The Fiscal Implications of Hurricane Strikes in the Caribbean

By Bazoumana Ouattara, University of Manchester; Eric Strobl, École Polytechnique; Jan Vermeiren, Kinetic Analysis Corporation and Stacia Yearwood, Caribbean Catastrophe Risk Insurance Facility.

Worryingly losses associated with tropical storms have risen considerably over the last few decades and are currently estimated to be about $US 26 billion a year. Moreover, some predict that the intensity of these phenomena may increase with climate change. In this regard, arguably the small disaster prone island economies in the Caribbean are particularly vulnerable, as their limited budgetary capacity prevents them from establishing sufficient financial reserves to absorb such potentially large negative shocks.

Added to this, their high level of debt restricts their ability to access credit in the aftermath of a natural disaster, while high transaction costs associated with the relatively small market restricts access to private catastrophe insurance covering potential losses. International aid also does not provide a solution since, when it comes, it is often too little and too late.

A demonstrative example of the consequences of such financial shortfalls in the Caribbean was the case of Hurricane Ivan, which struck Grenada in 2004 causing losses twice the size of the island’s GDP. In the immediate aftermath the country was no longer able to finance its public service bill, but had had no budget contingency in place or access to the private insurance given the relatively small market. It was thus was forced to introduce a number of revenue enhancing measures and delay efforts of recovery and reconstruction in order to address the fiscal shortfall, thus likely further amplifying the long term effects of the hurricane.

In fact it is in response to such fiscal vulnerability to natural disasters that in 2007 a number of Caribbean economies established the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a multi-country risk pooling scheme that can provide members with almost immediate fiscal relief when a natural disaster occurs. As a matter of fact, since its inception the CCRIF has issued over US$ 23 million as a consequence of 4 tropical storm events alone.

Payouts to participating members under the CCRIF as a consequence of a tropical storm are made according to the storm’s physical characteristics, predicted losses, a country’s risk profile, and a country’s loss coverage, the latter being the only choice parameter of a country.

Ultimately the country’s chosen coverage will, however, depend on its expectations with respect to the impact of a tropical storm event on its fiscal sector. In this regard, there are only a handful of statistically based studies which can provide quantitative indication as to the actual short-term fiscal shortfalls in response to a natural disaster event, and these provide mixed evidence of an impact on the fiscal gap of countries.

However, all existing studies only look at the impact of natural disasters events in terms of annual data. One suspects in this regard that much of the true short-term fiscal reaction is likely `netted out’ in annual terms, and thus can only provide limited insight into how severe such fiscal shortages in reality are likely to be.

In a recent study we address the limitations of the current literature by explicitly examining higher frequency, i.e., monthly, fiscal reactions to natural disaster events. Additionally, and unlike previous studies, we also provide estimates of return periods of fiscal shortages in an extreme value theory framework. To these ends, we compile a data set of monthly potential hurricane losses and fiscal expenditure and revenue over the 2000-2012 period for a set of Caribbean countries. We combine these data with destruction estimates derived from actual hurricane tracks and a detailed spatial distribution of assets. Our econometric analysis on this data shows that government revenue drops immediately after a shock, while there is no discerning significant effect on total public expenditure.

More specifically, an average hurricane reduces revenue by 17.6%, while the largest observed event reduced it by more than 200%. Examining the main components of expenditure, however, we discover that current expenditure increases temporarily two months following the shock. More specifically, an average event caused a 16.8% rise in current expenditure.

Overall, we find that there is an immediate and sizable impact on Caribbean economies’ monthly budget deficit, namely 20.3% for the mean hurricane strike. Using our estimates and extreme value modelling we show that return periods of significant fiscal impacts may be considerable for many of the island economies in the Caribbean. For instance, a 100% debt increase is likely to occur within the next 57 to 174 years, depending which island one considers.

First published as a policy brief by Fondation pour les études et recherches sur le développement international 

 

 

A Climate Potluck in Paris

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By Jonas Amtoft Bruun

“We have an agreement”. Those redeeming words from French foreign minister Laurent Fabius in the evening of Saturday the 12th of December unleashed a wave of standing ovations from high level UN staff, delegates and observers from business and civil society. Preceding this historic moment had been a fortnight of marathon negotiations and sleepless nights for the approximate 50.000 people that attended the 21st UN Conference Of the Parties (COP 21). The Paris meeting was a culmination of a 6-year redress effort for the UN climate regime following the catastrophic Copenhagen meeting in 2009, which collapsed into chaos and recriminations.

One point five, to stay alive

In The Paris Agreement developed and developing countries alike have agreed to limit emissions to hold the increase in the global average temperature to well below 2 °C (with an aspiration of 1.5 °C) above pre-industrial levels by the end of the 21st century. They have furthermore agreed to jointly mobilize billions of dollars in so-called climate finance, to help poorer countries cut emissions and manage the adverse effects of climate change. Targets will be subject to review on a 5-year basis.

The goal of limiting global temperature increase to 1.5 °C made it into the agreement through a well concocted lobbying campaign orchestrated by the Alliance of Small Island States (AOSIS). This was supported by over 100 countries and a large number of civil society organizations. According to the coalition, the half a degree difference is critical to the survival of the world’s poorest countries. In fact, Desmond Tutu once wrote, “A global goal of about 2 degrees is to condemn Africa to incineration.”

Unfortunately, reduction targets in the Paris Agreement are not yet adequate to avoid the disaster of more than 1.5-2°C of warming. More than likely they will lead to a 3 °C warming, which will bring with it disastrous climate change.

The Paris Climate Potluck

The inconsistency between targets and ambition has to do with the way the Paris agreement has been put together.

While the Kyoto Protocol set quantified and legally binding targets for rich countries related to their historic responsibility for causing climate change and current economic capabilities to mitigate them, the Paris agreement is essentially a ‘potluck’ of carbon-cutting plans submitted by each country.

These plans, which in UN jargon are called ‘Intended Nationally Determined Contributions’, differentiate substantively in ambition and jointly they do not add up to the reductions required to stay below a 1.5 °C or even 2 °C temperature increase. Furthermore, since the Paris agreement does not have any enforcement mechanism, there will be no penalty if countries break their promises.

Developed vs. Developing

A returning schism in the UN climate negotiations is over who should pay for developing countries moving beyond fossil fuels in economic development and also helping them adapt to the adverse effects of climate change. Climate finance is supposed to be new and additional from e.g. development aid.

In Copenhagen, developed countries promised to mobilise $100 billion annually by 2020. This figure has not changed in the Paris Agreement, however new language introduces the possibility of fundraising being a global effort. This will entail developing countries chipping in as well.

Global fundraising for climate finance is highly controversial. Most developing countries find being forced to pay some of the bill for climate change, which they did not cause, very unjust. Meanwhile developed countries argue that the strongest (economic) shoulders should carry the heaviest weight and many of the richest economies today are considered developing countries in the UN climate regime. This has to do with the fact that the division between developing and developed countries was made in 1992, when the United Nations Framework Convention on Climate Change (UNFCCC) was established. Back then major economies such as China, India, Brazil and South Africa were a lot less developed than today.

Essentially this boils down to a debate about what should be the basis for obligations: ‘historic emissions’ or ‘current economic capabilities’.

As this question has not been definitively resolved in the Paris Agreement, developed countries will likely look to the private sector to raise capital.

Granted, no one believes that it is possible to resolve the climate problem without engaging the private sector. However, it is important to identify the areas that private sector investments will not cover. Evidence shows that there is a lack of private climate finance flowing towards adaptation, which means that public funding will need to be allocated towards countries hardest hit by climate change.

Everything but the kitchen sink

Parties should also try to avoid creative accounting, such as the newly released report by the OECD, in which developed countries claimed to already be mobilizing $62 billion in climate finance. Using the OECD methodology (which accounts for everything but the kitchen sink) to analyse new promises made in Paris could take that total to $94 billion per year.

Meanwhile an Indian finance ministry analysis of the OECD report said that the real flow of climate finance is closer to $2.2 billion.

The debate over what counts is yet another reason why a clear definition of climate finance is urgently needed if the UN system is to make greater progress in the future. Paris was an important first step, but it will take a lot more consensus building from all parties to keep us in a 1.5–2 °C trajectory.

Business as usual on migration & climate change won’t produce sustainable development

By Professor Uma Kothari

The impacts of climate change are likely to be severe. Extreme weather events, heat stress, rising sea levels, infections and disease are just some potential results, which will hit poor and vulnerable populations in developing countries hardest. Yet the current ways in which international climate policy is incrementally formed through elite conversation is proving totally inadequate to deal with the growing threat.

Read more →

Dispatch from Lima: Seven Trends We Spotted at UN Climate Talks

By Lauren Gifford and Jonas Bruun

Two veterans of UN climate talks cut through the jargon and tell us what’s new and trending at this year’s summit in Lima, Peru.

UN Climate Change Conference COP20 Inauguration

(Photo: cancilleriadeperu / Flickr)

The 20th annual UN Climate Change Conference (Conference of the Parties, or COP) took place in Lima, Peru in December 2014. It’s a dress rehearsal for talks that should conclude a new international climate agreement in 2015. But with several strands of negotiations between governments, as well as hundreds of events being held in parallel, it can be hard to see the wood for the trees. So we’ve compiled a quick guide to some of the key trends shaping this year’s talks.

1. Zero emissions (but beware the small print)

Addressing climate change means rapidly weaning ourselves off the greenhouse gases that cause it. So what could be more welcome than a goal to reduce greenhouse gas emissions to zero by 2050?

A “net zero” movement is now pushing for carbon neutrality within one generation. But there’s a catch: “net zero” means you can still emit a lot, as long as emissions are somehow sucked out of the atmosphere elsewhere. That provision is already being used to support expensive and unproven measures to capture and store carbon from fossil fuel power plants and industry, as well as controversial, climate-manipulating geo-engineering.

Striving for zero emissions is a step in the right direction, but we’ll need more than a catch phrase to motivate investments in renewables, grassroots empowerment, and straight-up significant reductions in greenhouse gas emissions.

2. Setting your own target

“Intended nationally determined contributions” (INDCs) is the latest acronym in the alphabet soup of jargon that is routinely generated by UN climate talks.

INDCs are a way for countries to declare what concrete actions they’ll be taking to address climate change, in the hope that these ingredients can be baked into a new international climate agreement. The guidelines on what INDCs can be are intentionally flexible and ambiguous, allowing states to declare anything from economy-wide emissions targets to long-term national climate action plans.

Predictably, negotiators are now struggling to articulate INDCs in a way that is fair, equitable, and transparent. A number of developing countries are concerned that INDCs are becoming a ruse for developed countries to ignore tricky questions about their fair share of climate action, based on their current and historic responsibility for causing the problem in the first place.

There’s also a concern that INDCs will just focus on “mitigation” (reducing greenhouse gas emissions) even though, for many countries, adaptation (coping with the climate change that’s already locked in), finance and technology transfers are vital to any new international climate deal.

3. Everyone’s talking about justice

Until recently, if someone said “climate justice” they’d more likely than not be referring to the fact that climate change was mostly caused by a handful of industrialized countries and big corporations, who should pollute less rather than pushing “solutions” with negative impacts on Indigenous Peoples, people of color and the world’s poor. But this year we’re seeing “justice-washing” throughout the COP.

Even Lord Nicholas Stern, a leading capitalist climate economist, has been speaking the language of climate justice. While we are happy to hear that fat cats now have to open their eyes and ears to “local ownership” and “gender sensitivity,” these words shouldn’t be tossed around the point of meaninglessness.

4. Time to clean up climate finance

“Climate finance” is money from developed countries that is meant to help developing countries reduce greenhouse gas emissions (via mitigation) and deal with climate impacts that are already happening or unavoidable (adaptation). To this end, developed countries have promised to mobilize $100 billion dollars a year by 2020.

The reality of the climate finance delivered to date is not all rosy. For example, Japan provided $1 billion in loans to build coal-fired power plants in Indonesia, then counted it as their contribution to a “fast start” climate finance package that ran from 2012-2012. There are plenty more examples of dirty deals masquerading as climate finance, but we can’t afford sparse climate finance wasted on polluting projects.

It’s time for the COP to clearly define what can count as climate finance, including following the demand of civil society groups to adopt an exclusion listthat prevents a new, $10 billion Green Climate Fund from funding fossil fuel projects.

5. Big oil everywhere

Last year’s UN climate change conference was awash with corporate sponsorship, which we warned could become “the new normal.” Twelve months on, big oil firms are everywhere. Shell and Chevron even co-hosted an event where the aforementioned Lord Stern spoke against divesting from fossil fuels (particularly oil and gas). Meanwhile, these same companies are lobbying hard to water down any potential climate deal.

What happened to climate change being “the biggest market failure the world has ever seen?” as Stern once wrote? We guess the oil companies never got the memo.

6. Forest conservation gets a makeover

The initiative to Reduce Emissions from Deforestation and Degradation (REDD+) has been a hot topic at the climate talks for several years, but the means of financing forest protection remain unclear.

The initial REDD+ idea, pedaled by the World Bank, was to build a market for forest carbon offsets: big corporations could compensate for their own pollution by paying to preserve tropical forests. But REDD+ has increasingly negative connotations, as many of the initial schemes have been associated with displacing and disempowering indigenous and peasant communities and undermining their land rights.

In light of all the bad press, many forest projects are dropping the REDD+ branding and are simply being labeled “conservation projects” or “administrative agreements.” It remains to be seen whether or not these are any better at helping local people to preserve forests without compromising their livelihoods.

7. Gender, and arguing about its relevance

Developing “gender sensitive” policy is an increasingly important part of emerging climate finance schemes. But some governments object, including those of Sudan and Algeria. They want references to gender removed from the policies being negotiated in Lima. The European Union and Mexico, amongst others, insist that gender is a priority. The impasse continues.

Jonas Bruun and Lauren Gifford were part of the Institute for Policy Studies’ delegation at the UN climate talks in Lima, Peru.  Bruun is a Ph.D. candidate at the University of Manchester’s Institute for Development Policy and Management, and Gifford is a Ph.D. candidate at the University of Colorado, Boulder. This blog was originally published by the Institute for Policy Studies