Railway in germany

The physical risks associated with global heating have been detailed extensively. Responding to these risks traditionally involves categorizing two classes of assessments and actions: adaptation measures are just that—measures designed to adapt, if possible, to a range of physical climate risks. Mitigation measures, on the other hand, are measures specifically implemented to reduce greenhouse gas (GHG) emissions from a variety of sources, as well as other risks emanating from, for example, changes in land use. Both of these efforts need to be paid for, prompting an urgent question among those who attend to climate trends: how is that going to happen?

The question is particularly pertinent for adaptation spending; the funding of climate adaptation projects has lagged mitigation efforts by a considerable margin. Moreover, the “adaptation financing gap”—the difference between adaptation funding being made available and actual adaptation requirements—continues to widen.

We propose the creation of a new global asset class, adaptation bonds, which are dedicated to adaptation and resilience projects, that is specifically based on the US municipal bond market. This market is highly popular in the US and provides most of the financing for domestic infrastructure projects. It is also a popular market because interest income on municipal bonds is not, by legislation, taxable as income at the federal level or at the state level in most states. The principal justification of this new class of security is to expand the potential financing of a range of projects that governments at all levels can undertake, as opposed to situations where such projects are funded by central governments. Most adaptation projects would encompass the creation or improvement of infrastructure, both grey (i.e., built) and green (i.e., natural).

Not all such projects will generate the sort of cash flows that investors may require, and will thus require direct government support. But creating a new global asset class should expand not only the range of projects but also the range of opportunities for investors and thereby the investor base.