INSIDER: The Green Climate Fund’s Proposed Approach to Costs: Not Fit for Adaptation
As developing countries increasingly experience the impacts of climate change, ensuring that they have efficient access to adaptation funding is ever more urgent. The Green Climate Fund (GCF) is one of the world’s largest sources of finance for climate adaptation, and importantly, most of its finance is concessional, meaning it is delivered with significant grant components. It is therefore essential that the GCF Board, which meets this weekend, get the GCF’s approach to adaptation right.
However, a proposal that is currently under consideration by the GCF Board would take the Fund in the wrong direction when it comes to adaptation. If approved, it would likely ensure that a large category of urgently needed adaptation projects do not receive funding. The Board should defer decision on this proposal and go back to the drawing board.
Applying the Proposal to Adaptation Projects
At the heart of the current proposal is the assumption that there are two distinguishable types of activities: those that advance climate adaptation, and those that advance development. Since GCF money is dedicated to “climate finance,” the implication is that the GCF should only fund activities that advance adaptation and leave activities that advance development to other funders. Project proponents are therefore asked to separate the “climate” components of an adaptation project from the “development” components, so that the GCF can identify which portions of the project it will fund. To accomplish this, the decision currently in front of the Board proposes the following process, which would apply to all adaptation proposals:
- A project proponent must explain what a project similar to the proposed project would look like in a hypothetical world without climate change and how much it would cost to implement. For example, the proponent must describe and cost out an agricultural project that is expected to raise the income of smallholder farmers by $10 per month, assuming there is no need to adapt to climate change. This hypothetical project is called the “baseline project.”
- Then, the proponent must describe the proposed project and show how much it would cost. In our example, this is a project that will raise farmer income by $10 per month, while also helping that farmer adapt to climate change today and in the future.
- The cost of 1 is subtracted from 2 to arrive at the portion the GCF should pay for, the so-called “incremental cost.” In cases where the entire project would have been unnecessary in a world without climate change, the GCF would cover the “full cost” of the project. In other words, the cost of the baseline project would be zero.
However, the GCF recognizes that the reality is far more complicated. For this reason, the proposed decision gives the Board discretion to cover more than the incremental cost of a project but does not specify how it would make that decision.
What Is Wrong With This Picture?
The proposed approach oversimplifies reality in a way that could hurt adaptation finance in many developing countries. There are several key problems:
First, defining a baseline project forces a distinction between “adaptation” and “development” that is not useful in places where adaptation and development cannot be effectively separated. Take, for example, a very poor community that does not have a modern system of piped water treatment and distribution and relies exclusively on bore wells. Climate change exacerbates water stress, reducing the amount of water than can be extracted, so the community applies to the GCF for funds to build pipelines and provide water security for the community. The reality is that the new system has long been needed for good development reasons, as the borewell water was of unreliable quality and forced women to travel long distances, sometimes in unsafe conditions, to collect water. Yet, the proposal will also demonstrably improve the community’s resilience to climate change. Is this development? Or is it adaptation?
The proposed decision risks relegating many activities like our hypothetical example to the “baseline” category that the GCF will not fund. For countries that have difficulty accessing other sources of finance or have high sovereign debt, this situation could prevent the project from moving forward. Some GCF projects have already raised similar controversies, but the proposed decision does little to solve the impasse.
Second, the concept of a “zero cost baseline” project is unrealistic. The cost of the baseline project is zero when the proposed project would not be necessary in the absence of climate change. Under these circumstances, the GCF could fund total project costs, but there are very few (if any) true examples of zero-cost baseline projects in practice. Climate change does not create a radically new category of risks; it mostly exacerbates existing vulnerabilities and development challenges. For example, tropical cyclones in the Caribbean and the Pacific or wildfires in Indonesia are not new, but they are projected to be more intense and sometimes more frequent in a warming world. A project supporting new climate modeling capabilities or deploying early-warning systems would still be needed in a world without climate change. Climate change just happens to make these investments more urgent today.
What should the GCF do in these cases? The policy does not clarify. Are developing countries expected to demonstrate the expected percent increase in the severity of annual storms attributable to climate change, relative to some baseline without climate change? Even the world’s top research institutes are still working to develop methodologies for this calculation. Surely, that is too onerous an analytical burden for many countries and direct access entities.
Third, the policy introduces arbitrariness and opacity, because it ultimately leaves it to the Board to figure out what the GCF will pay for in each case, without clear guidance on how to make this decision. That will simply perpetuate the current system in which the amount the GCF will fund is often decided at the last-minute through opaque and ultimately arbitrary negotiations among Board members. Surely that is not how the world’s largest dedicated climate fund should be doing business. Project proponents need more clarity about what they can expect from the GCF through clearer, more transparent, and more consistent rules.
Is There a Better Way?
Yes. Ultimately, adaptation is about doing development differently in response to climate change, which requires addressing climate risks, climate impacts, and underlying vulnerabilities of people and ecosystems. In a previous study, we proposed that the GCF adopt a set of costing approaches—total activity cost, incremental cost, and beyond incremental cost—that are tailored to the range of adaptation activities it may be asked to consider. We suggested that a beyond incremental cost approach could be determined using qualitative factors, such as level of vulnerability and access to other resources.
Right now, however, the Board needs to send the proposed decision back to the drawing board.