Building a resilient climate future
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Building a resilient climate future

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Rescue workers help stranded people from a flooded area in the border town of Mae Sai in Chiang Rai province on Sept 11, 2024, following the impact of Typhoon Yagi. (Photo: Reuters)
Rescue workers help stranded people from a flooded area in the border town of Mae Sai in Chiang Rai province on Sept 11, 2024, following the impact of Typhoon Yagi. (Photo: Reuters)

Despite growing risks from natural disasters, Thailand is unprepared for the financial fallout. Severe floods, rising temperatures, and unpredictable weather patterns are becoming more frequent. Without action, the damage will escalate.

Thailand urgently needs a dual approach: investing in climate adaptation to minimise damage and establishing a robust disaster insurance system to aid recovery. Both measures are essential to safeguard the economy and its people.

However, challenges such as short-term financial planning, undervaluing long-term climate adaptation efforts, and insufficient budgets stand in the way.

Looming financial crisis

If Thailand fails to prepare for a 2C temperature rise by 2050, the financial consequences will be dire. The economy would shrink, public debt would soar, and the country's credit rating could drop from BBB+ to BBB-. This downgrade would increase annual interest payments, making it harder for both the government and private sector to secure loans and affordable financing for climate-related projects, reducing global competitiveness.

Prevention is cost-effective. According to the Global Commission on Adaptation, five main measures -- early warning systems, resilient infrastructure, mangrove preservation, dry-land agriculture, and flexible water management -- can averagely save four dollars for every dollar spent.

For instance, Europe's flood warning system, which cost €63 million (2.2 billion baht), reduced damages by 25%, saving an estimated €30 billion over two decades. In contrast, Thailand's warning system remains weak, resulting in preventable losses.

Thailand should learn from its neighbours. Vietnam and Indonesia have set clear budgets and plans for climate adaptation. Lagging behind, Thailand lacks concrete budgets for its national adaptation plan, rendering measures ineffective.

Insurance for recovery

When climate-induced natural disasters are unavoidable, insurance speeds up recovery. The economies where insurance premiums make up 3-4% of GDP recover within 10 months, while those with lower coverage could take over 30 months.

In Thailand, disaster insurance designed for climate change response is underdeveloped. The 2011 floods caused $54 billion baht in damage, but only 25% was covered by insurance. Similarly, in 2017, floods caused $382 million (13.7 billion baht) in losses, with just 10% insured. Families and businesses bore the burden, prolonging their hardship and slowing recovery.

To change this, Thailand needs government-backed programmes to help insurers operate in high-risk areas and make premiums affordable.

Challenges

Adaptation measures and insurance serve different yet complementary purposes. Adaptation reduces the frequency and severity of disasters, while insurance ensures faster recovery when disasters occur.

Short-term thinking: Both the government and businesses often focus on immediate costs, ignoring long-term climate risks. Thailand's national development plan does not account for climate impacts on GDP and public debt.

High discount rates make long-term investments, such as flood defences, appear less worthwhile. Lowering these rates would better reflect the benefits of climate adaptation and encourage investments.

Businesses are in the same short-term thinking trap. Only a handful of corporations have adaptation plans to cope with droughts, floods, and heat waves. And less than 20% of SET50 companies have clear climate adaptation plans, with most focusing on reducing emissions rather than preparing for climate challenges.

Budgetary constraints -- Nearly 80% of the national budget is already tied up in fixed expenditures, with public debt nearing the ceiling at 70% of GDP. This leaves little for development initiatives. Businesses, too, are reluctant to invest due to a stagnant economy and limited access to adaptation funds.

Thailand also struggles to attract international financial assistance, which primarily targets less developed nations.

Ways forward

First, the government must aim beyond short-term thinking and commit to protecting future generations.

This should begin with extending the country's national financial planning horizon to 10–20 years, incorporating climate risk assessments and investments to mitigate long-term risks.

The National Adaptation Plan should have a concrete budget, and climate adaptation investments should be tracked for efficiency.

To help businesses prepare for climate challenges, the Securities and Exchange Commission (SEC) should require listed companies to assess climate risks and issue response plans. The Bank of Thailand (BOT) should also evaluate climate change's impact on financial stability over the next 30 years and consider the borrowers' readiness in lending decisions.

Small and medium-sized enterprises (SMEs) need special help. The government should provide climate risk assessment and adaptation training to better prepare SMEs for climate impacts.

To overcome budget constraints, the government can use carbon taxes and blended financing -- a co-funding approach involving the state, private sector, and international organisations -- to fund an Adaptation Fund and support unprofitable but crucial climate adaptation investments. For example, Scotland used government subsidies to support private investment in upgrading social housing to withstand extreme weather.

The funds could also support "no-regret investments" such as forest restoration, which benefit communities and ecosystems regardless of climate projections.

Insuring protection

Natural disaster insurance is vital for faster recovery, but it must be affordable, widely available, and easy to reimburse. It should also incentivise people to prepare better for future climate risks.

Government-backed insurance programmes can help insurers operate in high-risk areas, making disaster insurance more accessible. For example, the UK's Flood Re project lets the government share the risk with insurance companies, making coverage cheaper for people in flood-prone areas. This project also supports homeowners to improve their properties to handle future floods.

To ease the financial burden of major disasters, the government can issue catastrophe bonds (Cat Bonds), which share risks with global investors. The Philippines, for example, issued Cat Bonds in 2019 for earthquakes and cyclones. It received $52.5 million after Super Typhoon Rai in 2021, when damages met the required threshold.

Parametric insurance, which provides automatic payouts based on specific climate-related indices, such as wind speed or rainfall, is another effective solution. Kenya's parametric insurance for droughts, for example, has saved livestock by quickly providing funds for feed, showing how timely support can mitigate disaster impacts.

In addition to insurance, the government should use recovery funds to build stronger infrastructure to mitigate future risks. For example, Queensland, Australia, invested in modern road technology to save $400 million in repair costs after floods. It should also invest in disaster preparedness, like Bangladesh's cyclone warning system, which reduced deaths from 300,000 to just five during a cyclone in 1970.

A robust disaster insurance system, coupled with well-funded adaptation projects, can protect communities while ensuring economic resilience. With long-term planning and strong public-private collaboration, Thailand can prepare for a future shaped by climate uncertainty.


Charika Channuntapipat, PhD, is a research fellow, and Mr Supanutt Sasiwuttiwat is a Research Fellow at the Thailand Development Research Institute (TDRI). This article is adapted from the presentation at the 2024 TDRI Annual Public Conference on 'Adapting to Climate Change'. Policy analyses from the TDRI appear in the 'Bangkok Post' on alternate Wednesdays.

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