Adapting and Mitigating Climate Change: A Deeply Nuanced Approach

Reporting from Copenhagen

It is clear that one of the major sticking points in any agreement at Copenhagen will be adaptation and mitigation finance.

So emotional are the positions behind this particular issue that Lumumba Di-Aping, chief of the Sudanese delegation and chairman of G77 plus China group, told reporters this week:

"The question of adequacy is really a question of what is the finance necessary to carry out actions or to implement programs commensurate with the risk we face."

Those risks are "condemning" developing countries to non-development, he said. "Ten billion dollars will not buy developing countries enough coffins."

Before the Copenhagen summit, developing countries demanded $395 billion a year minimum in technology transfer, adaptation and mitigation finance. Whatever the figure, climate adaptation and mitigation strategies must include climate insurance, says Koko Warner of the United Nations University Institute for Environment and Human Security and a World Bank advisor.

"If you can figure out a way to meaningfully link insurance approaches with disaster risk reduction, insurance, along with a whole suite of other tools could provide a way to create certainty in a lot of uncertainty," Warner says.

With "climate change, one of the biggest problems in the short-term and medium-term is the variability," she explains. "Especially for developing countries, the variability is what kills them. And they need a sure planning horizon so that catastrophe and disasters don't wipe out their development capacity."

For the insurance industry, an increase in severe weather events like cyclones, hurricanes and earthquakes means that, at best, premiums increase, and, at worst, "it means a rise in the number of people and properties that are just considered uninsurable," says Bob Ward at LSE's Grantham Institute.

Climate change inherently changes the nature of assets, Ward explained. It increases the exposure and vulnerability of populations to hazards.

In developing countries, the implications are fundamentally worse. Exposure and vulnerability are "mainly a function of your economic wealth. So wealthier societies are able to have more resilient structures, both social and economic," he says.

Packed Cities, Slums at High Risk from Climate Change

Today, over half the world's population is urban. Most of the population of the developing world resides in cities, and the largest cities in the developing world (Mumbai and Shanghai for instance) are located in "high risk areas" for natural disasters, flooding in particular as these cities are constructed on deltas, Ward notes. Deltas are advantageous for economic growth: access to large bodies of water for shipping and transport, but also "young land" susceptible to flooding.

With increasing urbanization in the developing world also comes the scourge of slums, with tens of thousands of people packed into unprotected, tight and often already unsanitary conditions. When an extreme weather event occurs,

"The impacts of flooding in developing countries can be far more devastating ... in terms of the potential impact on people's lives," Ward says.

He notes that while Hurricane Katrina was a catastrophe for New Orleans and the Gulf Coast, events like Cyclone Nargis and Hurricane Mitch were "one-hundred times worse."

The damage from Cyclone Nargis amount to to 2.7% of Myanmar's project 2008 GDP, killed almost 100,000 people and "50% of draught animals," and wiped out 25% of total yearly agricultural yield, devastating the economic livelihoods of hundreds of thousands of families.

Beyond the primary effects, any natural disaster has knock-on effects that get little attention. The availability of disaster relief funding is directly related to media coverage, Warner says. Failing international assistance, national governments dig into their budgets to provide relief funding to their people. The first thing that goes in the months and years that follow a disaster, as recovery begins, is funding for social services like hospitals and teachers' salaries. Education and health care suffer and permanently inhibit future economic development.

Ward says that governments are reluctant to properly discuss climate change in the context of weather and urbanization because in many cases it would mean physically moving people and "discussion about if it's economically viable to still have a city here in such an exposed and vulnerable location."

"They are difficult questions and they don't become less difficult by pretending that the problem doesn't exist," Ward said. "It's like we were talking about with the banking crisis, if you ignore risk the consequences become much greater."

UN-HABITAT notes that the Millennium Development Goals include a specific clause "to 'significantly improve' the lives of at least 100 million slum dwellers by the year 2020." But Ward points out that "It's significant that the UN's Millennium Development goals do not explicitly address risk from natural disasters even though it's shown to be a fundamental factor in economic development."

Making Climate Insurance Work for the Developing World

Warner and Ward both say that climate insurance can help mitigate climate related natural disaster risk.

One way to do this is parametric insurance, where weather pattern baselines are established. If weather falls above or below the parameters, a pay out is triggered automatically. Parametric insurance requires less infrastructure than regular insurance because it can be based upon gauges monitored by satellites and computers rather than in-person assessments, lowering its costs.

Microinsurance schemes can also be "cash for kind." Through the World Food Program in Ethiopia, unemployed participants do work that helps to bolster national defenses against natural disasters in exchange for food. External donors (agencies and other national governments) provide the capital to run the program.

Another way to insure against climate change-induced disasters is with sovereign risk pools. The Caribbean Catastrophe Risk Insurance Facility is one such example. CCRIF has 16 participant countries each paying in annual premiums equal to an average of 0.1% of GDP, an amount their national budgets allow for. The rest of the initial capital and yearly replenishment of the fund comes from donor countries from the developed world.

On average, one or two countries utilize the CCRIF insurance annually. Under the program, wind speed is usually used as a parametric proxy for damage and triggers payouts. But the fund covers insurance as well. In 2007, for example, Dominica and Saint Lucia both received funds from CCRIF after they were hit by an earthquake. Instead of waiting for disaster assistance to flood in from external sources, the governments received money almost immediately via wire transfer. Turkey and Taiwan have similar catastrophe reinsurance facilities.

On top of the donors, the sovereign funds diversify away the remaining risk on international capital markets through re-insurance.

There's no reason that climate risk cannot be managed "as long as you are sensible and know what the risk is, buy adequate insurance, and keep adequate capital," Ward says.

But he also admits that he knows of no one in the insurance industry willing to put a number on capital levels needed to adequately insure against climate change, in part because there has not been agreement between countries about disaster prevention standards and metrics.

"it's better for people to be thinking about each individual nation, how does insurance fit in my disaster reduction management plan, because every adaptation plan must mean upgrading disaster risk management," Ward said.

"At the moment, if you look at LDC's [least-developed countries] ... national adaptation plans, few of them have any substantive discussion of how they're going to manage disaster risk."

The strategy for climate risk adaptation and mitigation must clearly include significant capital from developed countries. In every type of insurance tool, financing from the developed world is integral to the scheme. The challenge will be getting developed countries to promise and then to actually deliver on any finance promises made. The biggest mistake to be made, it seems, is leaving Copenhagen without explicit financial enumeration.

Indeed, UN climate chief Yvo de Boer called all countries to action in his second daily press conference:

"This conference needs to be about turning words into real actions ... the day this conference ends. And further delayed action is not an option, especially for developing countries."


See also:

Microinsurance Protects Poor Farmers Facing Increasing Risks from Climate Change

Insurance CEOs Call on Industry to Get Proactive About Climate Change

'Climate Principles' Refocuses Banks on Sustainable Behavior

Road to Copenhagen: Managing Risk


(Photos, top to bottom: Myanmar Cyclone Nargis Relief Fund; Piers Brown / CC BY 2.0)

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