ON THE INCENTIVE COMPATIBILITY OF FUNDING ADAPTATION

Abstract

Voluntary contributions of the industrialized countries are small compared to the financial resources, the developing countries need for adapting efficiently to global climate change. This leads to the conjecture that under the current climate policy architecture industrialized countries lack incentive for funding adaptation in developing ones. This paper discusses the incentive compatibility of funding adaptation. Focusing on the strategic interaction between mitigation and adaptation in a post Kyoto world it is shown that as long as the industrialized countries' adaptation funding as well as the developing countries' contributions to mitigation are voluntary, industrialized countries have only weak incentive to fund adaptation. Moreover tightening the industrialized countries' mitigation targets has an ambiguous effect on global mitigation if the industrialized countries voluntarily fund adaptation. This confirms the above mentioned conjecture and provides insight relevant for the design of future climate policies, which include adaptation funding as an instrument.