On the inaugural day of the COP28 UN climate summit in Dubai, developing nations achieved a significant milestone with the approval of a new loss and damage fund dedicated to aiding the poorest and most vulnerable countries in coping with the irreversible impacts of climate disasters. The decision garnered a standing ovation from delegates, marking a moment of celebration.
The UAE, as the host country, and Germany have jointly committed $100 million each to the startup fund to address loss and damage. This fund aims to address the escalating costs resulting from extreme weather events and gradual disasters like sea level rise, ocean acidification, and melting glaciers.
On Nov. 22, 2022, low and middle-income nations celebrated approval of a “loss and damage” fund at the UN’s 27th Conference of the Parties (COP27). It was a “historic win for vulnerable countries already suffering the acute effects of climate change,” said Olivia Serdeczny, a research analyst at Climate Analytics, an advocacy group, in a January blog. “[That comes] after 30 years of negotiations.”
In the following months, wealthy countries argued that not all developing or climate-vulnerable countries should be eligible for compensation. “There are continued points of disagreement between developed and developing countries,” Harjeet Singh of the U.N.’s Technical Expert Group on Comprehensive Risk Management wrote in Context, a Thomson Reuters Foundation platform, in August. “Who will pay, who is eligible to receive funding and how easily it can be accessed, what will be funded, and what will be the sources and instruments of funding?
This year’s COP28 should witness tough negotiations between nations the UN classifies as wealthy and the rest of the world. Climate Change News reported in August that Sue Biniaz, deputy special envoy for climate at the U.S. State Department, said she “violently opposes arguments by some countries and environmental groups that developed nations have a legal obligation to pay into the fund.”
Advanced countries also debate which nations are “developing” and which are “climate-vulnerable.” Their aim is for the UN to stop classifying countries like China (the world’s second-biggest economy) and India (the fifth-biggest) as “developing nations.” That means they must contribute to the loss and damage fund and are not eligible for financial support, citing “climate vulnerability.”
Quick response
The loss and damage (L&D) fund is “designed to respond to immediate needs, so is different from other climate finance that relies on specific projects with no means of disbursing funds quickly,” noted Serdeczny. “Ideally, the L&D fund will kick in when a country requires urgent assistance in the immediate aftermath of [a climate crisis] that causes economic and other losses.”
It operates under the UN’s Framework Convention on Climate Change (UNFCCC) and the 2015 Paris Agreement.
To effectively support emerging and vulnerable nations when climate crises hit, the UN Environmental Programme said in November 2022 advanced economies need to commit at least $100 billion annually until 2030 to the L&D fund. They estimate investments in climate adaptation projects will range from $160 billion to $340 billion by 2030 and between $315 billion to $565 billion by 2050.”
To manage funding arrangements before COP28, the L&D fund created a transitional committee of representatives from 24 nations, 14 of which are classified as developing. Of those, two are “small island developing” states, and two are “least developed countries.” The rest represent advanced and wealthy nations.
According to the fund’s charter, the committee must meet “at least” three times before COP28. Its findings will be presented at a ministerial meeting in November ahead of COP28.” Serdeczny said the committee needs to tackle “tricky questions,” such as whether the fund will cover the value of lost or damaged assets or the cost of responding to an event.
Another question is whether advanced nations will foot the bill alone or will other countries like China and Saudi Arabia, classified as developing, will contribute.
Then there is the feasibility of “other sources of money … such as windfall taxes on fossil fuel companies,” said Serdeczny. “And who receives the funds and when? Where does the fund fit in with other [green] finance [options]? Coordinating with other finance structures is important.” The transitional committee also must decide “how the fund will be structured and governed.
Groundwork
The first committee meeting was in March. Preety Bhandari, senior adviser in the Global Climate Program and Finance Center, told Relief Web, a news portal, in August the first meeting focused on outlining the topics discussed before COP28 and compiling submissions for loss and damage support from the committee’s developing member nations.
The second meeting was in May, where conflicts arose between the 14 representatives from developing nations and 10 from advanced economies. “There were … clear divides, including what the transitional committee should focus on,” said Bhandari.
There were debates over setting up funding arrangements, fueled by vague L&D fund documentation. It “made for an easily confusing conversation,” said Bhandari.
Nevertheless, attendees agreed L&D money would go to nations that were “particularly vulnerable.” Bhandari said that led to debates over what metrics should be used to classify a country as “particularly vulnerable.”
Lastly, attendees touched on the potential of developing innovative financing avenues and channels to feed the L&D fund.
Outcomes of the second transition committee meeting “seemed to convey that the process was still in an exploratory phase,” Bhandari said. “While some committee members tried to infuse a sense of urgency and engagement, there was an unwillingness by others to even recognize … emerging issues.”
Making progress?
The third meeting, held at the end of August, was the committee’s last chance to agree on fundamental topics related to the L&D fund before COP28. The UNFCCC said in a press statement the meeting “resulted in significant progress toward fulfilling the mandate given to the committee at COP27.”
Its primary outcome was publishing five “informal notes.” The first two-page paper focused on funding, where “the co-chairs [said] further discussions are necessary on the matter of the fund’s legal capacity on privileges and immunities.” The second note was a six-page “non-exhaustive, indicative list” of funding issues.
The third (two-page) “informal note” gave options on how to structure the L&D fund if it is a “standalone institution.” It also outlined a scenario where the fund “would not have its own legal personality or legal capacity.” The paper said that option means “the fund’s assets … would be protected by the World Bank’s privileges and immunity.” Therefore, L&D fund employees would be on the World Bank’s payroll.
The note also proposed the terms and conditions of providing funding to “eligible” nations, but there was no mention, let alone agreement, on eligibility metrics.
The fourth note listed the proposed top sources of financing. They include national governments, regional economic integration organizations such as the EU and African Union, the private sector, philanthropies, NGOs and innovative sources.
The fifth informal note highlighted points of convergence and divergence of perspectives and a “non-exhaustive, indicative list of issues raised” about how countries should manage the money they get from the L&D fund.
Politics dominate
Requiring at least $100 billion annually until 2030 from wealthy countries that led the Industrial Revolution in 1799 was never going to be easy.
Despite agreeing to the L&D fund’s creation at COP27, the United States and EU specified non-negotiable terms when signing it. The EU signed the agreement on the condition the “highest emitters contributed to the fund and were also excluded from using the fund.” According to Climate Trade, an online carbon trading platform, of the world’s top 10 polluters, China, India, Iran, Saudi Arabia, and Indonesia are classified as middle-income or emerging economies.”
The United States is looking to limit the scope and accessibility of the L&D fund to a handful of small emerging countries. “The new fund should develop expertise, as opposed to covering everything in the universe,” Biniaz of the State Department told Reuters in August.
During the third meeting, U.S. negotiator Christina Chan said the United States wants to focus the L&D money on “covering slow-onset events such as sea level rise and desertification, [rather than] floods, heatwaves and storms.”
The U.S. also wants to prioritize countries with populations of less than 5 million. That means pushing other eligible countries to deal with multilateral development banks like the World Bank, IMF, ICF, and EBRD. Julie-Anne Richards, Strategy Lead at the Loss and Damage Collaboration, a climate advocacy group, told the Indian news portal The Wire in September, “That limits the [L&D fund’s] scope by limiting eligibility.”
The EU and the United States are also attempting to divide the term “emerging countries” into several classifications, decreasing the number of nations eligible for L&D money. Media outlets at COP27 reported the EU’s attempts to create two new classifications (small island developing states and least-developed countries) under emerging economies and limit L&D fund eligibility to those sub-categories.
Additionally, wealthy countries at COP27 argued for creating a new class of nations called “particularly vulnerable countries.” It would be a subset of “countries vulnerable to climate change” classification, which covers almost all emerging nations.
Meanwhile, media reports say developing low and middle-income nations want to rephrase the L&D fund document to ensure the inclusion of all emerging economies. Instead of L&D money going to a specific category of countries, it would be available to any nation based on the severity of the disaster and capacity to deal with it.
At COP28
This year’s COP will put L&D fund negotiators under pressure as the U.A.E. organizers chase a breakthrough announcement to compare with COP27 and COP26’s global pledges to keep global warming under 1.5 degrees Celius by 2030.
Cameron Hill, a senior research officer at the Development Policy Center, a think tank, noted there could be negotiations over alternative sources to finance the L&D fund. In a June blog, he said, “One potential option could be greater use of rich countries [IMF] Special Drawing Rights.” That means securing money and helping states suffering climate disasters would become the IMF’s problem.
Mark Plant, CEO of the Center for Global Development Europe, wrote in a January blog, “Special drawing rights could be useful for financing some part of L&D … within [a] narrowly defined set of procedures and institutions.”
Hill also noted “debt forgiveness” or “international tax and transfer mechanisms” as other options for wealthy nations to finance the L&D.
For tax and transfer proposals, Hill said it could involve “levies on international container shipping, financial transactions and airline travel.” Those proceeds “could either be used directly to meet assessed costs via the [L&D] fund or pooled by governments to help purchase tailored insurance products for climate vulnerable nations,” explained Hill.
Bhandari said that by the end of COP28, participants need to have “established the [L&D fund’s] barebone structure.” That includes “identifying constituents of the … funding arrangement.”
Negotiators also need to settle on the L&D fund’s hierarchy, create and publish its mandate, sign MoUs with its “constituents,” establish a secretariat, and set its guidelines. By the end of COP28, the L&D fund also needs to have a board of trustees, broad organizational procedures, and a governance framework.
COP28’s organizers appear determined to make the L&D fund a reality. Sultan Ahmed Al Jaber, the U.A.E.’s special envoy for climate change at COP28, stressed, “COP28 in Dubai … is the place to deliver and operationalize the fund and funding arrangements.
