Integrated Assessment for Identifying Climate Finance Needs for Loss and Damage: A Critical Review

This chapter looks at what we can learn about possible Loss and Damage (L&D) and finance needed to address it using economic Integrated Assessment Models (IAMs), which calculate economically optimal responses to climate change mitigation and adaptation in terms of maximising welfare (GDP) a few decades into the future. Interpreting modelled residual damages as unavoided L&D, a few results emerge from the analysis. First, residual damages turn out to be significant under a variety of IAMs, and for a range of climate scenarios. This means that if adaptation is undertaken optimally, there will remain a large amount of damages that are not eliminated. Second the ratio of adaptation to total damages varies by region, so residual damages also vary for that reason. Third, residual damages will depend on the climate scenario as well as the discount rate and the assumed parameters of the climate model (equilibrium climate sensitivity) as well as those of the socioeconomic model (damage functions). These uncertainties are very large and so will be any projections of residual damages in the medium to long term. The chapter raises other aspects that could influence estimates of L&D. An important one is that, since actual adaptation is very unlikely to be optimal, the amount of Loss and Damage may be influenced by the sources from which adaptation and Loss and Damage programs are financed. The level and structure of current limited financial resources is likely to result in adaptation that is significantly below the optimal level and thus result in significant L&D.

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