DevExplains: Why COP 27's loss and damage fund is the new battleground

The world’s agreement to establish a “loss and damage” fund at the 27th United Nations Climate Change Conference, was the standout breakthrough of the grueling two-week negotiations earlier this month in Egypt. Prior to the talks, the agreement was far from guaranteed: Loss and damage had been a greatly contentious political issue for many years, with high-income nations reluctant to acknowledge the implications of their historic responsibility for climate change. But while the agreement has closed one chapter of an international disagreement, the need to make loss and damage funding a reality has opened a new one, which has the potential to scar climate negotiations for years to come. “The Fund allows developing countries to have a foot in the door. So in that sense, it is important not to underplay this win,” said Faten Aggad, senior adviser on climate diplomacy and geopolitics at the African Climate Foundation. “No negotiation is a zero-sum game and often it is small wins … to build the negotiations on. So it matters.” Loss and damage finance is intended to pay for the effects of climate-related disasters. Advocates want it to be separate funding from the two main categories of existing climate finance: mitigation — for reducing fossil fuel emissions — and adaptation — to help societies adjust to the effects of climate change, which is underfunded compared to mitigation. There were some small loss and damage donations prior to COP 27 — but those were more displays of political solidarity with low-income and climate-vulnerable nations than anything financially meaningful. When the fund is realized, all future donations can have a dedicated home. But demand could soar into trillions of dollars, already leading to worries from experts such as Robert Stavins, a Harvard professor, that the fund could become “an empty shell.” How the fund will work is yet to be decided and the process is expected to expose significant climate diplomacy fault lines: Who will pay in, and who will receive? These issues “have been underlying climate finance discussions for a long time,” according to Alex Scott, who leads the Climate Diplomacy and Geopolitics program at E3G. But after years of stalemate, the questions will — in theory — have to be resolved in the next year or two. “So what can be done differently so we end up with something that actually works for the most vulnerable countries and communities? That’s a big red question mark.” --— Clare Shakya, climate change group director, International Institute for Environment and Development How it might work The loss and damage fund’s blank slate is what advocates such as Climate Action Network International campaigned for, according to Harjeet Singh, the organization’s head of global political strategy. He told Devex: “You can’t agree on establishing an institution and all that entails in just two weeks. … We knew we had to take a step-by-step approach” because of the reluctance of some countries to discuss loss and damage. CAN, long-time campaigners on the issue, want to see the institutional arrangements worked out this year, while operational details are hashed out the following year, before the fund gets going in the third year, according to Singh. His organization also wants the fund to be based in a low- or middle-income country, where the loss and damage issues the fund will deal with are likely to be closer to staffers. He said there could also be a disagreement over whether the fund is part of UNFCCC — which, as part of the U.N., is viewed as a fairer institution for less powerful countries. In a complex area, at least one thing is clear among climate experts interviewed by Devex: The loss and damage fund shouldn’t go through, or work like the Green Climate Fund. The process of accessing funds through the South Korea-based institution has been criticized for its complexity and length, particularly for governments from lower-income countries and small island developing states. “Having a political group [made up of different groups and regions with their own interests] design an instrument under global scrutiny ended up with the GCF; we’re going to go through the same process for the loss and damage finance,” said Clare Shakya, the climate change group director at the International Institute for Environment and Development. “So what can be done differently so we end up with something that actually works for the most vulnerable countries and communities? That’s a big red question mark.” While the “global, top-down approach” is being developed, Shakya thinks there should be equal investment into “bottom-up analysis” within the least developed countries and small island development states. This would aim to reveal “what they actually need and how the rules could work so it would help them get the financing in advance of a climate event striking, so they could take the necessary preventative actions, like evacuating people.” If the money was to come after an event, it would just count as a “new form of humanitarian aid, frankly,” said Shakya. In the countries that require funding, the approach to disbursements could be relatively straightforward, according to Shakya — and informed by what governments are already doing for vulnerable communities. “When you think about a single country, it becomes quite simple quickly because there are only so many mechanisms a government has and so many things everyone agrees would make sense,” she said. Some interventions might only require a policy change, Shakya added, “for example requiring banks to give holidays to loans when there’s been a climate shock.” Who pays? “One of the big fights we saw [at COP 27] was the issue of the contributor base, the US, the EU, others calling for countries like China, the Saudis, Singapore, Kuwait etcetera to step up and provide funding,” said Alden Meyer, senior associate at E3G, in a press conference. “That’s not going to go away, it's going to be a huge fight, not just on loss and damage but on broader climate finance going forwards.” The “other part of the battle is how they can convey [the tax cost] to their citizens,” added E3G’s Scott. Singh favors an approach using “historical responsibility [and] countries should practice equity within that group.” He worried that including countries like China or the Gulf States as contributors would “open the window” to lower-income countries eventually being asked to contribute. Voluntary contributions from middle-income countries for 10-15 years would be “fair,” added Singh. The United States and European Union, who long opposed the creation of a loss and damage fund, are strongly against China being able to access its financing, preferring it to be focused on the most vulnerable countries. How might they try to avoid paying? There are worries among some experts that loss and damage funding — which campaigners want as new and additional funding — might be conflated with other types of finance. Aggad said she was “concerned” by comments from French President Emmanuel Macron, where he said a loss and damage fund wasn’t the solution, and he’d prefer to link it to the Bridgetown Agenda, an initiative to reform international financial architecture that’s been spearheaded by Barbadian Prime Minister Mia Mottley. “This conflates the issue of adaptation … with that of loss of damage,” said Aggad. “The separation between the two agendas is a cornerstone of the position of the developing countries. Countries should also avoid the temptation of shifting the responsibility to the international system.” “This fund should make sure that everything happens in conjunction with all other streams of financing,” such as humanitarian aid, said Singh. He added that loans — which make up much of existing climate finance — will be opposed “really hard” by campaigners, as they are viewed as unfair because they add to countries’ debt burdens. How else might it be financed? High-income countries are themselves in troubled economic times, and have already lost a lot of trust in climate-vulnerable nations over the failure to deliver a promised $100 billion in climate finance. “Continuing as before, asking the rich countries to pay up, is not going to produce the level of finance [needed],” said Shakya. The COP 27 decision on loss and damage recognized “the need for support from a wide variety of sources, including innovative sources.” But political will is required “to do something never achieved before” to generate new and additional loss and damage financing, as public contributions from donors won’t be enough, according to Shakya. U.N. Secretary-General António Guterres has proposed windfall taxes on fossil fuel companies to pay for loss and damage, and the Marshall Islands have proposed levies on international shipping and aviation. A loss and damage levy on carbon offsetting has also been suggested. But such money would not be easy to come by. Global tax policies would require “a level of coordination that has always seemed close to impossible, and until now has always proven impossible,” said Shakya. “However I feel that things that used to feel impossible might have to be attempted because there’s no other way we're going to get the level and scale of financing that’s needed.” The COP 27 decision also “looks to the role of [international finance institutions] in helping to address loss and damage and secure countries liquidity when crises hit, looking at things like [climate shock-related] debt service suspension clauses in sovereign debt instruments,” said Scott. Who receives? Less wealthy countries at the receiving end of climate shocks will be the recipients of the money. But how that big group gets broken down is likely to be another bone of contention. The issue will be a “big faultline over the next couple of years, that risks … stymieing the north-south high ambition coalition from bringing what we need into COP 28,” according to Scott. “There will need to be a lot of work to resolve some of those differences to bring that coalition back together.” While Singh said the “countries who have less resources, who are more vulnerable have first right to access resources,” middle-income countries also remain at risk, according to Shakya, who recommended a study be undertaken to look at countries' vulnerability and their ability to protect their citizens. Who will qualify as “most vulnerable” will be a challenge, echoed Aggad. Referring to the Vulnerable Twenty group of countries, she added: “Loss and damage does not only affect countries like those who are part of the V20. It is a challenge with environment, economic and socio-economic implications for many more countries.” Structures will be needed in countries to determine how funds will be spent, according to Shakya. And Singh added that a “massive amount of work” was needed to ensure countries also had accountability systems for the money. He said: “Our fight was not about protecting governments, we are talking about people on the ground getting help.”