Operationalising the Loss & Damage Fund to Address Climate Change

REPORT

Operationalising the Loss and Damage Fund to Address Climate Impacts

28 September, 2023 | International Cooperation

Jhalak Aggarwal and Sumit Prasad

Suggested Citation: Aggarwal, Jhalak and Sumit Prasad. 2023. Operationalising the Loss and Damage Fund to Address Climate Impacts. New Delhi: Council on Energy, Environment and Water.

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Overview

To operationalise the Loss and Damage Fund (LDF)— established at the 27th Conference of Parties (COP27) after intense negotiations — a Transitional Committee (TC) has been tasked with providing recommendations on the institutional arrangements, elements of the funding arrangements, sources of finance, and ensuring coordination and complementarity with existing arrangements for L&D. This report attempts to answer the following questions – the scope of the fund, who pays, who receives, how much, and how the fund fits into the current finance architecture to provide the solutions needed. It also makes recommendations for the immediate accessibility component of the LDF, which focuses on processes that allow for the quick disbursal of finance that is fit for purpose.

Though the political commitment to establish a fund has been fulfilled, the real test now lies in reaching a consensus on operationalising it. It is important that COP28 delivers solutions ensuring finance is new, additional, predictable, adequate, fair, and debt free in the light of the current economic and climate realities.

Key highlights

On scope, the fund should comprise immediate disaster response, post-disaster resilience building efforts for both extreme weather and slow-onset events as well as economic and non-economic losses.
On institutional arrangements, the fund can be positioned as the third operating mechanism – along with the Green Climate Fund (GCF) and Global Environment Facility (GEF) – and is responsible only for L&D finance within the United Nations Framework Convention on Climate Change (UNFCCC) ambit. The report recommends the fund to have a Governing Council (GC) that functions as an oversight, decision-making body, and a secretariat to deal with day-to-day issues.
On the most thorny issue of who pays, developed nations should be the primary contributors on account of their historical responsibility, unfulfilled pledges, and capacity to pay. Additionally, the fund can mobilise money through taxes (climate damage, windfall, and aviation), multilateral development banks (MDBs), multilateral climate funds, philanthropies, and domestic carbon markets. On who receives, the fund should provide all developing nations access to the fund.
On quantum, the Transitional Committee can recommend a target to be set at approximately USD 200 billion by 2025, USD 430 billion by 2040, and USD 1.5 trillion by 2050 with the flexibility to be revised based on needs in the future.
On instruments, grants and unconditional cash transfers are the most suitable financing instruments.
There is a needs to develop additional capacity on the subject by developing a Global South–led consortium to enhance technical capacity and encourage attribution science as well as explore collaboration between the World Meteorological Organisation (technical body), Santiago Network (support arm), and the LDF Secretariat (coordinating body) to leverage existing expertise in scientific disaster attribution.

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Jhalak Aggarwal

Research Analyst

[email protected]

“The rising disasters both in terms of frequency and intensity are causing widespread destruction, especially in the developing nations. The lack of capacity, adequate resources, and equity compounded with the economic and geopolitical realities limits the nation’s ability to respond and adapt to uncertain risks and disasters and calls for immediate support at the required speed, scale, and adequacy. In the face of impending catastrophe, COP28 must deliver on the operationalisation of the Loss and Damage Fund where historical emissions and CBDR-RC remain the foundations of decisions on who the money will flow from and to whom, bridging the trust gap that has emerged over the years.”

Executive summary

A series of ongoing extreme weather events and disasters fuelled by climate change have devastated the lives and livelihoods of millions, and cost billions in losses and damages, especially in the Global South. The massive floods in Pakistan in 2022 inundated almost one-third of the land area, causing damages worth 10 per cent of the country’s gross domestic product (GDP)(World Bank 2022). Himachal Pradesh is currently devastated by cloudbursts and floods, reporting losses worth USD 487 million (Economic Times, 2023). This, compounded by carbon inequality, unjust distribution of impacts, inflation, and a debt crisis serves as a clarion call for loss and damage (L&D) finance to address, avert, and minimise climate impacts. L&D finance has been kept at arm’s length by developed countries ever since it was proposed 30 years ago in 1991 by the Alliance of Small Island States (AOSIS) (Government of Vanuatu 1991). But it was only in 2022, at the 27th Conference of the Parties (COP27), that they reached a long-overdue agreement. This marked a difficult and much-needed win for vulnerable nations, with the Parties agreeing to establish a Loss and Damage Fund (LDF) and funding arrangements to pay for climate-related L&D (UNFCCC 2022b). Though the political commitment to establish a fund has been fulfilled, the real test now lies in reaching a consensus on operationalising it.

To expedite the process of operationalising the fund, a transitional committee (TC) has been established and tasked with formulating recommendations; deliberations are ongoing.

As COP28 approaches, Parties, sub-national representatives of communities, climate activists, and experts across the world have their eyes set on the operationalisation of the LDF. This report examines the important elements that TC members must consider, particularly the immediate accessibility component of the LDF, which focuses on processes that allow for the quick disbursal of finance that is fit for purpose. It considers the following questions – the scope of the fund, who pays, who receives, how much, and how the fund fits into the current finance architecture to provide the solutions needed.

Challenges

There are several challenges that complicate the operationalisation of the fund:

Reluctance of developed nations to accommodate a new fund, and political unwillingness to commit to higher, additional non-debt finance to official development assistance (ODA) as well as to deliver on previous commitments.
Absence of a mutually agreed upon definition to categorise L&D activities that overlap with humanitarian support.
Low technical capacity – especially in developing countries – to scientifically model L&D makes it difficult to make robust estimates.
Immediate accessibility to funds has remained elusive in the domain of climate finance.
Poor financial mobilisation at the local level, where allocation does not favour the most vulnerable people within a country, communities, and households.
Poor data availability and processes for systematically collecting, recording, and reporting information on L&D.

Recommendations for implementating the Loss and Damage Fund

As a step forward, we propose a framework to operationalise the fund, with a specific focus on ensuring immediate accessibility. Our report aims to help TC members, negotiators, and policymakers with operationalising the LDF, particularly with defining the broad principles for the design and operation of the fund and the most appropriate financial instruments. This research can be used to determine the modalities that will ensure easy and immediate access, assess the effectiveness of the instruments to make them fit for purpose, and offer options to operationalise different elements under the fund. We provide the following recommendations from a developing country’s perspective to the TC to ensure timely operationalisation of the LDF:

Deliver solutions ensuring finance is new, additional, predictable, adequate, fair, and debt-free.
Decide on the scope of the fund, which comprises immediate disaster response, post-disaster resilience-building efforts, and comprehensive coverage to include slow-onset events and non-economic losses.
Agree on the institutional arrangements where the fund is positioned as the third operating mechanism – along with the Green Climate Fund (GCF) and Global Environment Facility (GEF) – and is responsible only for L&D finance within the United Nations Framework Convention on Climate Change (UNFCCC) ambit. In terms of governance, the fund can have a Governing Council (GC) that functions as an oversight, decision-making body, and a secretariat to deal with day-to-day issues.
Build consensus on who pays, acknowledging that developed nations should be the primary contributors on account of their historical responsibility, unfulfilled pledges, and capacity to pay.
Set targets to mobilise finances based on needs, with flexibility for the quantum to be revised over time. Based on the available research, the target can be set at approximately USD 200 billion by 2025, USD 430 billion by 2040, and USD 1.5 trillion by 2050. These figures can be revised based on needs in the future, as discussed in Table 1.
Provide all developing nations the access to the fund. The money can be disbursed in three phases. First, immediate recovery, based on a trigger (for example, when a nation declares that it has been impacted by a loss and damage event) in the form of unconditional grants or direct cash transfers. Second, recovery fund, where the total remaining amount is released after an assessment of the costs of the post-disaster recovery. And, third, a slow-onset window that allows for accessing the fund based on a defined plan of action to address and minimise the climate impacts.
Establish grants and unconditional cash transfers as the most suitable financing instruments. To fill the fund, apart from developed nations contributing, money can be mobilised through taxes (climate damage, windfall, and aviation), multilateral development banks (MDBs), multilateral climate funds, philanthropies, and domestic carbon markets to foster finance.

Way forward

We provide suggestions to increase understanding and capacity to address challenges related to L&D that can further expedite action on the subject:

Develop a Global South–led consortium to enhance technical capacity and encourage attribution science to assess the extent of the role of climate change in disasters.
Explore a collaboration between the World Meteorological Organisation (WMO) as the technical body, Santiago Network as the support arm, and the LDF Secretariat as the coordinating body. The aim would be to institute a dedicated department under the WMO to leverage the organisation’s expertise in scientific disaster attribution.
Improve data collection on L&D impacts and finance needs to support evidence-based decision-making. To this end, a national climate disaster database can be established and encourage the reporting and tracking of L&D financing in the common tabular formats.

As we approach COP28, the TC should offer the Parties clear recommendations for the operationalisation of the LDF. Bridging the gap in the ability of developing nations to secure adequate, predictable, and sustainable financial support is pivotal to provide assistance to those most affected.

FAQs

What is loss and damage?

Loss and damage commonly refers to the irreversible and unavoidable impacts of climate disasters (extreme and slow-onset events) that cannot be or have not been addressed through mitigation (reducing greenhouse gas emissions) or adaptation (adjusting to and building resilience against current and future climate change impacts). However, there is no official definition under the UN.
When was the concept of loss and damage first established?

The Alliance of Small Island States (AOSIS) was the first negotiating bloc to call attention to loss and damage in 1990, realising their vulnerability to the rising seas. However, the first real action was in 2013 with the establishment of the Warsaw International Mechanism on Loss and Damage (WIM) to enhance knowledge, strengthen dialogue, and increase support to address L&D; but it failed to deliver on the third function. Then, the Santiago Network was set up in 2019 to catalyse technical support and the Glasgow Dialogue in 2021 as a compromise to G77+China’s demand for a dedicated facility. It was only at COP27 when Parties finally reached a long-overdue agreement to establish a fund to pay for climate-related L&D.
What is compensation for loss and damage?

This refers to providing compensation to countries that have suffered significant harm or losses due to adverse climate impacts beyond the capacity of communities and countries to cope with or adapt to. However, the discussions have always remained complex and politically charged due to concerns related to responsibility and liability. Developed nations have rejected the official discussions on the topic fearing admission of legal liability, litigation, and claims worth billions of dollars. In fact, at COP27, when the agenda on loss and damage funding was added, countries agreed the outcome based on cooperation and facilitation, and without invoking issues of liability or compensation.