## clnea2022003

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### Laying the groundwork: legal foundations and adaptation planning
- Adaptation is necessary for advanced and developing economies alike because "Climate is changing and will continue to change even with intensive mitigation efforts (Note 1)."
- Adaptation complements but does not replace mitigation: "Adaptation and mitigation are both needed to help reduce damages from climate change. Without strong mitigation, it is not possible to stabilize global temperature, and adaptation would become either impossible or too expensive."
- Whole-of-government requirements:
  - Create or designate a coordination structure, allocate responsibilities, and establish stakeholder involvement processes.
  - Strengthen national legal frameworks to provide legal foundations for adaptation processes and institutions, and to mandate adaptation planning.
  - Legislative approaches include incorporating climate change into existing laws (examples: Kazakhstan, Vietnam) and stand-alone framework laws (examples: Japan, United Kingdom).
  - Common statutory focus areas: information generation and sharing; adaptation planning; institutional arrangements; processes for managing and monitoring adaptation actions.
- National adaptation plans (NAPs) are being developed, adopted, and updated worldwide as required by Article 7 of the Paris Agreement (2015).

### NAP process: four essential blocks (international guidance)
- Prerequisite: identify institutional arrangements and coordination mechanisms and consult key stakeholders to maximize ownership and information circulation.
- Four building blocks (UNFCCC 2012; European Commission 2018; World Bank 2021):
  - Identifying climate vulnerabilities and adaptation gaps:
    - Stock-taking and synthesizing information on climate change impacts and climate vulnerabilities.
    - Identifying information gaps, capacity gaps, and weaknesses in planning for adaptation.
    - Developing a roadmap for the NAP process and its implementation.
    - Establishing guidance on normative principles for adaptation.
  - Identifying adaptation solutions:
    - Address information gaps via support, dissemination, and training on relevant climate adaptation data and concepts with stakeholders.
    - Identify solutions aligned with national development plans; estimate costs and benefits and distributional impacts; communicate solutions to the public.
  - Mainstreaming adaptation into public financial management (PFM):
    - Mainstream climate adaptation into national planning, sectoral plans, disaster risk management, spatial planning, building regulations.
    - Incorporate climate risk management and estimated adaptation needs into budgets and financing plans.
    - Enhance implementation capacity.
  - Monitoring, evaluation, and reporting:
    - Continually monitor progress, reevaluate adaptation plans, and regularly update those plans.
- NAP progress assessment:
  - Progress toward publication of a full-fledged NAP is assessed according to UNFCCC guidelines around four main blocks divided into a total of 23 measures.
  - A country is considered to have taken a step if any detailed measure underpinning a block has been completed.
  - Information sufficiency categories referenced: light orange (insufficient to conclude on NAP progress but has an adaptation law, strategy or policy per United Nations Environment Program (2021)); gray (information insufficient).

### Adaptation solutions: extending the IMF three-pillar disaster resilience strategy
- The IMF Disaster Resilience Strategy (IMF 2019a) can be extended to cover continuous climate changes and countries of all sizes and income levels; the extended framework retains a three-pillar structure and nests the Disaster Resilience Strategy.
- Three pillars:
  - Prevention pillar: policies to reduce all climate risks and their impacts.
  - Alleviation pillar: policies to address realization of residual climate risks.
  - Macro-fiscal resilience pillar: guidance to secure resilient financing sources to meet funding and financial liquidity needs.

### The Prevention Pillar: fiscal and regulatory interventions
- Fiscal roles:
  - Provision of public goods and incentives to facilitate adaptation and reduce climate risks.
  - Public investment for climate-resilient and protective public infrastructure; roles in R&D and network markets (Note 1).
  - Importance of adequate maintenance for public infrastructure.
  - Direct and targeted transfers (taxes, fees, subsidies, tax expenditures) to correct market failures and incentivize private resilience when risks are not priced adequately.
- Regulatory roles:
  - Zoning and regulations to avoid moral hazard and reduce overall risk exposure.
- Specific intervention areas:
  - Provision of public information:
    - Risk maps for flood zones, coastal erosion, landslide areas to inform property investors and influence location and design decisions.
    - Public early warning systems (hydrometeorological and communication systems) with adequate resources to prevent loss of lives.
  - Reduction of inefficient risk-taking:
    - Accurate pricing of risks; address policy or market failures that distort efficient risk pricing (Note 1).
    - Make risk information salient; lower public contributions for high-risk areas or construction with inadequate resilience.
    - Subsidies to risk reduction (for example, accelerated capital depreciation provisions and tax credits) can incentivize upgrading private physical assets.
    - Risks of subsidies: may inefficiently lower private agents' costs of investing in risky areas.
    - Feebates—hybrid tax/subsidy systems—can be self-funding and politically feasible; design must avoid redundancy and "lock-in" effects.
    - Complement financial incentives with regulations such as construction standards and zoning (examples: limit new constructions in flood plains or coastal areas; expand forest coverage; protect via mangroves).

### Box 1 — Extending the IMF Disaster Resilience Strategy for Climate Change Adaptation (summary)
- DRS approved in 2019; three pillars: ex ante investment, financial resilience, contingency planning.
- Climate change adaptation extends DRS to cover changes in distributions of weather, sea level, water reserves, biodiversity, migration.
- Global disaster losses as a share of GDP have remained broadly stable over the last two decades at about 0.2 percent of GDP (Figure 1.1, 1990–2017).
- Reframed pillars:
  - Prevention pillar: expands ex ante interventions to include gradual capital depreciation, productivity losses, information uncertainty. Examples: new crop varieties, adapting tourism, better insulated homes, addressing hydropower underutilization.
  - Macro-fiscal resilience pillar: broadened to finance solutions to all types of climate risks.
  - Alleviation pillar: expanded contingency planning to address residual risks and slow changes.
- Prevention pillar details:
  - Public infrastructure and technologies: governments can provide protective infrastructure when supported by cost-benefit analyses; invest or support R&D for large, risky, or long-term projects.
  - Financial inclusion and private financing: private capital expected to finance viable risk-reduction investments; structural reforms improve access; fiscal support (guarantees, subsidies) possible.
  - Equity: prioritize based on cost-benefit analyses while reflecting preferences about inequality; target vulnerable groups (example: drought-resistant seeds); evaluate direct adaptation support versus alternatives (cash transfers).
- Alleviation pillar details:
  - Residual risk concept: cost of climate change = cost of adaptation + costs from residual risks.
  - Disaster contingency plans: require transparent intervention rules, clear leadership; example: Indonesia cited as best performer.
  - Financial inclusion and safety nets: access to savings, emergency borrowing, insurance; fiscal policy can promote financial access; social safety nets should be "adaptative" (examples: Fiji and Jamaica); design should avoid discouraging migration and ensure portability of benefits.
  - Compensation and relocation: consider where protective infrastructure has negative NPV.
- Macro-fiscal resilience pillar details:
  - Objectives: (1) ensure adequate fiscal space and mobilize resources for adaptation, (2) insure against large risks and secure liquidity after disasters.
  - Reflecting climate costs: macro-fiscal baselines should incorporate unmitigated effects of climate change.
  - Channels challenging fiscal sustainability include direct passive losses (lower revenue, increased expenditure), active adaptation policies with delayed revenue.
  - Fiscal space and revenue diversification: diversify tax base; engage in financial insurance schemes.
  - NPV guidance: implement adaptation programs if positive Net Present Value (NPV) for society; positive NPV does not guarantee government surplus or self-financing.
  - Financing choices: many adaptation programs will not be self-financing; small lower-income and vulnerable countries require increased concessional international support.
  - Self-financing investments and PFM: some policies can be self-financing long-term but need temporary financing; robust PFM needed.
  - Insurance and liquidity:
    - Small recurring shocks: self-insurance via budgetary instruments (budget reallocations, supplementary budgets, provisions, reserve funds). Example: Mexico’s FONDEN increased local GDP post-disaster by 2 to 4 percent with a benefit-cost ratio estimated between 1.5 and 2.9.
    - Larger disasters: risk transfers to international markets (contingent credit lines, regional risk-sharing facilities, private insurance, catastrophe bonds). Regional facility examples: Caribbean Catastrophic Risk Insurance Facility, Pacific Catastrophe Risk Assessment and Financing Initiative, African Risk Capacity, South Asia Disaster Risk Insurance Facility. Mexico’s FONDEN leverages private sector financing and issues catastrophe bonds.
  - Private sector risk management: promote regulation and incentives; layering approach—savings and provisions for frequent risks, insurance for large infrequent shocks.
  - Optimal mix: balance structural protection and financial protection; depends on fiscal space, market access, extent of damages, structural costs, public investment efficiency. For constrained governments, financial protection is more important; unconstrained governments favor structural protection.

### Box 2 — Building Financial Resilience to Natural Disasters in the Caribbean (summary)
- Climate vulnerability and macro-fiscal impact:
  - The Caribbean experiences on average seven CRNDs per year between 1980 and 2020.
  - Annual damages have averaged 2½ percent of GDP.
  - 17 percent of all CRND exceeded damages of 20 percent of GDP.
  - Academic estimates of immediate negative GDP impact of CRNDs range between 0.1 to 3 percent in the Caribbean, with permanent effects from large CRNDs.
  - CRNDs are associated with a contemporaneous increase in public expenditure by around 4 percentage points of GDP.
  - IMF staff estimates in Request for Disbursement Under the Rapid Credit Facility staff reports: mean growth revision after CRNDs of around 1.4 percent and an increase in public spending of 2.3 percentage points of GDP.
- Current resilience investments and financing gaps:
  - Structural resilience investment gaps estimated at 2–3 percent of GDP a year over a decade or more.
  - Only Dominica and St. Vincent and the Grenadines have funds dedicated to self-insurance; Antigua and Barbuda and Belize are creating savings funds.
  - Saved amounts are short of needs due to disaster frequency and external shocks such as the COVID-19 pandemic.
  - Most countries access parametric insurance through CCRIF, which is triggered by weather developments rather than actual damages.
  - State-contingent instruments and catastrophe bonds have been limited: Jamaica issued a catastrophe bond; Grenada and St. Vincent and the Grenadines are enrolled in the World Bank’s CAT Deferred Drawdown Option.
  - Hurricane-linked clauses used in debt restructuring by Barbados and Grenada.
  - Bond issuance limited by high cost, low market acceptance, and high data transparency requirements.
- Insurance markets and private coverage:
  - Nonlife insurance penetration lags estimates of average climate-related damages.
  - Property insurance often lapses after loan repayment due to high costs.
  - Regional insurers rely on overseas reinsurance; after a high-damage 2018 hurricane season, regional reinsurance costs increased by 10–40 percent.
- Benefits and financing needs of scaling resilience:
  - Investing in structural resilience can raise long-term GDP even absent disasters.
  - Financial resilience is needed to fund reconstruction while safeguarding public finances.
  - Scaling up insurance coverage to 15–30 percent of GDP could cover 99 percent of the fiscal costs related to natural disasters.
  - Upfront fiscal costs create transitional financing gaps because benefits accrue over medium and long term.
  - For small states like Dominica, total costs of building resilience are potentially very large and require over a decade to fully execute.
  - External concessional financing and a comprehensive disaster resilience strategy are key to closing financing gaps.
- Capacity building and IMF support:
  - IMF adaptation-related capacity development includes Climate Macroeconomic Assessment Programs (CMAP) and focused green PFM support.

### Mainstreaming adaptation in Public Financial Management (PFM) and Public Investment Management (PIM)
- Integrating adaptation in PFM:
  - Medium-term fiscal frameworks should link long-term adaptation objectives to short- and medium-term budget resources.
  - Climate-related disasters are fiscal risks that should be identified, quantified, disclosed (ideally as part of the fiscal risk statement), and factored into fiscal planning.
  - Steps: take stock of public assets exposed to hazards; quantify hazard probability and intensity, asset exposure, expected damage; identify other fiscal risks (revenue loss, unexpected expenditures); use historical and forward-looking methods.
  - Fiscal planning responses: invest in resilience, create fiscal buffers, ensure budget flexibilities, and make risk transfer arrangements.
  - Several PFM tools can integrate adaptation across the budget cycle; gradual adjustments preferred over parallel procedures.
  - Climate budget tagging has been used to track adaptation expenditure; external audits and oversight can ensure report quality.
  - Integrating adaptation in PFM may require changes to PFM legal frameworks.
- Green PFM Framework core questions:
  - Legal framework, strategic planning and fiscal framework, budget preparation (climate impact assessment, tagging, green spending reviews), budget execution and accounting, control and audit capacity, public investment management, fiscal transparency, coordination with subnational governments and state-owned enterprises.
- Public Investment Management and project design:
  - Mainstream climate resilience into PIM by assessing climate risks in project design, appraisal, selection, and implementation.
  - Adaptation investments should be supported by cost-benefit and social impact analyses reflecting intensifying climate risks.
  - For existing assets, maintenance and resilience investments should factor present and future hazards.
  - Tools to manage deep uncertainty: real options, asset criticality analysis, stress testing, robust decision-making, distributional metrics.
  - PIM weaknesses can lead to ineffective resilience investments; countries waste about one-third of infrastructure spending on average, with losses surpassing 50 percent in low-income countries.
  - IMF is developing a climate module for the Public Investment Management Assessment.
- Climate Public Investment Management Assessment (CPIMA) assesses:
  - Climate-aware planning.
  - Coordination between entities for climate-related public investment decision-making.
  - Project appraisal and selection incorporating climate analysis.
  - Budgeting and portfolio management with oversight of climate-related investment spending.
  - Risk management that incorporates climate-related fiscal risks into budgets and fiscal risk analysis.

### Annex 1 — Global progress on National Adaptation Plans (key statistics and findings)
- Coverage and methodology:
  - Information collected on 170 countries to create a comprehensive assessment.
  - Data sources include UNFCCC measures, European Union “Adaptation Preparedness Scoreboard”, World Bank compilations, UNDP portal, and independent research using countries’ official publications.
  - The UNFCCC’s guidelines are articulated around four main steps divided into a total of 23 measures (Annex Table 1.1).
  - The database counts the number of steps taken toward building adaptation plans; a step is counted if at least one measure was completed.
- Progress and statistics:
  - As of 2021, most countries have initiated the NAP process; all but a handful of Middle East countries have taken at least one step toward formulating and implementing their NAPs.
  - Many countries have made substantial progress: 104 out of 166 have taken three or more steps.
  - At least 52 countries have published a full-fledged NAP (Annex Table 1.2).
  - Publication of a complete NAP is an important milestone; NAPs are intended to be updated and strengthened (Element D.4 in Annex Table 1.1).
- Countries with a published NAP (selected list reproduced from Annex Table 1.2):
  - Albania; Armenia; Australia; Austria; Belgium; Brazil; Burkina Faso; Cameroon; Canada; Chile; Colombia; Cyprus; Czech Republic; Denmark; Estonia; Ethiopia; Fiji; Finland; France; Germany; Grenada; Guatemala; Hong Kong SAR; Japan; Kenya; Kiribati; Korea; Kuwait; Liberia; Lithuania; Nepal; Paraguay; Romania; Russia; Singapore; Slovak Republic; South Africa; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Suriname; Switzerland; Taiwan, Province of China; Timor-Leste; Togo; Tonga; Turkey; United Kingdom; United States; Uruguay; West Bank and Gaza.
- Limitations and next steps:
  - Assessment is complicated when planning is decentralized (for example, the United States and some European countries) or when documents are untranslated (for example, Norway).
  - More work needed to address data collection challenges and improve coverage.
  - Future work will focus on expanding the data set coverage and maintaining up-to-date information.

*Source: IMF Staff Climate Notes (clnea2022003).*

### 1.          Taking stock of present and future climate risks, identifying knowledge and capacity gaps,

### 1.          Taking stock of present and future climate risks, identifying knowledge and capacity gaps, and establishing guidance for next steps.

### Laying the Groundwork: legal foundations and adaptation planning
- Adaptation is necessary for advanced and developing economies alike because "Climate is changing and will continue to change even with intensive mitigation efforts (Note 1)."
- Adaptation complements but does not replace mitigation: "Adaptation and mitigation are both needed to help reduce damages from climate change. Without strong mitigation, it is not possible to stabilize global temperature, and adaptation would become either impossible or too expensive."
- Adaptation requires whole-of-government approaches:
  - Create or designate a coordination structure, allocate responsibilities, and establish stakeholder involvement processes.
  - Strengthen national legal frameworks to provide legal foundations for adaptation processes and institutions, and to mandate adaptation planning.
  - Examples of legislative approaches:
    - Incorporating climate change into existing laws (examples: Kazakhstan, Vietnam).
    - Stand-alone framework laws such as climate laws or climate adaptation laws (examples: Japan, United Kingdom).
  - Common statutory focus areas: information generation and sharing; adaptation planning; establishing institutional arrangements; processes for managing and monitoring adaptation actions.
- Adaptation planning should be articulated with other development plans and increase adaptive capacity and resilience.
- National adaptation plans (NAPs) are being developed, adopted, and updated worldwide as required by Article 7 of the Paris Agreement (2015).

### NAP process: four essential blocks (international guidance)
- Prerequisite: identify institutional arrangements and coordination mechanisms and consult key stakeholders to maximize ownership and information circulation.
- The four building blocks established by international guidance (UNFCCC 2012; European Commission 2018; World Bank 2021):
  - Identifying climate vulnerabilities and adaptation gaps:
    - Stock-taking and synthesizing information on climate change impacts and climate vulnerabilities.
    - Identifying information gaps, capacity gaps, and weaknesses in planning for adaptation.
    - Developing a roadmap for the NAP process and its implementation.
    - Establishing guidance on normative principles for adaptation.
  - Identifying adaptation solutions:
    - Address information gaps via support, dissemination, and training on relevant climate adaptation data and concepts with stakeholders.
    - Identify potential solutions that coincide with national development plans, estimate costs and benefits of adaptation options and their distributional impacts, and communicate solutions to the public.
  - Mainstreaming adaptation into public financial management (PFM):
    - Mainstream climate adaptation into national planning (national development plans, sectoral plans and strategies, disaster risk management plans, spatial planning, building regulations).
    - Incorporate climate risk management and estimated adaptation needs in budget and financing plans.
    - Enhance implementation capacity.
  - Monitoring, evaluation, and reporting:
    - Continually monitor progress, reevaluate adaptation plans, and regularly update those plans.
- NAP progress assessment note:
  - Progress toward publication of a full-fledged NAP is assessed according to UNFCCC guidelines, articulated around four main blocks divided into a total of 23 measures.
  - A country is considered to have taken a step if any of the detailed measures underpinning a block has been completed.
  - Information sufficiency categories referenced: light orange (insufficient to conclude on NAP progress but has an adaptation law, strategy or policy per United Nations Environment Program (2021)); gray (information insufficient).

### Adaptation solutions: extending the IMF three-pillar disaster resilience strategy
- The IMF Disaster Resilience Strategy (IMF 2019a) can be extended to cover continuous climate changes and countries of all sizes and income levels; the extended framework retains a three-pillar structure and nests the Disaster Resilience Strategy.
- Three pillars:
  - Prevention pillar: policies to reduce all climate risks and their impacts.
  - Alleviation pillar: policies to address realization of residual climate risks.
  - Macro-fiscal resilience pillar: guidance to secure resilient financing sources to meet funding and financial liquidity needs.

### The Prevention Pillar: fiscal and regulatory interventions
- Fiscal policy roles:
  - Provision of public goods and incentives to facilitate adaptation of firms and people and reduce climate risks and impacts.
  - Public investment for climate-resilient and protective public infrastructure and potential roles in research and development and network markets (Note 1).
  - Importance of adequate maintenance for public infrastructure.
  - Direct and targeted transfers (taxes, fees, subsidies, tax expenditures) to correct market failures and incentivize private resilience when risks are not priced adequately.
- Regulatory roles:
  - Zoning and regulations to avoid moral hazard and reduce overall risk exposure.
- Specific areas of intervention for close examination:
  - Provision of public information:
    - Risk maps for flood zones, coastal erosion, landslide areas to inform property investors and influence location and design decisions.
    - Public early warning systems (hydrometeorological and communication systems) with adequate resources to prevent loss of lives.
  - Reduction of inefficient risk-taking:
    - Accurate pricing of risks to incentivize efficient resource allocation.
    - Address policy or market failures that distort efficient risk pricing (Note 1).
    - Make risk information salient and use it to reduce inefficiency, e.g., lower public contributions for high-risk areas and for construction with inadequate resilience or protective standards.
    - Subsidies to risk reduction (for example, accelerated capital depreciation provisions and tax schemes such as tax credits) can incentivize upgrading and replacement of private physical assets to enhance resilience (for example, against floods or storms) and protection (for example, providing protection against outside heat).
    - Risks of subsidies: may inefficiently lower private agents' costs of investing in risky areas.
    - Feebates—hybrid systems where agents that take risks above the market average are taxed while agents that take risks below the market average are subsidized—can be more politically feasible and sometimes more efficient; one advantage is that they can be calibrated to be self-funding.
    - Design incentives to be targeted to relevant sectors and technologies and to avoid downside risks such as redundancy and "lock-in" effects.
    - Complement financial incentives with regulations such as construction standards and zoning (examples: limit new constructions in flood plains or coastal areas exposed to sea-level rise; expand forest coverage that protects against heat; protect via mangroves against floods), often at little or no direct fiscal cost.

_Italic: Source: IMF Staff Climate Notes (extracted content)._

### Box 1. Extending the IMF Disaster Resilience Strategy for Climate Change Adaptation

### Box 1. Extending the IMF Disaster Resilience Strategy for Climate Change Adaptation

### Overview
- The IMF Executive Board approved the Disaster Resilience Strategy (DRS) in 2019 as a framework for building resilience to large natural disasters in vulnerable developing countries.
- The DRS is based on a three-pillar strategy: (1) ex ante investment to limit the impact of natural disasters, (2) financial resilience including fiscal buffers and prearranged financial instruments, and (3) contingency planning to address ex post disaster needs.
- Climate change adaptation extends the DRS to cover broader issues including changes in the entire distribution of weather conditions, sea level, water reserves, biodiversity, and migration patterns.
- At the global level, disaster losses as a share of GDP have remained broadly stable over the last two decades at about 0.2 percent of GDP (Figure 1.1, 1990–2017).

### Reframing the Pillars for Climate Change
- The DRS pillars are reframed for climate adaptation:
  - Prevention pillar (formerly DRS first pillar): expands “ex ante interventions” to address all risks stemming from climate change, including gradual acceleration in capital depreciation, gradual productivity losses, and information uncertainty.
    - Examples: investing in new crop varieties, adapting tourism activities for declining snowfall, building better insulated or smarter homes, addressing underutilization of hydropower.
  - Macro-fiscal resilience pillar (formerly DRS second pillar): broadens “financial resilience” to finance solutions to all types of climate risks.
  - Alleviation pillar (formerly DRS third pillar): expands “contingency planning” to address residual climate risks, including support for populations affected by slow and gradual changes (e.g., farmers with declining yields or ski resort workers).

### Prevention Pillar — Investments, Market Failures, and Equity
- Public infrastructure and technologies:
  - Governments can provide protective infrastructure (for example, coastal protection against sea-level rise or water management systems) when supported by cost-benefit analyses.
  - Strategic public investments can overcome coordination and scaling issues when markets fail to reorient activities (for example, relocating industrial clusters or transitioning agricultural chains).
  - Governments can invest directly or support R&D for large, risky, or long-term projects (for example, development of adapted crop varieties or vaccines).
- Financial inclusion and private sector financing:
  - Private capital markets expected to finance viable risk-reduction investments; structural reforms are the best tool to improve financial access, with fiscal policy support possible (for example, guarantees or subsidies).
- Equity considerations:
  - Prioritize adaptation programs based on cost-benefit analysis while reflecting society’s preferences about inequality.
  - Target additional support to vulnerable groups (for example, developing and distributing drought-resistant seeds to poor farmers).
  - Evaluate direct adaptation support against alternatives (for example, additional cash transfers via new or existing programs).

### Alleviation Pillar — Contingency Planning and Social Protection
- Residual risk concept:
  - The cost of climate change equals the cost of adaptation plus the costs from residual climate risks.
  - Efficient alleviation policies reduce total climate change costs.
- Disaster contingency plans:
  - Essential to ensure timely post-disaster support and reconstruction; contingency plans should include transparent intervention rules, clear leadership responsibilities, and alignment with key vulnerabilities.
  - Example: Indonesia’s integrated disaster risk reduction approach cited as a best performer.
  - Government role in private sector resilience (example: Japan’s requirements and targets for business continuity plans).
- Financial inclusion and social safety nets:
  - Access to safe liquid savings accounts, emergency borrowing, and insurance is crucial for households and firms to withstand climate shocks.
  - Fiscal policy can promote financial access with nondistortive taxation and adequate incentives.
  - Social safety nets can alleviate impacts from both extreme events and slow-moving transformations; accurate risk assessment supports sustainability of social programs and financing plans should transparently factor in increased post-disaster needs (implicit liabilities).
  - Social protection can be made “adaptative” to improve timely targeting (examples: Fiji and Jamaica).
  - Program design should avoid discouraging migration to safer areas and make benefits portable across states or regions.
  - Cash transfers or vouchers can mitigate corruption risks and avoid disruption of local value chains where markets can meet needs.
- Compensation and relocation:
  - Where protective infrastructure has negative NPV (for example, protecting a sparsely inhabited coastline), compensation and support for relocation could be considered under equity considerations.

### Macro-Fiscal Resilience Pillar — Fiscal Frameworks, Financing, and Insurance
- Objectives:
  - (1) Ensure adequate fiscal space and mobilize financial resources for adaptation under prevention and alleviation pillars despite added costs from residual risks.
  - (2) Insure against large risks and secure timely access to liquidity after climate disasters.
- Reflecting climate costs:
  - Macro-fiscal baselines should incorporate unmitigated effects of climate change to evaluate and prioritize adaptation programs and quantify fiscal sustainability risks.
- Channels challenging fiscal sustainability:
  - Direct passive losses: lower revenue (GDP losses reduce tax base), increased expenditure (higher interest rate risk premium or greater use of automatic stabilizers), accelerated depreciation or destruction of public assets, realization of implicit liabilities (for example, government bailouts).
  - Active adaptation policies may generate revenues that do not cover total costs or only after long periods.
- Fiscal space and revenue diversification:
  - Fiscal space (sustainable fiscal balances and debt levels) facilitates lower-cost financing and avoids crowding out private sector adaptation.
  - Tax systems reliant on a few vulnerable sectors are a source of financial vulnerability; diversify the tax base or engage in financial insurance schemes.
- Net Present Value (NPV) guidance:
  - Adaptation programs should generally be implemented if they have a positive Net Present Value (NPV) for society (changes in consumer, producer, and government surplus discounted over program lifetime).
  - A positive NPV does not guarantee that government surplus is positive or that the program is self-financing.
- Financing choices and concessional support:
  - Many adaptation programs will not be self-financing and, together with fiscal costs of residual risks, will require creating fiscal space, greater financing, or both.
  - Small lower-income and vulnerable countries with constrained domestic revenue and high spending needs will require increased concessional international support.
- Self-financing investments and PFM:
  - Some adaptation policies can be self-financing over the long term but require temporary financing; robust public financial management (PFM) is necessary for evaluation, prioritization, and efficient implementation.
  - Examples of benefits: additional revenue (solar-powered energy), safeguarding tax base (coastal protection), lowering maintenance and repair costs (resilient infrastructure), and reducing post-disaster needs (disaster risk reduction).
  - Donor-financed adaptation projects can yield savings on post-disaster aid relief.
- Insurance and liquidity for disasters:
  - Weather disasters create reconstruction and humanitarian needs; timely aid has high opportunity costs of delay, so insurance solutions matter for countries with constrained finance.
  - Instruments by frequency of shocks:
    - Small recurring shocks: self-insurance via budgetary instruments (budget reallocations, supplementary budgets, provisions, reserve funds). Example: Mexico’s FONDEN increased local GDP post-disaster by 2 to 4 percent with a benefit-cost ratio estimated between 1.5 and 2.9.
    - Larger disasters: risk transfers to international markets (contingent credit lines, regional risk-sharing facilities, private insurance, catastrophe bonds) though expensive may be beneficial.
      - Examples of regional facilities: Caribbean Catastrophic Risk Insurance Facility, Pacific Catastrophe Risk Assessment and Financing Initiative, African Risk Capacity, South Asia Disaster Risk Insurance Facility.
      - Mexico’s FONDEN leverages private sector financing and issues catastrophe bonds to transfer earthquake risk to international capital markets.
- Private sector risk management:
  - Governments can promote efficient private financial risk management through regulation and incentives; layering approach: savings and provisions for frequent risks, insurance for large infrequent shocks.
- Optimal mix of structural and financial protection:
  - The optimal strategy balances structural protection (risk-reduction infrastructure) and financial protection (insurance/liquidity).
  - At the optimum, marginal benefit of adaptation equals marginal reduction in insurance premium plus residual costs after insurance.
  - The optimal mix depends on fiscal space, financial market access, extent of climate damages, structural adaptation costs, and public investment efficiency.
  - For governments not subject to financial constraints, risk-reduction infrastructure is typically best; for governments with limited fiscal space and borrowing constraints, financial protection is more important. Low public investment efficiency tilts toward financial protection.

*Source: Box 1. Extending the IMF Disaster Resilience Strategy for Climate Change Adaptation.*

### Box 2. Building Financial Resilience to Natural Disasters in the Caribbean

### Box 2. Building Financial Resilience to Natural Disasters in the Caribbean

### Climate vulnerability and macro-fiscal impact
- The Caribbean experiences on average seven CRNDs per year between 1980 and 2020.
- Annual damages have averaged 2½ percent of GDP.
- 17 percent of all CRND exceeded damages of 20 percent of GDP.
- Academic estimates of immediate negative GDP impact of CRNDs range between 0.1 to 3 percent in the Caribbean, with permanent effects from large CRNDs.
- CRNDs are associated with a contemporaneous increase in public expenditure by around 4 percentage points of GDP.
- IMF staff estimates in Request for Disbursement Under the Rapid Credit Facility staff reports: mean growth revision after CRNDs of around 1.4 percent and an increase in public spending of 2.3 percentage points of GDP.

### Current resilience investments and financing gaps
- Structural resilience investment gaps are estimated at 2–3 percent of GDP a year over a decade or more in the Caribbean.
- Only Dominica and St. Vincent and the Grenadines have funds dedicated specifically to self-insurance against natural disasters; Antigua and Barbuda and Belize are in the process of creating a savings fund.
- The amounts saved are short of needs, partly because of the frequency of natural disasters and external shocks such as the COVID-19 pandemic.
- Most Caribbean countries access parametric insurance through the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which is triggered by weather developments rather than actual damages, raising the risk that large damages may occur without triggering payouts.
- State-contingent instruments and catastrophe bonds have been limited:
  - Jamaica is the only Caribbean country to issue a catastrophe bond.
  - Grenada and St. Vincent and the Grenadines are enrolled in the World Bank’s CAT Deferred Drawdown Option.
  - Hurricane-linked clauses in debt contracts were used by Barbados and Grenada during debt restructuring.
- Bond issuance in financial markets has been limited by high cost, low market acceptance, and high data transparency requirements.

### Insurance markets and private coverage
- Nonlife insurance penetration in the Caribbean lags estimates of average climate-related damages.
- Property insurance is typically required for housing loans, but anecdotal evidence indicates lapses after loan repayment due to high costs.
- Regional primary insurers rely heavily on overseas reinsurance and pass disaster-sensitive reinsurance pricing to customers.
- After a high-damage hurricane season, regional reinsurance costs in 2018 increased by 10–40 percent, with the largest increases in directly impacted countries.

### Benefits and financing needs of scaling resilience
- Investing in structural resilience can raise long-term GDP levels for Caribbean islands even in the absence of disasters.
- Because resilience-building takes time, financial resilience is needed to fund reconstruction while safeguarding public finances.
- Scaling up insurance coverage to 15–30 percent of GDP could cover 99 percent of the fiscal costs related to natural disasters.
- Upfront fiscal costs of structural and financial resilience create transitional financing gaps because benefits accrue over the medium and long term.
- For small states like Dominica, total costs of building resilience are potentially very large and would require over a decade to fully execute.
- External concessional financing, including international climate funds, and a comprehensive disaster resilience strategy are key to closing financing gaps.

### Building capacity for adaptation
- Capacity development helps vulnerable and low-capacity countries identify adaptation solutions and related macro-fiscal impacts.
- IMF adaptation-related capacity development includes:
  - Climate Macroeconomic Assessment Programs (CMAP).
  - Focused climate-related support (e.g., green PFM).

### Mainstreaming adaptation in Public Financial Management (PFM)
- Well-integrated planning and budgeting functions are essential to implement adaptation plans; the medium-term fiscal framework should link long-term adaptation objectives to short- and medium-term budget resources.
- Climate-related disasters are fiscal risks that should be identified, quantified, disclosed (ideally as part of the fiscal risk statement), and factored into fiscal planning.
  - Steps include: taking stock of public assets exposed to natural hazards; quantifying probability and intensity of hazards, asset exposure, and expected damage; identifying other climate-related fiscal risks (revenue loss, unexpected post-disaster expenditures); using historical analyses and forward-looking methodologies.
  - Fiscal planning responses include investing in resilience, creating fiscal buffers, ensuring budget flexibilities, and making risk transfer arrangements.
- Several PFM tools can integrate adaptation across the budget cycle; gradual adjustments to existing processes are preferable to creating parallel procedures.
- Climate budget tagging has been used by some countries to track and report adaptation expenditure; external audits and independent oversight bodies can help ensure report quality and performance.
- Integrating adaptation in PFM likely requires changes to PFM legal frameworks.

### Green PFM Framework (key features)
- Core questions addressed by the IMF’s Green PFM Framework:
  - Legal framework: Are green PFM practices underpinned by an adequate legal framework?
  - Strategic planning and fiscal framework: Do strategic planning tools take into account green concerns?
  - Budget preparation: Are tools in place to integrate climate concerns into budget preparation and allocation (climate impact assessment, tagging, green spending reviews)?
  - Budget execution and accounting: Can the PFM system track and monitor outcomes of green expenditures?
  - Control and audit: Are oversight institutions equipped to analyze climate-related expenditures and outcomes?
  - Public investment management: Do PIM choices adequately reflect climate concerns for adaptation and mitigation?
  - Fiscal transparency: Are efforts made to ensure transparency and accountability for environmental aspects across the budget cycle?
  - Coordination with subnational governments and state-owned enterprises: Have PFM practices been adjusted to ensure these actors play a role in environmental goals?

### Public Investment Management (PIM) and project design
- Mainstreaming climate resilience into PIM enhances capital project decision-making by assessing climate risks and considering adaptation in project design, appraisal, selection, and implementation.
- Adaptation investments should be supported by cost-benefit and social impact analyses that reflect intensifying climate risks.
- For existing assets, maintenance and resilience investments should factor present and future climate hazards.
- The IMF is developing a climate module for the Public Investment Management Assessment to support integration of climate considerations.
- Project design tools to manage deep uncertainty include real options, asset criticality analysis, stress testing, robust decision-making, and metrics for distributional impacts.
- The World Bank’s resilience rating system provides guidance for including climate risks in project design.
- PIM weaknesses can lead to ineffective resilience investments; on average, countries waste about one-third of infrastructure spending due to inefficiencies, with losses surpassing 50 percent in low-income countries.
- The Public Investment Management Assessment framework can help countries assess PIM practices and design sequenced reform plans.

### Climate Public Investment Management Assessment (CPIMA)
- CPIMA assesses five elements of public investment management critical for climate-smart infrastructure:
  - Climate-aware planning.
  - Coordination between entities for climate-related public investment decision-making.
  - Project appraisal and selection incorporating climate-related analysis and criteria.
  - Budgeting and portfolio management with active oversight of climate-related investment spending.
  - Risk management that incorporates fiscal risks relating to climate change and infrastructure into budgets and fiscal risk analysis, managed according to a plan.

### Role of finance ministries and international support
- Finance ministries play a critical role in reflecting climate change in macroeconomic frameworks and integrating adaptation policies into the budget process.
- Finance ministries should coordinate with climate expertise holders, public corporations, and subnational governments to develop, prioritize, implement, and monitor fiscal measures that strengthen resilience without undermining PFM effectiveness.
- Capacity development support from the international community can accelerate adoption of green PFM practices and help countries meet requirements to access climate funds or climate instruments from multilaterals.

*Prepared by Isabela Duarte, Emilio Fernandez-Corugedo, Alejandro Guerson, Janne Hukka, Marie Kim, Sónia Munoz; additional sections prepared by Ozlem Aydin and Guohua Huang.*

### Annex 1. Global Progress on National Adaptation Plans

### Annex 1. Global Progress on National Adaptation Plans

### Background and purpose
- National Adaptation Plans (NAPs) are dedicated documents to articulate adaptation strategies; the NAP process was established under the Cancun Adaptation Framework in 2010.
- NAP objectives: reduce vulnerability to climate change by increasing adaptive capacity and resilience, and facilitate integration of adaptation into new and existing policies, programs, and activities within all relevant sectors.
- In 2015, integration of climate change into national policy, including climate change adaptation, became an action target under the climate action Sustainable Development Goals.
- Some countries incorporate NAPs within national climate change action plans; others develop separate, comprehensive adaptation frameworks.

### Methodology and data sources
- A global database, the adaptation plan tracker, was constructed to assess country progress based on the building blocks suggested by the UNFCCC.
- The UNFCCC’s guidelines are articulated around four main steps, divided into a total of 23 measures (Annex Table 1.1).
- Coverage and compilation:
  - Information was collected on 170 countries to create a first comprehensive and detailed assessment of adaptation planning progress.
  - Data sources include: UNFCCC’s annually updated publication of measures undertaken in developing countries; the European Union’s “Adaptation Preparedness Scoreboard”; World Bank’s compilation of Nationally Determined Contributions; World Bank’s Climate Change Knowledge Portal; UN Development Programme’s Climate Change Adaptation portal; and independent research using countries’ official publications.
- Counting methodology:
  - The database counts the number of steps taken toward building adaptation plans and addressing the UNFCCC’s four planning and implementation steps.
  - For countries followed by the UNFCCC, the database counts the number of steps for which at least one measure was completed.
  - For countries covered in the European Commission assessment, the mapping in Annex Table 1.1 is used and a step is considered taken if at least one submeasure is completed.
  - For the remaining subset, published adaptation documents were analyzed to assess whether at least one measure has been undertaken for each step.

### UNFCCC / European Commission planning framework (structure preserved)
- The framework is organized into Elements and Steps as mapped in Annex Table 1.1:
  - Element A. Laying the groundwork and addressing gaps — Step A. Preparing the ground for adaptation
    - 1. Initiating and launching the process to formulate and implement national adaptation plans (NAPs)
    - Coordination structure
    - 2. Submitting proposals for GCF readiness for NAPs
    - Stakeholders’ involvement in policy development
    - 3. Receiving approval for Green Climate Fund readiness funding for NAPs
    - 4. Formulating a mandate for the process
    - 5. Defining institutional arrangements and a coordination mechanism
    - 6. Consulting stakeholders
    - 7. Synthesizing available information, stocktaking of relevant activities, and assessing gaps and needs
  - Step B: Assessing risks and vulnerabilities to climate change
    - 8. Developing road maps for the process to formulate and implement NAPs
    - Knowledge gaps
    - 9. Completed road maps for the process to formulate and implement NAPs
    - Knowledge transfer
  - Element B. Preparatory elements — Step C: Identifying adaptation options
    - 1. Analyzing past climate and climate change scenarios
    - Current and projected climate change
    - 2. Comprehensively assessing climate vulnerability
    - 3. Undertaking activities on integrating adaptation into national and subnational development planning
    - 4. Identifying adaptation options to address key vulnerabilities
    - Identification of adaptation options
    - 5. Appraising, prioritizing, and ranking adaptation options
    - Funding resources identified and allocated
    - 6. Compiling draft NAPs for consultation and endorsement
    - 7. Communicating NAPs
  - Element C. Implementation strategies — Step D: Implementing adaptation action
    - 1. Designing coherent implementation strategies including synergy
    - Mainstreaming adaptation in planning processes
    - 2. Prioritizing climate change adaptation in national planning
    - Implementing adaptation
    - 3. Implementing and managing actions in NAPs to reduce vulnerability and facilitate integration of adaptation into development planning through policies, programs, projects, and other activities
  - Element D. Reporting, monitoring, and review — Step E: Monitoring and evaluation of adaptation activities
    - 1. Designing/applying a monitoring and evaluation framework or system
    - Monitoring and reporting
    - 2. Communicating progress on the process to formulate and implement NAPs
    - Evaluation
    - 3. Monitoring and periodically reviewing the process
    - 4. Iterative updating of NAPs

### Key findings and statistics
- Dataset coverage and progress:
  - Information collected on 170 countries.
  - The development of adaptation plans by country authorities is recent and remains a work in progress even in most advanced countries.
  - As of 2021, most countries in the world have initiated the NAP process; all but a handful of Middle East countries have taken at least one step toward formulating and implementing their NAPs.
  - Countries that have taken only one step have typically focused on analyzing how climate change may affect communities and the economy (Element B in Annex Table 1.1).
  - Many countries have made substantial progress, with 104 out of 166 having taken three or more steps.
  - At least 52 countries in the world have published a full-fledged NAP (Annex Table 1.2).
  - NAP publication spans all regions and all income groups, including low-income countries.
- Other structural points:
  - The assessment counts steps taken when at least one detailed measure in the corresponding block has been completed.
  - Publication of a complete NAP is an important milestone, but NAPs are intended to be updated and strengthened (Element D.4 in Annex Table 1.1).

### Countries with a published NAP (as listed in Annex Table 1.2)
- The annex lists 52 countries and territories with a published National Adaptation Plan, including but not limited to:
  - Albania; Armenia; Australia; Austria; Belgium; Brazil; Burkina Faso; Cameroon; Canada; Chile; Colombia; Cyprus; Czech Republic; Denmark; Estonia; Ethiopia; Fiji; Finland; France; Germany; Grenada; Guatemala; Hong Kong SAR; Japan; Kenya; Kiribati; Korea; Kuwait; Liberia; Lithuania; Nepal; Paraguay; Romania; Russia; Singapore; Slovak Republic; South Africa; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Suriname; Switzerland; Taiwan, Province of China; Timor-Leste; Togo; Tonga; Turkey; United Kingdom; United States; Uruguay; West Bank and Gaza.
- (This list is reproduced from Annex Table 1.2 as presented.)

### Limitations and future work
- Assessment challenges:
  - The assessment of adaptation progress is complicated when the planning process is decentralized (for example, the United States and some European countries) or when documents have yet to be translated (for example, Norway).
  - More work is needed to address data collection challenges and improve coverage.
- Planned next steps:
  - Future work will focus on expanding the data set coverage and maintaining up-to-date information.

*Source: Annex 1. Global Progress on National Adaptation Plans (clnea2022003).*

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_Source: https://www.imf.org/-/media/files/publications/staff-climate-notes/2022/english/clnea2022003.pdf_