Swedish firm wins AfDB contract to develop market-friendly Adaptation Benefit Mechanism for climate resilience

13/01/2017
Share |

The African Development Bank (AfDB), with support from the Climate Investment Funds (CIF), has awarded a contract to Swedish consulting firm CPMA International to help develop a global Adaptation Benefit Mechanism (ABM). The revolutionary ABM would serve as a business model to encourage private sector investment in climate change adaptation, sending a price signal to project developers that will encourage them to invest in technologies, goods and services which bring verified adaptation and resilience benefits to developing economies.

Under the ABM, project-based technologies and services that deliver supplementary adaptation benefits to developing countries will be able to have those benefits verified and issued as Adaptation Benefit Units (ABUs), and monetized through an Adaptation Benefit Unit Offtake Agreement (ABOA). ABOAs signed with creditworthy off takers are bankable and, subject to due diligence, may be used to raise debt to finance the projects.

An adaptation benefit can be defined as any activity that makes households, communities or economies more resilient to climate-induced shocks, and includes a wide range of products and activities not immediately recognized as essential to climate resilience. For instance, clean cooking stoves, flood prevention solutions, and access to electricity all help strengthen households, communities and economies by improving health and access to information, reducing women’s workloads, improving school attendance, protecting assets, enabling small-scale agro-processing, etc., all functions which ensure a stronger and more resilient society.

“At AfDB, we are very excited that the ABM model is beginning to take shape as a reality,” said Gareth Phillips, AfDB’s Chief Climate and Green Growth Officer and author of the concept. “In fact, it’s possible that in the long run financing projects through the sale of adaptation benefits could be equally or more beneficial to developing countries than financing projects through the sale of mitigation units as currently exists under the Clean Development Mechanism (CDM). Lower transaction costs may also make them attractive to donors and Corporate Social Responsibility (CSR) buyers.”

The ABM concept is based on experience from the mitigation-based CDM set up under the Kyoto Protocol, the UN’s former global climate change treaty, and also draws on the Payment for Ecosystem Services (PES) business model. Under an ABM, project developers will be incentivized to change their behaviour from business-as-usual to invest in adaptation technologies, thus beginning to make adaptation solutions marketable and adaptation projects profitable. Significantly, ABUs arising from projects will be defined in formal monitoring and reporting methodologies, so buyers can see what they are getting. ABUs, which will be denominated in units which are appropriate to the project in question, will not necessarily be fungible with one another. The price of an ABU will be determined, not by a supply and demand curve, but instead based on allowed costs, plus a profit margin, transparently displayed and verified in a “Project Design Document”. Un-quantified mitigation co-benefits will be left in the host country to help them meet their emission targets defined in the Nationally Determined Contributions which form the heart of the Paris Agreement on climate change. Helping countries meet their targets will encourage them to raise their ambition and take the world closer to the 2°C target which was set in a global agreement in Paris last year.

As envisioned, the ABUs would be transacted in commercial agreements between willing buyers and sellers with no international environmental compliance obligations. The lack of compliance regulation is significant, as it simplifies the process, removes unexpected interference in domestic policies, reduces liability and eliminates speculator-driven secondary markets. “While the ABM could run in parallel to the CDM, or another mitigation instrument with similar modalities and procedures,” explained Phillips, “ultimately, climate finance and private sector finance would flow to the countries with the most compelling adaptation needs rather than to those countries who have the most emitting technologies and the cheapest costs of abatement. At the Bank, this front-line resilience solution stands as one of our principal commitments to African nations.”

This revolutionary approach can potentially help make serious inroads in the significant under-funding which exists for adaptation, as opposed to the stronger trend toward funding for renewables and other mitigation technologies. This is particularly significant for Africa, which has among the lowest rates of greenhouse gas emissions on the planet and a much greater need for adaptation support. As much as 70% of Africa’s 2050 infrastructure still needs to be built and hundreds of millions of people, who need to move out of poverty and subsistence farming, remain highly exposed to changing climates and extreme conditions. While the international community has set a goal of directing 50% of its committed US $100 billion towards adaptation, adaptation projects and technologies offer little or no financial incentive to the private sector. A mechanism like the ABM will open the door for early investors to enter into adaptation-based projects.

About the Climate Investment Funds (CIF)

Established in 2008, as one of the largest fast-tracked climate financing instruments in the world, the US $8.3-billion CIF provides developing countries with grants, concessional loans, risk mitigation instruments, and equity that leverage significant financing from the private sector, MDBs and other sources. Five MDBs – the African Development Bank (AfDB), Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB), and World Bank Group (WBG) – implement CIF-funded projects and programs.