Africa is widely recognized to be the region most vulnerable to weather risks. Weather-related disasters are already undermining record growth across the continent, threatening hard-won development gains and vulnerable populations. Increasing climate volatility will counteract investments being made by countries to mitigate, prepare for and manage current weather risks. The World Bank estimates an adaptation investment cost of $14-17 billion per year over the period 2010-50 for sub-Saharan countries is needed to adapt to an approximately 2°C warmer climate forecast for 2050. Climate change is particularly threatening to the future of African agriculture, which impacts global food security and the economic livelihoods of hundreds of millions of Africans.
To date, funds have not been forthcoming in the magnitude required. As a result, African leaders have been exploring innovative and diverse ways to address the challenge of providing funding for climate adaptation across the continent. The Extreme Climate Facility (XCF) will be a new financial mechanism that will secure direct access for African governments to climate finance to respond to the impacts of increased climate volatility.
The XCF will be a data-driven, multi-year vehicle that will provide financial support to eligible African countries to help them build climate resilience and be financially prepared to undertake greater adaptation measures, should extreme weather event frequency and intensity increase in their region. The XCF will be an African-led initiative that is designed to access private capital, diversifying the sources and increasing the amount of international funding available for climate adaptation in Africa.
African Risk Capacity (ARC) provides an ideal platform from which to develop and operationalise such a new facility. The XCF will use both public and private funds and facilitate direct access to climate adaptation finance for eligible African governments based on the demonstrated need for enhanced adaptation measures. Its financial obligations to African countries will be securitized and issued as a series of climate change catastrophe bonds. Once established, the bonds will provide additional climate change adaptation financing to participating AU countries, in the event that weather shocks such as extreme heat, droughts, floods or cyclones increase in occurrence and intensity. The bonds will be financed by capital provided through private investors, with donors supporting the annual bond coupon payments. XCF will be structured so as to issue more than $1 billion in African climate change bonds over the next 30 years.
The XCF will be entirely driven by objective climate data, using Africa’s meteorological climatology as a baseline. XCF establishes a multi-hazard Extreme Climate Index (ECI) for each African climatic region. The index will track increases in the frequency and magnitude of extreme climate events over and above the baseline. When the index exceeds pre-determined thresholds, countries will automatically receive payments from the XCF to support their pre-approved climate adaptation plans.Should they occur, payments would start small and would increase with subsequent cat bond issuances, growing alongside increasing evidence of observed deviations from the baseline climatology.
The XCF was announced by ARC Governing Board Chair Dr. Ngozi Okonjo-Iweala, Coordinating Minister of the Economy and Honourable Minister of Finance of Nigeria, at the UN Climate Summit in New York on 23 September 2014. Over the next 18 months, the ARC Agency will lead the XCF Research and Development program, working with African States and their partners.
This work will determine country eligibility and the standards for climate change adaption plans, create the data-driven extreme climate indexes and thresholds that will be used to trigger payments to countries, and define the financial and legal structures necessary to use both public and private funds to finance XCF obligations. ARC is working towards the goal of having an effective and fair XCF design in place when nations convene in Paris in 2015 for the UN Climate Change Conference with the aim of issuing the first catastrophe bonds in 2016.