Towards an “Aid for Trade Plus” initiative to finance LDCs climate change adaptation needs

4 July 2013

There is now a growing body of evidence suggesting that sub-Saharan Africa is among the regions of the world that is most exposed to the deleterious 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. However, the adaptation funds maintained by the Global Environment Facility (GEF) are both small relative to LDCs' adaptation needs and they require co-financing, which has proved difficult for poor countries to provide on their own. Borrowing from other funds is costly and it 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 AfT initiative could complement adaptation financing where such projects have consists 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. At a time when the international community is pondering the future of AfT, this idea could provide a way to take the initiative forward and make it both more relevant 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, and yet resources available 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 USD 100 billion is available through these funds. Financing is coming mainly from the governments of developed countries, and is being 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 USD 100 billion per year.

Climate change adaptation: a funding gap with consequences

However, 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 USD 100 billion to USD 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 USD 1.07 billion.

However, what appears to be an important contribution of the LDCF to finance adaptation efforts hides a difficult situation for LDCs: the LDCF only covers part of the cost of adaptation projects. 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 USD 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. However, this link 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.

Table 1 sets out a possible mapping of adaptation projects into relevant AfT categories and Table 2 provides some practical examples from NAPAs.

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: AfT and adaptation financing: promoting synergy

Operationalising the proposed synergy is not straight-forward, however. To this end, a forthcoming study by ICTSD proposes a four-pillar approach to making the two funds complementary and mutually reinforcing:

    • The links between climate change adaptation and trade should be explicitly recognised and built upon. One way of doing this is by specifying the trade impacts of NAPA projects and clearly linking NAPAs with Poverty Reduction Strategy Plans (PRSPs).

    • While advocating for more resources for climate-change adaptation, LDCs can also demonstrate the linkages between trade-related adaptation projects and the AfT initiative and ask that AfT co-finances such projects. This requires AfT to provide scaled-up and additional resources.

    • At the operational level, LDCs will need to submit their NAPAs and PRSPs together to identify their complementary trade and adaptation needs. A common funding agency could efficiently synthesise trade-related and climate change-related financing needs. Alternatively, a dedicated AfT facility (on the trade side) might be needed as a counterpart to the GEF (on the climate change side).

    • Lessons learnt from both AfT and adaptation funding should be integrated in order to make the two funds operate in a coherent, complementary and mutually reinforcing manner. For example, AfT funds could be improved through greater country ownership, whilst in NAPA projects, the trade-development nexus could be further emphasised.

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 the unfolding reality of climate change. Adaptation, however, is costly. Whilst the international community has already made important financial commitments, a huge 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 intellectually appealing, operationalizing this idea calls for, first, formal recognition of the links between the two types of financing mechanisms, and, second, appropriate governance structures that could harness the inherent synergies.

At a time when the AfT community is pondering future directions for the initiative, this idea deserves a bit of consideration. If implemented, it could make both AfT and adaptation funds more effective, and help contribute globally to sustainable development.

Authors: Vinaye Ancharaz is the Senior Development Economist at the ICTSD; Paolo Ghisu is the Programme Officer for the Competitiveness and Development Program at the ICTSD; Sara Traubel is an intern for the Competitiveness and Development Program at the ICTSD.

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