Loss and Damage Fund - A Complex area of Climate Justice

Working Group II of the IPCC (2022) in its 6th assessment report has concluded that, with every fractional increase in global temperature, the severity and frequency of Loss and Damage(L&D) events will only increase; indicating that limiting global temperature rise to 1.5?C has become even more important.

L&D events disrupt local, regional, and international supply chains, they destroy infrastructure, houses, assets, factories, and lives. People are displaced or forced to migrate, land and ecosystems are lost or become unproductive, schools and health facilities are damaged or shut down, and cultural heritage and social ties are destroyed in the chaos that follows disasters. They are also responsible for non-economic losses to people and nature, which are hard to even estimate such as loss of culture, and productivity decrease due to trauma. Research estimates that L&D costs for developing nations, beyond adaptation costs, would reach around US$290–580 billion by 2030 and US$1–1.8 trillion by 2050.

There have been several discussions and negotiations on climate change-induced L&D but for the first time in 30 years, developed countries will step up to finance the recovery and rebuilding initiatives of under-developed and developing countries that have faced the wrath of climate disasters such as extreme weather events like hurricanes and flooding; also slow-onset events like rising temperatures, ocean acidification, biodiversity loss. This is a turning point: a hard-won deal that acknowledges the vast inequities of the climate crisis and an important milestone in climate justice for small and vulnerable nations.

Defining Loss and Damage

The Paris Agreement in Article 8 emphasizes “averting, minimizing and addressing loss and damage”, which is regarded by researchers as the “Third Pillar of climate action”. However, there is no definition of the term in any official UN publications; one of the major tasks for the Transitioning Committee to take up before COP28. The Warsaw International Mechanism in 2016 described L&D as “the adverse effects of climate variability and climate change that occur despite global mitigation and local adaptation efforts”. Warner & van der Geest (2013), well-known researchers on the topic, define L&D as being “…beyond peoples’ capacity to cope and adapt to climate change impacts.”

There is increasing consensus amongst researchers that an LDF framework should call for historical polluters to be held liable and providing “compensatory justice” to nations and communities having meagre historical climate change contributions, but are already experiencing severe effects of actions of the developed world. Major historical polluters, who are the root cause of these events, however, have continuously disagreed with this ideology. AlJazeera (2022) reported that the USA and EU were initially not in favor of the COP27 decision on L&D, most likely fearing it might spiral into a liability issue. They later supported on several conditions, one of which is indicative in the decision paper of the COP27 having no mention at all of the words “liability” and “compensation”. It is thus of paramount importance to the UNFCCC to come up with an all-encompassing, universally acceptable definition of L&D.?

Prioritizing Fund Allocation

UNFCCC will have to prioritize the victims and agree on whether these funds get distributed to vulnerable countries, communities, and/or local governments within countries. ?Historically, climate finance has always operationalized at snail's pace and has fallen short of the actual estimates required; it is highly likely that the same trend would apply to LDF as well. The Green Climate Fund, for instance, took four years to raise the first round of funding after its establishment in 2010. As the impacts of climate change are being accelerated, vulnerable countries need L&D compensation NOW. Rapid and flexible disbursement will be key in helping nations recover from L&D shock; if not, the LDF risks losing its relevance in climate finance. Hence, it is critical that these limited resources are allocated to the countries and communities most in need; in a swift, agile, fair, and equitable manner.

The starting point could be Least Developed Countries (LDCs), Small Island Nations (SINs), the Vulnerable 20 alliance(V20). An indicative list of developing nations having “specific needs and concerns” in facing climate-change-induced impacts, is also provided in Articles 4.8 and 4.9 of the UNFCCC. Given the short span of time to come up with a completely new framework, The TC could also draw learnings from existing fund allocation mechanisms such as the CPIA criteria used by the World Bank in International Development Agency fund allocations, or the 'STAR' Rating system adopted by the Global Environment Facility. Both these funds take a need-based (vulnerability and financial conditions) and performance-based (ability to utilize the funds appropriately) evaluation to decide the order of priority in fund allocation. Another relatively successfully implemented fund that could be used as a guiding light is the European Union Solidarity Fund.

Due to a shorter timeframe, further prioritizing from the above-mentioned groups of nations given the probable scarce funding is essential. This would require highly technical and robust analysis and the following 4 factors could assist in prioritizing allocation-

A)??Vulnerability

There is vast literature available to back up that the vulnerability principle is the most important criterion in deciding LDF allocation. The UNFCCC defines it as “the degree to which a system is susceptible to, or unable to cope with, adverse effects of climate change, including climate variability and extremes". It is the probability of occurrence, exposure, sensitivity, and adaptive capacity to/of a hazard. However it is worth noting that a vulnerable nation might not necessarily be the poorest. Many small island nations are relatively middle- and high-income nations (for example Mauritius and Singapore). These might still be eligible for funding under the principle of vulnerability as they are prone to higher risks of territorial loss due to sea-level rise.

Empirical analysis has also shown that in the past, the use of vulnerability as the sole criterion to ensure equity in the allocation of the Adaptation fund has had several problems. This could be overcome if members agree on a vulnerability ranking based on scientific evidence and indices. One such index is the Commonwealth Universal Vulnerability Index which has outlined various physical, socio-political, and economical vulnerability indices and calls for a global consensus on measuring vulnerability accurately. While it could still serve as a central qualifying and/or screening criterion, the extent of using vulnerability as a deciding factor will have to be agreed upon in COP28.

B)???Economic Impact

The Impact on the GDP of a nation due to L&D could be used as another factor to determine economic losses and assign priority. For example, the EU Solidarity Fund considers an event to be eligible for LDF if damages exceed 0.6% of gross national income. However, this could still hinder urgent deployment and mere estimates of impact will have to be considered to swiftly deploy funds. Thus, these assessments will need to be done by third-party audit organizations which would have to be approved by the UNFCCC, adding to the bureaucracy of operationalizing the fund.

C)???Attribution

The attribution of a weather event to be caused by climate change or not is another contested issue. However, science has evolved enough to take climate-change impacts into consideration for example, in the increased frequency of droughts in Africa; or floods and hurricanes in South Asia. If the likelihood of an extreme weather event being aggravated by climate change is evident, a proportion of the cost should be able to be attributed to LDF and should be a deciding factor in allocating funds and drawing lines between how much should be covered by LDF and disaster relief. Having said that, it is still an evolving area of research and would have to be dealt with sensitively.

D)??Additionality

On the ground, there is a very thin line between LDF and other concepts like adaptation funds, disaster response, humanitarian, and development aid, etc. These technical challenges should be solved by the Santiago Network to ensure the additionality of all new L&D finance. Thus, all existing funding/aid to a claimant nation should be thoroughly analyzed and overlaps of impact should be taken into account. The allocation should only be done when net additionality of impact is expected to be brought in by the proposed LDF.

Other factors could be the transparency index of the nation and urgency in terms of how urgently the fund is required (Immediate one-time support or long-term sustained support).

Distribution

The Scottish Government hosted an international conference in October 2022, before the COP27, to chart out best practices and explore innovative finance mobilization to address L&D. One of the aspects stressed was that the processes for assessing needs and distribution should be “inclusive, egalitarian, and suitable” for the affected local communities. Community members should be given the opportunity to take part in risk assessment and need-based planning activities, especially for the most vulnerable. LDF should be distributed based on the actual need, independent of the interests and preferences of contributing nations.

It is also recommended that direct transfer of aid to government agencies must be avoided and civil service organizations and NGOs should be identified and licensed for the funds to be utilized, to avoid corruption to large extents; ensuring that LDF reaches the most vulnerable. Several nations have set up national funds to deal with L&D brought on by catastrophes. These could be crucial components of the final framework for distributing LDF.

Concluding remarks

Will decisions on the use of funds be left to countries to decide? How would they align with other international funding? How well the national funds can be adapted to attract international investment and coordinated with the UNFCCC's goals? Who will pay and how much? Will Oil and Gas majors be included in financing? These are all complex questions that would need to be answered before operationalizing the fund. It is a landmark deal worth all the attention and celebration, but how it unfurls is something I am keen on seeing.

Sujay Hammannavar

MSc Environmental Policy/Technology