Plan for the worst, it’s on the horizon financing the Warsaw Mechanisms Risk Management Strategies through the Global Environment Facility and Special Climate Change Fund

By Samuel Edge

Samuel attended the 2016 UNFCCC Conference of Parties (COP22) where he represented the Sir Walter Murdoch School of Public Policy and International Affairs supported by Mal & Karyl Nairn. Samuel is studying a Masters of Public Policy and Management.

Abstract

The 2016 Marrakech United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP) 22 will include a review of the Warsaw International Mechanism (WIM) for Loss and Damage associated with Climate Change Impacts. The talks are expected to develop a new five-year work plan, reviewing the WIM’s structure, mandate and effectiveness. However, there are many unresolved issues relating to the WIM that are not being considered as part of this review. Among these issues is the autonomy of the WIM, if it should act as an independent pillar of the UNFCCC, and if not – how it will deliver any target outcomes. This paper proposes that outcomes for the WIM, particularly the implementation and funding of risk management strategies, can be achieved through the entities of the UNFCCC’s Financial Mechanism. With losses and damages being incurred by a growing number of developing countries linked to climate change, there is a need to fund efforts against the escalating catastrophes. Specifically, this paper argues for the development of further adaptation projects by the Global Environment Facility (GEF) with funding from the Special Climate Change Fund (SCCF), specifically Catastrophic Risk Insurance in developing countries as a form of Risk Management.

Policy Recommendations

  1. For the Conference of the Parties to consider financing the Warsaw Mechanism’s work plan through the Entities of Financial Mechanism, focusing on risk management strategies;
  2. To provide the initial financing for risk management strategies from the Special Climate Change Fund, with co-financing through the Global Environment Facility’s network;
  3. For the WIM to secure expertise in the development and implementation of Catastrophic Risk Insurance Facilities through existing United Nations – or affiliated – institutions;

Background

November 2016 marks the 22nd COP (COP22) of the United Nations Framework Convention on Climate Change (the Convention). The Convention is the platform for 194 countries to engage upon genuine action in the struggle against climate change, with the COPs forming a key deliberative forum for the application of the Convention’s provisions and strategic goals. These goals vary, the previous Convention, COP21 produced the Paris Agreement and established the Green Climate Fund (GCF) as the second operating entity of the Financial Mechanism of the Convention. With the ratification of the Paris agreement by the required 55 countries, the COP22 talks will focus on issues relating to matters separate to the GCF, including negotiations on loss and damage centred around a review of the Warsaw Mechanism.

Introduction : The expectations of the Warsaw Mechanism and COP22

The initial steps towards the institutionalisation of loss and damage relating to climate change as part of the Convention were discussed in 2013 at COP19 (UNFCCC, 2013); this was the development of the Warsaw International Mechanism for Loss and Damage associated with Climate Change Impacts (UNFCCC, 2013). The upcoming COP22 will shape the future direction for discussions on loss and damage, with the potential to better define the structure and capacity of the WIM, particularly in relation to financing.  This will entail a review of the initial two-year action plan developed in 2013 and the development of a new five-year work plan at COP22 (UNFCCC, 2014).

The WIM was developed over a series of COPs[1] to address a growing desire from a number of developing countries to see an independent mechanism established to compensate for the effects of climate change (African Group, 2012). The initial and ongoing expectation of the WIM is the development of new solutions to the increasing number of global incidents showing a connection to climate change (Warner, 2013; Hoeppe & Gurenko, 2016). This is particularly relevant for developing countries without the financial capacity to recover from - or adapt to - the effects of climate change and catastrophic disasters. There are, as Thompson & Otto (2015) describe it, conceptual ethical and moral merits to the development of an autonomous pillar within the Convention for loss and damage relating to climate change. However, COP19 and the preceding negotiations did not produce such a mechanism for reasons, largely political (McNamara, 2014), that are beyond the scope of this paper to discuss. Instead the COP19 talks developed the WIM under the Cancun Adaptation Framework (UNFCCC, 2013) but did not provide a means of funding for the WIM initiatives (Bateman, 2013). This is reflected in the outcomes and target strategies  within the nine key action areas outlined in WIM’s Executive Committee’s two year work plan.[2] By not establishing the WIM as an independent body of the Convention, its capacity to act autonomously, including the financing and delivery of proposed strategies and target outcomes, is significantly diminished; but does show a commitment by the international community to addressing matters of loss and damage resulting from climate change (Boran & Heath, 2016).

The purpose of this paper is to propose a means of directing finance to Loss and Damage projects, particularly in light of the growing number of economic losses that have been occurring in recent years (Kunreuther, 2008). This paper will propose the use of the Special Climate Change Fund (SCCF) and Global Environment Facility (GEF) to fund Risk Management projects. Additionally, this will include a brief on Risk Management and the development of Catastrophic Risk Insurance in developing countries as an adaptation project of the GEF and SCCF, and a review existing developments in this area.

Risk Management and Risk Insurance

The rate at which weather-related disasters and catastrophes are occurring has been increasing over the last two to five decades with growing economic loss and damages[3] (Kunreuther, 2008; Hoeppe & Gurenko, 2016). One possible means of addressing this grow is through Risk Management strategies, which can be an effective means of dealing with the extensive levels of uncertainty surrounding the likely impact of climate change (Kunreuther, et al, 2013) and an option in determining the appropriate policy response (Heazle, et al, 2013). The current ‘rationalist’ approach commonly deployed in developed countries such as Australia, focuses on the development of disaster risk management strategies heavily based on technical information and expertise (Heazle, et al, 2013). These are resources not readily available or present in developing countries, so much of the development of such strategies for development agencies is building capacity or knowledge management as part of risk management (GFDRR, 2016). Thematic across the literature on the application of risk management is building resilient communities (GFDRR, 2015; Helmer & Hilhorst, 2006; Helgeson & Ellis, 2015). Heazle et al (2013)[4] promotes building the resilience of communities incrementally to deal with disasters through training and the implementation of strategies to deal with known issues; that in doing so communities are afforded the opportunity to cope with short and long-term causes of risk-related events. This can include measures such as the storage of data and climate information to compare existing issues with developing ones[5]; or the reinforcement of existing practises against weather-related issues, such as the designing resilient cities (GFDRR, 2016). However, there are numerous possible forms of risk management and means of building resilience. 

One possible method for developing countries in developing risk management strategies is the application of Risk Insurance (Linnerooth-Bayer & Mechler, 2006). Risk Insurance, similar to standard insurance (Arrow, 1996), is a risk management technique with the capacity to provide many poor and developing communities the opportunity to adapt and better cope with losses and damages resulting from climate change – where properly implemented (Hazell, 2003). Risk Insurance has a number of benefits, including: financial protection in the form of immediate liquidity in the event of disaster[6]; risk modelling for hazards; minimising threats to development and wellbeing; and building resilience against climate change through the development of policy and frameworks (GFDRR, 2015). However, it should be noted there are issues with this approach, namely that many insurers are reluctant to provide insurance against catastrophes (Van den Bergh, 2004) and events like hurricanes are costing an increasing amount, which places insurers under significant stress (Mahul, 2001). This is more prominent on the macro-scale as the capacity of any one nation or insurer to effectively cover the cost of insuring an entire country is limited, leaving the insuring body liable to collapse in the event of catastrophic disaster (Lobo-Guerrero, 2010).

As a counter to such eventualities, there are a number of key components that need to be included in risk insurance dealing implementing risk for catastrophe’s and disasters or Catastrophic Risk Insurance (Linnerooth-Bayer et al, 2009), including: The development of parametric insurance, to cover a predetermined level of damage coverage based on catastrophe modelling; regional risk pooling, distributing the cost of insurance premiums amongst multiple countries in the region; the extension of the insurance to re-insurance markets internationally, to limit the potential collapse of a single-insuring, or region-restricted firm insurers; and to include non-private[7], bodies in the process to provide an adequate safety against a market collapse (Linnerooth-Bayer et al, 2009).

Financing and an Extension of Existing Capacity

However, even with a reasonable model the issue for developing countries is the lack of available financial resources to establish Risk Insurance and the appropriate structures (legal, regulatory and market) that accompany the development. Modelling by Munich RE (2013) shows developing countries are suffering the worst from the effects of climate change, with 95% of deaths in climate-related incidents occurring in developing countries, and only a small percentage of the inhabitants of these affected nations capable of affording risk insurance (Linnerooth-Bayer et al, 2009). The affordability issue for developing countries is the product of two key components: the high cost often incurred by the insured, with insurance companies demanding unaffordable premiums (Linnerooth-Bayer et al, 2009); and, the poor design and implementation of the Risk Insurance model, such as: cover exceeding practical limits; insurance companies not seeking re-insurance; or implementing insurance models that limit their potential losses (Linnerooth-Bayer et al, 2009). It has also been presented by Doelle (2014, 37) that many of the Parties considering risk management strategies generally are simply unwilling to bear the cost.

Contrary to these issues, the application of Risk Insurance in developing countries does have merit - where well designed and implemented. Currently, the World Bank is actively engaged in implementing risk insurance in developing countries, and seeking to further develop this method of risk management through the Global Facility for Disaster Reduction and Recovery (GFDRR) under the Disaster Risk Management Framework and Disaster Risk Financing and Insurance (DRFI) Program (GFDRR, 2015). This has seen the development of multiple Catastrophic Risk Insurance Facilities (CRIF), including: the Caribbean Catastrophic Risk Insurance Facility (CCRIF) (World Bank, 2012), the Honduras and Nicaragua Catastrophe Risk Insurance Project (HNCRIF) (Wold Bank, 2014), and the current development of a CRIF pilot in the Pacific Islands (World Bank, 2016). While many of these projects have a disaster focus, the World Bank is centred around global development and not exclusively climate change; therefore, this can include non-climate related disasters like earthquakes or conflicts (Boran and Heath, 2016).

Applying Risk Management to Developing Countries: The GEF and SCCF

Risk Management efforts are implemented under the Convention as a form of adaptation, a dynamic process key to future climate change efforts (Helgeson & Ellis, 2015), with numerous successful efforts developed by Global Environment Facility (GEF) (Gomez-Echeverri & Muller, 2009). With financing from the Special Climate Change Fund (SCCF) and Co-Financing through an extensive network of Private, Public and NGO’s, the GEF has implemented projects receiving up to $6 for every $1 utilised (GEF, 2016). An example of these funds being used to implement Risk Insurance is the development of the Southern Europe and Caucasus Catastrophic Risk Insurance Facilities or SEECCRIF. Risk Insurance in this particular area was developed due to an estimated ninety percent of the area of South-eastern Europe being located within river basins, making the region highly prone to floods (World Bank, 2011) and had in the years previous experienced significant losses and damage to a number of the regions countries.  

The project sought to provide risk insurance - in the form of a Catastrophic Risk Insurance - to a region with little to no ability to financially cope with such a significant loss again. The report, Financing Adaptation Action (GEF, 2012) outlines the initial source of funding provided by the SCCF to develop the following strategies in the region:

  • Actuarial and probabilistic country weather and climate risk assessments;
  • Funding the implementation of regulatory frameworks;
  • The collection of data and accurate reporting mechanisms for the development of parametric weather risk contracts
  • The development of risk maps, models and weather risk insurance products; and
  • Public education on the nature of disasters, climate change, risk insurance and its benefits. (GEF, 2012, 19)

This structure provides an existing framework for the future implementation of Catastrophic Risk Insurance Facilities through the GEF, and as a result of this project, the GEF has included in its submission to COP22 plans to further finance initiatives on catastrophic risk insurance (GEF, 2016, 3).

Conclusion

The Warsaw Mechanism’s key action areas encourage the implementation of risk management strategies and risk insurance in developing countries to limit the loss and damage resulting from climate change. While implementing strategies like risk insurance can potentially be achieved through the World Bank, GFDRR and DRFI program, doing so would detract from the climate change focus afforded to strategies implemented under the Convention.

Instead, the WIM should support the development of Risk Insurance in developing countries as a form of adaptation under the GEF and with financing from the SCCF. Implementing such strategies through the Convention will ensure the finances and projects funded are given a clear mandate to mitigate loss and damage resulting from the effects of climate change. To achieve this, there are a number of policy recommendations:

Policy Recommendations

1. For the Conference of the Parties to consider financing the Warsaw Mechanism’s work plan through the Entities of Financial Mechanism;

The current status of the Warsaw Mechanism under the Cancun Framework does not include a specific source of funding for the development of new loss and damage strategies. Given the limited resources available to the respective funds of the Convention, the available capital should be focused on achievable targets and where there is existing knowledge in their implementation – like Risk Management and Risk Insurance. Given the capacity exhibited by the GEF to develop and implement Risk Insurance in the case of SEECCRIF, this recommendation is for the continuation of adaptation projects with a focus on building community resilience.

2. To provide and increase the initial financing for risk management strategies from the Special Climate Change Fund, with co-financing through the Global Environment Facility’s network;

The GEF has a remarkable rate of co-financing with more than $2.3 Billion (US) sourced for adaptation projects (GEF, 2016, 35) from other development funds or the private sector. In this instance, much like SEECCRIF, there is a need and capacity for the development of Risk Insurance in partnership with international insurers, potentially incentivised by long-term financial gains through insurance premiums. However, this co-financing is only achievable with an initial source of capital from the SCCF. Because of this, provisions would also need to be made for an increase in the SCCF budget allocation for the development of Risk Management procedures like Risk Insurance. Currently, under the GEF’s Programming Strategy on Adaptation to Climate Change, there are scenario-based provisions for only 10% (GEF, 2014, 39) of the SCCF’s budget to be allocated to Disaster Risk Management strategies and projects. Given the inability for the Warsaw Mechanism to independently finance these projects, future strategies will require an increase in the funds allocated to risk management for loss and damage purposes.

3. For the WIM to secure expertise in the development and implementation of Catastrophic Risk Insurance through existing United Nations – or affiliated – institutions;

Both the Global Environment Facility and the World Bank’s Global Facility for Disaster Reduction and Recovery have a potential role to play in the development, implementation and funding of future risk management efforts. This will be particularly relevant if the WIM is not provided the autonomy required to effectively carry out independent financing of projects like Catastrophic Risk Insurance.

Footnotes

[1] COP16 in Cancun, developing a work program that lead to the COP17 talks and a focus on the need to explore a mechanism for loss and damage. This lead to Decision 3 of COP18, which mandated the development of an international mechanism for loss and damage

[2] The ninth being the development of the 5-year plan at COP22.

[3] Human, Structural, Cultural etc.

[4] Note, within an Australian context but with international capacity for application

[5] El Nino Periods in Mexico for example (Osgood et al, 2007)

[6] Rapid infusion of funds for relief (GFDRR, 2015, 43)

[7] Governments, NGO’s and the International Community generally

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