This post is the latest in our special issue: “Climate Change and Financial Markets – Risk, Regulation, and Innovation.” To learn more about the special issue and the work of the Global Financial Markets Center around climate change and financial markets, please read the special issue’s introduction here. And to review all The FinReg Blog posts that touch on climate change, go here.
The Intergovernmental Panel on Climate Change has said that there is a high likelihood of unavoidable climate change impacts. There have been recent signs of this impact (e.g. glacier melt, Amazon and Australian wildfires; etc.) which have accelerated and become more severe than anticipated, threatening natural ecosystems and human communities around the world. These changes have given rise to a movement calling for the declaration of a climate emergency.
The impact has also been felt in the Philippines and documented in a series of projects related to climate financing that the Center for Local and Regional Governance (CLRG) has been conducting in partnership with OXFAM. We share the lessons from our projects to illustrate the state of climate and disaster financing in the Philippines.
The Paris Agreement, which the Philippines ratified, contains actions on addressing climate impacts. Under Article 8, it emphasizes that vulnerable countries must avert, minimize, and address “loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events.” Based on Article 8, Section 4 of the Paris Agreement, “risk insurance facilities, climate risk pooling and other insurance solutions” should be prioritized.
The Philippines is among the most disaster-prone and climate vulnerable countries in the world. The country’s high vulnerability to natural disasters is attributed to factors such as a lack of land barriers, accelerating environmental deterioration, unsustainable development practices, and growing population. Between 1985-2015, the country experienced 410 natural disasters which led to over 40,000 deaths and $23 billion worth of damages. More recent data from 2010-2015 show a total of 96 climate-related disasters struck the country in this five-year period. This consisted of 44 floods, 51 storms, and one drought. Eleven million people per year were affected by these disasters during that period, with damage to property, crops, and livestock amounting to PHP 750 billion (15.1 billion USD) and took up almost 9% of the country’s annual national budget.
It is in this light that climate finance becomes crucial. In the Philippines, climate finance is defined by law as resources that have been allocated or may be utilized towards climate change adaptation and mitigation requirements of the country and its vulnerable communities.
A transboundary view of climate risks and risk transfers
Adopting a transboundary view of climate risk explicitly recognizes the interconnection between people, ecosystems, and economies in a globalized world. Hence, while the most affluent countries have been known to contribute most to historical greenhouse gas emissions (GHG) and have the greatest per capita emissions, the biggest rise in natural disasters have been in low-income countries, which have double the global rate in disaster incidences. As a result, climate shocks devastate poor communities with distressing frequency. It is for this reason that wealthier countries are also being called to support poorer nations in this fight, based on the principle of climate justice. While developed countries and multilateral institutions advocate the market-driven strategy of risk transfer, its operationalization requires the formulation of clear climate finance policies in recipient countries, and policy responses to address some constraints.
The demand for risk transfer instruments in emerging markets is often constrained by market gaps, lack of regulatory frameworks, poor data on disaster risk, a lack of a culture of risk financing, and the reluctance of large reinsurance firms to invest in the development of small risk markets. This dearth compounds the problem of ineffective and inefficient ex ante and ex post strategies to manage and cope with climate risks and shocks in developing countries, as we have been experiencing in the Philippines.
The global declaration of a climate emergency requires assessing the adequacy of policies to set up and regulate climate financing, especially in developing countries such as the Philippines. Are the Philippines’ climate and disaster financing policies effectively addressing climate impacts in the country, especially in its poor municipalities and communities?
Transformative governance is “an approach to environmental governance that has the capacity to respond, manage, and trigger regime shifts in coupled social-ecological systems (SESs) on multiple scales.” Its objective is to actively shift degraded SESs to alternative, more desirable, or more functional regimes by altering the structures and processes that define the system. Applying this lens to the Paris Agreement, St Claire and Aalbu (2016, 41-46) mention four transformative governance shifts emanating from the Paris Agreement: 1) shifting of responsibility towards subnational and non-state actors; 2) placing adaptation on par with mitigation in terms of importance to climate change; 3) developing measures for transparency and accountability; and, 4) paying special attention to those most vulnerable to climate change.
In this analysis, we try to extract key lessons from our experience with climate finance in the Philippines, then critique and expound on its applicability to climate finance governance, ending this with a climate finance policy framework that we have formulated.
Transforming climate financing
Disaster and climate risk financing presently rely mostly on public funds, especially for recovery and rehabilitation. As a result, government incurs opportunity costs. This means that large amounts of public resources go to disaster risk reduction (DRR) and climate change adaptation (CCA) projects rather than other basic public services or public investments for development. More transformative governance requires developing innovative measures on disaster and climate risk financing to properly address the demand for funding of recovery and rehabilitation expenditures.
Our experience in the Philippines highlight some issues in financing arising from the climate emergency. First, The Philippines’ experience with climate change expenditure tagging (CCET) shows that international commitments to finance climate impacts, especially commitments from the north, are severely lacking. Even as the Philippines has met the costs of climate change adaptation initiatives, most of these costs are still shouldered by the country. Less than two percent of its climate financing is in the form of grants, clearly showing that the rest of the world does not share in this burden. While some argue the need to shift responsibility towards subnational and non-state actors is consistent with the principle of subsidiarity, these are not necessarily what want with respect to climate financing, given that local communities and vulnerable local government units (LGUs) often do not have the funds for it. To that extent, the need to focus on the vulnerable is an important aspect of transformative governance, as the impact on poorer LGUs, and the livelihoods of the poor (e.g. farmers, fisherfolk) has been apparent in the Philippines’ experience.
Second, insurance in LGUs in the Philippines is an important proactive financing measure for alleviating and controlling disaster and climate risks. In recent years, insurance coverage has emerged as an important means for ensuring protection from disasters enabling communities to get back on their feet after a devastating loss. According to Lloyds Bank, an increase of one percent on insurance coverage (penetration) saves public spending for rehabilitation and recovery by 22%; in other words, it reduces the tax burden on the people by 22%. Despite the enactment of many laws mandating the insurance of LGU assets against disasters, most public assets in the country remain uninsured or under-insured.
As natural disasters in the Philippines worsen and intensify, the need for a working and effective insurance model becomes more compelling, especially for highly vulnerable LGUs. Models for funding LGUs have to be developed and scaled. While there are local sources that can be leveraged in the meantime (e.g. DRR Funds), these may not be enough to cover all critical facilities of vulnerable LGUs. This is where augmentation from national funds such as the People’s Survival Fund (PSF) and related public funds such as subsidies for state insurance institutions can come in.
Third, it is important to highlight the impact of the climate emergency on livelihoods, especially among the most vulnerable such as farmers and fisherfolk. Our experience in the 2015-16 El Niño crisis provide evidence that the types of impacts and areas likely to be impacted were already known and projected to result in massive loss and damage in agriculture. Even so, interventions were not done with enough urgency. National agencies were slow in mounting anticipatory policy actions for slow onset events. It was contrary to the mandates of both the country’s Climate Change Act of 2008 and the Disaster Risk Reduction and Management Act of 2010 (NDRRM) to create a taskforce that would carry out the policy and planning functions on climate change and disaster risk reduction. Questions on mandate and major issues with coordination and implementation were revealed in the El Niño responses.
The timely delivery of assistance to El Niño affected areas were also affected by the slow release of funds intended for Disaster and Emergency Response. Needed funds had to go through bureaucratic stages of approval and satisfy strict parameters, which affected the timely disbursement and mobilization of these funds. This highlights the problems with existing models for relief and financing that do not address new dimensions of the climate emergency.
Critique of transformative governance
Shifting of responsibility towards subnational and non-state actors
This shift towards subnational actors apparently is an application of the long-held principle of subsidiarity, or the primacy of local governments in frontline implementation. In the Philippines, this is also consistent with the tenets of local autonomy and devolution. Non-state actors can effectively refer to civil society organizations (e.g. OXFAM), in recognition of the prominent role they play in Philippine democracy, especially on empowerment, transparency, accountability, and whole-of-society mobilization, in addition to mobilizing external development financing to flow to vulnerable communities
Placing adaptation on par with mitigation in terms of importance to climate change
This parity between adaptation and mitigation reflects the difference in positions of developed versus developing countries. Developed countries prioritize mitigation actions presumably because they are already resilient, while developing countries like the Philippines are more vulnerable to climate impacts, and have weaker or less resilient economies, and therefore prioritize adaptation actions. Hence, with respect to public financing in the Philippines, adaptation is prioritized in terms of budget allocation, while mitigation is pursued as a function of adaptation. This policy is enshrined as a guiding principle under the 2010-2022 National Strategic Framework on Climate Change, which states that:
“The national priorities, and therefore, the pillars, of the National Framework Strategy on Climate Change shall be adaptation and mitigation, with an emphasis on adaptation as the anchor strategy. Whenever applicable, mitigation actions shall also be pursued as a function of adaptation.” (CCC, 2010, 5).
The need to develop measures for transparency and accountability
Transparency and accountability are already regarded as key principles in Philippine governance. These are especially applicable in climate finance in terms of tracking fund flows (e.g. CCET), and ensuring delivery of funds to climate-vulnerable sectors.
Special attention to the most vulnerable to climate change
This special attention approach at the global level can only mean that climate-vulnerable countries must be given priority with respect to climate fund flows. In the Philippine context, the Climate Change Act acknowledges the differential impacts of climate change, and recognizes that vulnerable sectors, including the poor, bear the most burden on loss and damage due to climate impacts. Institutional mechanisms establishing fund flows in targeting and prioritizing the vulnerable must be integrated into country planning and budgeting frameworks, both at the national and local levels.
We have highlighted the various institutional mechanisms on climate and disaster financing that illustrate the complexity and lack of coherence with respect to fund administration, as well as the lack of efficiency and effectivity of delivery mechanisms, especially with respect to vulnerable local government units and communities in the Philippines.
Transformative governance involves a broad set of governance components, but requires additional capacity to foster new social-ecological regimes, including increased risk tolerance, significant systemic investment, and restructured economies and power relations (Chaffin, et. al. 2016). Climate finance governance must be deeply integrated in broad policy arenas. It is transformative because the arena spans the global, national, and local levels.
- At the global level: nations must be held responsible for meeting their international commitments.
- At the national level: governments need to support capacities for LGUs to be insured, and to revisit processes for effective CCET and releasing of emergency funds for disasters.
- At the local – consider using the Disaster Risk Reduction and Management fund for insurance and other risk transfer mechanisms.
For the Philippines, the following policy reforms are needed:
- A climate finance policy framework where resilience needs are efficiently and effectively identified, based on a comprehensive climate and disaster risk assessment, loss and damage assessment both at the national/sectoral and local levels based on vulnerability;
- A climate finance policy not only for the purpose of achieving climate resilience for its own people, but also to systematically access climate funds provided under the Paris Agreement as a nationally intended strategic move; and,
- Reforms to address institutional fragmentation on climate finance in the country. Due to the worsening impacts under a climate emergency, the longer this fragmentation persists, the greater the loss and damage will be for the Filipino people, especially poor communities in vulnerable local governments.
Recent experiences in the Philippines have emphasized the need for transformative governance. Urgent policy responses are required to effectively address financing the climate emergency.
Erwin A. Alampay is a Professor at the National College of Public Administration and Governance of University of the Philippines.
Dennis dela Torre is a Supervising Researcher at U.P. Resilience Institute.
This post is adapted from a forthcoming book chapter titled “Financing in the Time of Climate Emergency,” submitted to the University of the Philippines Resilience Institute for publication in a book on “Climate Emergency in the Philippines” (edited by Juan M. Pulhin, Antonio G. M. La Viña, and Kristoffer B. Berse).