“Climate Change Law, Adaptation, and Sustainability”
Panel organized by CLEAR, ELI, and ASIL
Rio+20 Conference, June 15, 2012, Rio de Janeiro
THE PRIVATE SECTOR AND
CLIMATE CHANGE
ADAPTATION: INCENTIVES,
BARRIERS, AND THE LAW
Maria L. Banda
Contents
2
•
Private Sector Adaptation: Drivers, Barriers, and Assessment
•
The Role of the Law
•
Toward a New Framework for Private Sector Adaptation
3
Private Sector Adaptation
•
What is adaptation?
•
Why is adaptation necessary?
•
Drivers of private sector adaptation
•
Barriers to private sector adaptation
•
Current state of private sector adaptation
What is adaptation?
4
“Adjustment in natural or human systems in response
to actual or expected climatic stimuli or their
effects, which moderates harm or exploits
beneficial opportunities” (IPCC)
¨  Various types of adaptation can be distinguished,
including:
¨
¤  “Autonomous
adaptation” (e.g. based on cost-benefit
calculations or market changes)
¤  “Planned adaptation” (e.g. energy conservation based
on a deliberate policy decision in order to return to,
maintain, or achieve a desired state)
Why is adaptation necessary?
5
¨
¨
Mitigation and adaptation are both required to reduce the
impacts of climate change
Even with aggressive GHG emissions reductions, climate
change impacts are now unavoidable in many regions, as
the benefits of new cuts would not be felt until after 2040
(UNEP)
Extreme weather events, water scarcity, loss in crop productivity,
loss of biodiversity, sea level rise
¤  By 2040, the cost of climate damage could rise to $1 trillion/
year
¤  Developing countries are particularly vulnerable: between 2010
and 2050, they are facing a cost of $70-100 billion/year to
meet their climate change adaptation needs (World Bank)
¤
6
Climate Change Adaptation – a multi-stakeholder, multipronged (mandatory and voluntary), and a multi-level
approach (international, national, regional, and local)
Source: DiploFoundation 2012 (diplomacy.edu)
Private Sector Adaptation
7
The private sector is a critical source of adaptation
innovation, technology, as well as financing solutions
¨  Climate change impacts will affect almost every
aspect of business, but early action can reduce risks
¨  Despite growing awareness of the need for
adaptation, the private sector has not yet risen to
the task
¨
What is driving private sector
adaptation?
8
¨
Risks from climate change:
¤  Physical/operational
(e.g. extreme weather events –
Energy Corp.)
¤  Indirect exposure (e.g. pension funds)
¤  Market risks (e.g. shift in consumer demand), etc.
¨
Opportunities from climate change
¤  New
“adaptation marketplace” (Oxfam), e.g. SwissRe
insurance products in Ethiopia
¨
CSR / corporate citizenship /reputation risk are NOT
a sufficient driver
What are the barriers to private sector
adaptation?
9
¨
¨
¨
Uncertainty about climate change impacts and
quantifying risks
Short planning horizons (except for, e.g., pension funds,
utilities)
Upfront costs vs. long-term benefits
¤  E.g.
the private cost of capital may be higher than socially
desirable discount rate to ensure the welfare of future
generations
¨
Private costs vs. public benefits
¤  E.g.
beach developers will not bear the full burden of
coastal flooding
¨
Regulatory uncertainty
What is the state of private sector
adaptation?
10
¨
¨
¨
Private sector focus to-date: GHG mitigation
Widespread awareness of the need for adaptation
has not translated into concrete actions.
Companies take a “wait-and-see” approach to
adaptation
¤  “No
regret” or “soft measures” predominate. “Hard”
measures are rare
à
There are insufficient incentives for companies to
adapt today
Sources: CDP, UNEP, PWC, OECD, IFC.
11
The role of the law
•
Risks of mal-adaptation
•
Reaching optimal adaptation
Why is the law critical for private
sector adaptation?
12
¨
¨
Market forces alone are insufficient to drive private
sector adaptation
Moreover, autonomous actions may reduce the public
good or result in “mal-adaptation”
¤
¨
Maladaptation: “Any changes in natural or human systems that
inadvertently increase vulnerability to climatic stimuli; an
adaptation that does not succeed in reducing vulnerability but
increases it instead” (IPCC)
Regulatory and legislative measures can be a critical
catalyst for optimal private sector adaptation by:
¤  Removing
barriers to action
¤  Restructuring incentives
¤  Enabling private sector action
What are the risks from maladaptation?
13
Piecemeal, self-interested mal-adaptive actions may
¨  Undermine long-term, societal goals
¤
¨
Conflict with the goal of GHG mitigation
¤
¨
E.g. artificial instead of natural storm barriers (such as wetlands or
mangrove forests)
Encourage resource competition and exacerbate community
vulnerability and inequity
¤
¨
E.g. energy-intensive climate-proofing of buildings
Under-provide public goods
¤
¨
E.g. climate-resistant mono-crop plantations threaten biodiversity
E.g. monopolizing water use rights
Be too little, too late
What are the features of optimal
adaptation?
14
Optimal adaptation should achieve:
¨  Timely, effective, and comprehensive action
¨  Policy coherence (with mitigation, sustainable
development, and disaster management)
¨  Equity and community resilience
¨  Provision of public goods (e.g. biodiversity)
¨  Resilient ecosystems – “green infrastructure” (e.g.
wetlands or mangrove forests as natural storm
barriers)
Regulatory/legislative response can
facilitate optimal adaptation by
15
¨
¨
¨
¨
¨
¨
¨
Creating an enabling environment for private sector
adaption (and avoiding the “first-mover” problem)
Sending a strong market signal and lengthening business
time horizons (e.g. to encourage long-term financing)
Averting mal-adaptation
Ensuring the provision of public goods
Coordinating private sector adaptation with community
resilience and equitable growth (“Green Economy”)
Aligning adaptation with mitigation, sustainable
development, and disaster management policies
Expediting the adaptation process
16
Toward a New Framework for
Private Sector Adaptation
•
The Business and Human Rights Model
•
Mapping exercise
•
Final Caveat
What sources of law are needed for
adaptation?
17
¨
¨
¨
There is no single “law of adaptation.” The government
can incentivize private sector adaptation through a
patchwork of regulations adopted for other reasons
The appropriate regulatory measures will be highly
localized and sector-specific, because the underlying
climate risks and opportunities (and the level of
autonomous adaptation) are also highly localized and
sector-specific
While incentivizing an optimal level of private sector
adaptation requires primarily a domestic response, it will
also need alignment with international law obligations
How can we begin developing a legal
framework for private sector adaptation?
18
The reports of the UN Secretary-General’s Special Representative on
Business and Human Rights provides a useful model for policymakers
and lawyers:
¨  Six years of research involving governments, companies, civil society,
and investors
¨  Phase I identified and clarified existing standards and practices,
including impact of investment agreements, corporate law, and
securities regulations. Key finding: many fragmented initiatives, but
none could move markets
¨  Phase II developed a common, integrated framework (“Protect,
Respect, Remedy”)
¨  Phase III began implementing the Framework through concrete,
practical recommendations that could build on existing laws and
norms (“Guiding Principles” 2011)
Source: A/HRC/17/31
The emerging map of “adaptation law”
19
Corporate
Property
CSR
Tax
Investment
Treaty
Environmental
Municipal
Codes
Insurance
What are the building blocks for
private sector adaptation? (1/3)
20
Various municipal, state, and national laws provide the basic
foundations to develop a coherent and mutually-reinforcing law
of adaptation. For example:
¨  Water Regulations: Cross-Sectoral Effect
Limits on use and irrigation
¤  Demand-side measures (e.g. metering)
¤  Efficiency incentives
¤  Rethinking private ownership (e.g. South Africa National Water
Act)
¤
¨
Building Codes: Construction Sector
¤
¨
Stringent control of land development / construction
Quality Standards:
¤
Encourage durability / longevity of products
What are the building blocks for
private sector adaptation? (2/3)
21
¨
Securities Law:
¤  Financial
reporting: require disclosure of climate risks
and adaptation actions (as “material” or “significant”)
¨
Corporate Law:
¤  Fiduciary
duty: broaden definition to encompass
stakeholders
¤  Supply-chain management: directors’ duty of oversight
over corporate subsidiaries in third countries
¤  Regulate the extraterritorial activities of businesses
domiciled in their jurisdiction
What are the building blocks for
private sector adaptation? (3/3)
22
¨
Tax law:
¤  Tax
credits for adaptation investments
¤  Remove mal-adaptive subsidies
¨
Insurance Law:
¤  Create
enabling framework: e.g. weather-index
insurance (India)
Finally . . .
¨  Enforcement
¤  Access
to courts and expanded rules of standing
Adaptation and International Law
23
¨
Optimal adaptation requires aligning domestic measures
with international obligations and mainstreaming
adaptation in multilateral finance and investment
institutions. E.g.:
¤  Bilateral
investment treaty obligations or investment contracts
(adaptation-focused regulations as indirect expropriation?)
¤  International trade obligations (adaptation-focused
regulations as non-tariff barriers?)
¨
International environmental law offers principles to
guide planned adaptation:
¤  Precautionary
principle
¤  Cross-border management (e.g. for shared watersheds)
24
A final caveat
•
•
•
Though developing the law can help optimize adaptation, it will
not suffice on its own
Many regulatory and legislative measures will be seen as
punitive (and politically unpalatable) unless the underlying
problem of pricing is addressed
This will require:
•
•
•
Rethinking the measures of economic growth to discourage
resource over-exploitation and mal-adaptation
Valuing positive externalities like ecosystem services (the “life
support systems”) to encourage conservation of public goods
(forests, biodiversity, clean water, etc.)
Internalizing negative externalities