FNI Climate Policy Perspectives 3, November 2011
Approaches and criteria for allocating adaptation funds vary significantly among current sources - UN-backed funds and bilateral cooperation - and to some extent lack transparency and consistency. Such funding risks being spent in a haphazard way that repeats many of the mistakes made in development assistance over the past decades.
An Adaptation Market Mechanism (AMM) could contribute to efficient allocation of adaptation funds, promote adaptation activities by private and public actors through additional financial incentives, and raise additional and reliable adaptation money. This would help to avoid future public criticism of the effectiveness and efficiency of spending adaptation funding.
The proposed AMM would specify mandatory adaptation targets, on international, regional or domestic level. Participants who achieve their targets either by generating adaptation units or by buying them in the market would incentivize private, commercial and institutional actors to develop adaptation projects that create verified adaptation units.
A universally accepted and verifiable trading unit applicable to all types of adaptation activities would help to maximize the cost reduction potential for the AMM. We suggest applying net present value (NPV) for property saved; Disability Adjusted Life Years Saved (DALYS) for health benefits; and potentially a separate unit to consider the environmental benefits of an adaptation activity.