While many thought it was an impossible achievement, at this year’s UN climate negotiations (COP27), countries formally recognised the need for finance to address the loss and damage associated with climate change and agreed to establish a fund for ‘Loss and Damage’.

‘Loss and Damage’ is the name given to policy that supports vulnerable, developing countries manage their loss and damage due to climate change. It acknowledges that the people and countries least responsible for climate change are being affected first and most severely.

The global narrative on Loss and Damage has shifted

The speed at which the debate on Loss and Damage has shifted is remarkable. Finance for Loss and Damage has been a red line for many developed countries since it was first proposed over 30 years ago. Just last year, at COP26 in Glasgow, the Global North opposed the G77+China’s call for a dedicated finance facility for Loss and Damage.

For many vulnerable, developing countries, agreement to establish a fund for Loss and Damage was the litmus test of success at COP27. Recent devastating floods in Pakistan and the prolonged drought in the Horn of Africa, which has fuelled a major food crisis, have increased the visibility of climate-related loss and damage. This added urgency and pressure for countries to deliver on the issue at COP27. Even so, countries did not even agree to include finance for Loss and Damage on the official agenda until days before the negotiations started.  

At the start of COP27 at the World Leaders Summit, almost all country leaders – from both developed and developing countries – spoke to the importance of addressing Loss and Damage. In the first week of negotiations, seven developed countries – Germany, the United Kingdom, Scotland, New Zealand, Belgium, Austria and Canada – showed their solidarity and pledged around US$275 million in finance for Loss and Damage, most of which contributes towards the new Global Shield against Climate Risks initiative, launched by the G7 and Vulnerable 20 Group at COP27.

While activists and civil society groups aligned with developing countries to call for finance for Loss and Damage, it was not until days before COP27 was scheduled to finish that an agreement seemed viable. A key catalyst was the EU acting as a bridge builder by proposing a ‘mosaic’ of funding arrangements that prioritise the most vulnerable.

What countries committed to deliver on finance for Loss and Damage

In a historic first, countries formally acknowledged that existing funding arrangements for Loss and Damage are insufficient and the need for urgent and immediate new, additional, and predicable finance for Loss and Damage to assist developing countries that are particularly vulnerable to climate change. In response, countries agreed to two significant related matters – to establish ‘a fund’ and ‘new funding arrangements’. While these two matters seem to differ only in semantics, they respond to distinct concerns.

First, the decision to establish a fund for Loss and Damage that forms part of the UN climate architecture responds to calls from developing countries to have a dedicated finance mechanism funded by developed countries – who are the largest historical emitters. However, the decision text does not state which countries should contribute and makes no connection between provision of finance and historical emissions.

Second, the decision to establish new funding arrangements acknowledges that a ‘mosaic of solutions’ is needed to address Loss and Damage. Importantly, the new funding arrangements need to provide easy and fast finance for rehabilitation, recovery and reconstruction following climate-related disaster events, and to address impacts from slow-onset events such as sea-level rise – two areas where existing funding arrangements fall short. Additionally, the mosaic approach acknowledges the need to build on existing mechanisms and initiatives – both within and outside of the UN climate architecture. This includes the work of multilateral development banks and initiatives such as the Caribbean Catastrophe Risk Insurance Facility, and new initiatives announced at COP27, such as the UN Secretary General’s ‘Early Warnings for All’ and the Global Shield against Climate Risks.

While details of the fund and new funding arrangements were not decided, countries agreed to operationalise them both at the next UN climate negotiations, COP28 in Dubai. A new transitional committee, made up of country representatives, and the existing Glasgow Dialogue on Loss and Damage have been entrusted to progress discussions over 2023.

Where to next?

While COP27 delivered a breakthrough on finance for Loss and Damage, the real test will be whether countries can agree on the detail – namely, who pays, who receives finance, what types of Loss and Damage interventions will be eligible, and how new and existing funding arrangements can adequately provide the ‘mosaic of solutions’ needed. After decades of sidestepping these discussions, coming to consensus on the detail at COP28 will be no small feat.  

Deciding who pays will be challenging on a number of fronts. Developed countries continue to fall short of their commitment to deliver $100 billion in climate finance annually. On top of this, many developed countries are facing recession, large budget deficits, and cost-of-living crises, all of which contribute to a constraining political environment as well as a narrow focus on economic recovery. Moreover, despite the fact that developed countries like the United States agreed to establish a fund, it is unclear whether they will provide finance – especially considering their longstanding fear that finance for Loss and Damage may be considered acceptance of legal liability.

Calls from some developed and developing countries to widen the base of donors to include developing countries with high cumulative emissions like China and India will also pose new challenges, including the potential to divide the G77+China negotiating bloc. A spokesperson for China has stated that while China has no obligation to provide Loss and Damage funding, it is willing to contribute non-financially. Although it is unclear what a non-financial contribution entails, China stepping up to provide Loss and Damage assistance could further pressurise developed nations and large historical emitters to provide greater assistance.

The COP27 agreement is an opportunity to seriously explore innovative funding options for Loss and Damage, especially if developed countries commit little public finance. For example, developing countries have proposed that funds could be raised by a tax on airline travel or carbon-intensive bunker fuels used by ships. The COP27 agreement also calls for multilateral development banks, such as the World Bank and International Monetary Fund, to consider how they could provide new and innovative funding for Loss and Damage, which will contribute to much needed reform of international financial institutions so that their investment aligns with climate goals.

The Santiago Network on Loss and Damage – a technical assistance body that will be operationalised following COP27 – could support countries to navigate the ‘mosaic’ of funding arrangements. This would include providing guided assistance over the continuum of technical and finance support available – from emergency warning systems to building back in a more climate-resilient way after disasters to planned relocation and managing climate-related health risks.

While COP27 will be remembered for its historic decision on finance for Loss and Damage, this should not overshadow the fact that we are dangerously off-track to meet the Paris Agreement goal of limiting global warming to 1.5 degrees or well below 2 degrees. The world is already seeing the devastating impacts of climate change and is on the threshold of irreversible loss and damage. Urgent collective action to reduce emissions and build vulnerable countries’ climate resilience is critical to preventing catastrophic loss and damage in the future. Vulnerable communities at the forefront of the climate crisis are relying on the global community to take action.

The author would like to thank Elizabeth Robinson, Timo Leiter, Declan Conway and Alice Bian for helpful review comments.  

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