Mobilizing A Market For Climate Change Vulnerability

8 April 2016 | As the global climate changes, the Yelburga farming community of India’s Karnataka state will likely struggle to produce crops like peanuts and onions. In drought years, they lose up to 90% of their crop, and those years are expected to increase as the climate changes, according to Linus Adler, co-founder of the Higher Ground Foundation (HGF), a London-based non-governmental organization (NGO) that is working with the Indian NGO Samuha to help the people of Yelburga enhance their soil, change their crops, and better understand weather patterns.

HGF estimates implementing these practice for a selected pilot village will cost a little over half a million dollars, but could yield over $1 million in avoiding the impacts of climate change, generating a generous supply of “Vulnerability Reduction Credits” (VRCs), a funding mechanism developed by HGR. With VRCs, co-founder Karl Schultz is aiming to provide a degree of standardization to climate change adaptation finance.

Schultz has been involved in environment and development issues for two decades and notes how coordination between public and private sectors in the adaptation space is often unclear and climate models can be ambiguous. Plus, there’s often uncertainty when deciding the ultimate entity responsible for success.

There is also the challenge of not having a single way to measure results of adaptation, and Schultz is pushing for some sort of universal metric – VRCs – for evaluating projects, which will help facilitators prioritize and allocate resources to the most effective efforts – that is, activities that most effectively minimize vulnerability to climate impacts.

“This is a key tool that’s lacking in the adaptation toolbox,” Schultz says. “Certifying or crediting the results of adaptation can add clarity and thus encourage responses to all the other challenges.”

In February, HGF hosted a webinar defining VRCs and outlining the benefits they bring to the adaptation space.

VRCs Explained

At its core, VRCs are a monitoring and evaluation tool, a standard measuring a project’s contribution to reducing climate vulnerability. They function like other environmental credits and can be traded or retired and used to leverage finance.

HGF developed the concept based on the IPCC’s definition of climate change vulnerability, which focuses on exposure and sensitivity to climate change along with adaptive capacity, explains Adler. One VRC is valued at 50 euros (roughly USD $55) worth of avoided impact. It’s calculated by multiplying what HGF calls the Avoided Impact Cost by the Income Equalization Factor, and dividing that number by 50 euros determines how many credits a project earns.

The Avoided Impact Cost is a function of the exposure and sensitivity factors, and those are calculated using economic cost-benefit analyses. With increasing climate change, impact costs (and potential for avoiding these) are expected to rise, Adler says.

The Income Equalization Factor is essentially a playing field leveler and something Adler says is necessary when placing similar VRC value streams in different locations as a project in Bhutan would normally be valued differently than a project in Colombia.

Several principles comprise the VRCs framework and include focusing on the most vulnerable and also sustainability, acceptance from community and consistency, among others. They’re meant to ensure a project that receives VRC verification fulfills these key elements, and Schultz notes projects only receive credits after proving sustainable and effective adaptation measures.

The Finance Factor

The pilot project in India demonstrates VRCs’ financing abilities. Adler explains that securing a buyer for the VRCs can lead to upfront funding sources for the project, through a bank loan, for instance. It assures a revenue stream and the ability to repay. Also, because the VRCs have potential to generate double the cost of implementation, the sale of VRCs can result in a surplus for participating communities.

Acquiring buyers for VRCs won’t be easy but Schultz sees growth in adaptation finance as a part of momentum from the Paris Agreement and an expected increased interest from the private sector.

“The private sector is no doubt in the game too,” he says.

Between corporate social responsibility, investment opportunities and climate risks, businesses have reason to get involved, and Schultz says VRCs can help leverage this and make the best use of this newfound funding for adaptation purposes.

“Since there are already investment decisions, policymaking and finance for adaptation, VRCs can add value for improving this decision-making and potential to deploy resources more effectively,” Schultz says.

He adds that insurers could also utilize VRCs when writing policies.

A Bright Future for VRCs?

Despite the potential, HGF has its work cut out for it as it’s still in a development phase. The group is focused on building partnerships in order to pilot VRCs across the adaptation arena, into more project types and with more vulnerable communities.

Piloting the VRCs is critical, Schultz says, and HGF is not only planning to initiate projects but also to partner with existing and funded initiatives, which could use VRCs as a finance instrument. The group drafted a framework to use in consultation with experts outside of the field, intending to inform the pilots with real and varied experiences.

Adler says they also intend to engage with policymakers to scale up its use but also to more fully understand how VRCs can fit into adaptation and climate planning.

Schultz notes this dialogue too, saying HGF has plans to partner with financial institutions, like the Green Climate Fund, and others working on adaptation. Though that’s in the future, Schultz says. And HGF will continue its discussions with organizations and companies interested in buying VRCs when they become available.

For now though, he says, “we have much more work to do to get the word out on VRCs and their potential.”

Kelli Barrett is a freelance writer and Editorial Assistant at Ecosystem Marketplace. She can be reached at [email protected].