In the era of climate change, who pays for loss and damage?

Dennis Mombauer

Climate change is affecting human lives, livelihoods, economies, and other human and natural systems across the world. Developing countries such as Sri Lanka are particularly vulnerable to climate change and often have limited resources or ability to prevent the associated impacts, resulting in climate-induced loss and damage.

In the sphere of climate change and the United Nations Framework Convention on Climate Change (UNFCCC), “loss and damage” refers to climate impacts and/or projected risks that go beyond the practical or theoretical limits of adaptation. Climate-induced loss and damage can be economic or non-economic and take many different forms, such as food insecurity; loss of property, income, or livelihoods; impacts on physical, mental, or psychosocial health; loss of life; loss of territory; destruction of homes or infrastructure; loss of productivity (for example, agricultural yields or labour productivity); loss of cultural heritage; involuntary migration or displacement; degradation of ecosystem services; or loss of biodiversity.

The Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) states with very high confidence that limiting global warming to close to 1.5°C “would substantially reduce projected losses and damages related to climate change in human systems and ecosystems, compared to higher warming levels, but cannot eliminate them all.” To avoid the worst impacts, there is a crucial need to reduce further greenhouse gas emissions and enhance adaptation, but also to address the losses and damages that are either taking place already or are locked in due to the current degree of global warming.

Who pays for loss and damage?

In the Paris Agreement, which is the key international treaty on climate change, Parties explicitly recognize “the importance of averting, minimizing, and addressing loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events […].” The guiding principle of “common but differentiated responsibilities” stands at the core of the Paris Agreement and is meant to guide global climate action as well as the individual contributions of almost 200 countries which have adopted and ratified the Agreement. Under this, countries have different obligations due to their unequal resources and capacities, but also in light of historic responsibility and the need for global solidarity in the face of a world-wide challenge.

Developing countries have called for the UNFCCC and its members to establish a loss and damage finance facility (L&DFF), which could catalyse and channel funding from developed countries towards developing countries, who are experiencing severe climate impacts while being the least responsible for the crisis. However, despite complex negotiations and the hard work of many actors, such a facility has not materialized so far. Therefore, the question remains: if there is no L&DFF yet, and if countries across the world are already experiencing significant climate impacts, who bears the costs?

Currently, the costs of climate-induced loss and damage are predominantly borne by the governments of developing countries and by frontline communities themselves. For example, recent research suggested that between 2000-2019, members of the V20 group of vulnerable countries—of which Sri Lanka is a member—have suffered hundreds of billions of USD in climate-induced losses, which amounts to serious reductions of GDP, lost growth and development opportunities, and exacerbated challenges with external debt. In many cases, public funds cover costs through social protection schemes, disaster relief, public insurance—such as Sri Lanka’s universal crop insurance—, or other mechanisms. Impacts that go beyond these safety nets directly affect communities and households, especially the poorest and most vulnerable, who do not have the ability to bounce back and recover, often pushing them below the poverty line and destroying their livelihood sources.

Enhancing support and finance for loss and damage

The current situation is unfair and untenable, as it puts the burden of addressing loss and damage on those who are simultaneously the most vulnerable and least responsible for climate change and its impacts. The UNFCCC L&DFF would be an important step to support them, but in addition, there are other possibilities for mobilizing potential loss and damage finance in parallel to the multilateral negotiation process.

Proposed sources for loss and damage funding include special taxes or levies (for example, on the global aviation industry), multilateral funds, development banks, bilateral funding, debt relief or cancellation, interest-bearing special accounts (such as Bangladesh’s Climate Bridge Fund), premium payments for insurance, premium or capital support, remittances, Special Drawing Rights under the IMF (including through the Resilience and Sustainability Trust), bonds, debt swaps, private sector funding, philanthropies, crowdsourcing, or climate-related litigation.

In concrete terms, there has been increasing attention and activity around the issue of loss and damage recently, for example at the last global climate conference, COP26, which took place in Glasgow, Scotland, at the end of 2021. At COP26 and since then, there have been financial pledges outside the UNFCCC process, including GBP 2 million from Scotland as the first non-party stakeholder, and DKK 100 million (approximately GBP 12 million) from Denmark as the first party stakeholder pledging funding for loss and damage. Furthermore, the finance ministers of V20 member states have created a separate loss and damage funding facility, and there are other initiatives, such as the Global Shield against Climate Risks, which aim to contribute to and enhance the global financial architecture on climate risk and loss and damage finance.

At the next major climate conference, COP27 (the 27th Meeting of the Conference of the Parties to the UNFCCC), which is little more than two weeks away, loss and damage will be high on the agenda for many developing countries and other actors. Issues related to a L&DFF, but also to other forms of support and means of funding will be brought up across multiple workstreams.

Addressing loss and damage is a global challenge and responsibility, and it is important for developing countries to highlight their needs as well as existing delivery mechanisms that could be used to channel funding, once it is available, to those who are impacted the most (for example, public insurance mechanisms such as the one running in Sri Lanka). Providing evidence on loss and damage is a key need, as is the documentation of existing schemes and institutional setups—and there is hope that at COP27 and beyond, this can be turned into concrete commitments towards dedicated finance for loss and damage that will benefit those who need it the most.

This blog post was originally published as a guest column in Daily Financial Times on October 22nd, 2022, and is available here.

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Dennis Mombauer

Dennis Mombauer currently lives in Colombo as a freelance writer and researcher on climate change and education. He focuses on ecosystem-based adaptation and sustainable urban development as well as on autism spectrum disorder in the field of education. Besides articles and research, he has published numerous works of fiction in German and English.