The historic loss and damage fund

What enabled the agreement of a fund for loss and damage at COP27?

Expert comment Published 1 February 2023 Updated 3 February 2023 4 minute READ

The 2022 UN climate change conference (COP27) will be remembered in history for agreeing a fund for loss and damage but, for many, it was unexpected.

More than three decades have passed since the Alliance of Small Island States (AOSIS) first called for the creation of an international finance mechanism ‘to compensate the most vulnerable small island and low-lying coastal developing countries for loss and damage arising from sea level rise’. This request went unheeded, as did the call at COP26 in 2021 from the Group of 77 (G77) plus China, to establish a loss and damage ‘financing facility’.

Opposition towards a facility, or fund, continued after COP26. Many developed-country representatives said they did not see how a new fund would add value and that it would take a long time to operationalize. Some were also concerned about becoming legally obligated to provide compensation for loss and damage to climate-vulnerable developing countries.

Instead, the preferred option for most developed countries was to strengthen existing organizations to improve their response to loss and damage.

So what enabled the breakthrough and what does it mean for the Loss and Damage finance agenda in the year ahead?

Laying out the groundwork

When speaking to developed and developing-country negotiators about what enabled the agreement on the fund, the importance of the work undertaken before COP27 was highlighted.

The co-facilitators on Loss and Damage finance, for example, were appointed – and therefore could begin their work – well ahead of the conference. Furthermore, the incoming COP27 presidency held several informal consultations with delegations in the second half of 2022. Such efforts helped increase understanding among countries ahead of the conference.

One developing-country negotiator referred to COP26 as a ‘key political moment’ in terms of building momentum around the agenda for Loss and Damage finance and also highlighted that the intersessional meetings in Bonn in June 2022 had enabled technical discussions on gaps in the current financing architecture which increased pressure on developed countries.

Worsening climate change impacts globally, growing scientific evidence in relation to loss and damage and the fact that the chair of the G77 – Pakistan – had experienced catastrophic floods likely also contributed to enabling the agreement.

Immense pressure

The fact that developing countries had a united position on the question of the fund, and that they negotiated jointly under the grouping of the G77 and China, was critical in persuading developed countries to shift their stance according to both developed and developing-country negotiators.

From the outset of COP27, developing countries made it clear that the establishment of the fund was a ‘make-or-break’ issue for them. The AOSIS had, over the course of 2022, played an important role in driving the agenda forward and in rallying other G77 members around the shared position.

A developed-country negotiator described the discussions in the first week of COP27 as ‘constructive’ but said the dynamic changed  – and that pressure to agree to a fund increased substantially – when deliberations were elevated from the technical to the ministerial level.

The G77 and China’s calls for a fund were widely supported by civil society and the media which contributed to building the narrative that the fund was the litmus test for COP27. This put immense pressure on developed countries which played a key part in getting the deal done.

Turning point

Well into the second week of the conference, many developed-countries – including the US, the EU and the UK continued to oppose the creation of a fund at COP27. Instead, they advocated for there to be a COP27 decision to launch a process to identify appropriate funding solutions with a decision on an outcome at a later stage.  

However, late in the evening on what was scheduled to be the penultimate day of the conference, the EU changed its position, announcing it could agree to a fund at COP27 under certain conditions, which included making progress on the COP27 mitigation agenda as well as ensuring the new fund was targeted at the most vulnerable countries and open to receiving support from a broad range of donors.

This announcement – which many negotiators said came as a ‘complete surprise’ – shifted the politics on the question of the fund with one developed-country negotiator referring to it as the ‘turning point’ in the negotiations on Loss and Damage finance. 

In the end, not all of the EU’s conditions were met, but once support for a fund had been announced there was no going back, one developing-country negotiator commented.

Risk of collapse

Ultimately, it appears that willingness to reach an agreement – rather than a change in thinking regarding the usefulness of a fund – is what made many developed countries change their positions.

One developed-country negotiator said that the discussions on Loss and Damage finance were ‘going nowhere’ and there was a significant risk there would be no COP27 agreement on Loss and Damage finance nor on the Mitigation Work Programme or the cover decision.

The shift in position of their negotiating party came about to unblock the stalemate, according to the negotiator, who acknowledged they still do not consider a new fund to be an ‘optimal’ solution.

Scepticism or hesitancy regarding the fund was echoed by other developed-country negotiators.

One negotiator from a developing country said they perceived an increased willingness at COP27 from developed countries to listen to developing countries’ demands and concerns. Indeed, while developed countries remained sceptical about the value of a fund, they agreed because it was important for the developing world.

Questions remain                                                         

The agreement to establish a fund is a diplomatic triumph for developing countries but no party has gotten what they have wanted completely and the decision text is carefully framed to take both developing- and developed-country priorities into account.

The fund is, for example, part of a ‘mosaic’ of Loss and Damage funding arrangements, which is an important priority for developed countries. Moreover, the G77 plus China were advocating for a fund under the UN Framework Convention on Climate Change (UNFCCC), but it remains unclear whether the new institution will operate within or outside the remit of the convention. This is likely to be a sticking point in the discussions ahead.

There are several other fundamental issues that remain to be worked out.

One is the question of eligibility. At COP27, the G77 plus China advocated for a fund open to all developing countries, while developed countries pushed for a more targeted approach. The final decision states that the funding arrangements are to assist ‘developing countries that are particularly vulnerable’ to climate change impacts in responding to loss and damage. Which countries this terminology encompasses is yet to be determined.

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‘Who will pay?’ is another key question. Developed countries argue that the base of donors contributing finance needs to expand to account for emerging economies’ growing share of global emissions and increasing economic strength. Discussions on this topic are likely to be contentious. At COP27, several countries also expressed an interest in exploring ‘innovative sources’ of finance, but there is no consensus on what such solutions might look like.

Finally, what type of activity will the fund support? A developed-country negotiator highlighted that there are a range of different views within the G77 on what the fund should cover and that the institution cannot cater to all needs. They underscored that it is critical to assess what existing instruments can deliver before determining what gap the new fund should fill.

Challenging discussions await as a ‘transitional committee’ has been tasked with analysing these types of questions and with making recommendations to parties ahead of COP28.

The year ahead

Loss and Damage finance was the defining issue for COP27. A confluence of factors – including extensive preparation, immense pressure from the civil society and the media, developing countries speaking with one voice, a willingness from developed countries to ‘listen’ and strike a deal as well as the EU’s shift in position – lay behind the unlikely decision to create a Loss and Damage fund.

How the fund and other Loss and Damage funding arrangements are to be operationalized is yet to be worked out, but one thing is clear, it will continue to be a key part of the international climate agenda in 2023.