LATIN AMERICA AND CARIBBEAN Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines World Bank Group COUNTRY CLIMATE AND DEVELOPMENT REPORT Executive Summary October 2024 © 2024 The World Bank Group 1818 H Street NW, Washington, DC 20433 Telephone: 202‑473‑1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank Group with external contributions. "The World Bank Group" refers to the legally separate organizations of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). 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Executive Summary OECS countries face physical, economic, and social vulnerabilities that will deepen with climate change This regional Country Climate and Development Report (CCDR) focuses on four countries of the 11‑member Organization of Eastern Caribbean States (OECS)—Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines. The four countries chosen as the focus for this report are the only OECS member countries eligible for concessional International Development Association (IDA) financing for development objectives. The report contributes to the identification of opportunities for OECS countries to achieve their development goals and increase resilience by responding to the challenges posed by climate change in four ways: 1. It presents existing evidence on the challenges OECS countries face through multiple vulnerabilities —physical, social, and economic—and how they may deepen with climate change. 2. It provides estimates of a significant subset of the investments needed for adaptation to natural hazards in these countries. Estimated needs are large; they stand between 1 and 11 percent of discounted GDP investments annually over a 15‑to‑25‑year period, but the benefits they deliver through reduced risk and associated co‑benefits can also be large. 3. By linking investment costs to the broader fiscal and growth context through a robust macro framework, it highlights the difficult balancing act between building resilience and ensuring debt sustainability. 4. It identifies key actions that provide an opportunity to make headway on adaptation by building resilience to climate change while taking steps toward a more sustainable development path. All four countries face interlinked challenges that deeply influence their efforts to realize their development goals and respond to the challenges of climate change. First, they are all Small Island Developing States (SIDS), which makes their development pathways particularly vulnerable to external shocks. Second, they are all highly exposed to natural hazards and climate change, which directly affect a large portion of the land, assets, and population. Moreover, the high exposure to external macroeconomic shocks makes the management of natural disaster shocks even more difficult. Third, due to overly expansive fiscal policies during economic booms, all four countries have high public debt levels and little fiscal buffer to cushion their economies during downturns. Fourth, poverty remains high across all OECS countries, with official poverty rates of up to 30 percent, which increases the vulnerability of the population to shocks. Finally, all four countries exhibit gaps in human capital development, which worsened during the pandemic and could be further negatively impacted by climate change. Taken together, these challenges mean that these countries face the very real risk that climate change will deepen existing physical, economic, and social vulnerabilities. Climate change is expected to lead to the intensification and increased frequency of natural hazards, with important economic impacts. Current and expected future damages from these events are large across all four profiled islands, subject to significant uncertainty, and unevenly dispersed. Analysis done for this report1 suggests that the most severe economic losses for infrastructure result from floods and hurricanes. Dominica is most at risk, followed by Saint Vincent and the Grenadines. Median estimated annual losses through 2050 from floods are 9 percent of GDP in Dominica, 3 percent in Saint Vincent and the Grenadines and 2 percent for each of the other two countries. Within the 95 percent confidence interval, it is possible for those losses to roughly double. Median GDP losses from hurricanes (based on historical 1 The projected impacts of climate change on the overall economy were assessed in a climate‑adjusted macro‑structural model customized for each OECS country of focus. Initially, a baseline growth scenario was established for each country, projecting up to the year 2050 based on current climate conditions. The analysis then proceeded to simulate deviations in the economic trajectory that could arise from potential climate‑related shocks. This was done under various climate future scenarios, including Historical, SSP2‑RCP4.5, and SSP5‑RCP8.5 for flooding and hurricanes, as well as Optimistic and Pessimistic scenarios for heat and agriculture impacts, extending up to the year 2050. 1 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines frequencies and intensities) are lower than those for floods; in Dominica they reach around 3 percent of GDP by 2050. That said, within the 95 percent confidence interval, those losses could be as high as 23 percent within that period. Climate change will also bring slower‑onset impacts, such as rising temperatures, ocean acidification, sea level rise, beach erosion, land loss, salinization of groundwater, and reduced rainfall, all of which carry profound consequences. These processes can erode the productive capacity of the OECS economies by affecting key drivers of economic growth, through direct and indirect channels. Climate impacts can disincentivize private investment on the expectation of future damages, further undermining development trajectories. For example, rising sea levels and beach erosion may impact the tourism sector, which employs one in five workers in Saint Lucia.2,3 A reduction in precipitation of 12 percent by the turn of the century in the RCP 4.5 scenario (28 percent in RCP 8.5), as well as rising temperatures and lower crop yields, are projected to reduce GDP by up to 3.5 percent in the case of Dominica. Increasing temperatures also reduce outdoor labor productivity, with additional output losses of up to 4 percent of GDP in 2050 expected for all four countries.4 Chapter 5 elaborates on how these economic loss estimates could be driven downward through appropriate investments in climate adaptation and policies to build more resilient, diversified economies. High exposure to climate shocks and disasters across the OECS countries presents a challenge for sustained poverty reduction, which can hinder the achievement of these countries' development objectives. Poorer and vulnerable populations are often disproportionately affected by climate shocks. For example, in Saint Lucia, agricultural income accounts for between 14 and 15 percent of the household income for the two bottom quintiles of the population, compared with between 8 and 10 percent for quintiles three to five.5 In Grenada and Saint Lucia, poverty rates are expected to rise by up to 1.9 percentage points across 2030–2050 as compared to the baseline economic scenario, due to lower‑bound climate change effects on infrastructure, agriculture, and productivity.6 The most damaging effects are from hurricanes, which could increase poverty rates by an average of between 1.6 and 1.9 percentage points in Grenada. In Saint Lucia, the average deviation from the baseline is 0.3 percentage points, with little difference among the different climate future scenarios. With GHG reduction ambitions in place, the next step is to develop regulations, institutions, and coordination mechanisms for climate action All four countries have set GHG reduction targets in their Nationally Determined Contributions (NDCs) and prioritized resilience and adaptation in their national climate and sustainable development objectives. Dominica and Grenada have set absolute economy‑wide emission reduction targets, Saint Lucia has adopted an absolute emission reduction target only for the energy sector, and Saint Vincent and the Grenadines has an economy‑wide emission reduction target relative to Business as Usual (BAU). Energy, transport, and waste are the largest contributors to emissions in these countries and their governments have identified these as the priority mitigation sectors. For adaptation and building climate resilience, the priority sectors are agriculture (including fisheries), coastal ecosystems, and health. The national climate policy, strategies, and planning instruments, and most NDCs, for these countries also emphasize enhancing disaster risk reduction and management, social protection, and gender integration, and addressing loss and damage related to climate change. 2 GFDRR. (2024). "Nature based solutions for coastal resilience." Background note for the OECS CCDR. https://openknowledge.worldbank. org/bitstreams/ed18dd98-1033-4ea6-b8e7-a45bd1c6902a/download 3 World Bank staff calculations based on 2016 SLC‑HBS. Comparator countries are Barbados, Dominican Republic, Grenada, Costa Rica and Vanuatu. In Grenada, the share is 10.1 percent. 4 Agricultural impacts reflect long term changes in temperature and not specific drought events that could amplify the estimated impacts on agricultural productivity. 5 World Bank staff calculations based on Saint Lucia Survey of Living Conditions and Household Budgets 2016. 6 The poverty and distributional impacts of climate change‑related shocks were assessed by using the MFMod‑CC lower‑bound (95 CI) outputs for the baseline and climate future scenarios to perform micro‑simulations using the latest household survey data for Grenada (2018) and Saint Lucia (2015). The latest available household survey data for Dominica and Saint Vincent and the Grenadines is more than 15 years old and was therefore not used. 2 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines Despite strong commitment to climate action, the legal, regulatory, and institutional frameworks for climate action remain incipient. None of the four countries has a long‑term strategy (LTS) out to 2050 and all countries lack a comprehensive climate change framework law, relying instead on various executive strategies and plans from different agencies. Dominica is the furthest along in addressing this gap, given its Climate Resilience Act 2018 and the Climate Change, Environment and Natural Resource Management Bill 2020. The latter includes provisions for the expansion of government departments with climate‑related responsibilities and the establishment of a Climate Change Committee to function as a cross‑institutional coordinating body. Furthermore, none of the countries has coordination mechanisms or stakeholder consultation mechanisms. To address these issues, National Climate Change Committees (NCCCs) need to be bolstered to improve coordination across ministries, and regular consultation and communication with stakeholders needs to be integral to policy formation. A final challenge is that no country has an independent advisory body. Given the shared challenges in climate governance, such as ensuring policy alignment across various agendas, filling data gaps on climate risks, evaluating progress towards climate goals, and compensating for limited capacity, a regional independent advisory body on climate change could be beneficial. The impacts of climate change on human mobility need to be better understood and integrated into strategic planning. Existing regional free movement arrangements (FMAs) within the OECS Economic Union and the CARICOM Single Market and Economy have facilitated intra‑regional migration by providing a legal basis for the right of entry to the nationals of member states affected by disasters. These institutional frameworks may provide a foundation for migration as a viable climate adaptation strategy. However, there is limited timely and reliable data to help address climate‑related migration effectively. This is especially true for slow‑onset events, particularly SLR and others that impact agriculture and tourism livelihoods. This report therefore recommends investments in the generation of empirical evidence on the impacts of climate change on human mobility, as well as the development of specific provisions within these frameworks to help facilitate and more effectively manage cross‑border, intra‑regional displacement and migration. Building resilience will require significant adaptation investments to either retrofit or build‑back‑better This report estimates that the investments needed to build physical resilience are well beyond current investment trends for all four countries. To illustrate the cost of resilience investments, this report uses the resilience targets established by Dominica (the only country with a Climate Resilience and Recovery Plan, or CRRP) across all four countries to define a "resilient core" scenario. This scenario meets SDGs while limiting damages and service interruptions in energy, transport, water, hospitals, schools, and residential and commercial property. Two approaches to implementing adaptation are modelled: (i) a "retrofit" scenario in which a share of the current capital assets are retrofitted to make them resilient to a 100‑year return period event for hurricanes and a 50‑year return period event for flooding over a 15 year time horizon; and (ii) a "build‑back‑better" scenario in which there is no retrofitting but all new investments for depreciated or destroyed capital are designed in accordance with the improved resilience standards over a 25 year time horizon. Results show that the total discounted cost to achieve the resilient core through the "retrofit" scenario, in which adaptation investments are made over a 15‑year time horizon to existing capital, is at least 2 percent of cumulative GDP over the period 2024–2050.7 The alternative "build back better" scenario considers resilient investments only for new capital (no retrofitting) over a 25‑year horizon, coinciding with the rate of capital stock depreciation. This scenario enables significant cost savings as compared to the retrofit scenario. However, considering that resilient investments occur only when capital fully depreciates or is destroyed, this longer‑term horizon would also mean that residual risks remain elevated for longer.8 Both estimates are conservative.9 7 Values presented here are discounted over the timeline of implementation (15 or 25 years) using a 6 percent discount rate. Undiscounted values are presented in Table 3.2 in Chapter 3. 8 Oxford Infrastructure Analytics, 2023. Estimating Investment Needs for Climate Adaptation in the Eastern Caribbean. https://openknowledge.worldbank.org/bitstreams/3485bb90-6527-431f-a6cf-3bb1970f7c0a/download 9 The estimates provided are conservative and represent a lower bound of needed adaptation investments for the targeted resilience level. They do not include adaptation needs for heat, agriculture, blue economy, or complementary investments suggested in Nature Based Solutions for adaptation, for example. They also do not include all categories of hazard that could drive losses, such as landslide. Finally, the analysis makes assumptions targeted level of resilience which influenced the cost estimates, different design standards as developed for specific projects might differ, adjusting costs. Bottom‑up project level analysis is needed to fully reflect the full scope of adaptation costs. 3 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines FIGURE ES.1. Total cost 2024–2050 of implementing a A focus on management of water‑related "resilient core" challenges can also help strengthen resilience. 1400 200% This report recommends the development of 180% a roadmap on different water needs and an 1200 160% 1000 140% assessment of water sources. The roadmap 800 120% should (i) consider the quantity and quality of 100% 600 80% surface and groundwater resources, (ii) outline 400 60% needed measures to secure and better utilize 40% such resources (for example through improved 200 20% 0 0% storage and, better support for aquifer recharges), 15 yr 25 yr 15 yr 25 yr 15 yr 25 yr 15 yr 25 yr and (iii) explore additional water sources such as Dominica Grenada Saint Lucia SVG rainwater harvesting, wastewater reuse, and the implementation of demand management actions, Investment cost, USD m % of GDP such as efficient irrigation and non‑revenue Source: World Bank staff calculations. water management. Expanding and reinforcing hydrological real‑time monitoring, weather and climate forecasts, and early warning systems is another, cost‑effective way to build resilience. All four states will need to address the challenge of ensuring resilient housing. The first step here is to improve land management and land use planning, including identifying and designating suitable land for housing development, ensuring equitable land distribution, and encouraging denser and more compact developments. Second is the promotion of affordable housing, the absence of which forces many households to resort to squatting in low‑quality structures that are particularly vulnerable to natural events and disasters due to their substandard construction and often precarious location. Third is investing in resilient housing (i.e., using hurricane‑resistant designs and materials), strengthening building codes and regulations, and ensuring that the provision of basic services for these households—particularly water, sanitation and electricity—is also resilient. Last, enhancing access to financing options for housing, such as microfinance programs or mortgage assistance, can improve housing conditions for low‑ and middle‑income households. Investments in agriculture and the blue economy, which will be needed to ensure food security and the resilience of key economic sectors, will also open financial and economic opportunities. The incorporation of climate‑smart technology in agri‑food systems can increase adaptation and improve resilience of the sector. For example, providing new technologies, appropriate tools, and relevant training to smallholder farmers and agri‑processors would create efficiencies. In terms of supporting the growth of the blue economy, which could deliver significant development dividends for the economies of these four OECS countries, several steps are needed. The first is investments in information, including baseline mapping of vegetated coastal ecosystems to ascertain the blue carbon potential at the national and subregional level. This mapping could inform a future blue carbon credit market and support primary research on carbon emissions from these ecosystems due to sea surface temperature (SST) change, marine heatwaves, and other climate and development impacts. Second is investments in building resilience in the fisheries and coastal tourism sectors against shocks and the lingering effects of the global poly‑crisis. This will improve food security and economic resilience, and help enable resilient growth based around marine ecosystems. Finally, addressing transboundary considerations in key blue economy sectors (tourism, fisheries, and aquaculture) will also be critical. For example, investing in circular economy solutions for sargassum and regional approaches to sargassum monitoring that allow for collecting, composting, and converting sargassum into added‑value byproducts with commercial demand could help address this challenge. Nature‑based solutions (NBS) can complement other investments in coastal resilience and provide significant co‑benefits. Beach, mangrove, and coral restoration are among the key NBS available in this context. Given the prevalence of sandy beaches across the four countries, the possibilities for cost‑effective beach restoration are the most promising (Figure E.2). For beaches, benefit‑to‑cost ratios (BCRs) are mostly greater than 1, driven primarily by benefits to tourism, rather than flood mitigation. In places where mangroves are ecologically viable, mangrove restoration brings significant benefits (BCRs in the range of 4–5), particularly due to the benefits of enhanced carbon storage. Coral restoration, on the other hand, delivers BCRs of less than 1 unless flood mitigation benefits from corals are present. This caveat highlights the need for spatial prioritization of NBS investments to target corals that provide protection against flooding. 4 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines FIGURE ES.2. Effect of Nature‑based Solutions on expected average annual damages (EAAD) due to coastal flooding (a) Dominica (b) Grenada 3,8 7 6 3,6 5 EAAD (mill $) EAAD (mill $) 3,4 4 3,2 3 3,0 2 2,8 1 2,6 0 2010 2050 No NBS 2050 NBS 2050 2010 2050 No NBS 2050 NBS 2050 (c) Saint Lucia (d) Saint Vincent 14 2,0 12 1,6 10 EAAD (mill $) EAAD (mill $) 8 1,2 Total risk 2050 6 with NBS 0,8 4 0,4 2 0 0,0 2010 2050 No NBS 2050 NBS 2050 2010 2050 No NBS 2050 NBS 2050 Present risk Climate change Socio-economic growth Ecosystem degradation Risk reduction Source: GFDRR. "Nature‑based solutions for coastal resilience." Background Note for the OECS CCDR. https://openknowledge.worldbank.org/ bitstreams/ed18dd98-1033-4ea6-b8e7-a45bd1c6902a/download. Notes: The baseline risk of 2020 (including the effect of existing ecosystems) is shown in light blue. This risk increases by 2050 due to climate change (rising sea levels, in dark blue) and socio‑economic growth (which increases the value of the assets exposed to flooding, in light gray). Ecosystem degradation reduces flood‑mitigation capacity of NBS and creates additional damages (in red). Such damages can be reduced by preserving and enhancing NBS (the risk reduction by NBS is shown in light yellow, and the total risk with NBS by 2050 in blue). Finally, it will be necessary to complement all of the above investments with strong preparedness and response systems. Interventions should be structured around working with governments to holistically strengthen their emergency preparedness and response systems. This should include five components: (i) Facilities: Support the construction and maintenance of critical infrastructure such as shelters, warehouses, and state‑of‑the‑art Emergency Operations Centers, and ensure that they are well‑equipped and resilient to withstand disaster events; (ii) Information Management: Develop advanced decision support systems and emergency response plans that facilitate real‑time data sharing and decision‑making during crises; (iii) Equipment: Procure specialized search and rescue equipment and emergency management vehicles to enhance rapid response capabilities and resource mobilization; (iv) Personnel: Invest in training, exercises, and drills for emergency responders, equipping them with the necessary skills and knowledge to handle complex disaster scenarios; and (v) Legal and Institutional Framework: Strengthen the legal and institutional frameworks that underpin emergency preparedness and response, ensuring that they are adaptable, efficient, and responsive to evolving challenges. Synergistic actions that support the transition to low carbon can also help build climate resilience First, a systemic transformation of solid waste management in the OECS is needed; this will require numerous interventions that would benefit from regional cooperation to overcome a lack of economies of scale. In most Caribbean countries, waste from households and commercial enterprises is co‑mingled. Organic waste, which comprises 44 percent of the total waste among the four countries, is a major source of methane emissions for these small islands. Improved separation of recyclables and organic waste from the waste stream and treatment of both would minimize emissions, prevent leakage of waste, and reduce the landfill space required in the long term. The diversion of organic waste to composting or anaerobic digestion can reduce methane emissions. Improvements in solid waste management could improve marine ecosystem health and deliver economic benefits. Once safe treatment and disposal options are established, informal or uncontrolled disposal sites would need to be closed to prevent 5 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines further use. In parallel to these technical solutions to the identified challenges, it will be necessary to create an enabling environment aligned with integrated solid waste management. This would include, for example, the development of technical and contract management expertise at the regional level, adequate regulation to establish air quality control standards for incineration, the monitoring of water bodies, soil and air in landfills, and policies that protect both government and private sector providers and allow for the fulfillment of public‑private contracts. A second synergistic action is the move away from fossil fuels for power generation, which could strengthen resilience, reduce economic vulnerabilities, and support the achievement of climate commitments. On the supply side, the four OECS countries have ample renewable energy (RE) resources to enable the shift away from fossil fuel power generation (which currently accounts for between 80 and 98 percent of all power produced, depending on the island). Existing high electricity tariffs will help in this transition, but other elements of the enabling environment can be improved. In the short run this would include the publication of detailed solar and wind resource maps, improvements in the regulatory framework on grid access and dispatch (as well as capacity building on procurement), and aligning incentives so that utilities can support and even contribute to a RE transition. On the demand side, pilots of high‑return energy efficiency (EE) investments—for example through energy efficiency measures for public buildings—will bring valuable experience to the pursuit of larger energy efficiency ambitions. Opportunities for regional collaboration should be explored to scale up RE and EE supply chains, including through EE standard setting and the development of specialized training programs. At an early stage, the support from international donors and international financial institutions (IFIs) through technical assistance and concessional finance will be relevant for building technical and institutional capacity. There are also synergistic actions in the transport sector, where continued progress in the planning for electric mobility and the building of resilience in seaport, airport, and road infrastructure are recommended. Planning for e‑mobility can be advanced by ensuring the consideration set includes road vehicles, intra and inter‑island ferries, the on‑shore powering of cruise‑ships, and regional cooperation on interconnection standards. The expansion of e‑mobility should be carefully coordinated with the greening of the grid, both because the economic case for e‑mobility rests on a greener grid and because the increased and variable power demand from e‑mobility can have a potential impact on grid stability. Regarding transport infrastructure, the four OECS countries have little redundancy in seaports and airports, which are vital to their economies (including for tourism and the import of almost all energy needs). Bringing resilience to ports not only requires making specific investments to counter the risks of identified hazards but also embedding resilience into port operations. This means making resilience integral in governance and management, determining acceptable levels of risk, creating emergency management and recovery plans, and providing training for staff on disaster management procedures. Public‑private partnerships (PPPs) can be used to attract private sector participation in the development of digital logistics platforms to support agricultural and seafood trade, which would contribute to more efficient and resilient transport and logistic infrastructure. Digital platforms can be implemented in synergy with the new mandatory requirement from the International Maritime Organization to implement "Maritime Single Window" systems for the electronic exchange of information required on the arrival, stay, and departure of ships in ports. Beyond the resilient core of physical capital, policy reforms and investments will be critical to build the resilience of human capital through health, education, and social protection services Stronger health systems are the first critical component for enhancing resilience and protecting human capital. Rising temperatures and more frequent and severe weather events will directly affect health and well‑being, including through increased heat‑related deaths, spread of communicable diseases, and negative impacts on mental health. At the same time, climate change disrupts the very health services needed to address these challenges. Despite some progress, OECS health systems face significant gaps in health systems resilience and climate change adaptation, including preparedness and response capacity. When it comes to basic health services, gaps are present even under normal operating conditions. These will only be exacerbated by climate change; weaknesses in aspects of financing, service delivery, health workforce, and the supply chain in Eastern Caribbean health systems may increase the systems' vulnerability to climate impacts. 6 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines Building the resilience of the education system and investing in new skills and jobs tailored to the green and blue economies and adaptation to climate change is a second key component in human capital development. More frequent disasters, in the absence of mitigating measures, can lead to more frequent school closures and the consequent loss of learning, particularly for the most vulnerable. Measures include doing more to provide disadvantaged households and teachers with the tools needed for children to participate in remote learning. Also critical are investments in strengthening educational infrastructure against disasters and the development of training modules for teachers and students on climate adaptation and mitigation. In terms of developing human capital to support economic growth and transformation, all four countries could benefit from establishing pathways to develop the technical and behavioral skillsets needed to support the move toward a low‑carbon path, higher‑value‑added sectors, and diversification of economic activities (for example through eco‑tourism jobs related to preservation and protection of coral reefs, commercial production of sea moss, and the business of solar power). Regional cooperation among OECS countries would help achieve the necessary economies of scale for specialized skills training programs. For the final component of human capital, social protection (SP), systems are emerging in the region but are far and few between, with critical gaps in ensuring they are integrated, interoperable and risk‑informed. Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines have rich social protection programs across the three main SP pillars: social assistance, social insurance, and labor market interventions. Public spending on social assistance in the four countries is, on average, higher than the Caribbean, Latin America and Caribbean (LAC), and world averages. The countries have been making efforts to increase and improve their implementation capacity in SP. All that said, structural gaps in SP remain, hindering a full contribution to resilience building. The first gap is in the supply of SP interventions. For example, only Grenada offers unemployment insurance, through a program just recently established in 2023. The second issue is that coverage gaps for existing SP interventions are limiting their effectiveness. For instance, anti‑poverty cash transfer programs in the four countries reach less than half of the poor. Finally, all four countries have low institutional capacity in SP including few human resources, limited information technologies capabilities, and the lack of coordination. Adaptation investments deliver high economic benefits but entail high financing costs, provoking a difficult balancing act between building resilience and ensuring debt sustainability Even without adaptation investments, economic impacts from natural disaster shocks can be attenuated by focusing on resilient reconstruction: building back better. Modeling results for the four countries show that with timely reconstruction, the most severe annual GDP losses in 2050 would range between 2.5 percent in Grenada to 9 percent in Dominica, which is 1.5 to 16 percentage points lower than a scenario without resilient reconstruction. The overall GDP and growth impacts will depend on the speed and completeness of reconstruction and recovery. This underscores the importance of having a well‑defined disaster risk management strategy in place, with an appropriate disaster risk financing framework that includes readily available financing sources identified ex ante. Assuming that reconstruction is debt‑financed, the associated fiscal impact measured by the increase in the debt‑to‑GDP ratio could be as much as 12 percentage points in 2050 for Dominica and 3.5 percentage points for Saint Vincent. For Grenada and Saint Lucia, the economic activity generated from reconstruction has the potential to offset debt accumulation over the long run. Boosting the resilience of capital assets to hurricanes through select adaptation interventions opens the possibility of minimizing and even reversing economic losses over the long run. In both the retrofitting and build‑back‑better scenarios, this report made investments resilient to a 100‑year return period event for hurricanes and a 50‑year return period event for flooding. In the retrofitting to increase hurricane resilience scenario, after an initial period of investment during which GDP dips below the baseline level, economic benefits are evident for all countries, with median GDP rising above baseline levels. Avoided economic losses are greatest for Dominica over the long run and are shown to boost GDP by some 10 percentage points above baseline by 2050. In the build‑back‑better scenario for hurricane resilience, where adaptation interventions are incorporated only when replacing depreciated or destroyed capital assets, avoided economic losses are slightly lower as adaptation investments take 7 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines a longer time to be realized. GDP results for adaptation interventions for capital stock exposed to floods follow a similar pattern, with avoided median annual economic losses in 2050 averaging about 1.4 percent in the retrofitting scenario and 1 percent in the build‑back‑better scenario. Exclusively financing adaptation investments through public debt is fiscally unsustainable, however, meaning that complementary fiscal measures are required. Assuming the public portion of adaptation investment is financed by new public debt, retrofitting, brings another reason why the build-back-better strategy is preferable. Modeling results show that financing adaptation investments by increasing indirect taxes will have a temporary negative impact on GDP in the short run, but over time could boost the GDP level by similar magnitudes as debt financing, and with a more modest increase in the debt‑to‑GDP ratio. Funding adaptive investments by reallocating existing public expenditures also has the potential to keep debt increases modest, but at a greater expense to long‑run GDP, particularly if adaptation investments are funded by reallocating existing capital expenditures. These impacts are illustrated for the case of hurricane resilience investments in Figure E.3. FIGUE ES.3. Alternatives to debt-financed adaptation investments for hurricane shocks under an optimistic climate future (SSP2-4.5) GDP (% differences from baseline) DMA GRD 15.0% 2.0% 10.0% 1.5% 1.0% 5.0% 0.5% 0.0% 0.0% -5.0% -0.5% -10.0% -1.0% 2020 2025 2030 2035 2040 2045 2050 2020 2025 2030 2035 2040 2045 2050 2.0% 3.0% LCA 1.5% 2020 2025 2030 2035 2040 2045 2050 2.0% 2020 2025 2030 VCT 2035 2040 2045 2050 1.0% 1.0% 2.0% 3.0% 0.5% 1.5% 0.0% 2.0% 0.0% 1.0% -1.0% 1.0% -0.5% 0.5% -2.0% -1.0% 0.0% 0.0% -1.5% -3.0% -1.0% -0.5% -1.0% -2.0% -1.5% -3.0% 2020 2025 2030 2035 2040 2045 2050 2020 2025 2030 2035 2040 2045 2050 Debt (default) Indirect Tax Public Investment Debt to GDP ratio (percentage points change from baseline) DMA GRD 100 5 80 4 60 3 2 40 1 20 0 0 -1 -20 -2 2020 2025 2030 2035 2040 2045 2050 2020 2025 2030 2035 2040 2045 2050 12 20 LCA 10 2020 2025 2030 2035 2040 2045 2050 152020 2025 2030 VCT 2035 2040 2045 2050 8 126 20 10 104 8 15 2 5 60 10 4 0 -2 2 5 -4 -5 0 2020 2025 2030 2035 2040 2045 2050 0 2020 2025 2030 2035 2040 2045 2050 -2 Debt (default) Indirect Tax Public Investment -4 -5 2020 2025 2030 2035 2040 2045 2050 2020 2025 2030 2035 2040 2045 2050 Debt (default) Indirect Tax Public Investment Note: World Bank staff calculations of median annual deviations in GDP and the public debt‑to‑GDP ratio from the baseline under alternative financing sources of adaptation investments for hurricane shocks under an optimistic climate future (SSP2‑4.5). Adaptation costs spread over 15 years. 8 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines Fiscal policy can be reoriented to make countries more resilient to the effects of climate change and natural disasters and to contribute to climate change mitigation. Given existing high debt burdens, the OECS countries will need to reorient revenue and expenditure policy toward the creation of fiscal space to fund additional climate investments. This can be done by developing frameworks for climate resilient public investment management and green public procurement, improving efforts at domestic resource mobilization, and through expenditure containment, including improved spending allocation and efficiency. Policy measures will also need to be framed within a defined fiscal framework to signal credible medium‑term fiscal plans. The OECS countries could also benefit from harmonizing fiscal policies at the regional level to enhance revenue from the tourism sector, encourage private sector participation to fund climate investments, and incentivize the shift to a low‑carbon development path. OECS governments should seek opportunities to reduce potential fiscal outlays in the event of a natural disaster through risk transfer instruments and a layered approach to disaster risk financing. The Ministry of Finance plays a leading role in developing and implementing effective disaster risk finance policies, in collaboration with line ministries and disaster risk management agencies. Recognizing that a certain amount of residual risk remains, the OECS countries are working on strengthening regional resilience to natural hazards and climate change. With World Bank support, the OECS countries of focus in this report are exploring how they can further strengthen and increase their financial protection against disasters. The following three risk transfer options are being explored: (i) a catastrophe swap that uses a derivative contract to secure reinsurance; (ii) a catastrophe bond which utilizes the capital markets; and (iii) additional cover from Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC). Despite efforts to create fiscal space, the OECS countries will not be able to finance the cost of climate adaptation and maintain fiscal and debt sustainability without additional concessional financing from the international community. The IMF estimates that for Grenada, even after considering domestic resource mobilization in line with its Disaster Resilience Strategy (DRS), the country would still require additional external grant financing of about 2.5 percent of GDP annually through 2030, while Dominica would require an additional 8 to 11 percent of GDP per year through 2035. These amounts cover full infrastructure investment needs and not just what would be required for resilience. Even though the ability of the OECS countries to maintain debt sustainability while funding resilience critically depends on donor support, grant financing for these countries is limited and has been declining. Although the four OECS countries under review are eligible for concessional International Development Association (IDA) financing for development objectives, country allocations are limited and need to be supplemented with other concessional climate financing, as well as the leveraging of resources from the private sector. Leveraging the private sector for climate action will require interventions to improve risk management in the financial sector as it facilitates the economic transition to a greener economy. There are two interrelated challenges that will need to be overcome to effectively leverage private sector investment: (i) the management of climate and environmental risks to the financial sector and (ii) the mobilization of financial capital for mitigation and adaptation investments. On the first point, de‑risking instruments in combination with public‑private partnerships (PPPs) can be particularly effective in incentivizing private investment in climate‑resilient infrastructure, as they can de‑risk projects by combining support from the state and IFIs (through guarantees, grants, and concessional finance) with long‑term contracts. On the second point, the sustainable finance market in the OECS is nascent, even compared to the wider LAC region, where it has taken off in recent years. All climate‑related financial flows in the Eastern Caribbean region have been executed using a limited range of financial instruments: grants accounted for 61 percent of the total, while debt instruments accounted for 38 percent. Options for shifting this trajectory include the exploration of instruments such as labeled bonds (green/blue or sustainable) or green/blue loans. Attracting private climate finance in a sustained way requires additional reforms that improve the enabling environment for private investments, including foreign direct investment (FDI), to take place. The main task of governments is to create an enabling environment that allows private financiers and investors to operate under acceptable levels of financial, commercial, political, contractual, legal, and regulatory risk. IFIs can provide critical support in crowding‑in private investment in the short term by providing blended finance instruments and by absorbing risks that other financiers are unable to bear. In the long term, creating an adequate framework upstream would require reforms and institutional capacity to enable the management of private operators' participation in development. 9 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines The road to strengthened resilience requires large investments, but prioritizing key investments as well as actions to strengthen knowledge and information can increase the efficiency of every dollar spent The analysis in this report provides a series of diverse actions across several sectors that are needed to support these four OECS countries in moving toward a resilient and low‑carbon development pathway. The recommendations highlighted in this report fall into three thematic categories: (i) building the knowledge base for action through strong information and information systems; (ii) investing in strengthening resilience; and (iii) establishing and strengthening efficient, effective institutions. These three categories have been deliberately chosen to underscore that while the needed investments to support enhanced resilient growth are indeed large, just as important are the significant knowledge and institutional changes that will be needed to complement, facilitate, and increase the efficiency of the recommended investments. Table E1 summarizes the priorities that need to start in the short term (within 5 years). A full set of recommendation including for the short and long term is provided in Chapter 6, and assessed along four criteria: (i) potential climate mitigation and adaptation benefits; (ii) other co‑benefits (iii) urgency, defined as critical in the next five years; and (iv) potential barriers to implementation, namely missing policy and institutional frameworks, political economy challenges, and inadequate financing. 10 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines TABLE ES.1. Priority actions to build climate resilience in OECS countries Knowledge Investments Institutions Increasing the knowledge to manage The sequencing of investments Building the necessary institutions for risks, produce and disseminate needs to be informed by the specific a resilient transformation may take early warnings, and incentivize hazard vulnerabilities and the time, but starting now is important. favorable behavior changes can trade‑off between cost and benefits, Without needed institutional changes, have benefit‑to‑cost ratios of 1 to 9.10 considering both retrofit and the inefficient allocation of resources Leveraging regional institutions build‑back‑better options. may drive up costs. and training efforts can help bring savings through economies of scale. Country level actions Generate empirical evidence on the Build a resilient core through Establish a comprehensive legislative impacts of climate change on human infrastructure resilience investments framework for climate change mobility. in energy, transport, waste, water, supported by integrated strategies and Implement integrated, health, and education. This report plans coordinated across agencies. interoperable, and risk‑informed SP highlights floods as causing the Build capacities for emergency information systems. most expected damages, especially preparedness and response systems to airports. —at the national level and in Develop solar and wind resource maps. Scale up investments in renewable operations of sub‑national entities energy and pilot energy efficiency such as ports (for example by Attract private sector participation investments to build markets. determining acceptable levels of risk, in the development of digital Explore the use of PPPs in creating emergency management and logistics platforms to support trade. combination with blended finance recovery plans and promoting staff Pursue opportunities for green to mobilize private investment for awareness). bonds and other sustainable finance critical infrastructure in strategic Support integrated solid waste vehicles to increase access to sectors. management with an improved finance for climate action. authorizing environment. Promote the use of fintech, Reform public investment management including digital payments and the systems to reduce costs and ensure development of the regional credit efficiency of public spending on bureau, to improve the access to adaptation needs within the context credit and climate finance for SMEs. of a fiscal responsibility framework especially in the face of shocks. Regional Build the knowledge base on carbon Invest in building resilience in Coordinate on the development emissions from marine systems, the fisheries and coastal tourism of e‑mobility (including ferries and blue carbon potential, and the sectors against shocks and lingering on‑shore powering of cruise ships) to impacts of climate on agriculture. effects of the global poly‑crisis to develop interconnection standards Establish an OECS sargassum improve food security and economic and inter‑island transport networks. (and sea moss) response platform resilience. Develop specific provisions within to tackle the offshore collection Address economy of scale barriers the existing regional free movement of sargassum and utilization for for RE and EE investments arrangements for climate‑induced commercial products. (including bulk procurement) by human mobility to manage Explore opportunities for a regional developing equipment standards, intra‑regional displacement and waste management strategy regional supply chains and exploring migration flows. including treatment, disposal, and financing mechanisms to bring in sector‑related policies. private capital. Accelerate workforce readiness to support the green transition, pooling regional demand for skills to develop needed expertise in areas such as waste management and green energy development. 10 Global Commission on Adaptation. 2019. "Adapt Now: A Global Call for Leadership on Climate Resilience." The Hague, The Netherlands: Global Commission on Adaptation. 11 Country Climate and Development Report: Dominica, Grenada, Saint Lucia, and Saint Vincent and the Grenadines