By Mauro Pisu, Hélia Costa, Filippo Maria D’Arcangelo, Yannick Hemmerlé, Tobias Kruse and Luisa Lutz
The physical risks posed by global warming keeps rising. This is despite the progress of many countries in ramping up climate-change mitigation policies over the past decades. The risks threaten public finances, household incomes, investment and economic growth. As such, they call for urgent action in adopting effective climate change adaptation without relinquishing robust efforts to reduce greenhouse gas emissions. One of the main challenges is to steer private capital towards adaptation as its large financing needs far exceed the capacity of the public sector alone.
The recent OECD paper, “Accelerating Climate Adaptation: A Framework for Assessing and Addressing Adaptation Needs and Priorities” (OECD, 2024a), offers guidance for designing and implementing effective climate change adaptation policies and strategies.
A multi-step framework for adaptation
By building on recent and ongoing OECD work, this paper develops a multi-step framework to integrating adaptation into broader economic policy making. It consists of three key steps (Figure 1):
- Identifying climate-related risks and impacts: This involves assessing the incidence of climate hazards as well as the exposure and vulnerability of populations and assets to these hazards. Assessing these components and their evolution over time allows for estimating the economic costs of climate change. Costs can affect public finances and private-sector incomes, and lead– through demand and supply channels – to lower growth and other adverse macroeconomic impacts.
- Identifying adaptation actions: Adaptation actions aim at reducing exposure and vulnerability of populations and assets to climate risks, thus limiting the costs incurred when risks materialize. Mitigation efforts, however, remain vital to diminish the incidence of climate hazards. Adaptation actions fall into different categories: technical measures (like barriers or green roofs); infrastructure planning (including upgrading building standards or changing urban structure); behavioral or organizational changes (e.g. changing working hours to avoid peak temperature); and structural economic adjustments (e.g. systematic shifts in economic activity). They need to be prioritized based on estimates of economic benefits (i.e. avoided losses) while taking into account implementation costs.
- Planning and implementing adaptation: This step involves identifying and implementing the most suitable policy tools to drive adaptation actions, securing adequate financing, as well as exploiting synergies between adaptation and mitigation efforts. National Adaptation Plans (NAPs) play a critical role in allocating responsibilities, monitoring and evaluating adaptation objectives, and ensuring that policies are tailored to country-specific risks and contexts (OECD 2023a).
Figure 1. A multi-step framework for adaptation
Policy instruments for driving adaptation
Policymakers have a range of policy tools at their disposal to promote and accelerate adaptation actions. The need for different tools and their effective combinations depend on the obstacles hindering private adaptation. These policy tools include:
- Economic instruments: These rely on market incentives to encourage private sector’s consumption and investment choices to be aligned with adaptation objectives while allocating resource efficiently. This will lower the cost of adaptation. The instruments include tax breaks or subsidies for climate-resilient infrastructure and incentives to promote insurance mechanisms against climate-related risks, tax breaks or grants to developers and homeowners to encourage the adoption of stricter building practices and the construction of buildings that can withstand extreme weather events.
- Regulations: These constrain the behaviour of individuals, businesses, and governments by mandating production and work practices that are aligned with adaptation objectives. Regulations can be effective when firms and individuals are unresponsive to price signals, and when economic instruments are politically difficult to implement or fail to overcome coordination failures. For instance, well designed building codes, zoning laws, and land-use regulations help reduce exposure to climate hazards. For example, in Portugal, land-use regulations forbid construction in areas with high wildfire risk. In some countries, the absence of regulations informed by wildfire risk assessments has contributed to large damages in recent years (OECD, 2023b).
- Information provision: The provision of information on climate risks help to overcome information gaps, thus encouraging private adaptation actions, mobilising private finance and bolstering the contribution of the insurance sector to adaptation actions. Information provision thus complements and enhances the effectiveness of economic instruments. Early warning systems and climate risk assessments can enhance awareness to and preparedness for climate risks. For example, the Japanese Emergency Alert System (J-Alert) enables authorities to broadcast rapid warnings of heavy rainfall, storm surges, and tsunamis in affected areas (Japan Meteorogical Agency, 2024). Germany has implemented a “flood passport” that includes a risk assessment and recommendations for additional precautionary measures (OECD, 2024b).
- Direct government provision: In some cases, direct government provision of public goods is necessary to protect communities from climate risks. For instance, in regions vulnerable to sea-level rise and storm surges, governments may be better placed to invest directly in coastal protection infrastructure – such as seawalls, dykes, and other coastal defenses – than the private sector. Examples include the Dutch Delta Works (a series of protective infrastructure against flooding in the Rhine-Meuse-Scheldt Delta), and the London Thames Barrier (which protects London from storm surges). The long pay-off time, large initial financing needs and the absence of clear revenue streams of this type of projects pose significant barriers to their implementation by the private sector, thus justifying direct government provision.
Financing Adaptation
Meeting adaptation needs requires large financial resources, particularly in developing countries (UNEP, 2023). Mobilizing private finance is essential, but market failures and information gaps hinder private investment. Governments can play a pivotal role by providing guarantees, equity stakes, and public-private partnerships to de-risk private investment (OECD, 2024c). Additionally, integrating adaptation into national budgets and fiscal planning can ensure that resources and responsibilities are allocated efficiently across national and local governments (OECD, 2023c).
Looking ahead
The OECD’s framework on adaptation provides a robust foundation for integrating climate adaptation into economic policy. By identifying climate risks, prioritizing adaptation actions, and leveraging a mix of policy instruments, countries can build resilience to climate change.
This work also points to existing gaps in terms of assessing the macroeconomic and fiscal costs of climate change, as well as the costs and benefits of adaptation actions and policies. Current work at the OECD focuses on advancing this knowledge, using a combination of econometric analysis and modelling approaches, contributing to bridge the gap between micro-level estimates – such as the firm-level impacts of heat stress and other weather related events– and macro-economic assessments.
References
Japan Meteorogical Agency (2024), Emergency Warning System, https://www.jma.go.jp/jma/en/Emergency_Warning/ew_index.html
OECD (2023a), Measuring progress in the implementation of national adaptation policies, https://www.oecd.org/climate-change/adaptation-measurement.
OECD (2023b), OECD Economic Surveys: Australia 2023, OECD Publishing, Paris, https://doi.org/10.1787/1794a7c9-en.
OECD (2023c), “Climate adaptation: Why local governments cannot do it alone”, OECD Environment Policy Papers, No. 38, OECD Publishing, Paris, https://doi.org/10.1787/be90ac30-en.
OECD (2024a), “Accelerating climate adaptation: A framework for assessing and addressing adaptation needs and priorities”, OECD Economic Policy Papers, No. 35, OECD Publishing, Paris. http://dx.doi.org/10.1787/8afaaeb8-en
OECD (2024b), OECD Economic Surveys: Austria 2024, OECD Publishing, Paris, https://doi.org/10.1787/60ea1561-en.
OECD (2024c), “Unlocking finance for climate-resilient infrastructure”, Chapter 3 in: Infrastructure for a Climate-Resilient Future, OECD Publishing, Paris, https://doi.org/10.1787/a74a45b0-en.
UNEP (2023), Adaptation Gap Report 2023: Undefinanced. Underprepared. Inadequate investment and planning on climate adaptation leaves world exposed, Nairobi, https://www.unep.org/resources/adaptation-gap-report-2023.