.C., “The Two Fragilities: Vulnerability to Conflict, Environmental Stress, and their Interactions as Challenges to Ending Poverty,” in The Last Mile in Ending Extreme Poverty, ed. L. Chandy et al, Washington: Brookings Press, 2015, p. 328-368
[4]In particular, ambiguity-averse behavior may play an important role.
[5]As one example, investment today in (incremental) organizational capacity capital (such as training of community groups and or of officials) provides a real option to use this organizational/ social/ human capital in combination of expensive capital in the future when needed. For a general framework with different examples see Linquiti and Vonortas 2012
[6]Smith 2015 (as in Note 3).
