OPINION: Opportunities and challenges for private sector investment in adaptation
There are a number of measures that a developing country can use to support private sector investment in adaptation. Charlotte Ellis of Adam Smith International and John Ward of Vivid Economics explore various areas where countries can take action to stimulate investment, and argue that national climate funds are particularly well positioned to support private sector activity in adaptation.
The need for climate change adaptation is especially high in Africa, given it is one of the most vulnerable regions in the world to the impacts of climate change. Adaptation costs in Africa are likely to be in the region of $20-30 billion per year over the next 10 to 20 years and are expected to rise thereafter. In order to secure the economic growth of African developing countries, the private sector – an engine of growth – will need to adapt quickly.
The private sector has a crucial role to play in tackling the adaptation challenge. Businesses’ revenues and profit streams are vulnerable to climate impacts and this economic vulnerability can be reduced by effective climate change adaptation. The private sector also has the opportunity to make a profit whilst delivering goods and services that will deliver adaptation services and benefits to the rest of the economy.
The obstacles to achieving private sector investment in adaptation are complex, varied and numerous. Policy obstacles include everything from burdensome import/export legislation that discourage the import of adaptation technologies to a lack of progressive tax reform to economically incentivise investment into adaptation. Countries may have regulatory barriers, such as water price subsidies or limited water metering requirements, thereby discouraging sustainable use of water.
A lack of capacity, awareness, knowledge and skills in the private sector can also be a significant obstacle; if a business does not understand the threat, it is unlikely to adapt. A lack of finance can further exacerbate the problem as enterprises in many developing countries are unable to access credit to fund crucial adaptation investments.
In order to overcome regulatory barriers, developing countries must adopt regulations that encourage – rather than hinder – investment in adaptation. This can be in the form of new guidance on construction standards that enforce minimum adaptation requirements on new buildings such as minimum requirements on insulation, wastewater, flood management and so on. Likewise, obligations can be placed on operators of critical infrastructure to report regularly on climate change risks and their planned mitigation actions.
In order to overcome the challenge of a lack of awareness, a country must strategise to keep the private sector adequately informed. Incorporating knowledge of climate change impacts and adaptation in secondary and post-secondary education curriculums will be a key long-term solution. Information and communication technology can be invested in, for instance early disaster warning systems, or up-to-date climate information provided to vulnerable sectors such as agriculture. Governments can also promote the use of adaptation technologies in the private sector, including irrigation systems, flood defences, resistant crops and so on.
States can also adopt laws and policies providing economic incentives for adaptation. This can be achieved through subsidising climate change adaptation technology. Tax incentives can be provided for companies in the supply chain of adaptation technologies on sales of adaptation solutions. However, often governments lack the finance and capacity to carry out such reform.
Creating and utilising a national climate fund can provide crucial access to finance for the private sector whilst supporting government to instigate reforms, via the provision of dedicated, specialised expertise not available elsewhere in government.
Country climate funds are well-placed to stimulate the private sector’s activity in adaptation by virtue of their accessibility to national and local businesses. In most cases, they can finance private sector adaptation projects directly, or else finance programmes that seek to address key barriers such as information dissemination. Application processes can be quick, and the funds can be very responsive – often with the ability to provide technical assistance to applicants where needed.
This dual capacity – both to fund the private sector, and to support wider government activities – means national climate funds are uniquely well placed to support a national private sector to invest in climate change adaptation.
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