Mechler iiasa eco instruments
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Transcript of Mechler iiasa eco instruments
Managing climate risks The role of economic instruments for
Public-Private Partnerships
Session on „Public-private partnerships to build disaster and
climate resilience” OECD
18.6.2014
Reinhard Mechler
Key points for discussion
• IPCC 2014 climate risk perspective
• Role of economic instruments for incentivizing adaptation
• Risk financing instruments
• Considering equity and efficiency
IPCC risk perspective: Dealing with climate variability and change
IPCC, 2014
IPCC risk perspective: Dealing with climate variability and change Example: Losses from coastal and riverine flooding in Europe
IPCC, 2014
Economic instruments in DRR and CCCA
Instrument category Instruments
Subsidies Grants; tax reductions; price supports
Taxes and fees Land taxes and fees; energy taxes
Licences, permits and variations
Tradable units; project based offsets; advance market commitment
Other Market Based Instruments
Payments for ecosystem services; water markets; habitat banking
Risk Financing Instruments (RFIs)
Risk Pool; insurance; catastrophe bonds; weather derivatives
MBI
RFI
Economic instruments in DRR and CCCA
1. Helping to directly manage impacts • Risk financing good evidence
2. Helping to indirectly manage risks • by providing incentives (all instruments) mixed and limited evidence 3. Managing risk and promoting growth • RFI manage systemic risk and thus allow higher return-
higher risk activities Limited evidence
Economic instruments in DRR and CCCA - IPCC AR5 WG II
• Economic instruments have high potential as flexible tools because they directly and indirectly provide incentives for anticipating and reducing impacts and can have lower costs to the public budget.
• Instruments offer some useful possibilities for addressing climate change but they also have problems of effective implementation that need to be addressed.
• Risk financing mechanisms at local, national, regional, and global scales contribute to increasing resilience to climate extremes and climate variability, but involve major design challenges so as to avoid providing disincentives, causing market failure and worsening equity situations (medium confidence).
Sector-specific ability of economic instruments to incentivise adaptation
Bräuninger et al., 2011
Flood risk in Europe - only a third insured, and risk increasing
Total annual average flood risk: 3.4 billion Euro
AT B BU CZDK
ESFIF
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HIRITLVLTLUNLPLPOROSK
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UK
Total annual uninsured average flood risk: 2.3 billion Euro
AT B BUCZDK
ESFI
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LTLUNLPL
POROSK
SLESS
UK
Bräuninger et al., 2011
Commercial insurance UK
Netherlands (loss compensation)
France all hazards system
Commercial sovereign insurance
Caribbean Catastrophe Risk Insurance Facility
EU Solidarity Fund (loss compensation)
Public Private
Central European Catastrophe Risk Insurance Facility
National/provincial flood property insurance
International sovereign risk pools
US NFIP
Insurance markets: public-private partnerships are omnipresent
• Inform clients about available risk prevention measures and associated costs enabling to evaluate potential risks, benefits of the insurance contract on offer, and the cost of risk prevention measures
reward risk reduction by premium discounts
• But: Insurance often provides disincentive and leads to moral hazard (i.e. inaction due to inappropriate incentives)
• Insurers can require risk reduction as a contractual condition: e.g. fire safety measures as a condition for insuring a home or business
• Also: insurers can work jointly and invest in risk reduction Example Switzerland: cantonal public monopoly insurers contribute to risk reduction, including building codes and land-use planning, and also financing of the Fire Service and Cantonal Civil Defense Services
Incentivizing risk management and climate adaptation Opportunities and challenges of risk financing instruments
Assessment of the risk financing instruments based on multiple criteria
Bräuninger et al., 2011
The European Solidarity Fund (EUSF)
EUSF under risk of depletion due to large scale flood events
Jongman et al. (2014)
1/3 climate 2/3 socioeconomics
Risk acceptance threshold
Managing risk
Mechler et al. (2014)
Rethinking the EUSF Reduction in losses after insurance and EUSF
Jongman et al. (2014)
Key points for discussion
• IPCC 2014 climate risk perspective
• Role of economic instruments for incentivizing adaptation
• Risk financing instruments
• Considering equity and efficiency