Market Forces

To make nature financing more equitable, we must understand how NCS credits are used

This blog was authored by Julia Ilhardt, former High Meadows Fellow, Global Climate Cooperation. It was originally published on EDF’s Climate411 blog channel. Read the full post here

At the end of last year, 196 nations agreed to the historic Global Biodiversity Framework, which includes the goal to protect 30% of land and sea area by 2030. Still, nature is woefully underfinanced, with investments in nature-based solutions needing to double to USD 384 billion per year by 2025, according to UNEP. 

Using crediting to incorporate natural climate solutions (NCS) into carbon markets is one way to generate significant finance for nature while cutting emissions, and it’s gaining public and private sector attention. However, both producing and using credits raises important equity considerations. A new paper from EDF focuses on the issues around use, including how credits may impact the communities surrounding polluting facilities. This blog lays out the framing, key issues, and potential solutions, with more detailed analysis available in the paper. 

To understand equity, ask the right questions 

Achieving environmental equity means ensuring that both the processes and outcomes associated with policy decisions are fair and just. Environmental benefits and burdens must be balanced. Everyone is entitled to a healthy ecosystem. 

Across academic and civil society literature, environmental equity is often framed along three dimensions: recognitional, procedural, and distributional equity. The graphic below defines these dimensions of equity and provides examples of questions that carbon market stakeholders should ask when designing and implementing crediting programs. 

In the context of NCS crediting, equity questions arise on both the demand and supply side. On supply, issues include the rights and priorities of communities generating credits, benefit sharing arrangements, and stakeholder consultation processes. On demand, these include the impacts of credit use on local co-pollutants, disparities in environmental burdens, and the distribution of benefits.  

In some cases, supply and demand considerations may come into tension, for instance when credit usage could exacerbate a community’s air pollution on the demand side but support local livelihoods on the supply side. 

Though equity should ultimately be considered holistically, this paper focuses specifically on demand, digging into the details and evidence around the use of NCS credits. EDF’s forthcoming NCS Crediting Handbook will include a chapter on supply side issues, including a section on safeguards for people and the environment. 

Read the full post here.

The NCS Crediting Handbook will explore other components of equity and integrity, including questions around the generation and transaction of credits. Visit our NCS Crediting Handbook and Briefing Series page for upcoming briefs, and to get the latest on our work in the NCS crediting space. This and other research are also part of EDF’s Economics Discussion Paper Series.

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Understanding how communities are vulnerable to climate change is key to improving equity and justice

Hurricane Harvey dropped more than 60 inches of rain on the greater Houston region in 2017.

This blog was co-authored by Dr. Grace Tee Lewis, Senior Health Scientist, Climate and Health

Last month, Environmental Defense Fund and Texas A&M University published a new study that found all states in the U.S. are at risk from the effects of climate change, particularly neighborhoods experiencing disproportionate environmental harms and risks, health disparities and infrastructure problems. We published our research paper, Characterizing vulnerabilities to climate change across the United States, in response to a growing push to identify and address these climate injustices and inequities. This movement is exemplified by the Biden Administration’s executive order to ensure environmental and economic justice are key considerations in how the administration governs on the issue of climate change.  

With the Biden Administration’s recent legislation – including the Inflation Reduction Act, Bipartisan Infrastructure Bill and Creating Helpful Incentives to Produce Semiconductors and Science Act (IRA, BIF and CHIPS) – we have a historic opportunity to tackle decades of systemic neglect in low-income neighborhoods and communities of color. We can help level the playing field by directing resources to build resilience and adaptability in the right places across our country.

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A New Pilot Launches to Support Equitable Flood Recovery in NYC

This blog was authored by Environmental Defense Fund economist, Carolyn Kousky.

Facing $150 billion annually in direct costs from climate-related disasters, the current system of disaster recovery in the U.S. is failing many families and communities.

Most households struggle with timely access to sufficient financial support for the wide-ranging expenses disasters impose. And without adequate financial resources for recovery, natural disasters can become tipping points that set back hard-earned financial gains — especially for low-income households.

A new pilot program that just launched in New York City could help address gaps in assistance and increase equity in recovery. Supported by a National Science Foundation Civic Innovation Challenge award, the effort focuses on the delays low- and moderate-income households can face in accessing funds for immediate post-disaster needs, which can range from buying a generator to mold remediation to temporary housing.

The small pilot aims to get funds to people very quickly after a flood.

One in six adults in the U.S. in 2021 experienced financial hardship from a natural disaster and people with low incomes and people of color are disproportionally harmed by these events. Many households do not have enough savings to repair, rebuild, and recover, and low- and moderate-income households are often denied post-disaster loans. Federal disaster assistance is insufficient, can miss those who need it the most, and can be slow to disburse. Disaster insurance can provide funds for property repairs and reconstruction, but can be too expensive or unavailable, or may not meet the needs of certain populations.

A team that crosses sectors and expertise— including Environmental Defense Fund, the Center for NYC Neighborhoods, the New York City Mayor’s Office of Climate & Environmental Justice, SBP, Guy Carpenter, Swiss Re, and ICEYE — has been reimagining how to help low-income households with the growing risk of flooding from extreme rainfall. As heavy precipitation events increase, it imposes serious costs on households that are often unaware of the risk and lack needed financial resources.

Fast and flexible support after a disaster

Not receiving needed funding for weeks or months — as is the case with other sources of assistance — can be problematic for households without financial buffers or safety nets. To cover emergency expenses, for example, they may be forced to reduce spending on important things, such as medical care, or may fall behind on bills.

To increase the speed of assistance, the Center for NYC Neighborhoods, a nonprofit that promotes and protects affordable home ownership, is piloting a program that would make small emergency grants available immediately after a flood hits. This requires disaster financing that isn’t slow, cumbersome, or restricted. We turned to a special insurance-like tool to meet this need: parametric risk transfer.

Parametric risk transfer is an innovation that can provide fast and flexible dollars after a disaster. With a parametric product, a measurable event, such as wind speed at a certain location, automatically triggers a payout. This means funds become available incredibly quickly.

Our team worked to develop a parametric product that will pay the Center for NYC Neighborhoods when certain pilot neighborhoods flood following extreme rainfall. Rainfall flooding was fairly new to parametric markets, so we had to work with partners to determine the specific measurement that would trigger a payment. In the end, we settled on measurement of the footprint of the flood, determined by combining information from on-the-ground flood sensors, satellite data, and social media pictures and videos taken during the flood.

Here’s how the program will work: Once a severe flood happens in a pilot neighborhood, payment will quickly be sent to the Center for NYC Neighborhoods from a reinsurance company (for this pilot, Swiss Re). The center will use those funds to activate an assistance program of emergency cash grants to cover immediate post-flood needs while households wait for other forms of assistance that take longer.

An urgent need for new models of disaster recovery

Going forward, maintaining such a program will require a fundamental shift in disaster financing.

Many institutions, for example, are happy to donate relief funds following a disaster. If some donors would instead donate smaller amounts before a disaster to cover the costs of the premium on the risk transfer product, this could generate much greater payouts when a disaster occurs and reduce the amount of time it takes for nonprofits working on disaster recovery to receive funds.

We are testing one small pilot, but there are other innovative models that could also improve climate resilience and equity in recovery: microinsurance policies for households; coupling insurance to loans made by Community Development Financial Institutions; community-based models of disaster insurance; forecast-based financing; and others.

Now is the time to test these models, in partnership with researchers, in order to evaluate their effectiveness, and then refine their design to optimize their ability to meet social goals.

These new models are urgently needed. In our pilot, we have learned that designing a new approach takes committed partnerships, conversation, and dialogue. It takes collaboration between nonprofits, community groups, insurers and brokers, local governments, researchers, and data providers. It takes an ability to listen, a willingness to try something new, and a commitment to learn by doing.

The most important thing we’ve learned? We achieve more when we work together.

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Economic Resilience to Climate Impacts Requires Making Disaster Insurance More Inclusive in the US 

This blog was authored by Environmental Defense Fund economists Karina French and Carolyn Kousky. See their report: Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap.  

Over the past year, the U.S. has seen yet again how climate-driven disasters threaten lives and livelihoods, from the devastating hurricanes, Ian and Fiona, in Florida and Puerto Rico to catastrophic rainfall flooding in California. These types of severe climate shocks cause disproportionate harm to people with low income and people of color, driven by inequitable housing and planning policies, underinvestment in resilient infrastructure and buildings, and barriers to accessing disaster recovery dollars. 

Insurance is one key tool for financial protection from the economic shocks resulting from disasters. However, despite a relatively robust insurance market in the US, many of the people most in need of financial resources to recover face a disaster insurance system that is inaccessible, unaffordable, and/or not designed for their needs.  

In a new report published this week in partnership with Ceres, we offer a roadmap for how local, state, and federal policymakers can improve the disaster insurance system to make it more inclusive.  

The Economic Burden of Climate-Driven Disasters 

Natural disasters create unexpected and widespread economic costs for households. In the short term, people face the immediate costs of evacuation, temporary housing, generators and fuel to deal with power outages, and direct damage to homes, personal items, and vehicles. In the long term, disasters can have a significant effect on economic well being, causing a loss of income or loss of a job when industry is disrupted, persistent increases in housing costs as housing stock suddenly declines, and permanent displacement and relocation. Without financial safety nets, the financial shocks of disasters can be tipping points into poverty and cause an increase in wealth inequality within a community.  

Millions of Americans face these costs each year. The Federal Reserve estimates that in 2021, one in six adults were directly affected by a natural disaster, and this will only increase as climate change makes extreme rainfall, wildfire, and hurricanes more frequent and severe. Studies consistently find that more than one in four American households could not pay for an unexpected expense of $2,000; this economic precarity is even more acute for Black and Hispanic households, where 35 – 40% of households report facing difficulties paying bills if faced with a small emergency expense.  

Households generally have four main sources of financial resources for disaster recovery: savings, loans, federal aid, and insurance. While the U.S. has more wealth to help in recovery compared to other countries, low-income households and people of color still face barriers to accessing all of these. On average, low-income, Black, and Hispanic households have lower cash savings and liquid assets to rely on for emergency expenses. Some households can make use of debt to finance recovery, such as federal Small Business Administration disaster loans, but research has shown that lower-income households face higher loan denials due to credit and debt-to-income requirements. Federal disaster aid, distributed through The Federal Emergency Management Agency (FEMA)’s Individual Assistance program, is not guaranteed, slow to distribute, and limited in quantity: from 2010 to 2022, FEMA provided grants to households in only 43% of major disaster declarations, and the average payment to impacted households was just $2,860 (Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap).  

Insurance can be a financial resilience tool that fills some of these gaps. Insurance payment distribution is faster, as it does not rely on lengthy bureaucratic processes. Research shows that households with insurance recover better and faster after a disaster. But disaster insurance remains unaffordable and inaccessible to many low-income households.  

The Challenge of the Disaster Insurance for Low-income Households 

Why are so many households locked out of the disaster insurance market? Our research identified three main drivers of exclusion: unaffordability, direct and indirect discrimination, and lack of coverage for unprofitable market segments.  

Natural disasters are inherently more challenging and expensive to insure. When a major storm or wildfire strikes, the losses across a community and group of policyholders are correlated, making it difficult for insurers to pool risk and cover costs over time. To do so, insurers must tap into large resources of capital (reinsurance, reserves, etc.), which makes disaster insurance expensive and less readily available. Advocates for frontline communities emphasize how low-income households simply cannot afford to purchase disaster insurance over other immediate costs, such as housing or auto payments.   

Some households face systematically higher insurance costs or lower payouts. Insurers base underwriting and pricing decisions on how likely it is they will need to make payments back to policyholders; while insurers are banned from using factors like race and income to set rates in most states, there are many aspects of the insurance contract that can indirectly lead to differential impact along race, class, and gender lines, such as the use of proxy variables and procedural barriers to negotiating claims. A handful of qualitative and quantitative studies have shown discriminatory outcomes in insurance prices, payment times, and payment amounts. 

On the supply side, it can be difficult for insurers to profitably offer products that are more widely affordable or that meet the needs of smaller market segments. There are also limited insurance products that address the many non-property losses that households incur. Insurers cite low profit margins and challenging regulatory environments for the lack of innovative or appropriate products that might address some of the needs low-income households and renters face. Because of this, there may be gaps in insurance that the private market cannot fill; providing affordable insurance to some households may require philanthropic support or public-private partnerships. 


Policies for Regulatory Reform and Market Innovation 

Given the increasing economic burden of climate-related disasters, systemic change is needed to ensure vulnerable households have tools for financial resilience. In our Inclusive Insurance report, we outline a suite of actions across sectors and scales that can be taken to create a disaster insurance system that is more affordable, accessible, transparent, people-centered, and just.  

With legislation and new programs, federal and state policymakers can take action to:  

  • Target financial resilience funding to households and communities who need it the most by subsidizing disaster insurance for low-income households to provide lower-cost coverage, or mandating that insurers provide fair underwriting and insurance offerings to disinvested communities through a Community Reinvestment Act for the insurance sector. Policymakers could also provide funding to communities in the form of community grants for insurance innovation, enabling them to design and test their own programs.   
  • Increase transparency and monitor the market by mandating data disclosures from insurers about the demographics they serve, such as in the Home Mortgage Disclosure Act (HMDA). This would enable researchers to better assess any disproportionate impacts in disaster insurance markets. 

Through regulatory reform, state insurance regulators can: 

  • Enable innovation in the insurance sector to meet the needs of underserved populations, by preemptively establishing regulatory frameworks for new insurance products like parametric or community insurance, or creating new regulatory sandboxes to enable insurers and regulators to test new products before scaling up.  
  • Provide more consumer protections and transparency to prevent differential treatment by reforming the claims contestation procedure to be more equitable and accessible and establishing complexity limits and coverage standards that give consumers the tools to better understand and compare insurance products. Regulators can also support research on the extent of direct and indirect discrimination in insurance markets, and the effectiveness of policies meant to address it.   

Through innovative programs, local government leaders can: 

  • Provide community-scale insurance support tailored to each context, such as insurance consultations for households to help individuals navigate the procedural barriers and find cost savings, and community-based insurance models where the local government serves as the aggregator for insurance purchase and distribution.  

Insurers and private sector leaders can:   

  • Expand product offerings to include innovative insurance products, such as parametric and microinsurance, that can be more affordable and serve households previously left out of the insurance market.  
  • Provide households tools for cost savings by increasing the transparency around the pricing of risk factors and offering opportunities for cost saving through risk mitigation that households can take advantage of, such as fortified roofs.  

Promising First Steps 

Already, local and federal leaders are taking action to better understand and fill the disaster insurance gap.  

Learn more about what state and local leaders can do to create a more inclusive insurance system in our report, Inclusive Insurance for Climate-Related Disasters: A U.S. Roadmap.  

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What policy instrument options are available to address methane emissions from the oil and gas sector?

This blog was coauthored by Maureen Lackner, Huong Nguyen and Aaron Wolfe.

New EDF Economics Discussion Paper describes the instrument options available to policy makers in both oil and gas producing as well as importing countries.

Measuring to assess context and quantity of methane emissions in the EU. Photographer: Jarno Verhoef.

Policy makers around the world are increasingly recognizing the need to drastically reduce methane emissions in parallel with carbon dioxide emissions. More than a hundred countries have signed the Global Methane Pledge and made a collective commitment to reduce global methane emissions by 30% by 2030 from 2020 levels.

Reducing methane emissions in the oil and gas sector is considered particularly promising, not only because of estimated low or even negative net abatement costs for many of these emission sources, but also because most of these solutions involve mature existing technologies and work practices.

What public policy instruments can help reduce methane emissions from the oil and gas sector? We address this question in our recent EDF Economics Discussion Paper Policy Instrument Options for Addressing Methane Emissions from the Oil and Gas Sector from the perspectives of oil and gas producing as well as importing countries. Read More »

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Building North-South cooperation to fight the ‘tragedies’ of climate change

This post draws from a chapter for a book I wrote in 2020: “Overcoming the tragedy of distance – cooperating with our friends’ friends” in Living with the Climate Crisis ed. Tom Doig. Bridget Williams Books, Wellington, New Zealand 

I believe that finding ways to work more intensively and effectively with people with very different resources, cultures and life experiences is critical to rapid global decarbonization.

For me, the unprecedented challenge from climate change is that most mitigation has to occur in countries with fewer resources. Key high-emitting countries such as India, China, Indonesia and Brazil, as well as smaller countries such as Laos, Ethiopia, and Peru are all projected, in business as usual forecasts, to have rising emissions as they develop.

These countries have strongly competing priorities, as they also need to address poverty or resolve internal conflict. They are unlikely to mitigate greenhouse-gases fast enough without help. Yet, to stabilize the climate, those countries and all others must reduce their emissions to net zero and the faster the better.

Models by EDF(2019, pp. 200-232) and IETA(2019) suggest that we could double the amount of global carbon dioxide mitigation to 2035 with no extra cost if richer countries can support emerging and developing countries effectively, but that’s hard. ‘International trading’ of mitigation, where richer countries, or their companies, support developing countries to reduce their greenhouse gas emissions, has long been a goal, but it has not yet lived up to its promise.

We will all benefit if we can resolve this together. I also think those of us with more resources owe it to poorer countries to help; they are the most vulnerable to climate change, to which they have contributed little. It seems deeply unfair to also expect them to bear the full burden of their transition to net-zero.

Tragedies of climate change

Humans however often struggle with cooperating and sharing with people who are far away from them, in either a physical or social sense. I struggle to empathize with people in India whom I will never meet, but who will need support when they replace coal-fired power plants with renewables as India moves toward net-zero emissions. I don’t think I’m alone in this and I imagine they feel the same about people like me who are not taking rapid action on climate change even when we can afford it.

Is our fundamental problem in mobilizing resources to support developing country decarbonization this “tragedy of distance?”

“Tragedies” are situations where we humans are brought down by our own flaws. These tragedies make climate change particularly challenging to address.

The “tragedy of the commons” suggests that if we can’t exclude people from use of a common resource, we are doomed to destroy it through overuse. For example, the fish stock in a particular area isn’t destroyed because people can’t see what is happening, but because if others are going to over-fish, whatever one individual does, it is in each individual’s personal interest to go fishing while the fish are still there. They feel they can’t protect it. That’s a self-fulfilling prophecy.

The “tragedy of the horizon” suggests that individual and collective myopia and selfishness lead us to take actions now although they will cause our future selves and future generations to suffer. The phrase was coined by Mark Carney (Former Governor, Bank of England) for climate change, but another classic example is most countries’ inability to invest enough of the wealth that they extract from non-renewable minerals, like oil, to sustain their citizens’ well-being in the future. Again, we can see this coming but struggle to avoid it.

These tragedies are not inevitable. Some communities solve them impressively (e.g., the many examples from the work of Nobel Prize winner Elinor Ostrom and her colleagues, or Norway’s Sovereign Wealth Fund). Others find partial solutions. New Zealand avoids the worst problems of overfishing by limiting catches through the Quota Management System, a system which, though imperfect, has now lasted for more than thirty years. Humans also have relatively good ‘institutions’ for making intergenerational decisions. Families tend to have strong bonds for at least a couple of generations. We may not make “efficient” decisions for our own future selves and our descendants, but we do, generally, care.

Climate change is an issue where all tragedies—of distance, of the commons, and of the horizon—are fully engaged. Climate change is global and cumulative, with extremely long-term, long-lived impacts. Although it is now clear that people alive today are already experiencing the impacts, the major benefits from our mitigation actions today will be experienced not by older people like me, but by our children and grandchildren.

We have worked hard for nearly thirty years to build institutions at the international, national and local level to coordinate mitigation efforts. We need to keep doing this. Despite our lack of obvious success so far, we have made considerable progress. However, these approaches depend very much on a hierarchical approach. That approach is appealingly elegant and logical in responding to a global problem, and is a critical part of the solution, but it’s not working fast enough. And having only one coherent institutional approach is inherently fragile.

We need both coordination and cooperation

United Nations climate agreements try to replicate the success of economic institutions in managing human activity. However, in contrast to institutions that aim to address climate change, many international economic institutions, such as those that govern commerce and banking are essentially addressing a coordination problem. Their success is not easily replicated when dealing with a global cooperation problem like climate change.

Maybe the approaches of more traditional and Indigenous societies have something to offer us as a complement. These societies have broad networks of relationships that extend into the natural world and rely on these and shared belief systems rather than institutions to manage goals and conflicting interests. Traditional ways of thinking of Māori, the Indigenous people of New Zealand, contrast strongly with the hierarchical assumptions about how humans relate to each other and the natural world, “the Great Chain of Being,” common in much contemporary Western thought.

Can we harness shared belief systems and existing North-South relationship networks and reduce the tragedy of distance? Could that help us build deep collaborations among small groups of countries to support the large-scale transfers of resources needed for efficient global climate action?

Is it better to think about transfers to support mitigation in developing countries as primarily about establishing networks of relational contracts, and the strong communication and trust that supports them, rather than centralized carbon commodity trading systems where all have to trust one system?

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