LONDON (Thomson Reuters Foundation) - A major U.N. fund that helps developing countries adapt to the negative effects of climate change faces a bleak financial future because of rock-bottom prices on the carbon market, its main source of income.
Marcia Levaggi, manager of the Adaptation Fund Board secretariat, told Thomson Reuters Foundation the fund could no longer provide grants for projects managed by intergovernmental agencies, such as the U.N. Development Programme, without additional contributions. Seven projects recommended by the board in countries including Mali, Cuba, Myanmar and Uzbekistan - amounting to $48.7 million - are on hold.
The Adaptation Fund is meant to be financed mostly from a 2 percent levy on the value of certified emission reduction (CER) credits issued under the U.N. Clean Development Mechanism (CDM) each year. The credits are earned by projects in developing nations that cut greenhouse gas emissions, and can be traded and sold by industrialised countries to meet part of their emission reduction targets under the Kyoto Protocol.
But due to oversupply and uncertainty about future global caps on emissions, prices for the credits have plunged to around 60 euro cents ($0.82) per tonne of carbon dioxide, slashing the Adaptation Fund's income.
"It's not the 12 euros per tonne we used to have in 2011 - now it's really bad, and we cannot count on a recovery of the carbon markets in the near future," Levaggi said from Washington. "The CDM doesn't seem to be on a good track to continue, at least in the way it was."
As of the end of August, the Adaptation Fund had raised $188 million from the sale of CERs and $151 million from donors. But the flow of money from the carbon market has slowed to a trickle, and is estimated to bring in only a further $145-150 million up to 2020.
Since 2011, the Adaptation Fund Board has approved a total of $190 million for initiatives to strengthen resilience to droughts, floods, storms and rising seas in 28 countries. The most recent project to get the green light - protecting rural communities in Guatemala from extreme weather - was only possible thanks to donations from the Swedish government and the Brussels Capital Region.
The Adaptation Fund does still have money left in its depleting coffers, but this will only be available for climate change projects that are developed and led by national and regional agencies, such as government ministries and research institutes.
Because the fund has strict procedures in place to ensure that these national implementing entities (NIEs) can run programmes well, it has taken more time for them to meet the requirements than multilateral institutions. Of the 29 projects approved by the board so far, only four are managed by national-level organisations.
But the pace of these projects is picking up, and they account for seven out of nine proposals now under review. The projects range from water and agriculture innovations in Jordan to preparing lagoon ecosystems and communities for sea-level rise and extreme weather in Benin.
"They are starting to get up to speed, and if this continues we may also run out of funds for NIEs at the end of 2014," Levaggi warned, noting that the fund has $105 million remaining for nationally-led projects.
UNIQUE ACCESS FOR DEVELOPING STATES
To outsiders, it may seem puzzling that the Adaptation Fund limits the amount of money it can grant to climate adaptation initiatives managed by multilateral agencies. But allowing developing countries to access its resources directly is a unique aspect of the fund that poorer nations fought hard for at U.N. climate talks in 2008.
"It takes a huge investment to go through the accreditation process (for an NIE) - it is time and resource-consuming," said Levaggi. "They need some predictability, and the prospect of getting some funding."
Since March 2012, the fund has been considering innovative mechanisms to mobilise additional public and private money for adaptation, ranging from bonds to certificates issued to companies wanting to demonstrate their environmental credentials. But nothing has been settled on yet, and a call for online donations from individuals and businesses at last year's U.N. climate talks raised only around $1,000.
The Adaptation Fund has also been talking to wealthy governments with a view to soliciting more donor contributions. But it's a hard sell in tough economic times and periods of political changeover. Australia, for example, backed off an AU$15 million ($14.2 million) pledge earlier this year.
Levaggi noted there is also competition from other financing vehicles for climate change activities, especially the U.N.'s fledgling Green Climate Fund (GCF), which is due to get up and running next year. As a result, potential contributions to the Adaptation Fund "will depend on the signals that come from the GCF, because we know that most donors are saving money for that", she added.
Developing nations are frustrated by the slow pace of discussions on the design of the GCF, which is meant to channel billions of dollars of climate finance in the coming years. The fund’s board is meeting this week in Paris. Donors, including Britain, the United States and Germany, have said they will put money into the GCF but want to be happy with the way it will function first.
Researchers and climate campaigners fear this caution is holding back funding that is urgently needed to help the poorest and most vulnerable people adapt to the worsening impacts of a warmer world.
"The GCF shouldn't be used as an excuse not to pledge to other funds like the Adaptation Fund that are badly in need of resources. (Donors) shouldn't play one off against the other," said Oscar Reyes, a fellow with the climate policy programme at the U.S.-based Institute for Policy Studies.
Sven Harmeling, climate change advocacy coordinator for the aid group CARE, said donor excuses about contributions to other climate funds and the poor state of the carbon markets don't wash.
"These kind of institutional arguments are being used, but many people in developing country delegations (at U.N. climate talks) increasingly recognise the value of the knowledge and experience that is being generated by the Adaptation Fund," Harmeling said. "Additional finance should be pledged by developing countries by COP19 at the latest," he added, referring to November's U.N. climate conference in Warsaw.
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