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

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UK

Total annual uninsured average flood risk: 2.3 billion Euro

AT B BUCZDK

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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