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Mechler iiasa eco instruments

Expert Workshop on Adaptation Financing and Implementation, Putting Priorities into Practice in OECD Countries, Paris, 18-19 June, 2014

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Mechler iiasa eco instruments

  1. 1. Managing climate risks The role of economic instruments for Public-Private Partnerships Session on „Public-private partnerships to build disaster and climate resilience” OECD 18.6.2014 Reinhard Mechler
  2. 2. Key points for discussion • IPCC 2014 climate risk perspective • Role of economic instruments for incentivizing adaptation • Risk financing instruments • Considering equity and efficiency
  3. 3. IPCC risk perspective: Dealing with climate variability and change IPCC, 2014
  4. 4. IPCC risk perspective: Dealing with climate variability and change Example: Losses from coastal and riverine flooding in Europe IPCC, 2014
  5. 5. Economic instruments in DRR and CCCA Instrument category Instruments Subsidies Grants; tax reductions; price supports Taxes and fees Land taxes and fees; energy taxes Licences, permits and variations Tradable units; project based offsets; advance market commitment Other Market Based Instruments Payments for ecosystem services; water markets; habitat banking Risk Financing Instruments (RFIs) Risk Pool; insurance; catastrophe bonds; weather derivatives MBI RFI
  6. 6. Economic instruments in DRR and CCCA 1. Helping to directly manage impacts • Risk financing good evidence 2. Helping to indirectly manage risks • by providing incentives (all instruments) mixed and limited evidence 3. Managing risk and promoting growth • RFI manage systemic risk and thus allow higher return- higher risk activities Limited evidence
  7. 7. Economic instruments in DRR and CCCA - IPCC AR5 WG II • Economic instruments have high potential as flexible tools because they directly and indirectly provide incentives for anticipating and reducing impacts and can have lower costs to the public budget. • Instruments offer some useful possibilities for addressing climate change but they also have problems of effective implementation that need to be addressed. • Risk financing mechanisms at local, national, regional, and global scales contribute to increasing resilience to climate extremes and climate variability, but involve major design challenges so as to avoid providing disincentives, causing market failure and worsening equity situations (medium confidence).
  8. 8. Sector-specific ability of economic instruments to incentivise adaptation Bräuninger et al., 2011
  9. 9. Flood risk in Europe - only a third insured, and risk increasing Total annual average flood risk: 3.4 billion Euro AT B BU CZ DK ES FI F D G H IR IT LV LTLUNLPL POROSK SL ES S UK Total annual uninsured average flood risk: 2.3 billion Euro AT B BUCZ DK ES FI F D G HIRITLV LTLUNL PL PORO SK SL ESS UK Bräuninger et al., 2011
  10. 10. Commercial insurance UK Netherlands (loss compensation) France all hazards system Commercial sovereign insurance Caribbean Catastrophe Risk Insurance Facility EU Solidarity Fund (loss compensation) Public Private Central European Catastrophe Risk Insurance Facility National/provincial flood property insurance International sovereign risk pools US NFIP Insurance markets: public-private partnerships are omnipresent
  11. 11. • Inform clients about available risk prevention measures and associated costs  enabling to evaluate potential risks, benefits of the insurance contract on offer, and the cost of risk prevention measures  reward risk reduction by premium discounts • But: Insurance often provides disincentive and leads to moral hazard (i.e. inaction due to inappropriate incentives) • Insurers can require risk reduction as a contractual condition: e.g. fire safety measures as a condition for insuring a home or business • Also: insurers can work jointly and invest in risk reduction Example Switzerland: cantonal public monopoly insurers contribute to risk reduction, including building codes and land-use planning, and also financing of the Fire Service and Cantonal Civil Defense Services Incentivizing risk management and climate adaptation Opportunities and challenges of risk financing instruments
  12. 12. Assessment of the risk financing instruments based on multiple criteria Bräuninger et al., 2011
  13. 13. The European Solidarity Fund (EUSF) EUSF under risk of depletion due to large scale flood events Jongman et al. (2014) 1/3 climate 2/3 socioeconomics
  14. 14. Risk acceptance threshold Managing risk Mechler et al. (2014)
  15. 15. Rethinking the EUSF Reduction in losses after insurance and EUSF Jongman et al. (2014)
  16. 16. Key points for discussion • IPCC 2014 climate risk perspective • Role of economic instruments for incentivizing adaptation • Risk financing instruments • Considering equity and efficiency