Research

COP27: The Past, the Present and the Future of Loss and Damage Compensation

20 December 2022 10:26

The establishment of a loss and damage compensation could no longer be delayed. Factors impeding progress were overcome. COP27 agreed on a new loss and damage fund.

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The UN Climate Change Conference COP27 presented a timely opportunity to discuss “matters relating to funding arrangements responding to loss and damage associated with the adverse effects of climate change,” commonly referred to as ‘loss and damage fund.’ Loss and damage was the main topic of negotiations, and fortunately progress was made in this important area. Member states acknowledged the urgent and immediate need for new and enhanced funding arrangements to assist developing countries that are particularly vulnerable to the adverse effects of climate change. COP27 concluded with one major breakthrough: the agreement to establish a ‘loss and damage fund.’ Yet many key institutional arrangements as well as governance, and exactly how the fund will operate, are currently unclear.

This article explains what allowed for progress to be booked at COP27 and why it did not happen before, despite the fact that vulnerable developing countries have been demanding climate justice for many years. It also discusses the biggest challenges to effective implementation in the near future.

What Is ‘Loss and Damage’?

‘Loss and damage’ is commonly referred to as all negative consequences of climate change: The economic, social and cultural losses and damage to nature and people caused by unavoidable risks of climate change. Loss and damage may occur where climate adaptation has not been optimally implemented – because measures are extremely costly, not physically, socially or technically possible, or simply insufficient to prevent negative consequences. In other words, loss and damage may cover the many impacts of climate change that cannot be, or have not been, avoided through mitigation or adaptation.

What Hindered a ‘Loss and Damage Fund’ All These Years?

Poor developing countries face greater risks from climate change and often lack the financial resources and institutional capacity to recover from climate change-induced disasters. For years, these countries have been strongly advocating for increased action and support to cope with the negative impacts of climate change. How come the parties have so far failed to reach an agreement? Many reasons have delayed the decision to establish a loss and damage fund over the past 30 years, even as loss and damage received increasing attention in previous climate negotiations. We outline these hindering reasons taking a historical perspective.

“‘Loss and damage’ compensation refers to funding arrangements for developing countries that have suffered damage from climate change.”

The matter of compensations for the negative impacts of climate change was first discussed during the United Nations Framework Convention on Climate Change in Geneva, Switzerland, in December 1991 (see Figure 1).

Figure 1

Source: RaboResearch

The term ‘loss and damage’ was not used in an official COP document until 16 years later, at the COP13 in Bali, Indonesia. The 2007 Bali Action Plan called for enhanced action on adaptation, including “disaster risk reduction and means to address loss and damage associated with climate change impacts in developing countries”. However, the plan only charted the course for a new negotiating process designed to tackle climate change. Since COP13, the discussion about liability and compensation has always been at the heart of the agenda of COP conferences.

In 2013, the Warsaw International Mechanism for Loss and Damage (WIM) was established at COP19. The WIM was intended to support vulnerable countries by promoting the implementation of approaches to address loss and damage. The proposal was submitted by the G77 group of countries and China, but was eventually watered down and no financial mechanism was agreed upon. The Paris Agreement signed at COP21 included a specific article on loss and damage, but it was very explicit in not creating any legal obligations. Thereafter, however, the group of developing countries proposed on several occasions (including at the recent COP25 in Madrid and COP26 in Glasgow) the creation of the fund, but the richest countries – those with the highest historical emissions – refused to meet the demands related to this fund.

In short, the incredibly slow progress in establishing a loss and damage fund was mostly caused by the fear of the richer countries of becoming legally liable for the damage caused by climate change. Liability, they felt, could potentially lead to them being forced to provide large sums of financial compensation, which would be difficult to anticipate. However, in spite of their fears, this process was resumed for multiple reasons, which we discuss in the next section.

What Were the Turning Points of COP27 in Terms of Loss and Damage?

At COP27, loss and damage was the main topic addressed during the final negotiations, and the decision to establish and operationalize a loss and damage fund was one of the main headlines in many media outlets. Rich countries, after years of indecision, overcame their concerns, which allowed this important decision. Thus, another question arises: why now? Here we identify four factors that have enabled a more concrete step forward.

The latest version of the Sharm el-Sheikh Implementation Plan “welcomes the adoption of decisions -/CP.27 and -/CMA.4, on matters relating to funding arrangements responding to loss and damage associated with the adverse effects of climate change.”

First, the new loss and damage fund indicates that not only rich countries would contribute to the fund, but the funding should come from a variety of sources, public and private, including innovative sources of finance. This means that rich countries might have more leverage to compensate for their historical emissions as more funding sources have become part of the agreement.

Second, several entities including governments of vulnerable countries, NGOs and other civil society organizations, stressed that the timeline for establishing a loss and damage fund could not be delayed until COP28 (especially since little action had been taken at COP26 in Glasgow). In addition, higher visibility and acceptance of the connection between global warming and extreme events (as suggested in the Intergovernmental Panel on Climate Change (IPCC)’s Working Group II (WGII) contribution to the Sixth Assessment Report (AR6), released in February 2022) might have contributed to increase the pressure from media and – in general – from society at large.

So far, limited progress has been made in developing an adequate, fair and efficient financial architecture for loss and damage compensation. Despite the IPCC’s strong support for increased loss and damage measures, no specific percentage of international climate finance has been assigned to compensate the negative consequences of climate change. According to the 2021 edition of the Global Landscape of Climate Finance, total climate finance in 2019/2020 reached USD 632bn (10% higher than in 2017/2018), but probably only less than 3% was used for loss and damage. Bilateral financial commitments by developed nations, including Belgium, Denmark and Scotland, which supported immediate response to extreme climate disasters are only a fraction of what is needed. Therefore, more resources are required to cope with loss and damage.

Third, as extreme events such as heat waves and tropical cyclones are likely to become more frequent and more intense due to human-induced climate change – as explained in the IPCC AR6 WGII report – it is important that more emphasis be placed on the issue of loss and damage. A recent report analyzing climate risks for 180 countries showed that countries like Malawi, South Sudan, and Bolivia, have experienced multiple devastating events in a relatively short period of time. These vulnerable countries are unlikely able to rebuild and recover at the needed pace before the next event hits. In most cases, they do not have sufficient financial buffers to absorb the impacts and may need more time to rebuild and recover. Or governments borrow (and increase debts) to finance recovery. Resources for loss and damage can thus help developing countries to finance post-disaster reconstruction and move out of this vicious cycle of high debt.

Fourth, parties preferred to focus on more pragmatic matters such as loss and damage rather than on other more future-oriented and uncertain matters such as mitigation. Mitigation has proven to be very hard to implement, and will not become any easier in times of evident political uncertainty and global economic slowdown. While loss and damage, by definition, is associated with money that vulnerable countries would receive for an event that has already occurred, rather than for an event that could potentially occur in the future.

The establishment of a loss and damage fund could no longer be delayed. The mobilization of finance to address loss and damage is a core priority for many developing countries, and has finally become a key issue in the UN climate negotiations.

Toward Climate Justice: How Will the Fund Operate?

However, the road to effective compensation for loss and damage is still arduous. In order to deliver timely and effective support to vulnerable countries, the ‘transitional committee’ must translate many questions into clear actions. This committee, set up to make the new fund operational, is likely to meet in March 2023 and its difficult goal is to pave the way for a swift and determined adoption of the fund at COP28. We outline and discuss some of the main challenges until COP28.

Challenge #1 Ambiguity About the Definition

Different actors have interpreted and operationalized the term ‘loss and damage’ according to their own agendas. The broad definitions around loss and damage introduce multiple uncertainties, particularly when it comes to determining the ‘donor base’ of this new fund. Will the donor base include only developed countries (based on the 1992 United Nations Framework Convention on Climate Change (UNFCCC) definition) or will it be extended to include all countries responsible for high levels of emissions? In other words, it is unclear which countries must provide financing for the fund and which countries will be entitled to its benefits. There is a contentious issue here connected to whether China, the world’s largest emitter of greenhouse gasses but still classified by the UN as a developing country, should contribute to the fund.

Challenge #2 How Do We Evaluate the Damage?

The scope of losses and damages covered by the fund should also be evaluated. Methodologies to evaluate loss and damage would differ from those used for mitigation and adaptation funding. Besides meeting the criteria of consistency and fairness, methodologies that value losses and damages experienced by vulnerable people (including non-economic losses, such as life-related losses and the loss of cultural heritage) must provide highly granular information both in time and space.

Box 1: What Countries Will Need Compensation?

After climate disasters, countries often need financial assistance for relief and recovery. In some cases to deal with safe migration and resettlement, in others for long-term security to re-establish lives and livelihoods. Developing countries, many of which are least responsible for climate change, are some of the most vulnerable countries. They are hit by climate change-induced disasters and in great need for financial help. A recent study on 55 of the world’s most climate-sensitive economies found that they would have been 20% wealthier today had they not suffered the worst consequences of climate change over the last two decades. Not only have these countries contributed the least to causing climate change, they are also the least equipped to respond to its costly shocks. Another example concerns the Pacific Island Countries, some of the most exposed and vulnerable countries in the world, which would need to invest more than 10% of their GDP in climate-resilient infrastructure and other adaptation strategies. Future losses and damages will rise with increased global warming, even if effective measures to limit global warming to 1.5°C were put in place.

Challenge #3: Origin of the Money

Institutional arrangements and governance considerations will be vital in determining the effectiveness of the new fund. Firstly, it is still unclear where the money will come from and how this new fund will be aligned and coordinated with existing UNFCCC funds and new funds such as the Global Shield Financing Facility. Secondly, will the money be earmarked for loss and damage or will it be redirected from other funds, for example, by repurposing money that might have been earmarked for adaptation or resilience?

Challenge #4: The Role of Financial Institutions

Many non-state actors, including private financial institutions, play a key role in the newly established loss and damage fund. Private financial institutions can advocate proper definitions of impact finance and investments that help compensated countries to use the resources effectively and to invest in the right sustainability measures. Financial institutions can play an even more fundamental role by accelerating the availability of resources needed by affected communities for relief and rehabilitation. This can be the case for multilateral development banks, which have experience with multi-donor trust funds as well as with risk transfer instruments. Also because these banks have an established regional presence.

Looking beyond COP27, the fund’s near-term success will depend on effectively resolving these challenges. In particular, the politicized disagreements between countries over the historical responsibility of developed countries for climate change and their liability for providing loss and damage compensation.

The loss and damage fund must be operational by next year’s climate conference. Once the fund effectively responds to the needs of vulnerable countries, these can stop diverting their wealth toward preparing for and recovering from the effects of extreme weather. Instead, these countries can use their money to work on adaptation and resilience and can contribute to meeting the 1.5°C goal of the 2015 Paris Agreement. Finally, while a loss and damage fund is essential, it is of no use unless the climate crisis is also tackled from other angles, such as the radical transformation of the energy sector and more ambitious targets to reduce global emissions. These angles reinforce the need for taking major climate actions.