Vulnerability reduction credit

The United Nations Framework Convention on Climate Change (UNFCCC) is creating a "Green Climate Fund" that targets $100 billion/year by 2020 to go to a "balance" of climate mitigation and adaptation support in developing countries. And while it states that “leveraging private finance” is a common line, the adaptation finance debate is thin on substance regarding how markets could contribute to developing, funding and executing climate adaptation projects.

Most approaches proposed to fund and mobilize the trillions of dollars needed for developing countries to adapt to climate change are “top down” with resources assumed to be sourced from treasuries or other direct taxation measures. This calls into question if funding will suffice. Another challenge is that projects supported to date often don’t present robust metrics that quantify how much they reduce climate vulnerability.

In 2004 Callaway introduced the question, without developing it further, would a market mechanism for climate adaptation be possible? Karl Schultz proposed in a discussion paper in 2009, followed in 2011 in Climate Policy journal the concept of a vulnerability reduction credit (VRC™), a credit based on  the degree to which  assets  or productivity endangered by climate change  are protected, with provision to adjust credit issuances based on development levels.

There are a number of researchers who have subsequently proposed a market mechanism to finance climate adaptation projects. Matt Baca has suggested that a "reverse auction" for alternative adaptation projects would create incentives for cost effective adaptation. Kate Miles proposes that emission reducing Clean Development Mechanism projects could gain supplemental credits if they incorporated climate adaptation measures. Persson asked the question in a working paper, "could an adaptation 'market' emerge," without detailing exactly how. "Butzengeiger-Geyer et. al., suggested that targets should be set for "saved wealth," "saved health" (avoided disease, disability and deaths), and "environmental benefit" (saved species and protection of habitat), with tradable units created for each of these categories.

Some commentators have also, starting in early 2012, begun to ask the question how a market mechanism for adaptation could be designed. Dirk Forrister, incoming Executive Director of the International Emissions Trading Association, wrote "an interesting set of market instruments could emerge to put private companies into the role of financing and delivering adaptation," with the "threshold policy questions....how supply and demand would be formed, and how benefits would be quantified (or how a tradable 'credit' might be denominated.)"

Defining the Vulnerability Reduction Credit
In a poster shown at the 2012 "Planet under Pressure" conference, Schultz et. al. defined a VRC as "a unit of climate vulnerability reduction crediting with a nominal value of 50 Euros." For a particular project, the number of VRCs issued would be a function of the avoided impact cost (vulnerability) of such project, i.e.: Number of VRCs = Avoided impact costs of a project / EUR50.

Efficient vulnerability reduction projects would then be characterized by a market value of the VRC of below EUR50, matching the return expectations of a project developer/investor in the vulnerability reduction project and the “impact versus cost” expectations of credit buyers.

Adjusting for Development Levels
Taken at face value, if projects are assessed and prioritized solely based on the level of monetized assets protected, then projects that reduce the vulnerability of asset- rich communities would be favoured over asset-poor communities with the same or higher levels of vulnerability. Furthermore, poorer communities generally lack the very assets that afford them higher levels of resiliency.

This would seem perverse when aggregate human needs such as shelter, food security, and health are much greater in developing countries. There is therefore a need to consider alternative methodologies for ‘asset’ valuation that can more suitably value social, economic and environmental assets in developing countries, enabling us to set meaningful ‘baseline’ valuations that underpin meaningful climate vulnerability and damage estimates.

The idea of "normalizing" credit issuances against levels of development has been established for climate mitigation projects. Crediting future increases in energy demand, where it is currently being suppressed, has a basis in Clean Development Mechanism (CDM) emission reduction crediting rules and may be applied for VRCs. In the CDM, the minimum service level is a baseline of emissions where minimum human needs such as basic energy services (including lighting, cooking and drinking water supplies) are met. A Suppressed Demand Baseline is appropriate when basic energy services are below the “minimum service level” at the time of implementation of the CDM project activity.

The VRC concept as proposed by Schultz borrows this “minimum service level” concept and apply it to climate adaptation if per capita assets or productivity in particular communities in developing countries, such as irrigation, storm drainage, or building standards, are below a minimum service level to withstand climate impacts, or where agricultural productivity is below a certain threshold. This effectively makes investment in vulnerable communities look more attractive, and by doing so, puts them on a more equal footing with countries (and communities) already operating at that minimum service level.

Higher Ground Foundation calls this the "Human Vulnerability Factor" (HVF) as it normalizes assets or productivity to human impact. The key simplifying assumption of the HVF is that "human" per capita damage or loss is proportional to per capita income or economic asset levels: the human damage is not the monetary value, but rather the monetary value times the inverse of the fraction of income or other development metric below a certain threshold. One way to define a minimum threshold that serves as the basis for the Human Vulnerability Factor might be through gross national income thresholds. For instance, a community involved in an adaptation project may have a per capita income one half that of the World Bank's threshold for upper middle income, and thus the HVF is two. When calculating VRCs expected, the adaptation project's reduction in monetary losses or damages would be multiplied by two.

In The Spirit Level, Wilkinson and Pickett (2010) established that wellbeing indices such as life expectancy and "happiness" (as self identified) level off when countries reach a middle income level. Hence, above the determined income threshold, a level that is considered to be sufficiently "developed", the HVF is no longer employed (the HVF = 1). This means in "developed" countries, the VRC is calculated based simply on the level of monetary loss or damage caused by climate change.

Other measures, such as the Human Development Index, may provide a broader perspective on a community’s resilience to climate change, but may be too involved, or expensive, to quantify at the community level for VRC project registration. The adoption of a universal Human Vulnerability Factor for all vulnerable communities seeking VRC registration would serve as a baseline point from which to measure and compare the monetary benefit of a project. It allows us to compare the value of projects and issuance of VRCs in a fair way, by enabling us to quantify the ‘vulnerability reduction’ of projects. The Human Vulnerability Factor is therefore a major assumption – but a very useful one when it comes to measuring the climate vulnerability reduction from specific projects.

Conclusion
The vulnerability reduction credit demands robust measures to prove, post hoc, vulnerability reduction, it offers potential to raise an order of magnitude’s greater funding than overseas development assistance, and opens up opportunities for communities and businesses to create bottom-up solutions, cost effectively, transparently, and sustainably. With appropriate regulation, the market price of VRCs becomes a valuable means of prioritizing adaptation interventions.

The Higher Ground Foundation, a non-profit organization, is promoting the VRC™.