Loss and Damage finance in the climate negotiations

The impacts of climate change are wreaking destruction across the world, causing loss and damage that adversely affects livelihoods, human health, ecosystems and cultural heritage. Many of the countries and communities experiencing severe loss and damage have contributed little to human-induced climate change, and typically have low technical and financial capacity to address loss and damage – raising the critical question of how their financing needs should be met.

The provision and mobilization of what is termed ‘Loss and Damage’ finance is a key issue in the UN climate negotiations. While progress has been made in recent years, the topic remains contentious, emotive and complex. Drawing on 26 closed-door interviews with representatives from Least Developed Countries, Small Island Developing States, emerging economies and developed countries, this research paper aims to enhance understanding of different countries’ perspectives on Loss and Damage finance, as well as identify pragmatic and politically realistic steps that could be taken in the near term to start building a shared vision among governments on a way forward.

The paper shows that Loss and Damage is recognized as an increasingly important and urgent issue by developing and developed countries alike. Many developing countries consider loss and damage to be a ‘life or death issue’ and several consider the financing of policies and plans addressing the problem to be the ‘third pillar’ of climate action under the Paris Agreement, alongside climate change mitigation and adaptation. Many developing-country governments stress the scale of loss and damage which they currently suffer and are expected to suffer in the future, as well as the urgent need for financial support. Many developed-country interviewees express willingness in principle to help address loss and damage-related needs. In September 2022, Denmark became the first UN member state to pledge dedicated Loss and Damage finance, and members of the G7 are collaborating with the Vulnerable Group of Twenty (V20) of climate-vulnerable nations to launch a new initiative at COP27 to support populations affected by loss and damage.

Numerous challenges continue to impede meaningful progress on the Loss and Damage agenda, however. These challenges include confusion around concepts; diverging views on the most appropriate funding arrangements; difficulties in achieving sufficient scale in funding; and a lingering fear among some developed countries that they risk becoming legally liable to provide vast sums in financial compensation.

Given the challenges and differences in views, it is likely that the most realistic pathway forward in the near term will be to further assess how existing organizations in the climate, development and humanitarian spaces can be reformed to improve their responses to loss and damage, and then for governments to pursue such reforms. Clarifying the mandate of the Glasgow Dialogue process (itself a political outcome of COP26) and putting Loss and Damage finance on the formal COP negotiation agendas – starting at COP27, where the topic is on the provisional agenda, which needs to be adopted at the beginning of the conference – would be important for fostering productive discussions, building trust and enabling formal decision-making.

Developing more detailed proposals on what form a dedicated ‘Loss and Damage Finance Facility’ could take, what types of activity it could support, and how it could be funded – while bearing in mind the concerns identified in this paper – may help build support for such a facility. The challenge of bringing some developed countries on board should not, however, be underestimated, especially if the preferred shape of the facility were to take the form of a new standalone fund under the United Nations Framework Convention on Climate Change (UNFCCC). It is critical all Parties – including developed-country Parties – bring concrete ideas and proposals on possible Loss and Damage funding arrangements to the table.

The provision of ‘new and additional’ finance explicitly aimed at addressing Loss and Damage from developed countries could, in addition to providing some relief to those experiencing loss and damage, help elevate the profile of the topic in the climate talks, make Loss and Damage finance a less taboo subject, and instil positive momentum into the discussions. However, in the current political and economic context, the amounts involved are likely to be relatively small. There is thus a need to think creatively about how to reach scale in funding.

In parallel with the discussions taking place within the UNFCCC, governments can develop national and regional loss and damage disbursement mechanisms which could receive support from local and international partners. Governments may also consider integrating loss and damage considerations in national development and climate plans – and conducting loss and damage needs assessments – to inform planning and investment processes, and to increase awareness among donor governments and organizations of what the concrete needs are.

Likewise, by sharing case studies of Loss and Damage finance projects, and mandating the Intergovernmental Panel on Climate Change (IPCC) to produce a ‘special report’ – similar to those it has published on other climate topics – on loss and damage specifically, governments can help to clarify the important boundaries between ‘averting’, ‘minimizing’ and ‘addressing’ loss and damage and convey which responses have proved effective to date.

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Loss and Damage finance in the climate negotiations

Anna Åberg

Nina Jeffs

Summary