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Climate Superfunds, MFIs' Resilience Investments, California's Climate Bond, and More
'Polluter pays' principle picking up steam among climate-ravaged US states
Louie Woodall
February 19, 2024
AI-generated via DALL-E
A roundup of climate superfund proposals in the US, the latest climate resilience investments from MFIs, a look at the public submissions to Australia’s consultation on natural disaster response, catching up on California’s climate resilience bond, and an agriculture-focused Innovation of the Week.
Superfunds for Climate Shocks Gain Traction
Who should pay to help communities bounce back from climate shocks?
Ask the governments of those countries on the frontlines of climate change, and they’ll say the rich nations most responsible for the buildup of greenhouse gases in the atmosphere. This is the logic underpinning the Loss and Damage Fund operationalized at COP28.
However, it’s increasingly a question being asked within countries as well as between them. In the US, a handful of states want to set up “climate superfunds” to cover the costs of preparing for and responding to climate disasters. Who would stump up the dollars? You guessed it — the fossil fuel industry.
Earlier this year, Vermont lawmakers introduced the Climate Superfund Act. This would generate a cash pile for spending on “climate change adaptive or resilience infrastructure projects,” with contributions extracted from fossil fuel businesses that produced one billion or more metric tons of greenhouse gas emissions between 2000 and 2019.
The timing is significant. Last July, Vermont was hit by monster storms that caused widespread flooding, resulting in over US$1bn in damages. Furthermore, studies suggest that flooding in the Lake Champlain basin could exceed US$5bn by the century’s end. That’s a high price tag, and one the legislature doesn’t think the public should have to pay.
The list of “adaptive or resilience infrastructure” projects the fund would support is extensive, including everything from flood protections to energy efficient cooling systems.
The definition of “entity” in the context of those forced to pay into the fund is even broader, encompassing any individual, corporation, political subdivision or other foreign nation “that holds or held an ownership” in a fossil fuel business over the covered period.
It’s possible that investment funds and asset owners would be caught in scope, if their holdings generated emissions above the one billion metric tons threshold. BlackRock certainly could, based on its 2020 financed emissions data. Of course, their potential contribution to any superfund would depend on the dollar amount Vermont assigns to climate-related damages — a job the Act delegates to the State Treasurer.
Maryland, New York, and Massachusetts have their own climate superfund bills in process, and at the federal level, Vermont’s own Bernie Sanders is pushing for a US-wide version. While that effort is likely DOA given the makeup of the US Congress, at the state level some or all of the superfund proposals could be made law. The Vermont version has over 100 backers in the legislature, and in Massachusetts, Boston City Council is all in favor of polluters paying for adaptation and resilience.
Financial institutions with big stakes in fossil fuel companies may want to keep an eye on these bills. Though they themselves may end up out of scope, it’s possible some of their portfolio companies will be on the hook for state-level payments. Even if these companies fight against the superfunds in the courts, the legal expenses and reputational harm could make them less attractive investments over time.
World Bank, IMF Approve Climate Resilience Projects
Multilateral financial institutions have been busy on the climate adaptation front. Here’s a rundown of two of the latest developments.
Last Friday, the International Monetary Fund (IMF) reached a “staff level agreement” with the Côte d’Ivoire on a US$1.3bn reform package to climate-proof the African nation. Planned reforms include integrating climate into public financial management, strengthening climate policy governance, reducing the agricultural sector’s climate exposure, and addressing coastal erosion. The reforms are expected to be rolled out over the next three years.
Côte d’Ivoire is Africa’s tenth-largest economy and a major exporter of cocoa, coffee, and timber. Its agricultural outputs are sensitive to climate risks like heavy rainfall and rising temperatures, hence the importance of building climate resilience.
The financing is supported by the IMF’s Resilience and Sustainability Facility (RSF), which was established to bankroll policy reforms that lower climate risks and those linked to longer-term structural challenges. RSF funds are restricted to countries with “high-quality policy reforms” and “sustainable debt and adequate capacity to repay.”
The staff level agreement is subject to final approval by the IMF Executive Board.
Separately, last Tuesday the World Bank greenlit US$195mn to upgrade infrastructure around the Senegal river, a lifeline for millions of people in the African nations of Mauritania and Senegal.
The funding of the Senegal River Valley Development and Resilience project (SRVDP) is intended to support “regionally integrated, climate resilient, and inclusive infrastructure and services” for border communities in both countries. Investments will go toward enhancing irrigation infrastructure, helping farmers address changing rainfall patterns, and the use of climate-resilient crops. The SRVDP will also finance nature-based solutions to support biodiversity and “ecosystem resilience.”
The US$195mn will be disbursed from the IMF’s International Development Association (IDA), which provides grants and low to zero-interest loans for projects that improve poor people’s lives.
Aussies’ Thoughts on Climate-Proofing Disaster Response
Australia has taken an inclusive approach to tackling its exposure to climate shocks. Last year, the federal government’s department of Home Affairs invited the public to think up ways to improve how it responds to natural disasters, which are becoming more severe and frequent due to climate change.
Last week, the government published the written responses to this call for aid. Among the over 120 submissions are reports from individuals, nonprofits, municipalities, and even a financial institution. The government intends to use the responses to guide its policy development on disaster response.
Let’s take a look at what the financial institution — National Australia Bank (NAB) — wrote in its submission. The country’s fourth-largest lender had lots to say about the value of volunteers when it comes to responding to climate-driven disasters, but little in the way of financing adaptation and resilience. NAB also referred to how its philanthropic arm has supported partnerships with disaster relief organizations, provided grants to local communities, and given out emergency financial assistance to employees and customers. However, there was nothing on how its commercial business could weigh in on climate-proofing Australia.
Other submissions put the need for increased adaptation and resilience financing front and center. Advocacy group Emergency Leaders for Climate Action (ELCA) said there is “a critical need to upscale public investments in resilience and develop innovative financing pathways.” This would be cost effective as well as good risk management. ELCA says that between 2005 and 2022, the federal government invested just AUD$510mn in resilience, while spending AUD$24bn on disaster recovery and relief.
Between 2005-2022, the Federal Government spent almost $24 billion on disaster recovery and relief, with just $0.51 billion allocated to resilience. Investing in risk reduction and resilience provides a ‘triple dividend’ of avoided loss and suffering, reduced disaster costs and potential economic and social benefits even in the absence of hazards occurring.
The Australian Institute for Disaster Resilience (AIDR) made a similar plea for resilience investment, claiming that financial investment in preparedness and prevention yields AUD$9.60 for each dollar spent.
The question of how to improve the country’s disaster response efforts has become more salient following a season of fires and floods that stretched the Australian Defence Force, which despite its military purpose has increasingly been called upon to clean up in the wake of catastrophes. Greater adaptation and resilience funding could reduce the amount of such clean up work, shortening the amount of time the military has to be deployed.
Cali Climate Bond Woes
Time to check in on California’s climate resiliency bond.
Last year, the Golden State’s legislature cleared the way for a US$15.5bn bond proposal to be placed on the 2024 ballot. This would give California voters the opportunity to vote yes or no to billions of dollars for protection against climate-driven floods, droughts, wildfires, coastal erosion, and much more.
State Senator Ben Allen, who helped shepherd the bond proposal, said last year that it would guarantee funding for climate resilience “[b]eyond the annual budgetary ebb and flow.”
However, this very same ebbing and flowing has pitched the bond into rough waters.
In January, Governor Gavin Newsom took an ax to the state’s climate spending plans in response to a looming budget crunch. An original US$58bn earmarked for climate measures is being reduced to US$48bn, and negotiations are in progress on resizing the proposed climate resiliency bond. Politico reported last month that Newsom is expected to offer his opinion in the May budget revision. At present, US$10bn appears to be the new size that advocacy groups and lawmakers are working toward. If all goes according to schedule, the bond will be on the ballot this November.
In an interview with Politico published last week, State Senator Allen said the budget crunch puts extra pressure on the bond, which will have to do more of the financial heavy lifting on resilience given the cutbacks elsewhere. “This is not just a way to backfill cuts. You propose a bond for long-term investments, because you’re ultimately asking people in the future to pay for these investments that benefit them. That’s the whole point of a bond,” he said.
For years now, governments and corporations have issued bonds labeled ‘green’ or ‘sustainable’ to attract climate-conscious investors and ringfence funds for the clean energy transition. It makes sense for the ‘resiliency’ label to be applied in this context, too. In this case, the branding may help persuade California voters to approve the bond amidst the budget crunch.
Still, borrowing is borrowing, whatever name it’s given. Ultimately, investors need to believe the bond is a sensible addition to their portfolios, something that will be informed by their views on California’s fiscal situation.
💡Innovation of the Week💡
It’s scary just how much climate change could upend the food system.
A 2015 study claims that around one-quarter of the world’s wheat production will be lost to climate-related physical risks if no adaptive measures are taken. The Intergovernmental Panel on Climate Change, meanwhile, projects that extreme agricultural droughts will be at least twice as likely at 1.5°C of warning, and 150 to 200% more likely at 2°C.
It’s easy to understand, then, the high interest in climate-resilient agriculture. If we want to continue feeding ourselves in a hotter world, adaptation is key. The risks are particularly acute in the global south, where climate impacts are projected to be greatest.
Financing for climate-proof agriculture is flowing, notably from the United Nations’ Adaptation Fund. Universities and governments are also getting in on the act. Last week, Australia’s Grains Research & Development Corporation announced a AUD$1.9mn investment into developing “heat resistant wheat genetics,” as well as research into what enables wheat crops to survive under high-temperature conditions.
The three-year investment is in partnership with the Australian National University (ANU) and agriculture industry participants.
“We know high temperatures accelerate the development of wheat, inhibit flower development, and reduce the efficiency of photosynthesis, stunting a plant’s growth and reducing yields,” said Prameela Vanambathina, GRDC genetic technologies manager, “But we don’t yet understand what processes are responsible for the variation in heat tolerance of Australian germplasm — which limits the breeders’ ability to introduce and develop heat tolerance into modern crops.”
The GRDC funding is intended to shed light on these processes, and in the best case find ways to develop heat tolerant crops for both Australia and the southern hemisphere at large.