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What is the COP27 Loss and Damage Fund?
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Blog...What is the COP27 Loss and Damage Fund?

What is the COP27 Loss and Damage Fund?

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Net zero trajectory
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In this article we’ll explore what the Loss and Damage Fund is, why it took so long to become a reality, and what the next steps are in terms of getting the fund up and running.
Business
2023-05-26T00:00:00.000Z
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arial shot of flooding in a village

The Loss and Damage Fund is credited with being a historic breakthrough and the defining achievement of COP27, the UN climate summit held in Sharm El Sheik, Egypt. It has taken over thirty years, since the concept was first floated, for the fund to finally become a reality. The agreement to provide funding for communities dealing with the devastating impacts of climate change represents a milestone for climate justice. 

👉 In this article we’ll explore what the Loss and Damage Fund is, why it took so long to become a reality, and what the next steps are in terms of getting the fund up and running.

What is the Loss and Damage Fund?

Climate change impacts are being felt across the globe - from more frequent and intense heat waves, to prolonged periods of rainfall and flooding, to more long-term changes in weather patterns that affect biodiversity and crop yields. There is no corner of the world that is not affected in some way. However, some countries are more impacted than others, and unfortunately these tend to be developing nations who lack the infrastructure and resources to effectively deal with the growing challenge of global warming.

Climate change can have a profound impact on communities with economic, social and cultural losses and damages. Often the communities who are most affected are also the most vulnerable, meaning that they lack the financing and the resources to both prevent the worst effects of climate change, and to deal with the resulting impact.

What makes the situation even more unjust is that the countries who are the worst impacted by climate change also tend to be those who are least responsible. Take Pakistan for example - in 2022, Pakistan experienced some of the worst flooding in recent history, with almost one third of the country under water. Yet, Pakistan emits less than 1% of the world’s annual greenhouse gas emissions. 

The Loss and Damage Fund recognises these injustices and aims to help developing nations deal with the unavoidable impacts of climate change.

Two people walking through a large flooded plain

The history of the Loss and Damage Fund

The idea of a loss and damage fund was first floated over thirty years ago in 1991 at the United Nations Framework Convention on Climate Change in Geneva, Switzerland. 

Developing nations who face greater risk from climate change, and who often lack the financial resources and institutional capacity to recover from climate events, began to advocate for support to deal with the impacts of climate change and to address the geographic imbalance between the cause and effect of global warming. 

Despite being flagged as a topic of discussion as early as 1991, it wasn’t until COP13 in 2007 that the term ‘loss and damage’ was included in any official COP documentation. From this point onwards, the discussion of climate liability and compensation became a central part of the annual COP agendas. 

Yet, progress was slow and no consensus could be reached for years to come. For example, in 2013, attendees of COP19 in Warsaw created the Warsaw International Mechanism for Loss and Damage (WIM) with the intention of supporting vulnerable communities, however the mechanism was watered down and included no financial mechanism to support the initiative. 

The Paris Agreement signed at COP21 in 2015, also included a specific article on loss and damage, however it was careful not to create any legal obligations for countries, and again didn’t include any sort of finance mechanism. 

At subsequent conferences, developing nations continued to push for the creation of a fund to support the financing of climate related loss and damage recovery. However, wealthier nations (who are also historically those responsible for the majority of carbon emissions), fearing that they could become legally liable for damages resulting from climate change, prevented this from becoming a reality.

The UN headquarters in Geneva

COP27 and the Loss and Damage Fund

COP27, held in Sharm El Sheik in Egypt marked a significant turning point in the push to create some kind of loss and damage fund. It was one of the main topics of discussion at the conference and after intense negotiations a deal was finally struck. 

The agreement to create a loss and damage fund, providing financial support for vulnerable countries experiencing devastating climate effects, received much praise and was declared to be a historic breakthrough. But what led to this change in heart of wealthier nations? 

There are several factors that paved the way to the acceptance of the Loss and Damage Fund by developed nations - who had historically blocked the funds creation. The first factor is that the new fund doesn’t just lay the financial burden on developed nations, but states that funding should come from a variety of sources, including both public and private sources. 

Another factor that pushed wealthy nations to agree to the creation of the fund, is the higher visibility surrounding the topic of climate justice. It’s now almost universally accepted that wealthier nations are responsible for a significant portion of carbon emissions and that these emissions are the primary force driving climate change. 

The continued efforts of developing nations and NGOs to push for the creation of a loss and damage fund meant that wealthier nations could no longer ignore the issue. Increased media coverage and pressure may also have been a motivating factor.

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How will the Loss and Damage Fund work?

The aim of the Loss and Damage Fund is to provide financial assistance to poorer nations as they deal with the negative consequences that arise from the unavoidable risks of climate change - for example: rising sea levels, extreme heat waves, desertification, forest fires, crop failures etc. The funding will help vulnerable nations to rebuild the necessary physical and social infrastructure. 

While the fund is undoubtedly a historic breakthrough, its success largely depends on how quickly nations are able to get the fund up and running.

In order to achieve functionality of the fund, a Transitional Committee on the operationalisation of the new Loss and Damage Fund was set up. Composed of 24 members representing different geographical regions, the Transitional Committee held its first meeting in March 2023. It is tasked with developing recommendations ahead of COP28 which will be held in Dubai (UAE) in December 2023.  

So what are the main points that the Transitional Committee will need to address?

Important considerations for the Loss and Damage Fund

If the Loss and Damage Fund is to prove a success and actually help developing nations to deal with the devastating impacts of climate change, there are a number of crucial considerations that the Transitional Committee and COP members will need to come to an agreement on. So what exactly are these important considerations?

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The scope of the ‘Loss and Damage Fund’

While it’s generally understood that the beneficiaries of the Loss and Damage Fund will be developing nations who are severely impacted by the unavoidable effects of climate change, the exact scope still has to be clearly defined. 

What is the threshold for damage and loss? What constitutes an ‘unavoidable risk of climate change’? These are just some of the questions that will need to be answered to get the fund up and running.  

Another crucial question that also needs to be negotiated is which countries will be responsible for the financing of the fund? Funding will most likely fall on developed nations, but what definition will be used to determine this threshold? Will the definition of ‘developed nation’ contained within the United Nations Framework Convention on Climate Change (UNFCCC) be applied, or will countries with high levels of emissions also be asked to contribute? 

During negotiations at COP27, the EU agreed to the creation of the Loss and Damage Fund on the condition that large economies and emitters are considered as potential donors, even where they are technically classified as a developing nation under the UNFCCC. This will be put to the test during negotiations over whether China will be called upon to provide financing - China is one of the world’s largest greenhouse gas emitters, yet the country is still classified as a developing nation by the UNFCCC.

Busy street in a Chinese town with lots of cars and people

Financing

The financing of the new Loss and Damage Fund is still something that needs to be ironed out. As it stands, it’s unclear where this money will come from and how the fund will be aligned with existing UNFCCC funds. For example, will the financing for the Loss and Damage Fund be redirected from other funds and by repurposing money that was originally set aside for climate change mitigation measures?

The UN has stated that ‘Social protection, contingency finance, catastrophe risk insurance and catastrophe bonds can provide a certain buffer and rapid pay-outs after disasters. However, a broadened donor base and innovative finance tools would be needed to respond to the magnitude of loss and damage.’

The mention of innovative finance tools could include options such as: windfall taxes on fossil companies, debt loss and damage swaps, international taxes, or a dedicated finance facility for loss and damage under the UNFCCC.

rolls of US dollars

The issue of responsibility

The topic of how the Loss and Damage Fund will be funded also brings up the issue of responsibility. This refers to the fact that it is typically developed nations that are historically responsible for the most emissions. The weight of responsibility grows even further if we take into account the colonial past of colonizer nations. The UK for example is responsible for twice as much global heating as previously thought when we include the emissions of countries that were once under the rule of the British Empire. 👉 When former British colonies are also considered, it is estimated that the UK is responsible for as much as 5% of global emissions!

This raises questions about climate justice and fair funding for the Loss and Damage Fund. Many argue that colonial powers bear a heavier responsibility when it comes to supporting climate action in less developed nations.

The role of financial institutions

Non-state actors such as private financial institutions are expected to play a pivotal role in the newly created Loss and Damage Fund. Private financial institutions are in a position to help countries to use financial resources effectively. Development banks in particular have experience with multi-donor funds and risk transfer instruments that can help to accelerate the availability of resources needed by affected communities. 

These are all considerations that will need to be extensively discussed as the Transitional Committee prepares its recommendations for COP28. To learn more about the UK’s Net Zero Strategy, take a look at our article on the topic.

Large buildings belongings to banks and financial institutions

Closing the climate financing gap

At COP26 developed nations pledged 100 billion USD annually to go towards developing countries for the purpose of climate change mitigation and adaptation. However, these financial commitments have yet to be met in full, leaving a large gap in the climate finance needed to deal with the impacts of climate change. 

Not only this, but research shows that this is not nearly enough - as much as 1 trillion USD per year is needed by 2025 to successfully support developing countries, rising to 1.7 trillion per year by 2030. 

As it stands, current climate change funding pledges fall far short of what is actually required to mitigate the worst impacts of climate change and to deal with the unavoidable consequences.

someone putting coins into a piggybank

Looking forward

The Loss and Damage fund is an important first step and an opportunity for climate justice to take hold. However, the future of the Loss and Damage Fund is hanging in the balance, and much will depend on how successful the Transitional Committee is in reaching an agreement with member states on the operation of the fund. COP28, later in the year, will be a big test when it comes to the future success of the Loss and Damage Fund.

The biggest challenge faced by the Loss and Damage Fund is undoubtedly its funding - not only are current climate related funds under-funded, but current pledge totals are a long way off the estimated amounts needed to deal with the impacts of climate change.

Media and public pressure mean that developed nations can no longer ignore their responsibility towards vulnerable developing nations suffering from the effects of climate change, nor can they deny the role they have played in creating the situation in the first place. It’s hoped that this increasing pressure will encourage wealthy nations to deliver on their promises. 

👉 It’s also worth noting that although the Loss and Damage Fund is incredibly important and necessary - extinguishing fires (so to speak) is not a long term solution to climate change. We also need to urgently address the root causes of global warming to prevent the situation from escalating. This means that we must eliminate our reliance on fossil fuels and transition to a low carbon economy. 

What about Greenly? 

At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required. 

If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.

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