A. Background

1. Kiribati is extremely vulnerable to climate change (CC). Like many islands in the Pacific, Kiribati consists of low-lying atolls with an average height above sea level of around three meters. Kiribati has 1,143 kilometers of coastline and 21 inhabited islands.

2. Higher sea levels, more frequent and extreme storms, and changing patterns of rainfall may adversely affect, for example, water supplies, agriculture and fisheries output, and human health:

• Water resources. Although projections are uncertain, changing precipitation patterns are likely to further reduce the size of Kiribati’s already limited freshwater lens.

• Agriculture and fisheries. Increased inundation and salinization of agricultural land is likely to reduce agricultural output and productivity; while damage to coral reefs may accelerate the depletion of fish stocks. The World Bank estimated potential costs in the region of one-sixth of GDP in 1998 under some future emissions scenarios.

• Human health. Higher temperatures and wider areas of flooded land could increase the prevalence of vector borne diseases such as dengue fever.

3. These risks are exacerbated by Kiribati’s limited capacity to adapt. Poor information, skills, access to technologies, public services, and infrastructure as well as existing environmental stresses mean that the population of Kiribati is unlikely to be able to manage impacts efficiently or effectively.

B. Fiscal Costs of Adaptation

4. Evidence on the likely cost of adaptation measures for lower income countries is scant, and even rarer in the case of fiscal costs. Little is known of the fiscal costs in the poorest and most vulnerable countries. This information gap reflects remaining scientific uncertainties, particularly acute in lower income regions. Still, emerging estimates of aggregate adaptation costs in developing countries run in several tens of billions of dollars per annum, with two recent studies by the World Bank and the United Nations Development Program (UNDP) placing the aggregate cost at around US$45 billion per annum.

5. Rudimentary and limited analysis for Kiribati suggests that adaptation could often be relatively inexpensive in absolute terms, but large relative to its resources. Kiribati’s National Adaptation Plan for Action (NAPA) identified priority adaptation investments totaling approximately US$12 million. The World Bank (2000) estimates that the impact of climate change on Kiribati could cost up to 1/3 of 1998 GDP. Nicholls and Tol (2006) find coastal protection costs could be in the region of one percent of GDP annually in some of the most affected islands in the Pacific.²

6. Further efforts to assess the costs and benefits of CC responses are essential to facilitate integration of spending on adaptation into wider development programs. Adaptation needs to compete with other uses of scarce funds. While benefit-cost ratios seem high for many measures of public spending on adaptation, the same is true for many nonclimate-related items. Kiribati’s NAPA is a welcome start in this direction.

C. Fiscal Strategies

7. Institutional and financial weaknesses in many of the most vulnerable countries create scope for donor support in meeting adaptation costs. Funds have been created to this end, but remain modest: delivered financing is around US$26 million (UNDP, 2007)—though committed amounts are larger—and is likely to expand, for example, with the establishment of the United Nations Adaptation Fund (financed from a 2 percent levy on the sale of Clean Development Mechanism credits). Kiribati has received support, for example, from the United Nations Framework Convention on Climate Change in the development of its NAPA and from the Global Environmental Facility (reported to be approximately US $6.6 million). In addition, a strong case can be made for increased assistance, with achievement of the Millennium Development Goals otherwise potentially jeopardized.

8. Adaptation will require increased public expenditure both on climate-related public goods and to protect programs driven by other concerns. Kiribati’s NAPA identified priority expenditure areas such as improving drinking wells, reducing losses from water distribution systems, and reinforcing natural sea defenses. In addition, the provision of more generalized public services, such as health and education systems, are likely to be an important part of resilience building efforts.

9. Significant uncertainties and irreversibilities require balancing precautionary spending on adaptation against the risk of undertaking unnecessary expenditures. To the extent that public investments are more likely to involve heavy sunk costs (for example, desalinization plants), the option value of waiting may be significant in favor of more flexible, incremental strategies. Additional spending will also be needed to protect wider investments, but full “climate proofing” is generally not optimal: the investments themselves may need reconsideration, and some residual climate risk accepted.

10. Thus, in the near term Kiribati could usefully concentrate on capacity building and other low cost actions, as has been done is several other Pacific Island nations; and better evaluation of larger expenditure programs, including permanent migration, and contingent liabilities in the longer term. Many of the low cost actions used in the Pacific today entail reducing environmental and economic stresses by reinforcing traditional knowledge and resource management practices. The Solomon Islands, for example, has made efforts in marine conservation and Samoa has made efforts with an environmental health program. Coastal defense is another major strategy, particularly for urban areas. Successful examples of mangrove rehabilitation in the region include Palau and Tonga, with projects in Samoa and Papua New Guinea performing less favorably. Moreover, the UNDP finances a relatively inexpensive Coastal Zone Management Project in Majuro.

11. Finally, climate change responses may raise some limited revenue opportunities. Water pricing, for example, has the potential to be an effective measure with which to foster increased conservation and reduce demand for limited water resources. In addition, large renewable endowments may create opportunities for generating revenues from emissions “offsetting schemes.”

D. Examples of Insurance Markets as a Complimentary Strategy

12. Intervention may be appropriate to facilitate private insurance. Insurance does not reduce the physical damage from climate change (and through moral hazard effects could worsen it). It can however reduce the consequent welfare losses, including by reducing implicit fiscal risks. In many developing countries, however, market insurance may be unavailable or unaffordable at actuarially fair rates. There may then be scope for public intervention to provide or facilitate access to risk markets: in Malawi, for instance, the World Bank and donors provide drought insurance. Strengthening wider social insurance schemes also improves resilience to extreme weather events, as to other traumas.

13. Recent financial innovations also point to new ways of coping with some climate related fiscal risks. The Caribbean Catastrophe Risk Insurance Facility, for example—bringing together CARICOM countries and launched with donor support in 2007—pays out in the event of parametric trigger points (such as hurricane wind speeds) being exceeded. It is estimated to offer premia about 40 percent below market rates, and provides rapid payment if disaster strikes. Still, such schemes (as well as wholesale instruments such as catastrophe bonds, which tap deeper capital markets) are often limited by high transaction costs, asymmetric information, and issues of moral hazard, but indicates scope for addressing fiscal and other risks from climate change through insurance mechanisms. Moreover, whether further innovations could deal with longer-term climate risk, and the uncertainty surrounding some risks, remains an open question (Heal and Kristrom, 2002).

14. Given the many other fiscal challenges faced by Kiribati, and the possible scale of damage, however, the self-insurance reasonably achievable may be limited.