The importance of the historic agreement at COP27 to establish “loss and damage” financing for vulnerable countries to respond to the impacts of climate change was made excruciatingly evident when two consecutive cyclones hit the small island nation of Vanuatu. Cyclone Judy and Cyclone Kevin wreaked havoc in the South Pacific within 72 hours of each other in early March 2023, causing devastating destruction.
Vanuatu has championed the cause of addressing loss and damage since 1991 and recently garnered the support of more than 105 countries for a resolution at the UN General Assembly that asks for an opinion from the International Court of Justice (ICJ) on the obligations of governments to fight climate change. Such a document coming from the ICJ could help provide legal backing for activists and advocates, including in the UN climate negotiations, who are seeking increased action from governments, including key topics like loss and damage.
Loss and damage refers to the consequences of climate change that goes beyond what people can adapt to or the resources communities have to recover. Addressing loss and damage is key in the mission for climate justice because developing countries did the least to cause climate change and yet bear the brunt of these impacts. As part of the decisions coming out of COP27, governments agreed to establish funding arrangements as well as a dedicated fund to address loss and damage. The decision also established a Transitional Committee to develop recommendations ahead of COP28 in November 2023 for how to operationalize these structures.
Considering the short time frame and urgency, it will be crucial for the committee to learn from the experiences of existing climate and environmental funds to inform a successful design and implementation. For instance, quickly accessing reliable climate funds has been a persistent challenge for developing countries due to factors like insufficient fundraising, difficulties and inconsistencies in fund allocation, delays in access channels, as well as the structural political and organizational complexities in each of the existing funds. The resolution of this challenge is essential for helping vulnerable communities deal with disastrous losses and damages.
While establishing the new loss and damage fund, and to some extent broader funding arrangements, the Transitional Committee will need to consider these three key questions:
1. What Type of Fund Should the New Loss and Damage Fund Be?
Determining the role that the loss and damage fund should serve in the wider ‘mosaic of solutions’ — a term used to refer to the collection of channels and initiatives both inside and outside the UNFCCC and the Paris Agreement to respond to loss and damage — will be critical for the committee to consider.
Then a decision will need to be made on the structure of the fund which includes options such as a gap fund, a catalytic fund or a mixed model. A gap fund is designed to provide financing for projects that cannot be funded through traditional financing mechanisms, whereas a catalytic fund is designed to mobilize additional financing from other sources, such as private investors, by providing seed funding and technical assistance. For example, the World Bank’s City Climate Gap Fund uses its resources to address the gap in urban climate finance through financing project preparation and capacity building. Meanwhile, the Asian Development Bank’s ASEAN Catalytic Green Finance Facility is an example of a catalytic fund because it uses its financing to de-risk green infrastructure projects and attract more private capital.
This choice will then determine how the fund’s resources are raised and the potential avenues for disbursement. A version that combines the two types of structure is also a possible option. This could support a larger mobilization of resources and capital, which in turn could translate into both faster (disaster-related) responses as well as capacity building and enabling activities. With this in mind, the Transitional Committee may also decide whether the loss and damage fund should play the role of ensuring complementarity and alignment in the new funding arrangements.
Ultimately, the final recommendation must be fit to support vulnerable countries responding to loss and damage from climate change. This includes creating structures that can appropriately respond to the various types of loss and damage, from addressing immediate needs in the aftermath of a sudden-onset catastrophe to responding to slow-onset loss and damage as well as supporting responses to both economic — harm to livelihoods and property — and non-economic loss and damage, which includes loss of life and losses to biodiversity and cultural heritage.
2. What are the Boundaries and Scope for the Loss and Damage Fund and Funding Arrangements?
The fund and funding arrangements need to ensure their ability to help vulnerable countries which are experiencing the brunt of climate impacts.
They must consider the continuum between loss and damage and adaptation and how funding can also enhance future adaptive capacity. Loss and damage is intrinsically linked to adaptation: increased adaptation leads to less loss and damage and, similarly, responses to loss and damage that increase adaptive capacity in the long run will help avoid future losses and damages. So, while adaptation (averting and minimizing loss and damage) is indeed distinct from addressing loss and damage, solutions to address loss and damage must also ensure a more resilient future so that the effects of climate impacts might be lessened in subsequent crises.
One example is the Pacific Disaster Resilience Program from the Asian Development Bank which provides a source of contingent disaster financing that can be rapidly disbursed following disasters. In addition, the program helps build adaptive capacity and resilience in the countries through platforms that assess disaster risk information, multi-hazard disaster risks and post-disaster financial management capacity.
It’s also important for the committee to consider how loss and damage overlaps with other targets of finance, such as humanitarian finance. But these overlaps are limited — finance for loss and damage and humanitarian finance only have specific areas of convergence — and only form part of the solution. Both types of finance are still insufficient at meeting the needs of developing countries. In December 2022, Oxfam highlighted that humanitarian needs caused by climate change, conflict and economic failure, are outstripping the aid system’s ability to respond to them.
For consistent, aligned programs to holistically address loss and damage over the complete lifespan of the climate-induced crisis, the fund and funding arrangements need to ensure all components of loss and damage— from immediate through to long-term responses — coordinate with each other and flow together.
Lastly, with all of this in mind, it is important to ensure that adaptation and loss and damage finance are not conflated and that finance for loss and damage is not diverted or relabeled from adaptation finance.
3. Where Will the Money Come From?
The funding sources for the loss and damage fund are yet to be confirmed. Vulnerable countries and climate advocates have called on those most responsible for the climate crisis to contribute, but who exactly that refers to and the details for how that would happen are yet to be worked out.
Furthermore, other sources of funding such as private equity on windfall taxes from fossil fuels have been suggested as complementary sources, but there is not yet a scaled-up global mechanism for such an approach. The closest example is probably the allocation of a share of proceeds from carbon credit transactions under the Clean Development Mechanism to the Adaptation Fund . While this is a good precedent in terms of structure, it’s a risky approach in terms of funding reliability. A slump in the market where the levy is applied can lead to a shortfall in funding.
The Transitional Committee might also consider the experience of other financial mechanisms under the UNFCCC as well other non-UN funds that can provide experiences and lessons learnt on various funding approaches, such as through regular or ad-hoc budgetary contributions, via regular replenishments, through levies or taxes, or via Special Drawing Rights from the IMF.
For example, the experience under some UNFCCC mechanisms shows that their model, which currently relies on voluntary country contributions at regular intervals, does not align well with country needs, as it leads to rushed proposals at the end of each cycle as well as project cancellations. This model can also slow down disbursements when resources begin to run low. It is too restrictive in the number and nature of access channels, inevitably limiting resources that can be allocated to each country for specific strategic areas of interventions. A mixed model between a gap and catalytic fund could tackle this issue by providing multiple avenues for capital raising.
Managing the Work of the Transitional Committee
In pursuit of answers to these finance questions, the Transitional Committee is also responsible for recommending institutional arrangements, modalities, structure, governance and terms of reference for the fund, while also drawing out elements of the new funding arrangements, new sources of funding and how to coordinate the ecosystem of institutions addressing loss and damage.
The Transitional Committee will be able to draw on input from the UNFCCC secretariat and information from mandated workshops, the Glasgow Dialogue — which was established at COP26 to discuss loss and damage funding — and the convening of international finance institutions to be hosted by the UN Secretary General. Such input will help support the Transitional Committee’s work and ensure swift but robust decisions can be made.
Beginning March 27, 2023, the Transitional Committee will be holding at least three meetings, which we recommend they organize by concurrently addressing all three funding questions — namely type of fund, scope of the fund, and sources of finance — through the creation of three working groups. After brainstorming and creating the skeleton of the new fund during the first meeting, the following meetings can focus on the details and complexities of all three questions.
In between sessions, we propose the Transitional Committee seek informal feedback from the UNFCCC at the June negotiation session — which serves as a midpoint check-in between COP27 and COP28 — which can then inform the second and third meetings. By the end of this process, the Committee will have developed a proposal for the entire structure of a new loss and damage fund and broader funding arrangements.
The tentative plan could take the following suggested form:
How the Transitional Committee can Succeed
There are important comparisons that can be studied and potentially replicated (even if just in part) not only from climate finance instruments, but also from other financial mechanisms, such as pooled funds which allow donors to pool their contributions into single, unearmarked funds to support local humanitarian efforts, the European Union’s Structural Funds, and other humanitarian funds. Each one of these options can offer insights into good practices for key principles in fund structuring and fund management, namely predictability, adequacy of fund volumes, clarity on methods of co-financing, fast disbursements in urgent or disaster situations and broad access. Over the course of the coming months, we plan to provide analysis on such tools as well as various other topics relevant to the work of the Transitional Committee.
The Transitional Committee’s success will depend on how it manages to clarify and develop the critical issues we outlined. Drawing guidance from processes and workshops within the UNFCCC, as well as interacting with experts within and outside the world of climate negotiations will help address the right solutions for funding loss and damage.