# **3. How much will effective climate change adaptation cost the SIDS?**

Climate change adaptation comprises three pillars (Cervik, 2022). The first pillar entails investments in physical infrastructure to strengthen its resilience to climate related shocks, such as intense storms or flooding and infrastructure for which the only purpose is to prevent or reduce damage from climate change, such as a flood protection scheme. It also includes investments in soft infrastructure such as early warning systems and policy measures to help communities which are vulnerable to climate change to diversify or adapt their livelihood activities in ways which reduce vulnerability, such as changes in farming practices or relocation away from areas at severe risk of flooding.

The second pillar is the building up of fiscal buffers with which to fund recovery expenditures necessitated by the occurrence of climate related disasters without jeopardizing fiscal sustainability. Such buffers could include contingency funds and insurance cover. The third pillar entails contingency plans and other measures to enable an expeditious response to a disaster. Estimating how much individual countries need to invest in climate change adaptation is very complex. What particular investments are needed, and are cost effective, depends on country specific characteristics and the level of risks facing specific physical assets within these countries. The latter can be very difficult to estimate because of uncertainty, which characterizes the likely incidence and magnitude of future climate disasters. These uncertainties escalate as the geographic scale becomes smaller, because the vulnerabilities to climate change disasters are often very location specific (Heal and Miller, 2013).

The largest fiscal costs of adaptation, on an ongoing basis, will involve the capital investment requirements of pillar one. These investments involve three main components; making new infrastructure assets more resilient to climate change hazards, by changing the design or using stronger materials than would be the case if the assets were not exposed to climate change hazards; retrofitting existing infrastructure assets to make them more resilient to climate change hazards; and constructing new types of infrastructure to provide protection against specific types of hazards, such as coastal flood protection schemes.

There are very large differences in the estimates of the annual fiscal costs across EMDEs and SIDS and between different studies, mainly for three reasons. First, there is a large degree of heterogeneity across SIDS in terms of the specific climate change hazards to which they are exposed and the physical investments needed to counter these hazards. Second, there can be large differences in estimated costs depending on how the objective of adaptation investment is defined. One strategy involves using an efficiency criterion, in which the adaptation investments are undertaken up to the point where the marginal cost of adaptation equals the expected marginal benefit, in terms of the discounted value of expected damage averted. Essentially, this approach minimizes the sum of adaptation costs and the expected residual damages from climate change which are not averted by adaptation. A second, and generally more expensive approach in terms of public investment costs, involves undertaking sufficient adaptation investment to hold expected future damages below some pre-determined threshold, such as a small percentage of GDP.<sup>14</sup> These two approaches are termed the cost minimization strategy and the risk intolerance strategy in an IMF analysis (2021a). A third reason for differences in estimated adaptation costs is that a large part of these costs involves strengthening

> 14 Other approaches are also possible, such as by incorporating distributional considerations so as to balance the objectives of efficiency and fairness.

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