Vulnerable nations want a formal loss-and-damage financing mechanism, but the Global North needs to let go of its fear of legal liabilities and litigation for that to happen
The 27th UNFCCC Conference of the Parties (COP27) is set to kick off at a time of global churn. The meeting, being held in Egypt this year, comes with a backdrop of raging geopolitical and economic uncertainties. To make matters worse, the impacts of climate change have been felt relentlessly through the year, as reports of extensive damage and loss of life have flooded in from around the globe due to extreme weather. As scientists warn of fast approaching “points of no return” in the earth system due to climate change, the current context has undoubtedly sharpened the pitch for a separate redressal mechanism to resolve the “Loss and Damage” bottleneck at COP27.
According to the IPCC, Loss and damage (L&D) refers to “the impacts of climate change that cannot, or will not, be adapted.” It is also now well established in IPCC’s reports as well as independent studies that the impacts of climate change are worst felt in geographies and communities that are least responsible for emission increases. Primarily located in least developed and developing regions of the world, the capacity to absorb and adapt to these impacts is also limited. The misalignment of cause and effect has for a long time lent itself to a demand from the most vulnerable countries for a redressal mechanism, including a separate financing facility, to deal with L&D. And the case is becoming more compelling every year. Will COP27 be the tipping point as far as these demands are concerned?
Saleemul Haq, director of the International Centre for Climate Change and Development in Bangladesh, certainly thinks so. “COP27 in Egypt will be the COP1 of this new era,” he said. While the claim for such a redressal mechanism is firmly protected by the principles enshrined in the overarching UNFCCC agreement, the path to ensuring this will likely have to navigate roadblocks posed by political, economic and legal realities.
Loss & damage is ‘not mitigation, adaptation’
Paying for climate loss is not the same as financing for mitigation or adaptation. Mitigation involves efforts to reduce emissions, for example, by replacing coal with solar power to reduce CO2 emissions. Meanwhile, adaptation finance refers to money meant to increase the capacity to prepare for and absorb current and impending impacts of climate change. But what about the havoc wreaked by the impacts of climate change anyway—which tend to disproportionately affect those that are least protected from these impacts? This is where the label of Loss and Damage comes in. It could be said that L&D comes into play when mitigation and adaptation miss the mark.
“Now it’s no longer something we are preparing for or trying to prevent. But it’s something we’re going to have to deal with,” Haq warns. Mitigating climate change and adapting to its consequences will remain critical, but loss and damage makes clear there’s an additional requirement that can’t be handled by disaster relief, humanitarian assistance or insurance. It is a distinct issue that needs distinct money, vulnerable countries argue.
The clamour around L&D is not exactly fresh. During negotiations to finalise the Paris Agreement in 2015, developing countries succeeded in demarcating L&D as separate from adaptation in Article 8 of the agreement text. The victory, however, was only partial, as developed nations managed to get their own clause inserted stating that the article does not provide basis for any liability of compensation.
The Warsaw International Mechanism (WIM) for loss and damage, adopted in 2013, remained a technical body without a mandate for any direct intervention or support about climate change associated losses and damages once they started to occur. At COP25 in Madrid in 2019, developing countries pressed for a new entity to support vulnerable countries dealing with climate-related losses. Resultant from this pressure, in 2019, the Santiago Network on Loss and Damage (SNLD) was born as a facility to provide technical assistance but it is yet to be operationalised, for lack of clarity on funding structures among other reasons.
Not slated to be on the agenda originally, L&D was added later to the provisional agenda at the request of the Group of 77 and China (G77+China)—the negotiating bloc of developing countries. Although an important bit of acknowledgement of the issue, the provisional agenda status means that L&D would be up for formal discussion only if there is absolute consensus among the 193 parties to the Paris Agreement. “If countries fail to agree to this agenda item, proceedings at the climate summit could derail right from the start,” write climate policy researchers at the World Resources Institute.
Acknowledgment and denial
In Glasgow, during last year’s COP26, developing countries demanded the setting up of a financing mechanism for loss and damage. The proposal for such a mechanism was removed from the final version of the text. Any mention of a separate funding facility was replaced with the provision of a three year dialogue named the “Glasgow Dialogue” as was proposed by developed countries, led by the US. This dialogue, as the text states, will be, “between Parties, relevant organisations and stakeholders to discuss the arrangements for the funding of activities to avert, minimise and address loss and damage associated with the adverse impacts of climate change”.
Given a chance, developing nations will look to build on last year’s momentum. According to Haq, if the agenda item is adopted, the best outcome would be an agreement to establish a Finance Facility for Loss and Damage. COP27 could either be a beacon of solidarity, in which developed countries recognise the legitimacy of L&D demands, or it could further strain the fragile fabric of trust holding collaborative global climate action together. At the Ministerial Meeting of the Like Minded Developing Countries (LMDC) held in October, India’s environment minister Bhupendra Yadav urged LMDCs to prepare a plan of action in respect of adaptation and loss and damage.
One big roadblock in L&D discussions are fears, primarily in governments of the Global North, of legal liabilities and a deluge of litigation in case such a redressal mechanism offers legal footing for such cases. CarbonCopy reported on the prospects and fears of this hampering progress in L&D discussions in December last year.
Rich countries divert humanitarian aid to meet climate fund targets
According to a 2018 study, total damages in developing countries could reach between $290 billion and $580 billion by 2030. By mid-century, the costs are likely to balloon to between 1 and 1.8 trillion US$. Africa is set to lose 5% to 15% of its gross domestic product annually to climate impacts, according to African Development Bank Group estimates. The report says a group of 55 climate-vulnerable nations have lost a fifth of their wealth over the past 20 years due to climate-fueled disasters. Some countries have begun to price loss and damage into their climate targets. The small Pacific island nation of Vanuatu, with its negligible contribution to global greenhouse gas emissions (0.0016%), is calling for nearly $180 million for loss-and-damage compensation and has grounded its new climate targets on support from developing countries.
In the absence of a separate funding mechanism, funding for L&D is currently collapsed under humanitarian aid, and have been found to divert budgets meant for education and poverty reduction toward their climate finance pledges. Vulnerable countries say existing methods have failed to stop warming and its climate impacts while emissions continue to rise, falling far short of the pledges made at Paris in 2015.
Stark message: ‘Won’t pay trillions of dollars of the debt’
The issue of who pays for losses incurred due to climate change impacts and how is evidently coming to a head. Vulnerable nations want a formal loss-and-damage financing mechanism set up through the UN process to give it legitimacy and account for developing countries’ needs and priorities. The Alliance of Small Island States is seeking to set up a new, stand-alone fund for loss and damage before talks start in Egypt.
A stark message was delivered to major lenders recently amid annual meetings of the World Bank and International Monetary Fund by Mohamed Nasheed, former president of the Maldives and an ambassador for the Vulnerable 20 Group, or V20, who warned that those countries could stop payments on half a trillion dollars in debt if lenders don’t embark on reforms to the global financial architecture.
“We are living not just on borrowed money but on borrowed time, and that time is running out,” Nasheed said at a meeting of V20 finance ministers, while the group called for sweeping reforms to lending, climate finance and insurance facilities, as well as support of green growth plans they’re developing.
Debt-relief measures, linked to climate action, thus far have reportedly been a matter of frustration among vulnerable nations. While demands for support to contend with climate impacts have been clear, they have been met by “climate prosperity offers” which are effectively procurement plans for a cleaner economy, explained Sara Jane Ahmed, a finance adviser to the V20 to the ClimateWire.
The World Bank and IMF are also under pressure to overhaul their lending practices to get more money flowing to countries on the front lines of the climate crisis. Climatewire reported that IMF Managing Director Kristalina Georgieva thanked Nasheed, while saying that the IMF is bringing climate change into its operations through a new trust that aims to provide low-interest, long-term financing to developing countries. She was also receptive to the idea of swapping country debt for investments in climate resilience.
Insurance as the last resort?
The strong demands for financing facilities to help tackle mounting losses in vulnerable geographies seem to have begun paying some dividends outside the ambit of the UNFCCC. Developed economies of the G7 recently acknowledged damages to developing countries. The V20 and G7 came to an agreement on a facility for climate risk that has been named the Global Shield. The facility has a stated objective to improve insurance and social protection schemes to enable better response to disasters.
Experts explain though that climate risk insurance could in effect amount to be a decoy to shift the costs for L&D away from the Global North and onto the victims. The report finds that insurance has a limited role in addressing loss and damage, and it is ill-equipped to cover slow onset of events. Privatisation of social safety nets, via insurance, places the onus to pay premiums on the most vulnerable, which is less effective than a social safety net provided by the government where risks can be shared fairly across society.
According to the Loss and Damage Collaboration, climate risk insurance is not flexible: if floods wash away farmers’ crops that are insured against drought, there is no pay out. By comparison, social safety nets are found to be more flexible and fairer, adding that the risk premium (profit + cost of business) makes insurance punishing. In rich countries such as the US, state and larger local governments are more likely to self-insure.
On the flipside, there is also the risk of climate disasters crushing the insurance industry. In France, weather-related insurance claims are forecast to increase 5x in most affected regions, in Australia 1 in 7 properties in at-risk regions are uninsurable by 2030. In California wildfires, one insurer losing $500 million. The report says the insurance industry is looking for new markets with climate insurance at the same time contributing to the climate crisis by backing the fossil fuel industry with insurance coverage & investments.
Further, the small loss and damage finance provided by the G7 as part of the InsuResilience Global Partnership, has a significant focus on climate insurance 80% of first three years of payments went to insurance schemes; its target indicators are all insurance focused. The report asks, will the Global Shield launched by Germany & the G7 follow InsuResilience & focus on insurance, or will it have a more inclusive approach with vulnerable country driven solutions that are more equitable?
The V20-G7 partnership could also be a double-edged sword as far as L&D at the COP goes. While it does indicate some progress in the willingness among developed nations to engage with the L&D question, it could also end up undermining discussions of redressal mechanisms within the UNFCCC frameworks. If that happens, it will deal a big blow to demands for an inclusive and equitable process to be applied across developing and vulnerable geographies and any L&D finance would have to come through structured (and likely conditional) deals to exclusive parties.
Measuring the incalculable
The loss and damage of cars and bridges can be compensated, but non-economic loss and damage (NELD) such as loss of knowledge systems or extinction of species which can not be alleviated or repaired pose a particularly tricky challenge, says the Loss & Damage (L&D) policy brief. The brief adds that NELD occurs in almost all cases of L&D and impacts individuals, society, and the environment.
NELD to Indigenous and local knowledge in the Pacific Islands region is increasingly concerning, the paper says. As study participants explained: “The changing climate conditions will affect the reliability of some of the local knowledge which can lead to their disappearance as locals will find them to be useless …Entire ways of life collapse when the material manifestations of deeply grounded Indigenous knowledge, science, and philosophy are deleted by the effects of climate change”.
Heatwaves in March and April in India and Pakistan were 30 times more likely due to climate change. According to the report, the true ecosystem cost cannot be known without reliable data. However, direct deaths, massive crop losses, increased food insecurity, and the growing recognition that these temperatures are likely to be yearly occurrences are causing a range of NELD.
In the Global North, Germany, Belgium, the Netherlands and Luxembourg faced massive floods in July 2021 with increased intensity. Full NELD impact hasn’t been assessed, but 200 people died and many people lost their homes and belongings, resulting in a range of intangible and emotional losses. The report says the ground floor residents of a German care home were drowned, “demonstrating that people experience NELD differently based on intersectional marginalisation.”
The report points out that people who experience NELD are not a homogeneous group, but they experience disproportionately depending upon the intersectionalities of race, class, gender factors and structural determinants that create uneven vulnerability to climate change in different contexts. The UNFCCC proposed four different ways to measure NELD: economic valuation, multi-criteria decision analysis, risk indices, and qualitative and semi-quantitative assessments.
The battle of priorities
These tangible, but difficult-to-quantify losses further complicate the negotiation landscape around L&D. Egypt is hosting COP27 in challenging times. The Presidency wants to focus on what countries have committed and delivered so far, and securing the means for implementation of current and future commitments. While the current poly-crises confronting the world have galvanised L&D demands from the Global South, it has also condensed a varying set of priorities among nations. L&D will likely have to jostle with energy and food security, economic uncertainty and tight monetary conditions, and overcome unfavourable odds of making it to the final agenda, in order to carve out some progress under the UNFCCC and Paris Agreement frameworks.
That COP27 will resolve the many standing issues in order to create a robust L&D redressal mechanism is unlikely. The conference though certainly offers a point of convergence for demands to be articulated and amplified. The magnitude of recent losses and its implications on security and economy has forced the Global North to confront L&D as a significant threat. Now there is room for negotiation. If the moment can be capitalised and used to coalesce a sustained demand, it will become nearly impossible to ignore calls for redressal and funding mechanisms in the years to come. In some ways, this itself would be a historic turning point.