International Adaptation Funding and the Donor’s Welfare Maximization

In a recent paper, Schenker and Stephan [2014] have shown that adaptation funding in the range as envisaged in international climate policy negotiations can be Pareto-improving. Not only will the funded developing world, which does not own sufficient resources for adapting optimally, profit from receiving adaptation funding. Terms-of-trade improvements dominate the transfer costs and hence lead to welfare gains in almost any developed region except North America. However, funding of adaptation has a public good character. It improves the production technology, reduces the production prices and improves terms-of-trade for all netimporters of vulnerable goods. Having a simple analytical model and a numerical model at hand, we show that despite its public good character Nash equilibria exist which include positive amounts of North-South adaptation funding. However, the resulting transfers are much smaller than the aspired amount of international climate finance.