In order to generate sufficient finance to fight climate change, we must get innovative
Despite the clear evidence of climate-induced loss and damages around the globe -- for instance, the approximately $1.5 billion damage due to cyclone Amphan, the inundation of standing crops worth $662.5m due to flash floods in 2017 in Bangladesh, the loss of $3bn in insured property due to Hurricane Dorian in 2019 in the US, the loss of 300 lives in India in 2017 due to landslides, and on and on it goes -- there is yet to be any concrete decision taken on channelizing finances to address loss and damages.
Developed states have been trying to establish insurance as a standalone solution to address loss and damages for years, but still in many countries, there exists a lack of concept on the approaches of risk transfer and an absence of a regulatory framework for introducing insurance.
The issue in developing countries
In some developing countries, people consider insurance to be a decisive scheme and find it expensive in terms of paying a premium as they don’t have the affordability.
Paying premium means payment for the development of goods and services, infrastructure, education, and addressing natural disasters that are out of the scope of micro and meso level insurance. Due to several reasons such as a lack of trust, mismanagement, economic instability, and excessive politicization of the insurance industry, it can’t be a standalone solution to address loss and damages.
Additionally, the expansion of insurance companies needs long-term planning and time frames for addressing loss and damages.
These are challenges confronted by both public and private companies which often have an interest in rapid results and short-term benefits. However, without both short-term and long-term profitability, insurance solutions will not work properly for addressing loss and damages.
Global leaders came to a conclusion at SUVA Expert Dialogue, held from May 2-3, 2018, in Bonn before the 24th Conference of the Parties (COP 24) that insurance can’t be the ultimate solution to address loss and damages. Given this context, they suggested putting innovative sources of financing instead of insurance schemes.
Looking to innovate
Innovative finance can play a role in increasing funding, complementing existing public flows, and internalizing social and environmental loss and damages of both state and non-state actors. In the 25th Conference of the Parties (COP25) held in Madrid, Spain, one of the key issues of negotiation was to set up a financial arm composed of additional and innovative sources of finance to address climate-induced loss and damage which would compel fossil fuel companies to pay for compensation.
International Air Passenger Adaptation Levy (IAPAL) could be one of the best proposals that the Least Developed Countries (LDC) Group can revive, though it didn’t get much attention earlier when the Maldives submitted a proposal in 2008 on behalf of the LDCs at COP14.
In 2019, it was revived in a revised version, called International Airline Passenger Levy for Loss and Damage (IAPALLnD) and agreed to channelize funds to fix loss and damages in developing countries. The revived proposal has gained satisfactory political support among LDCs, Small Island Developing States (SIDS), and AILAC (Association of Independent Latin American Countries) members.
Generally, this levy proposed to deduct $6 and $61 in case of economy class and business class passengers respectively which might accumulate over $8-10bn annually, and this amount would be given to the Adaptation Fund under the UN Framework Convention on Climate Change (UNFCCC) by the airlines. Consequently, the newly proposed Global Loss and Damage Fund could collect those funds from the Adaptation Fund to compensate for the vulnerable communities.
Besides, the mechanism of IAPAL is similar to another financing instrument, named the Solidarity Levy -- a mechanism that has stood the test so far.
In 2005, France President Jacques Chirac at a meeting at the World Economic Forum proposed the Solidarity Levy to be imposed on airplane tickets in order to raise revenues to fund health care in developing countries.
The funds raised through this levy will provide financial support to UNITAID, an entity that undertakes health care schemes to assist developing countries to fight against diseases like HIV/AIDS, malaria, tuberculosis, etc.
UNITAID was successful at reducing the price of HIV/AIDS medicines and made the treatment of HIV/AIDS more affordable by providing medicines to 400,000 children suffering from HIV/AIDS.
This levy so far has dedicated $40m of its funds to African countries that ensured better access to treatment for children suffering from HIV/AIDS.
Furthermore, it conducted HIV tests on 8 million pregnant women to ensure proper diagnosis and has been introduced in Africa, a region having high HIV/AIDS prevalence rates.
UNITAID along with its partners is also battling against malaria by ensuring better treatment for the sufferers and better prevention of the disease by distributing bed nets and anti-parasitic drugs during the rainy season in areas with a high prevalence of malaria.
So, based on the success of the Solidarity Levy, it can be stated there is a huge possibility of the successful implementation of IAPALLnD if the proposal is accepted by the developed states.
However, there are some challenges in implementing IAPALLnD as there is a probability of exerting some negative effects on the aviation industry. If the rise of ticket prices reduces demand, airlines might reduce their volume of flights. Although price elasticity is quite low in the case of long and short-haul business flights, it is high in the case of short-haul leisure flights.
Elasticity might be high in some specific countries as well and this might reduce the demand for air flights to some extent when the price of air tickets rises. Moreover, airlines are required to bear some fixed costs per flight, for example, the cost of fuel, landing fee, etc, which does not vary with the number of passengers it carries.
Due to such fixed costs per flight, it might not be economical for an airline to fly with a very small number of passengers, which could result in cancelled flights.
On the other hand, if demand falls in response to such a levy and airlines also reduce their volume of operation, employment in aviation might be greatly hampered. Also, employment in some other industries, like oil or fuel industries that supply fuel to the aviation industry, might be hampered as well.
Generally though, due to price elasticity of demand being very low when it comes to short and long-haul business flights, there should not be any significant fall in overall demand for air travelling that can cause severe harm to the aviation industry.
The impact of Covid-19
There is an uncertainty that it will be difficult to negotiate implementing IAPALLnD because the aviation industry is suffering huge losses due to the Covid-19 pandemic. Notable reduction in the number of passengers resulted in the cancellation of flights, or planes flying without passengers from one airport to another.
This significantly exerts negative impacts on the aviation industry such as laying off workers, declaring bankruptcy, and many more. According to Statista, the forecasted revenue from air passenger traffic globally in 2020 before Covid-19 was $581bn and estimated revenue loss of airlines worldwide due to Covid-19 is $314bn.
Additionally, some LDCs fear that if the levy on all international air travel is imposed, it might impact the arrivals of tourists in LDCs, making the tourism sector vulnerable. Given this context, IAPALLnD should be considered for only developed countries. The Warsaw International Mechanism (WIM) and Standing Committee on Finance (SCF) should bring this discussion forward at the forum of SCF and COP 26 in front of global leaders and relevant stakeholders.
Also, negotiations on loss and damages finance should focus on addressing both practical questions and political traits which include the enhanced action and support to address loss and damages and the necessity of additional financing.
SM Saify Iqbal is working as a development activist. This article is part of a study conducted by Centre for Participatory Research and Development (CPRD), funded by Bread for the World, Germany.