Adaptation Benefit Mechanism: What is it and how can we use it?

Earlier this year, the IPCC released its new report, which outlines how human activity has ‘unequivocally’ changed the earth’s climate across every region of the globe.[1]?The experts revealed that human activities now affect all major climate system components, with observed changes in the frequency and intensity of precipitation, agricultural and ecological droughts, and the reduction of Arctic Sea ice.??Table 1 below proportions the current state of the climate to previous conditions based on these revelations.

For many of us reading the report, the impact of climate breakdown can seem far removed. However, for millions of people this report is not simply stark warnings about the future, it is a reality they are already facing every single day. It is important to recognise that the climate movement is not simply about protecting the planet. It is primarily about caring for the people who live on it. Therefore, we need to develop policies and other measures that will contribute to the costs of adaptation and resilience on the part of the Global South to avert the climate catastrophe proposed by the IPCC and, indeed, to fight climate injustice.

Developed nations over the years have mainly focused on migration as a means to reduce GHG emissions and to limit temperatures rising to 1.5°C above pre-industrial levels.[2]?Although these actions continue to fall short of targets, these nations have introduced a range of approaches that have made renewable energy and low carbon development increasingly attractive. These include emission caps and trading schemes, cost-reflective energy tariffs, carbon taxes and levies, as well as the removal of fossil fuel schemes.?In contrast, approaches to support climate adaptation are fewer still. Developed nations have so far failed to adopt measures to contribute towards the costs of adapting to the impacts associated with GHG emissions. That is to say, adaptation benefits are not fungible. They are context- and project-specific and unique for each adaptation action. The lack of comparable metrics, then, and , indeed, the absence of a structured financial mechanism have altered the international community’s approach to adaptation. The latter is being much ignored in the world’s climate change activities and that spells news for developing countries, particularly within Africa where the need for support is heavily weighted towards adaptation.

At WE&B, we have investigated this aspect a bit further. We find that there is a challenge to mobilise enough money to create genuine adaptation benefits and, thus, to assist developing nations adapt to climate change. For this reason, we propose another approach in which efficiency is measured by the ability to develop effective, context-specific solutions and by incentivising private sector investment. A similar response has brought the?African Development Bank?to create the?Adaptation Benefit Mechanism (ABM). In collaboration with some African and other developing countries, and with the support from the Climate Investment Fund, the Bank has sought to implement a more transparent asset – certified adaptation benefits – that both encourages private sector investment as well as a compliance value for the Paris Agreement, nationally determined contributions (NDCs), and the sustainable development goals (SDGs).[3]

A Non-Market Mechanism

Article 6 of the Paris Agreement makes the provision for the development of both market and non-market mechanisms. While there is no formal definition of a market and a non-market mechanism, one may suppose that the former is characterised by a high degree of comparability between the units that are for sale and the goods that can be transferred between the buyer and seller. Non-market mechanisms do not, however, result in such universal and internationally tradable units that are subject to market price fluctuations and speculation. They can be viewed as a quantitative or qualitative element of a product – or a ‘co-benefit’ of a service. That is to say, a non-market mechanism can be sold with the goods or services, or it can be sold separately to a different party. In either case, the promise of payment is?ex post?and, therefore, a ‘benefit’ for the off-taker, because?the investor takes the risks and the rewards of the delivery.[4]

In its simplest terms, the ABM builds upon a non-market mechanism. It is designed to enable actors to purchase a wide range of ‘adaptation benefits’ from private or public sector project developers, and, for this reason, it adopts the modalities of a non-market mechanism to:

• Define an adaptation benefit and establish the level of additional finance which the project developer needs to create the benefit;
• Define a methodology to monitor and report on the generation of the benefits;
• Deploy simple and cost-effective means of verifying outputs to ensure benefits exist and are correctly accounted for; and
• Provide an additional ‘Adaptation Benefit Output Agreement’

The ABM does not rely on a supply and demand function to set the price. In fact, the only ‘good’ which it needs to consider is the Adaptation Benefit Unit (ABU); that is, what is delivered to the entity that provides the funding source for the adaptation project. The market for ABUs is not commoditised. There is no fungibility between units, so the price depends on the cost of creating the units as well as the project costs for the project developer. Likewise, there is no accumulated demand curve. Whilst there may be an obligation to support adaptation, there is no definition of adaptation against which to access compliance and no way of knowing the number of acquisitions. The price of ABUs will in consequence remain close to the cost of production per project.[5]

The ABM is, however, not restricted to a non-market mechanism. There is an element of a market in terms of how a project developer itself uses the cash flow from the delivery of the ABUs. If, for example, a project developer was to agree a price and sign an agreement for ABUs with a reputable buyer – priced in a hard currency – the contract would represent a valuable source of cash flow against which capital could be borrowed.[6]?With such commercially viable position, the project developer would be entitled to recover a portion of the project costs from the generation of the ABUs to compensate them for the risks they have undertaken in the process. These costs are made transparent so that the buyer can access whether they are reasonable, and, for this reason, another project developer might offer to implement an ABM of the same quality at a lower price. One could argue, though, that such contracting is simply an aspect of competition that exists at all tendering procedures and, therefore, does not determine whether the mechanism is market or non-market based. Competition only encourages reliability and value for money, which in turn simplifies the process substantially.?

The Pilot Phase

On 21st?March 2019, the African Development Bank launched the Pilot Phase of the ABM. The Bank’s Director for Climate Change, Anthony Nyong, said at the event that “innovative incentive mechanisms for adaptation are needed to speed up the transition to a low-emissions, resilient, and sustainable Africa”.[7]?In particular, the ABM will come to assist developing countries with their climate change needs and priorities for adaptation, which are set out in their respective NDCs under the Paris Agreement.?

Since the launch of the Pilot Phase, the Bank and its partners have sought funding from various sources to realise multiple small-scale demonstration projects to test the mechanism on the ground. The intention behind is to promote the demonstration projects to potential investors?in exchange for?funds such that they contribute to the credibility of adaptation activities and, indeed, the transformation towards resilient development. The demonstration projects themselves are also being used to develop methodologies for the delivery of adaptation benefits, verify the outcomes, and prove the effectiveness of ABM for mobilising new adaptation finance for replication. To this end, the certified adaptation benefits will only be granted to the project developers, donors, or host countries, as agreed. The Bank has simultaneously established a lean interim ABM Board, Methodology Panel and a Secretariat to guide and advise the development of the Pilot Phase. The latter is made up of the Bank itself to provide secretarial support to the Board and Panel. It maintains an ABM registry as well as a database of incremental costs for the various adaptation measures, while the other two entities monitor the methodologies by the project developers, project registration, and the generation of certified adaptation benefits.

?More than twenty-five years ago, when the United Nations Convention on Climate Change was signed, nobody could guess that the private sector would have any appetite for investments in renewable energy and mitigation. Policy framework and incentives had to be set up to bring them on board. We are now in a similar situation for adaptation. To meet the Paris Agreement targets on climate finance and adaptation we need the same.[8]

Following the Pilot Phase, the Bank envisages that sufficient infrastructure, methodological composition, and awareness will exist to enable project developers and host countries to define adaptation benefits in advance and sign off-take agreements with climate change financiers.[9]?The take-off agreements will secure payments on delivery of certified adaptation benefits, while the payments themselves will enable financial institutions to consider ABM revenues as a potential new source of income – and an additional security against loans and equity investments. In this context, the Bank is currently looking for the creation of a guarantee instrument that will underwrite payments to project developers in the event that off-takers default.

From our previous projects on the African continent, we at WE&B are much aware of the ways in which its many nations are already suffering disproportionately from climate hazards. And, for this reason, it does not come as a surprise that adaptation is a priority under the Paris Agreement to enable communities, economies, and ecosystems to adapt and build resilience to the negative impacts of climate change. Indeed, the ABM initiative represents such opportunity, because it allows countries to voluntarily use market and non-market instruments to raise capital for reducing GHG emissions – and, more importantly, because it introduces a powerful incentive for private sector engagement.

[1]?IPCC. (2021). Summary for Policymakers. In?Climate Change 2021: The Physical Science Basis. Cambridge University Press. https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_Full_Report.pdf.

[2]?Hickel. (2020). Quantifying national responsibility for climate breakdown: an equality-based attribution approach for carbon dioxide emissions in excess of the planetary boundary.?Lancet Planet Health, 4, 399.?https://www.thelancet.com/pdfs/journals/lanplh/PIIS2542-5196(20)30196-0.pdf.

[3]?African Development Bank Group. (2017). Public and Private Investment in Adaptation. https://blogs.afdb.org/a-race-against-time/post/public-and-private-sector-investment-in-adaptation-16923. ?

[4]?African Development Bank Group. (2019). Adaptation Benefits Mechanism: Giving Resilience a Value.?https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/ABM_-_Giving_resilience_a_value_-_Pilot_phase_information_note.pdf.?

[5]?African Development Bank Group. (2018). Applying Resource-based Finance to the Paris Agreement.?https://blogs.afdb.org/a-race-against-time/post/applying-results-based-finance-to-the-paris-agreement-18829.?

[6]?African Development Bank Group. (2017). Public and Private Investment in Adaptation.

[7]?African Development Bank Group. (2019). #AfricaClimateWeek.?https://www.afdb.org/fileadmin/uploads/afdb/Documents/Generic-Documents/AfDB_at_Africa_Climate_Week_2019.pdf.?

[8]?Luc Gnacadja at the #AfricaClimateWeek. Gnacadia is former Minister of Environment of Benin, former Executive Secretary of the UNCCD, and President of GPS-Dev.

[9]?African Development Bank Group. (2019). Adaptation Benefits Mechanism: Giving Resilience a Value.