Adaptation financing in a global agreement: is the adaptation levy appropriate?

Abstract

The climate negotiations recognize that adequate and additional funds are needed to assist adaptation in developing countries. This article analyses whether a future 2% or any higher adaptation levy (AL) can achieve this, whether it causes – as it is a tax on the Clean Development Mechanism (CDM) – a significant excess burden, and how it alters the relation between adaptation financing and mitigation. While former studies have focused on single AL levels, this article determines the transfers from the CDM and the AL for a range of emission reduction targets and AL levels with a partial equilibrium model based on marginal abatement cost estimates for 2020. Revenues from a 2% AL are negligible and remain inadequate for ambitious emission reductions and an AL that maximizes transfers (e.g. US$15 billion for 30% reduction target). Revenues are mostly subtracted from CDM transfers, so little additional funds are raised (e.g. less than $2.4 billion for 30% reduction target). Adaptation financing increases disproportionally with more stringent reduction targets for a rising levy, and the share of Annex I country expenditures devoted to transfers increases slightly. Both effects are only small. The excess burden is larger than 85% of the additional funds. Policy relevance Financing adaptation in developing countries has become a cornerstone of a global climate agreement. The mechanism for raising additional funds has not yet been determined. This article assesses the potential of upscaling one option that is already in place under the Kyoto Protocol: the 2% AL on the CDM. It is estimated that even a much higher AL does not generate substantial additional funds, mainly redistributes transfers within non-Annex I countries, does so at social costs in the same order of magnitude as additional funds, and increases the share of Annex I country expenditures devoted to transfers. It is unwise to link mitigation and adaptation as CDM and AL jointly do, since this taxes a beneficial activity. Financial instruments with transfers that decrease with or are independent from climate protection would be preferable.