COP27 makes history: Parties agree to set up fund for climate loss and damages

Clarity on the financing mechanisms, avenues and responsibilities to be etched out over the next year, but window opened to expand donor base beyond developed countries

Working overnight, the conference of parties (COP27) of 134 countries made history on African soil when they decided to establish a “funding arrangement” for the loss and damage caused by climate change. The Global North agreed, in principle, to set up a separate loss and damage fund for the Global South. The demand for a fund was raised in the run-up to COP27 by several developing and vulnerable countries after a year of brutal climate impacts worsened financial conditions and indebtedness across the world. 

Link to 1.5°C: ‘Rich continue to colonise carbon budget of the poor’

The decision adopted in the early hours of Sunday links the 1.5°C warming limit as “essential to limiting future loss and damage”, raising the question of equity, a word completely missing from the document. 

The issue of how and where such warming limits should be placed in any text on the matter was an issue of contention that persisted through two weeks of fraught negotiations following the adoption of the agenda for the conference. Disagreements prominently included the fixing of responsibilities for financing the fund, the channels that would be used for disbursement and how beneficiaries would be identified.

As the deadlock showed no signs of loosening in the second week, a flurry of draft proposals were submitted by groups, including the G77+China, the Environment Integrity Group and the EU to the UNFCCC Secretariat. The EU proposal, in particular, created waves around Sharm el Sheikh as it linked the L&D fund to global emissions peaking—a red line for many developing countries that are yet to achieve their developmental objectives and claim a fair share of the remaining carbon budget in order to meet them. Parallelly, with no resolution in sight, ministers from Chile and Germany put together an alternate text that sought to crystallise contentious issues into three separate options. 

While some headway was made with this version, an agreement was still not in sight. This is when a new proposal endorsed by members of negotiating blocs the Umbrella Group and the EIG, which borrowed elements from all proposals that had been submitted before was circulated among parties. This was the proposal that the COP Presidency finally  borrowed heavily from in order to break the deadlock and force an agreement. The link with 1.5°C without an explicit mention of equity can be viewed as an attempt by the Global North to shift the burden of finance and climate action to developing countries, who have historically had a miniscule share of the emissions that are primarily responsible for global warming. 

Fund for “particularly vulnerable”

The adopted L&D fund now refers to recipients as developing countries that are “particularly vulnerable” to climate change.  This is a departure from the draft decision that kept open the possibility for all developing countries to access the fund. The wording change is worrisome because it is hard to define which countries are “particularly vulnerable”. All countries are particularly vulnerable, but the wording is vague enough to work around. The EU and the US initially rejected the demand for a new fund arguing that existing funds, including humanitarian aid, should be used. Then the EU demanded that China and India be excluded, which was seen as an attempt to divide the developing countries. 

The EU and the US also wanted to expand the list of countries contributing to loss & damage finance to include high-income developing countries such as China and Saudi Arabia. While this ultimately did not make the final cut, the text does contain important language around reforms that shall be pursued at international development banks the IMF and World Bank early next year. 

Parties decided to set up the Santiago Network, which will provide technical assistance in averting, minimising and addressing loss and damage.

Who pays for the fund? 

The proposal acknowledges “many institutions and stakeholders” involved in financing and welcomes the EU’s Global Shield initiative. Developing countries see the Global Shield as a distraction that diverts resources away from loss and damage. An estimated three-fourth of “loss and damage” funds so far are for the Global Shield. Experts see them as Global North countries subsidising northern insurance corporations in the name of loss and damage finance. By 2050, the economic costs of loss and damage could exceed $1 trillion annually. UNEP estimates adaptation costs between $280-570 billion dollars by 2050 (in 2012 dollar value) for developing countries, for a temperature scenario of about 2°C degrees. 

Without identifying who exactly will pay, the proposal seeks to mobilise new and additional resources, including sources, “under and outside the Convention and the Paris Agreement”. The proposal seeks to expand sources of funding to “a wide variety of sources”, as a window to include developing countries as funders. The proposal seeks “innovative sources”  which could mean taxes on fossil fuels, aviation or shipping, but the proposal also “urges” private sources to provide support, which comes in the form of debt financing, allowing the private sector to profit from the debt of developing countries.

The process of operationalisation 

The proposal is seen as a political signal to restore broken trust, but a lot depends upon how it is operationalised next year. It will be subject to consensus from the Transition Committee. The 24-member panel (10 from developed countries and 14 developing countries) will hold at least three meetings per year starting next year. The panel is tasked with the crucial work to decide who requires funding and what will be the source of that funding. The committee has the tough task to actually identify “vulnerable” recipients of funds and new donor countries, other than the rich countries and report to COP28. 

At present, the fund is only assured, but the quantum of finance and sources are yet to be determined. Any finance that exists at the moment to address loss and damage in vulnerable nations exists outside the UNFCCC process and is woefully inadequate relative to expense sheets that seem to be rapidly expanding year after year as impacts of climate change worsen, particularly for those who have contributed the least to global warming.

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