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16 November, 2020 06:36:52 PM

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Innovative climate finance for addressing loss and damage: Opportunities and challenges

Due to several reasons such as lack of trust, mismanagement, economic instability, and excessive politicization of the insurance industry, it can’t be a standalone solution to address L&D. Additionally, the expansion of insurance companies needs long-term planning and time frames for addressing L&Ds
S M Saify Iqbal
Innovative climate finance for addressing loss and damage: Opportunities and challenges

Despite the clear evidence of climate-induced loss and damages (L&Ds) around the globe, for instances, approximately 1.5 billion USD damage toll due to cyclone Amphan, inundation of standing crops worth of 662.5 million USD due to flash flood in 2017 in Bangladesh, loss of 3000 million USD insured property due to Hurricane Dorian in 2019 in USA, loss of life of 300 people in India in 2017due to landslide and so on, there is any concrete decision yet to be taken on channelizing finances to address L&D. Developed states have been trying to establish insurance as a standalone solution to address L&D for years, but still in many countries, there exists a lack of concept on the approaches of risk transfer and absence of a regulatory framework for introducing insurance.

In some developing countries, people consider insurance as a decisive scheme and find it expensive in terms of paying a premium as they don’t have affordability.

Paying premium means payment for the development of goods and services, infrastructure, education, and addressing natural disasters that are out of the scope of micro and macro level insurance. Due to several reasons such as lack of trust, mismanagement, economic instability, and excessive politicization of the insurance industry, it can’t be a standalone solution to address L&D. Additionally, the expansion of insurance companies needs long-term planning and time frames for addressing L&Ds. These are challenges confronted by both public and private companies which often have an interest in rapid results and short-term benefits but without both short-term and long-term profitability, insurance solutions will not work properly for addressing L&D. Global leaders came to a conclusion at SUVA Expert Dialogue, held from 2-3 May, 2018 in Bonn before COP 24, that insurance can’t be the ultimate solution to address loss and damage. Given this context, they suggested to put on innovative sources of financing instead of insurance schemes.

Innovative finance can play a role in increasing funding, complementing existing public flows, and internalizing social and environmental L&Ds of both state and non-state actors. In the 25th Conference of Parties (CoP) held in Madrid, Spain, one of the key issues of negotiation was to set up a financial arm comprised of additional and innovative sources of finance to address climate-induced loss and damage which would compel the fossil fuel company to pay for compensation. International Air Passenger Adaptation Levy (IAPAL) could be one of the best proposals that the Least Developed Countries (LDC) Group can revive though it didn’t get much attention earlier when the Maldives submitted a proposal in 2008 on behalf of LDC at COP 14, but still has many prospects to apply for financing L&D. In 2019, it was revived in a revised version, called International Airline Passenger Levy for Loss and Damage (IAPALLnD) and agreed to channelize funds to fix L&Ds in developing countries. The revived proposal has gained satisfactory political support among LDCs, Small Island Developing States (SIDS), and AILAC (Association of Independent Latin American Countries) members.

Generally, this levy proposed to deduct 6 USD and 61 USD in case of economy class and business class passengers respectively which might accumulate over 8-10 billion USD annually and this amount would be given to the Adaptation Fund under the UN Framework Convention on Climate Change (UNFCCC) by the airlines. Consequently, the newly proposed Global Loss and Damage Fund could collect those funds from the Adaptation Fund to compensate for the vulnerable communities.

Besides, the mechanism of IAPAL is similar to another financing instrument, named the Solidarity levy- a mechanism that has stood the test so far. In 2005, France President Jacques Chirac at a meeting of the World Economic Forum proposed the Solidarity Levy to be imposed on airplane tickets in order to raise revenues to fund health care in developing countries. The funds raised through this levy will provide financial support to UNITAID- an entity that undertakes health care schemes to assist developing countries to fight against diseases like- HIV/AIDS, Malaria, Tuberculosis, etc. UNITAID was successful to reduce the price of HIV/AIDS medicines and made the treatment of HIV/AIDS more affordable by providing medicines to 400,000 children suffering from HIV/AIDS. This levy so far has dedicated $40 million of its funds to African countries that ensured better access to treatment for children suffering from HIV/AIDS. Furthermore, it conducted HIV test on 8 million pregnant women to ensure proper diagnosis by Self-testing kit which was also been introduced in regions like Africa, a region having high HIV/AIDS prevalence rate. UNITAID along with its partners is also battling against malaria by ensuring better treatment for the sufferers and better prevention of the disease by distributing bed nets and anti-parasitic drugs during the rainy season in areas with a high prevalence rate of malaria. So, based on the success of the Solidarity Levy, it can be stated there is a huge possibility of the successful implementation of IAPALLnD if the proposal is accepted by the developed states.

However, there are some challenges in implementing IAPALLnD as there is a probability of exerting some negative effects on the aviation industry because if the rise of ticket price reduces demand, airlines might reduce its volume of flights. Although price elasticity is quite low in the case of long and short-haul business flights, it is high in the case of short-haul leisure flights. Elasticity might be high in some specific countries as well and this might reduce the demand for air flights to some extent when the price of air ticket rises. Moreover, airlines are required to bear some fixed costs per flight, for example- the cost of fuel, oil, landing fee, etc., which does not vary with the number of passengers it carries. Due to such fixed costs per flight, it might not be economical for an airline to fly with a very small number of passengers which could result to cancel flights. On the other hand, if demand falls in response to such levy as well as airlines reduce its volume of operation, employment in aviation might be greatly hampered. Also, employment in some other industries like oil or fuel industries that supply fuel to the aviation industry might be hampered as well. Generally, price elasticity of demand is very low when it comes to short and long-haul business flights and there will not be any significant fall in overall demand for air traveling that can cause severe harm to the aviation industry.

Ironically, there is an uncertainty that it will be difficult to negotiate about implementing IAPALLnd because the aviation industry suffers a huge loss due to COVID-19 outbreak. Notable reduction in the number of passengers resulted in the cancellation of flights or planes flying without passengers from one airport to another, which significantly exerts negative impacts on the aviation industry such as laying off workers, declaring bankruptcy, and many more. According to Statista, the forecasted revenue from air passenger traffic globally in 2020 before the COVID-19 outbreak is 581 Billion USD and estimated revenue loss of airlines worldwide due to the Corona virus outbreak is 314 bn USD, a total loss of above 250 Billion USD.

Additionally, some LDC countries fear that if the levy on all international air travel is imposed, it might impact the arrivals of tourists in LDCs, making the tourism sector vulnerable. Given this context, IAPALLnD should be considered for only developed countries according to the Principle of Common but Differentiated Responsibility and Respective Capabilities (CBDR). The Warsaw International Mechanism (WIM) and Standing Committee on Finance (SCF) should bring this discussion forward at the forum of SCF and COP 26 in front of global leaders and relevant stakeholders. Also, negotiations on L&D finance should focus on addressing both practical questions and political traits which include the enhanced action and support to address L&D and the necessity of additional financing.

The writer is working as a development activist.

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Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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