Innovative Financing for the Adaptation Fund: Pathways and Potentials is a report written by Carsten Warnecke, Ritika Tewari, Sönke Kreft, Niklas Höhne for the New Climate Institute.The Adaptation Fund was established under the Kyoto protocol and funded under the Paris Agreement to help developing countries manage the impact of climate change. The fund has used innovative finance schemes such as direct access to finance development projects, has streamlined project cycles to allow participation of small institutions, and holds an impressive track record of delivering results-based adaptation finance. Because a key revenue source, the Clean Development Mechanism, has dried up, the resulting unresolved funding gap has resulted in funding shortfalls.

The fund has used a number of innovative finance options, including international and national instruments, as well as those of non-state actors. International instruments include proceeds on international crediting and from international unit transfers as well as contributions from the Carbon Offsetting and Reduction Scheme (CORSIA) under the International Civil Aviation Organization (ICAO). National instruments include earmarking auctioning revenues from national emission trading schemes (ETSs) and national carbon taxes. Non-state actors include a share of proceeds from voluntary carbon markets and earmarking auctioning revenues from sub-national ETSs.

None of these options have technical limitations to exclude them from further consideration, and all can be designed to lead to fair contributions. The difference on climate impact of all options is negligible. All options face uncertainty due to lack of political willingness of relevant decision makers.

A clear resource mobilization strategy is needed. This document recommends the following strategies:

1. For the Adaptation Fund to have any success, it needs to take a proactive role on the issue, especially through its Resource Mobilisation Task Force.

1. Follow and engage in developments on operationalization of the Article 6 of the Paris Agreement: The Adaptation Fund must closely follow and continually engage in the UNFCCC process on markets, especially on a reasonable share of proceeds under Article 6.4 mechanism (Option A.1) and build on fairness arguments to highlight potential adaptation contributions from transfers under Article 6.2 (Option A.2).

1. Create specific relations with cities and regions: The Adaptation Fund Board and its secretariat should reach out to frontrunner ETS cities and regions (Option C.2) that are interested in supporting the Fund in its most urgent funding crisis. Leadership examples set by non-state-actors can furthermore push the envelope for countries to act.

1. Identify proactive countries for national funding schemes: The Adaptation Fund can initiate direct communication with proactive countries with mature ETSs which already earmark funding for international climate policy purposes to discuss possibilities to pilot earmarking of auctioning revenues (Option B.1) and national carbon taxes (Option B.2).

1. Achieve share of proceeds from Voluntary Carbon Markets: The Adaptation Fund should closely engage with actors in Voluntary Carbon Markets to explore a good practice levy (or price premium) towards adaptation (Option C.1).

1. Create momentum at the level of ICAO: Pushing action on the ICAO approach (Option A.3) is essential to tap the future demand coming from aviation. Further, overlaps discussed in this study between this and other options must be carefully considered and can provide alternative routes to cover the potential from aviation.

Link to full paper