Analysis, interviews, roundtables, reports and more on the topics that matter to you.

07 February 2024

Climate loss and damage: A hard nut to crack

Reporter at Uxolo
Climate finance
Middle East & Africa, Americas, Asia-Pacific, Europe
Loss and damage caused by climate change was finally operationalised into a proper fund at COP28 last November. But how do you raise $400 billion of humanitarian zero-return financing to repair and prevent damages in already debt-stricken developing countries?

If you were going to place climate mitigation, adaptation, and loss and damage on a rising scale from easy to finance to difficult, loss and damage would be at the very top. There is not a clear pathway for funding monumental, climate-caused disasters, like when Vanuatu lost 64% of its GDP in a single cyclone in 2015. The Loss and Damage Collaboration estimates the annual need for loss and damage financing at around $400 billion, a figure which is expected to grow as global warming continues to move beyond the 1.5C target (currently 2.3C is the reality if the world continues on its current transition path).

However, after 30 years of calls for finance for loss and damage to be recognised in the COP text, a Loss and Damage Fund was finally operationalised at COP28 in November 2023. Although this is a victory for the small-island nations and least-developed countries that stand to lose the most from climate change, many questions remain as to how the fund can be implemented and what instruments could enable the provision of humanitarian zero-return financing to debt-stricken developing countries.

To understand how and from where it could be financed, it is critical to understand the conditions it needs to fulfil. There is a general agreement that it should primarily give out grants, firstly because of the worsening debt crisis in countries like Vanuatu, Bangladesh, and Fiji where rising sea levels pose a severe threat; and secondly because these countries are not responsible for the GHG emissions that have led to this point. On top of this, the fund will need to have the capacity to issue long-term financing – to allow countries to develop long term plans – and immediate payment provisions for disaster events.

Another key condition is that loss and damage funding should be separated from mitigation and adaptation. Julie-Anne Richards, independent consultant on loss and damage, says, “it would be a mistake to redirect adaptation finance to loss and damage; we need new finance over and above that already provided for adaptation and development – both of which are already chronically under-funded”. Funding needs for adaptation are currently estimated at $387 billion a year but, in 2021, public multilateral and bilateral adaptation finance flows declined by 15% to $21 billion.

Looking at the options

The standing ovation from delegates in Dubai for finally getting the fund agreed was mismatched by the meagre amount – $661 million – it received in initial pledges. In addition, because it needs grants, some figures on the Loss and Damage Board have outlined they do not want development banks to foot the bill – one source says, “MDBs are lenders, forcing them to give out grants will only make them smaller when they need to triple in order to do what they need to do”. Other ideas, such as carbon pricing mechanisms or a windfall profit tax on fossil fuel companies, have been advocated for by some, like Antonio Guterres, but are far from ready to implement.

Instead, Dr Melanie Pill, research fellow in climate change at the think tank Lowy Institute, shares some existing mechanisms the fund could draw inspiration from: “A good blueprint is the EU Solidarity Fund (EUSF)” – in an extreme weather event, countries affected can apply for money from the fund and they will receive a portion based off of their GDP loss, up to a capped amount. The EUSF matches the Loss and Damage Fund’s need to uphold recipient agency and context-dependent flexibility – “It can be used for non-economic losses such as the preservation of cultural heritage … countries get to decide what to spend their money on”.

She adds that beneficiary countries also have to detail the measures they will take to prevent and limit future damage – in the case of loss of damage, there could be an additional stipulation for how countries plan to reduce GHG emissions. This would help to address the developing vs developed country debate which delayed the fund agreement signing up to the final hour: “The clock didn’t stop ticking in 1992 when Annex 1, Annex 2, and the Non-Annex Countries were established – China has contributed almost as much in historical emissions as the US and the EU now”, says Pill.

Another option is for a solidarity levy, where a country collects money for a common cause domestically and decides a system for raising the funds which works within its political system – for example, France has a solidarity tax which applies to each commercial aircraft departing its territories.There could be an opportunity for a pact of countries to agree on an international levy and channel finance from those that are producing GHG emissions to those that are most affected by them.

Pill particularly highlights the role philanthropy could play. The Institute for Policy Studies recently led a study of people who have signed the Giving Pledge, a promise to give away the majority of their fortunes in their lifetimes, and found that the combined assets held by the 73 living pledgers who were billionaires in 2010 rose from $348 billion to $828 billion in 2022. Strategically channelling and engaging with this significant capital pool through UN funds, to causes like loss and damage, could make a serious dent in the current gap, Pill says.

It all depends where it sits

There were four options for where to initially place the new fund for the first four years: under the Green Climate Fund (GCF), under the Adaptation Fund, as a fund in its own right, or within the World Bank Group – of which the latter was chosen, at the behest of the US.

This has received some criticism from the G77 and activists who argue: this makes small island states and middle-income developing countries ineligible to directly access financing, inverse to where loss and damage crises are occuring; risks indebting nations further through loans; and, it would not be steered by the Global South.

One alternative would be to house the fund within the GCF which would have the same legitimacy, scope, reach, and institutional infrastructure as the World Bank, but from a Global South captaincy. Sitting within a larger organisation allows the fund to act as a legitimising instrument, being the first to move in when disasters occur and pave a groundwork for additional aid.

A source familiar with the GCF says, “Politically speaking, I would not be surprised if it stays within the World Bank – once these funds are established, they just develop roots – but, practically speaking, the GCF is a very good spot for it – the underlying principles are very similar”. The source believes the funds would have to be completely separate because the commitments countries have made to the GCF are separate from those made to loss and damage, and that would entail separate replenishment cycles – like with the World Bank and the Climate Investment Fund: “It would have to have a completely different board, decision structure and architecture because the GCF is a climate fund and this would be a humanitarian fund”.

The Uxolo perspective

Loss and damage sits in the middle of a tense political debate that boils down to one critical question from developing countries: ‘we didn’t cause this problem, so why (and how) should we pay for it?’. But, as Pill highlights above, it is not quite as simple to use the UN divide anymore – countries like China, Russia, Brazil, South Africa, and Indonesia are contributing their fair share to climate change as well.

What really matters is that it is low-income and marginalised communities that are currently footing the bill. As Richards says, “the main financiers of loss and damage are the world’s poor, disproportionately women, who can least afford it”. In Bangladesh, rural families are estimated to spend almost $2 billion a year repairing and preventing climate damage; Vanuatu’s 2023 discretionary budget allocates 20% to addressing climate impacts; and of the $10 billion pledged to Pakistan in the wake of the recent floods, $8.7 billion is in loans that will need to be repaid.

In short, the $661 million pledged at COP28 is a bandaid where intensive care is needed, and that intensive care bill is only going to get bigger whilst the pace of investment in energy transition lags behind what the science dictates. Spend on mitigation will reduce spend on climate loss and damage in the long term, but for now, spending on both needs to start dwarfing what has been generated or offered to date.

Interested in finding out more?
Ask the analyst

You might also like

15 February 2024

AfDB’s hybrid capital first: A new funding tool for MDBs

AfDB's highly anticipated $750 million 10.5-year perpetual non-call venture into hybrid capital has not only established a promising benchmark, but has also signalled what...

22 February 2024

CLIMA: A new type of grant to unlock debt market ambitions?

IDB’s new CLIMA initiative offers a new type of grant that imitates a 5% loan principal discount to borrowers for meeting nature and climate objectives. The goal is not only...