The Loss and Damage Fund: A primer for advocates

After a fraught period, the final discussions of the Transitional Committee on L&D concluded in Abu Dhabi, UAE in November 2023. The committee, which consists of 24 members from a mix of low-and middle incomes as well as high-income countries, had been tasked with providing recommendations on the operationalization of the L&D fund, one of the key outcomes of COP27 in Egypt.

Despite enthusiasm regarding the fund during COP27, the transitional committee’s progress over the 2023 was marred by strong political differences amongst representatives, culminating in a last minute attempt to break the deadlock on the fund’s operationalization ahead of COP28 in November 2023.

In spite of these challenges, the Transitional Committee has put forward a proposal to serve as the basis of discussions around the operationalization of the L&D fund at COP28. This Donor Tracker Insight offers an in-depth look at the topic of L&D, the progress made by the transitional committee since COP27, and what advocates should expect going into COP28.

What is loss and damage?

While the UNFCCC has not set a clear definition of L&D, it has been broadly defined as “the actual and/or potential manifestation of impacts associated with climate change in "developing" countries that negatively affect human and natural systems.” The term often designates climate change impacts that cannot or have not been avoided, and that have led to both economic and non-economic losses.

L&D is the third pillar of climate finance after mitigation, which aims to reduce greenhouse emissions, and adaptation, which addresses the negative impacts of greenhouse gas emissions. Article 8 of the Paris Agreement establishes L&D as a separate pillar, recognizing the "importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change". The different pillars of climate action are interrelated and interdependent, with increased efforts in adaptation and mitigation having the ability to reduce the costs of L&D. However, according to the IPCC Sixth Assessment Report released in 2022, efforts can "substantially reduce projected losses and damages … but cannot eliminate them all".

It is estimated that L&D will cost LICs and LMICs approximately US$290 billion to US$580 billion annually up to 2030, rising to between US$1.1 trillion and US$1.7 trillion by 2050, with the range depending on the success of mitigation and adaptation strategies. Existing funding for L&D currently flows through frameworks such as the Santiago Network and the Global Shield against Climate Risks. However, these funding sources in no way match the level of financing needed.

The history of loss and damage

Advocates have been calling for loss and damage compensation since the 1990s

Calls for L&D financing have been voiced by LICs and MICs for over thirty years, and were originally championed by SIDS. In 1991 the Pacific Island country of Vanuatu, in collaboration with the Alliance of Small Island States, proposed the inclusion of an insurance mechanism in the first ever UNFCCC. The insurance mechanism proposed that "industrialized" countries would share “the financial burden of L&D suffered by the most vulnerable small island and low-lying ‘developing’ countries.” This proposal was firmly rejected by "developed" countries, and set a dynamic that would continue throughout the following years.

The development of an "insurance" at the Conference of Parties

Although the proposed insurance mechanism did not make it into the UN Framework Convention on Climate Change, the document did refer to the provision of “insurance … to meet the specific needs and concerns of ‘developing’ country Parties". The Kyoto Protocol, agreed upon in 1997, also referred to “insurance” as a way to mitigate the impacts of climate change. Subsequent international climate meetings and their adopted texts included references to a type of “insurance” to address climate change and its impacts, but did not explicitly refer to financing for L&D, or any financial liability to support most climate-vulnerable countries.

Loss and damage compensation remains contested

While “insurance” was mentioned over the subsequent years, conversations around compensation proved to be a major point of contention between states. COP15 in Denmark saw other countries join AOSIS to bring up the topic of L&D, making it a major point of discussion. However, many donor countries continued to reject the notion of compensation.

However, the issue saw small breakthroughs throughout the 2010s. For example, COP16 in Cancun saw the establishment of a two-year work programme on L&D. At COP19 in Poland, the Warsaw International Mechanism on L&D was established, which asked “developed” countries to contribute financially to L&D. In the Paris Agreement, L&D became the third pillar of climate action, with countries agreeing to tackle the “loss and damage associated with climate change impacts.”

Scotland leads the charge for loss and damage at COP26

Fast forward to COP26 in 2021, former First Minister of Scotland Nicola Sturgeon took to the stage and announced that her country would support the Climate Justice Resilience Fund, donating GBP2 million (US$3 million) to the fund, calling on the moral responsibility of ‘‘developed’’ countries to do the same. It was a symbolic gesture that brought the question of L&D to the forefront of COP proceedings, and resulted in the establishment of the Glasgow dialogue on L&D. At COP27, Scotland pledged a further GBP5 million (US$7 million) to L&D. Scotland was joined by Denmark, Germany, Austria, Ireland and Belgium, who also committed funds to L&D at COP27.

What is the state of loss and damage negotiations?

COP26 marked the acceleration of discussions around L&D, with COP27 leading to the establishment of a dedicated fund. To facilitate the fund’s operationalization, a Transitional Committee was created to develop concrete proposals for COP28. Over the course of discussions in 2023, key conflicts and recommendations emerged ahead of COP28

Where the fund should be hosted?

Recipient countries represented on the committee preferred the option of having a fully independent fund and were originally against the suggestion of the World Bank, put forward by US and EU members. This opposition arose from the high costs charged by the World Bank for hosting the fund, its lack of a strong climate action culture, and US influence over the organization. However, in a surprising turn of events, recipient countries compromised, agreeing to recommend the World Bank as an interim host of the L&D fund. The fund would thus be a World Bank-hosted Financial Intermediary Fund for a period of four years, starting from COP28.

What countries can benefit from the fund?

Donor countries have previously advocated for the access to the fund to be restricted to LDCs and SIDS, while partner countries preferred the fund to serve the needs of vulnerable countries more generally. Members of the Transitional Committee agreed on the phrasing of "developing" countries that are particularly vulnerable to the adverse effects of climate change.

Which countries are obligated to finance the fund?

There are several perspectives on which countries should provide funding to the fund, which reflect wider concerns around who should contribute to climate financing, and how much they should contribute.

The first perspective focuses on the historic responsibility of donor countries to compensate for high historic and current emissions. This is supported by the Paris Agreement, which sets forward the principle of common but differentiated responsibilities, emphasizing the role of “developed” countries in addressing the impacts of climate. This option has been preferred by the G77+ China.

The other perspective, championed by donor countries, particularly the US, is to attract funding from a wide variety of public and private sources, and increasing pressure on high-emitting ‘developing’ countries, such as China, to contribute to global climate finance goals. Chinese climate envoy Xie Zhenhua firmly rejected this suggestion at COP27, stating that China’s status as a ‘developing’ country absolves it of responsibility to contribute to the fund.

Another option is basing contributions on “fair share” allocations. For example, research by the Center for Global Development estimates countries’ “fair share” allocation to the L&D fund based on historical emissions and current income. However, donor countries largely oppose this plan, as it is seen to increase the potential for litigation and compensation around damages caused by high levels of historical and current emissions.

Donors’ fear of liability is also closely linked to the increasing demands for “climate reparations”, which call for correcting past and ongoing harms related to climate change through compensatory measures, both financial and non-financial. In 2022, the IPCC's report on climate change highlighted the connection between contemporary climate impacts and historical patterns of inequity, providing evidence to support calls for reparations. The US is particularly against the notion of "climate reparations" as indicated by US climate envoy John Kerry’s absolute and public refusals to commit the country to reparations in July 2023.

As of November 2023, the committee’s proposal does not refer to the principle of common but differentiated responsibilities, and instead calls for contributions to the fund on a voluntary basis, regardless of income or development designation. Additionally, the proposal encourages mobilization of finance “including grants and concessional loans from public, private and innovative sources.”

Who will be represented on the board?

The Transitional Committee suggested a split between 12 members from "developed" countries and 14 members from "developing" countries.

How much finance should donors provide?

Regarding the question of funding levels, recipient countries suggested a target of US$100 billion per year by 2030 as a “minimum commitment” of funding, given the estimates for L&D.

Experts expect the initial target for the fund to be set at US$500 million annually. While the target provides a starting point, it falls far short of L&D projections, such as damages from flooding in Pakistan over 2022 and 2023, which are estimated at US$40 billion. Contention over funding levels is further aggravated by donors’ failure to meet the US$100 billion climate finance pledge.

There are also questions on how L&D will be included into the 2024 New Collective Quantified Goal on Climate Finance. On the divide between adaptation and mitigation, some experts expect L&D to be rebranded as a part of adaptation finance, which could weaken the initiative. In specific cases, experts have also expressed that it may be difficult to establish a distinction between adaptation and L&D, around slow onset events, for example.

Takeaways for COP28

Success at COP28 depends on the operationalization of the L&D fund, for which the Transitional Committee successfully proposed several major recommendations.

However, last-minute objections from donor countries, such as the US, indicate that the battle for the operationalization of the fund is far from over. Beyond political negotiations, there are several details that would need to be sorted out, like the scoping and procedures for accessing and functioning of the fund.

The discussion around L&D is also indicative of broader climate action discussions that will take place at COP28. Within these discussions, there is often a tension between incremental change and radical transformation. Topics such as the nexus of climate and development, reform of the international financial system to better address climate change and its impacts, and the need for increased financing towards climate adaptation also experience this tension, with some countries pushing for and others resisting calls for swift and significant action to fight climate change.

How can advocates shape loss and damage debates?

Beyond the political discussions at COP28, advocates can play a role in helping operationalize the fund in a way that creates the most impact. For example:

• Scope
  • What is the purpose of the fund, and what exactly does it fund?
  • What are the specific aims, for example reconstruction, recovery, fiscal space, transformative recovery, slow onset events, and human mobility?
• Funding model
  • What are the triggers to access finance?
  • Who benefits from the fund, and who is eligible to receive funding?
  • How is the fund set up to receive money and disburse money?
  • What kind of funding is given out, i.e., grants or loans? And will financing take the form of general funding or funding for specific programs and/or projects?
  • How is the money distributed, i.e., will it be distributed directly from the fund or through another intermediary? And how will it be administered?
  • Will there be sub-funds and/or windows, and what would these target?

With these operational details in mind, here are some specific issues that advocates should consider:

Supporting calls for loss and damage financing

• Increase pressure on leaders to operationalize the fund at COP28: Engage with countries around L&D to push for the operationalization of the fund and maintain momentum around the need for L&D finance.
• Support and/or join key advocacy groups: For example, the Allied for Climate Transformation by 2025 is a consortium of think tanks and experts that have published a joint call to action to address the needs of climate-vulnerable countries at COP28.
• Support accurate data collection on L&D: Support better tracking and analysis of L&D, and climate change and its impacts more generally, in order to increase transparency and accountability among countries.

Supporting the operationalization of the L&D fund

• Ensure effective use of funding for L&D: One key question is the discussion around how to make a relatively small amount of money make a big difference when climate disasters occur. Here, advocates can connect experiences and lessons learned from previous work within disaster risk management activities, and also understand what aspects of risk management can support L&D work.
• Advocate for flexible funding sources: The L&D fund should be flexible in terms of sources, so that the fund has enough money to be useful. Given the reticence of some donor countries to provide significant amounts of financing, and the potential for funding that is provided to take away from adaptation efforts, there is a need to ensure that a wide variety of public and private stakeholders commit to the fund.
• Ensure that the fund’s structure allows for rapid response: Money will need to flow quickly, with as little intermediaries as possible. Administrative arrangements must build a fast-moving institution that can quickly direct resources towards governments.
• Ensure direct access to funding for local communities: Advocate for finance flows that are not only quickly available to local communities, but that they are also tailored to the specific context and needs of local communities.