Adaptation Financing Strategy and Cost-Benefit Analysis

Summary: Adaptation Financing Strategy

The Adaptation Financing Strategy (AFS) was developed under the NAP to identify how much financing is required to implement priority adaptation measures, assess available resources, and determine how the financing gap can be addressed. It builds on the National Economic Appraisal and Cost–Benefit Analysis, stakeholder consultations and an assessment of Malawi’s adaptation finance landscape. The analysis estimates a national capital requirement of USD 4.58 billion over a five-year investment phase, with agriculture accounting for 71% of this need and irrigation alone for close to 40%. Operating costs add about USD 437 million in the first year of operation, rising by 5% annually. Existing adaptation finance, when considering only the share delivering adaptation benefits, is estimated at about USD 203 million per year against an annual need of approximately USD 916 million, leaving a financing gap of roughly USD 700 million per year, or USD 3.5 billion over the five-year investment phase.

The strategy is built around three pillars: (1) quantifying and addressing the adaptation funding gap; (2) mobilising and aligning public and external resources, including domestic budgets, multilateral climate funds and development partners; and (3) crowding in private finance through risk-sharing instruments and an enabling policy and investment environment. It promotes blended finance, combining public and concessional resources with private capital, while recognising the need for grants for public goods such as early warning systems and watershed protection. Carbon revenues, particularly from forestry, are identified as a complementary source rather than a core financing stream due to market volatility and evolving Article 6.2 rules under the Paris Agreement. The strategy therefore provides a framework for mobilising and directing resources towards priority adaptation investments and strengthening Malawi’s capacity to finance implementation of the NAP.

Cost Benefit Analysis of the NAP

The National Economic Appraisal and Cost–Benefit Analysis (CBA) was undertaken under the NAP to provide an economic basis for prioritising and financing climate adaptation investments. It assesses 22 priority adaptation measures over a 20-year horizon under two climate scenarios: RCP 4.5 (moderate emissions) and RCP 8.5 (high emissions), drawing on climate risk and vulnerability assessments and consultations in eight highly vulnerable districts: Phalombe, Balaka, Chikwawa, Dedza, Karonga, Kasungu, Rumphi and Salima. The analysis highlights the significant economic cost of inaction, with cumulative losses across the five sectors projected at 6–20% of GDP by 2040 and above 30% by 2080 under high-emission pathways. It estimates a national-scale capital requirement of about USD 4.58 billion, demonstrating the scale of investment required to strengthen resilience.

The analysis finds that adaptation is economically justified, with a portfolio net present value of USD 5.76 billion and an internal rate of return of 33% under RCP 4.5, while individual measures range from 17% to 89%. Returns are higher under RCP 8.5 because greater climate impacts result in greater avoided losses. Market benefits are estimated at approximately USD 682.6 million per year under RCP 4.5 and USD 787 million under RCP 8.5. The report identifies priorities including agricultural productivity, irrigation, rainwater harvesting, nature-based solutions, aquaculture, social protection, early warning systems and resilient infrastructure, while also highlighting the potential of forestry carbon markets. The investment case remains positive under cost increases and benefit reductions of up to 30%, although the report cautions that national IRR and NPV rankings should not be considered in isolation, as local conditions and stakeholder priorities also influence adaptation investment decisions.