Editing IPCC:AR6/WGII/Chapter-17 (section)

=== FAQ 17.2 | What financing options are available to support adaptation and climate resilience? ===

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What do we mean by ‘climate finance’?

The UNFCCC has no formally agreed upon definition of climate finance. The current IPCC definition is: ‘ ''the financial resources devoted to addressing climate change by all public and private actors from global to local scales, including international financial flows to developing countries to assist them in addressing climate change'' ’ (see Annex II: Glossary).

What needs to be financed?

Financial resources might be needed for a range of adaptation and resilience building activities. These include research, education and capacity building; development of laws, regulations and standards; provision of climate services and other information; reducing the vulnerability of existing assets, activities and services; and ensuring future development—such as new infrastructure, settlements, health services and business activities—is climate resilient. Finance is also needed to recover and rebuild from the damage of climate hazards that cannot be completely avoided through adaptation. Adaptation actions can be undertaken by many different actors, alone or in partnership, including national and sub-national governments, public and private utilities, businesses of varying size, communities, households and individuals.

'''Table FAQ17.2.1 |''' Examples of adaptation and resilience activities that might need to be financed

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| Training of agricultural extension officers so that their advice to small-holder farmers can support implementation of climate adapted agriculture. Additional financial support is needed for the costs of farmers transitioning to climate-resilient agricultural practices.

| A new urban development requires higher standards (and up-front costs) for buildings, roads, stormwater systems and water re-use and to be resilient to expected changes in heavy rainfall, runoff, temperature and water supply reliability.

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| A water utility requires capital expenditure to increase supply through a desalination plant and to reduce leakage from its reticulation system in response to a scenario of reduced surface water availability and an increase in customers.

| A catastrophe risk insurance facility is established to provide post-disaster (drought, hurricane, flooding, pest outbreaks) recovery finance to national governments. The facility requires capital to be able to underwrite the insurance products it offers.

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How much finance is needed?

The amount of adaptation finance depends on global, regional and local factors, including: the amount and timing of global warming, and how this translates into impacts and adaptation needs across the world; the levels of adaptation already in place; the type of risk being adapted to; and the adaptation options being chosen, including whether the adaptation required is incremental or transformational.

The most-mentioned figure for finance need is the developed countries’ commitment to provide USD 100 billion per year by 2020 to support developing countries’ efforts in mitigation and adaptation. Negotiations will start in 2021 on updating this amount for 2025. While sometimes thought to represent the actual cost of responding to climate change in developing countries, this is not the case. More recent estimates of the global cost of adaptation by 2030 across developed and developing countries range between about USD 80 and 300 billion per year.

What types of finance are available?

Four main types (or instruments) of finance are currently being used to support adaptation. These different types are not mutually exclusive; grants can be combined with loans to provide blended finance.

'''Table FAQ17.2.2 |''' The main instruments through which adaptation is being financed.

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| '''Grants''' provide finance without any repayment requirements. Most grants for adaptation have been provided by multi-lateral funds such as the Green Climate Fund or a fund managed by a single OECD country such as Germany’s International Climate Initiative. Some countries have national climate or environment funds that provide grants for their own climate adaptation actions. Grants are also provided by philanthropic foundations and sometimes by companies as part of their environmental and social responsiveness mandate.

| '''Concessional loans''' require partial repayment of the finance provided. These involve either capital repayment coupled to below-market interest rates or capital repayment only. Concessional finance is almost entirely provided through multi-lateral development banks such as the World Bank. This finance is particularly important for developing countries where market interests are high due to poor credit ratings or other risk factors, or where the return on investment is too low make a commercial loan viable.

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| '''Non-concessional loans''' (or debts) are commercial instruments, where capital repayment and market interest rates apply. These may be provided through development banks or private banks. Green bonds are a relatively new form of market loan, designed to meet climate and other environmental sustainability criteria in terms of how the proceeds are used. In recent years, green bonds have offered better interest than ordinary bonds owing to oversubscription by investors who are looking to move towards environmentally sustainable investment portfolios.

| '''Budget re-allocation''' does not require raising of new finance; rather, it involves moving funds already secured away from other purposes towards adaptation. In government, this might involve re-allocation towards flood defence. In the private sector, a company might move budget from marketing, research and development, or perhaps dividends, towards increasing the climate resilience of operation, infrastructure or their value chain.

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Where are different types of finance most useful?

Grants are useful for a range of adaptation actions where it is hard to generate a financial return. These include capacity-building activities, piloting new adaptation innovations, high-risk investment settings or projects where there are considerable non-financial benefits. In contrast, loans and other debt instruments can often support larger investments, for example for scaling out of successful pilot projects or for building adaptation and resilience into general development investment. To date, a large proportion of international climate finance for adaptation in developing countries, especially in Sub-Saharan Africa and Oceania, has been grant led, sourced from OECD public funds, indicating that in many instances financing via loans is either considered too risky by the commercial investment sector or it has been hard to demonstrate sufficient return on investment.

[[File:21aed069f5c6b610df012ed92589bd04 IPCC_AR6_WGII_Figure_17_FAQ_17_2_1.png]]

'''Figure FAQ17.2.1. |''' '''The distribution of adaptation finance across different regions and different types of finance in 2015–2016, as tracked by the Climate Policy Initiative.''' The size of each circle represents the amount of finance, with amount in billions USD superimposed.

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