Adaptation Funding and Greenhouse Gas Emissions: Halo Effect or Complacency?

• Author: Djoundourian, Salpie

1. INTRODUCTION

The debate surrounding climate change centers on the choice of appropriate policy tools to address the impacts of anthropogenic emissions of greenhouse gases (GHGs). The establishment of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 marked the beginning of an era of international cooperation to combat climate change and its negative impacts. Initially, the UNFCCC encouraged industrialized countries to stabilize GHGs emissions without any obligations. The yearly meetings of the UNFCCC parties, referred to as Conference of Parties (COP), represented the venues that allowed evaluation of progress and determined courses of future actions in combating climate change. A key milestone in climate negotiations under the UNFCCC was the Kyoto Protocol signed in 1997 as part of C0P3. During the first phase of implementation of the Kyoto Protocol, the industrialized countries (Annex I countries), accounting for 39% of 2010 global GHG emissions, committed to an average of 5% reduction in their emissions between 2008 and 2012 in comparison with their base year levels (1990 levels). During the second phase (2013-2020), the countries committed to reduce emissions by at least 18 percent below 1990 levels. Non-Annex I countries were exempted from abatement commitments following the principle of common but differentiated responsibilities whereby the historic responsibility for emissions by industrialized countries was considered as the legal imperative under the Kyoto Protocol. More recently, the COP meetings of Copenhagen (2009), Cancun (2010), and Doha (2012) shed light on the option to adapt to the negative impacts of climate change as a complementary policy option to the abatement of harmful emissions.1 However, the presence of this latter option has raised serious concerns among experts and policymakers about the potential for complacency with regards to emission abatement efforts by countries that might adapt or over-adapt (Benchekroun et al., 2017).

In the extant literature on emission abatement and adaptation, which is predominantly theoretical, there is no clear consensus about the impact of adaptation efforts on emission abatement. While some papers find that adaptation and emission abatement are substitutes (Kane and Shogren, 2000; Parry et al., 2001; Zehaie, 2009), others show complementarity under specific conditions (Marrouch and Ray Chaudhuri, 2011; Ingham, 2013; Lazkano et al., 2016). In this paper, we complement the theoretical work by providing the first empirical evidence on the nature of the relationship that exists between adaptation and emissions. Specifically, we investigate the impact of reducing adaptation costs via adaptation fund transfers on emissions of greenhouse gases. Our study allows determining, more broadly, if there exists a halo effect of adaptation funding or if, on the contrary, there exists a complacency effect as feared by some policymakers.2 According to English (1934), the halo effect can be defined as the 'tendency in rating to be influenced by general impression or attitude when trying to judge separate traits'. Although, the effect was first studied within psychology in the early 20th century, its use in the study of social situations, including business and politics, has expanded tremendously since (see for e.g. Rosenzweig, 1994; Leuthesser et al., 1995). In the context of the current study, the halo effect would indicate a pro-green or pro-climate action attitude, or, equivalently, a complementary relation between adaptation efforts, reflected in seeking adaptation funding, and emissions abatement efforts. Whereas the complacency effect would indicate satisfaction with adaptation efforts and dismissing any further emissions abatement efforts.

Using data from the Word Development Indicators to measure Carbon Dioxide ([CO.sub.2]) emissions and other greenhouse gas emissions, we use a staggered difference-in-differences methodology to compare the emissions of non-Annex I countries that received funding for their adaptation activities (the treated countries) before and after the adaptation funding approval date relative to the emissions of the other non-Annex I countries (the control group).3 While the effects of the Kyoto Protocol (1997) on emissions are examined empirically (Morel and Shishlov, 2014; Aimer and Winkler, 2016), albeit shyly, the impacts of adaptation to climate change on emissions levels are not. Our paper attempts to fill this gap in the literature, which to the best of our knowledge has not been examined so far.4 Using a difference-in-differences and an event study analysis, we show that countries that received adaptation funds had a significant and negative change in a number of measures of [CO.sub.2] emissions, providing support for the halo effect hypothesis.

The remainder of this paper unfolds as follows. Section 2 overviews the global efforts related to adaptation to climate change. Section 3 discusses the theoretical literature on the linkage between adaptation and emissions abatement. Section 4 presents the data and methodology. Sections 5 and 6 present the results and robustness tests, respectively. Section 7 concludes.

(2.) ADAPTATION UNDER THE UNFCCC

Globally, more than twenty multilateral funds and initiatives, in addition to numerous bilateral and national funds, support abatement and adaptation efforts to climate change. The adaptation finance architecture includes special funds that developed countries contribute to, earmarked for supporting adaptation efforts in developing countries that were part of the non-Annex I parties under the Kyoto Protocol (1997-2012) and the subsequent Paris Agreement (2015), and that are most vulnerable to climate change impacts. The Climate Funds Update (CFU) monitors such funds and updates the progress of multilateral fund approval for projects across the globe. According to CFU, the largest source of funding for adaptation projects under the UNFCCC is the Green Climate Fund (GCF) that supports both abatement and adaptation efforts, with pledges reaching US$ 10.3 billion, 50% of which are expected to support adaptation projects.5 For instance, the Pilot Program for Climate Resilience (PPCR), the Least Developed Countries Fund (LDCF), and the Adaptation Fund (AF) each allocated close to a US$ 1 billion in adaptation funding. The cumulative funds during 2002-2019 from major sources, approved for adaptation projects, amounted to more than US$ 7 billion. Table 1 presents summary data on the various multilateral funds that support adaptation efforts. While most of the funds support adaptation projects, few are multifocal and include projects that promote abatement and other goals including sustainability, poverty reduction and agricultural resilience. There are few multilateral funds that work outside the UNFCCC channels in addition to a national multi-donor fund that supports public projects in Indonesia at local and national levels.

Each of these funds have their specificities. The AF, for example, is financed in part by government and private donors, in addition to proceeds from a two percent share of certified emissions reduction (CER) issued under Kyoto Protocol's Clean Development Mechanism (CDM) projects. To date, the AF has supported more than 200 projects in nine different sectors including agriculture, coastal zone management, food security, disaster risk management, and urban and rural development, among others. These projects are chosen on the basis of community vulnerability to climate change and the level of urgency of action or severity of impact in case of inaction. Enabling farmers to invest in climate resilient technologies and practices, to seek and employ drought tolerant seeds, and to employ more sustainable water and land management practices are just a few of the benefits of the AF supported projects. Regionally, the largest amount of funds flow to Sub-Saharan Africa (42%), followed by East Asia and the Pacific (16%), Latin America and the Caribbean (15%), South Asia (14%), Europe and Central Asia (5%), and Middle East and North Africa (5%). The top 20 recipient countries, which include Bangladesh, Niger, Zambia, Cambodia, Tanzania, Nepal, Mozambique, Samoa, Bolivia, and Tajikistan, have each received more than US$ 100 million.6

The question of interest to policymakers concerns the relationship between adaptation and abatement and the incentives created by the measures employed to tackle climate change. Adaptation measures may potentially change the rules of engagement at the local levels. Once communities adapt to climate change impacts, their reaction or response to further climatic change may differ, positively or negatively. Parry et al. (2001) argue that mitigation/abatement can buy time for adaptation, and adaptation can raise the thresholds of tolerance, i.e. increased complacency, that need to be avoided by mitigation. They argue that when these responses are considered separately, they appear inadequate to meet the climate change challenge, however, when combined they make a powerful response. In fact, the AF supported projects require that applicants to the fund produce an elaborate proposal that delineates the potential impact of the adaptation effort on the future climate change scenarios. A good example is a local adaptation project that enhances household and community resilience to climate change in an offshore small-island in Bangladesh. This climate friendly development project climate-proofs water resources and prepares the community for disaster response through capacity building. However, it also provides off-the-grid renewable sources of electricity, which directly contributes to emissions abatement for the locals and, more importantly, indirectly benefits adjacent communities through the ripple effect on abatement stemming from renewable technology adoption.7 Standard economic theory clearly states that if adaptation and...