12 Nov 2013 – Financing LDC climate change adaptation through Aid for Trade

While the aid for trade initiative has great potential to help address climate change, the necessary conditions are not often present in LDCs. It is necessary to ensure the institutional mechanisms are in place to allow for the effective delivery of aid and, as this article points out, help the most vulnerable countries adapt to climate change.

There is now a growing body of evidence suggesting that sub-Saharan Africa is among the regions of the world most exposed to the damaging effects of climate change. Effects such as decreases in precipitation levels, increased frequency of extreme weather events, and shifting of rainy seasons would have a significant impact on the agricultural sector, livestock and fisheries, water resources, coastal zones, tourism, and infrastructure. Given the economic importance of agriculture in many African Least Developed Countries (LDCs) – for example, Burkina Faso, where agriculture and forestry related activities account for 86 percent of the country’s employment, contribute 40 percent to GDP, and generate a significant share of foreign exchange, notably from cotton exports (over 50 percent) – these climate change-induced events could have far-reaching effects on trade, food security, and indeed on livelihoods and long-term development.

Adapting to climate change is a necessity for African countries, especially the most vulnerable economies, the LDCs. All African LDCs have drawn up a National Adaptation Plan of Action (NAPA); a key instrument of climate change mainstreaming, also meant to serve as a fund-raising proposal for adaptation projects. The adaptation funds maintained by the Global Environment Facility (GEF) are however both small relative to LDCs’ adaptation needs and require co-financing, which has proved difficult for poor countries to provide on their own. Borrowing from other funds is costly and may not be a desirable option for debt-laden LDCs. Moreover, it is morally objectionable to ask poor countries to borrow to deal with a problem that is not of their making.

The Aid for Trade (AfT) initiative could complement adaptation financing where such projects have trade impacts. This article makes the case for an “Aid for Trade-plus” initiative which consists of an augmented AfT initiative that finances trade-related adaptation projects. As the international community gathers in Warsaw to advance the UN Framework Convention on Climate Change (UNFCCC) discussions, the synergies proposed in this paper merit consideration as a way to address significant climate finance constraints, as well as making trade and climate agendas more coherent and effective.

Climate change financing: A global effort

The global effort to mitigate, and adapt to the current and anticipated effects of climate change has been intense in recent years, yet the available resources are insufficient to meet the needs of the LDCs. The international community has mobilised a plethora of funds and resources aimed at adapting to and mitigating climate change. Estimates suggest that close to US$100 billion is available through these funds. Finance is delivered mainly from the governments of developed countries, channelled either through bilateral aid or multilateral funds administered by various UN institutions. A crucial actor in the climate change financing arena is the GEF, a multilateral body that administers a number of the largest climate change funds.

The architecture of climate change financing is in a state of continuous flux. The most recent innovation is the establishment of the Green Climate Fund, agreed at the 16th UNFCCC Conference of the Parties (COP) in 2010. The GCF is expected to become the main multilateral financing instrument for climate action in developing countries, providing a total of US$100billion per year.

Climate change adaptation: A funding gap with consequences

In spite of the multitude of actors and the size of funding available, a large resource gap still exists. This is particularly the case for funds aimed at supporting adaptation measures. It is estimated that developing countries need between US$100 billion to US$450 billion per year to adapt to the effects of climate change.

The UNFCCC has established that LDCs’ climate change needs are ‘urgent and immediate’, especially in the area of adaptation, which LDCs have identified as their top priority. The Least Developed Country Fund (LDCF), set up in 2002, is specifically geared to providing adaptation finance to LDCs. The fund has supported the preparation of National Adaptation Plans of Action (NAPAs), a process through which LDCs identify their adaptation priorities and their funding needs. To date, all LDCs have submitted their NAPAs. Some of these propositions have translated into implementation; as of January 2013, 80 specific NAPA activities have been implemented or are in the process of being implemented in 46 LDCs, with the total amount of funding dispersed for these projects running to US$1.07 billion.

What appears to be an important contribution of the LDCF to finance adaptation efforts in reality masks a difficult situation for LDCs; the LDCF only covers part of the cost of adaptation projects and LDCs are expected to raise the remaining funds independently through co-financing. The current track record reveals that about 75 percent of the total amount spent so far on the implementation of NAPA activities has come from this co-financing share, outside of the LDCF.

LDCs are encouraged to seek aid from bilateral donors or multilateral funds. In reality however LDCs have often ended up footing a large portion of the bill themselves. For example, a NAPA project under implementation in Burkina Faso at a cost of US$23.3 million is financed to the tune of 75 percent by three Burkinabe ministries, with the LDCF and other multilateral and bilateral donors playing a relatively small financing role.

Such a situation poses a moral and financial dilemma. First, as established early on in the multilateral climate change talks, the burden of responsibility for climate change action falls on the industrialised countries, as they were historically the largest emitters of greenhouse gases, and continue to be among the biggest polluters. LDCs, in contrast, contribute a negligible share to global emissions. However, rich countries’ commitment to climate finance has lagged behind policy action, leaving LDCs with a large share of the cost of their adaptation needs.

Second, given their financial constraints, LDCs should not be expected to cover the costs of adaptation. These countries are often heavily indebted and rely on bilateral budget support. Asking them to finance their adaptation projects may lead to resources being diverted from crucial areas such as health or education. Alternatively, LDC governments may not invest sufficiently in adaptation, which they see as a smaller priority relative to their more pressing needs. This option, unfortunately, is a tragic reality among many LDCs.

The co-financing potential of AfT

It is in this context that the AfT initiative shows promise as a potential source of co-financing to complement the overall climate change finance architecture.

AfT is intended to enhance developing countries’ capacity to trade by building economic infrastructure and institutions, and addressing other supply-side constraints. A close look at the adaptation priorities that LDCs identified in their NAPAs shows that a strong synergy can be built between climate change financing and AfT. This is because many of the climate change-related projects have clear trade-related impacts. More specifically, many adaptation projects focus on sustaining LDCs’ trade in the agricultural sector. A key priority of LDCs here is to promote climate-smart agriculture, through enhanced productivity, diversification, and better infrastructure. Adaptation projects, such as experimental changes in crop mix, livestock breed and fish species, development and diffusion of drought-resistant crop varieties, improved soil and water management systems, and refurbishing of weather-battered coastal infrastructure, are aimed at maintaining or raising agricultural yield in the face of climate change or variability. Whether the agricultural crops concerned by these measures are traded or not, a strong link exists between climate change adaptation and trade, even if this link is not direct and often not quite obvious. In the case of an export crop, adaptation can help maintain or increase the level of exports. Where the crop is meant for local consumption, adaptation can contribute to national food security and save foreign exchange by avoiding the need to import. In any case, even a previously non-traded crop can become an important export product if successful adaptation generates an exportable surplus.

For example, the New Rice for Africa (NERICA) – a rice variety that delivers high yields, adapts well to African environments and can thrive on poor soil conditions and dry lands – has been successfully adopted in LDCs like Guinea, Sierra Leone and Uganda. This has led to increased yields and higher incomes for farmers, as well as foreign exchange savings for these countries.

These are projects in the climate change domain; yet they have discernible trade-related impacts. As such, adaptation projects provide a link between climate change financing and the AfT initiative, a key objective of which is to help developing countries increase their exports. This link however is currently either not specified or not sufficiently emphasised in NAPAs. Instead, climate change adaptation efforts are seen more as an isolated or self-contained issue

A unique opportunity exists to realise synergy between AfT and climate change adaptation funds. The benefits from doing so are two-fold: first, AfT could provide additional resources to top up limited adaptation finance, or it could serve as an effective co-financing instrument. Second, a complementary and reinforcing approach between the AfT initiative and the adaptation funds is likely to bring additional benefit and greater effectiveness in tackling both climate change and trade-related issues in pursuit of sustainable development goals.

AfT and adaptation financing: Promoting synergy

Operationalising the proposed synergy is rather straightforward. A forthcoming study by ICTSD proposes the following approach:

  • The links between climate change adaptation and trade should be explicitly recognised and built upon. There is a need to further inform, if not educate, stakeholders on the synergy between AfT and climate funds. Indeed, an AfT-plus initiative can make both AfT and adaptation funds more effective and contribute globally to sustainable development objectives.
  • Since AfT is defined as “whatever a country considers as trade-related,” nothing excludes it from financing climate change adaptation projects where these have demonstrable trade impacts. However,  AfT for adaptation financing must be new and additional.
  • Operationalising the complementarity between AfT and climate change  funds does not require any new governance mechanisms. There is no need,for example, for specialised funds or for a centralised facility.

Conclusion

Despite only having contributed minimally to climate change, LDCs are the most affected by it. In the future, climate change will pose a huge challenge to these countries’ livelihoods, and will probably call for important sacrifices to be made in order to adapt to its unfolding reality. Adaptation, however, is costly. Whilst the international community has already made important financial commitments, a significant funding gap remains. The need to cover this gap is urgent.

In this context a complementary approach between AfT and adaptation financing presents an important opportunity. To the extent that adaptation projects have discernible trade-related impacts, a case could be made for the AfT initiative to top up limited adaptation funding or to co-finance adaptation projects. While this idea may sound ambitious, it is in fact a practical one. To implement it, developing countries need only to start demanding AfT for their trade-related adaptation needs. Source: International Centre for Trade and Sustainable Development

Vinaye Ancharaz, Senior Development Economist, International Centre for Trade and Sustainable Development (ICTSD), Paolo Ghisu Programme Officer for the Competitiveness and Development Program, International Centre for Trade and Sustainable Development (ICTSD), Sara Traubel Former Intern for the Competitiveness and Development Program at the ICTSD