Summary

What was Decided at COP27?

Although it has long been a priority for developing countries, real progress in addressing loss and damage was only achieved at COP27 in 2022.¹ In its final moments, parties agreed to establish “new funding arrangements for assisting developing countries that are particularly vulnerable to the adverse effects of climate change”, including a dedicated fund for responding to loss and damage. A Loss and Damage Transitional Committee was also established as a coordinating mechanism, with a tight one-year mandate to make recommendations on operationalising these measures for consideration and adoption at COP28.

The decision text refers to both “new funding arrangements” (which relates to improving existing sources of finance for loss and damage) and a new fund, since these were the priorities of developed and developing countries respectively. Many developed countries were hesitant to further fragment the already extensive climate finance landscape with the introduction of a new fund. They expressed a preference for augmenting existing mechanisms, such as regional insurance pools, adaptation finance, finance for disaster risk management, humanitarian aid and financial stability support.² Frustrated with the shortcomings of these instruments, developing countries wanted to see a wholly dedicated fund that assists with loss and damage. This call was strongly advocated by Egypt and echoed by the Alliance of Small Island Nation States, many of whom are facing serious threats from rising sea levels.³ This fund would include financial compensation for extreme weather events and slow onset events, with some countries advocating for the financing of slow onset as well as more complex quantifications of loss, such as the loss of heritage and culture.⁴ In the end, parties agreed to pursue both pathways, with a view to operationalising the arrangements of each by COP28.

Another sticking point was the various conditionalities around the fund that some developed countries hoped for. Questions were raised about who would contribute to it, with the European Union initially being adamant that the more well-endowed developing countries such as China and Saudi Arabia should contribute. Other issues that needed to be resolved include the nature of the fund and where it would sit—for example, whether it would be within the Green Climate Fund (GCF) or a standalone entity—as well as how types of loss and damage would be covered, and which countries would be deemed particularly vulnerable enough to climate change in order to benefit from it.

How Negotiations Have Progressed this Year

Things got off to a difficult start with the delayed establishment of the Transitional Committee earlier in March 2023, but it has since held all of its mandated meetings and recently concluded on 4 November 2023.⁵ A synthesis report on the mosaic of existing funding arrangements was also released in May, making recommendations on alternative sources of funding, such as debt swaps, debt buybacks, debt securitisation and international solidarity levies.⁶

Nature and Location of the Fund

One question that dominated the discussions was whether the fund would be an operational entity under UNFCCC’s Financial Mechanism, making it a standalone fund like the Green Climate Fund (GCF) and therefore subject to the guidance of the UNFCCC’s Conference of the Parties (COP).

This would be important for developing countries because the fund would then be guided by the operating principles of the UNFCCC, including its relation to equity and various responsibilities in light of respective capabilities. This position was maintained in the recent meeting in August, where it was proposed that the fund should sit under the UNFCCC as a financial mechanism with its own board. This aligns with what Zambia, on behalf of the African Group of Negotiators (AGN), was looking to see, as well as the Least Developed Countries negotiation bloc (LDC Group). By comparison, the United States, France, and Canada were supportive of using an existing entity (such as the GCF), to avoid delays in establishing the fund. In a surprise submission by the United States at this meeting, it was proposed that the World Bank act as the trustee of the fund, receiving its funds and holding its assets separately with its own independent board that receives guidance from the UNFCCC’s COP.

Form and Volume of Finance

The AGN is hopeful to see the funding take the form of grants so that it does not further indebt already burdened African countries, emphasizing that “debt repayment goes way into the future and affects future generations”.⁷ Moreover, some developing countries are looking to see the provision of at least USD 100 billion per year until 2030. In comparison, the US is advocating for the form of grants and concessional loans that do not set any specific financial target.

Who Should Benefit?

There were diverging views during the discussions around which countries should benefit. Developed countries tended to favour “extremely vulnerable” countries, such as least developed countries (LDCs) and small island developing states (SIDS). Australia suggested that all developing countries could benefit, but the focus should be on particularly vulnerable states. In comparison, developing countries continue to maintain that they should all equally benefit regardless of their income. In this regard, some have proposed that the fund be paid out according to the nature of the event rather than the economic position of the country. Developing countries also want to see the fund finance a broad spectrum of losses, including non-economic loss and damage and slow-onset disasters, instead of plugging gaps within the existing financial system. However, Germany favoured the fund extending finance to areas that aren't already financed by existing mechanisms.

Who Should Contribute?

There have also been ongoing debates about which countries should contribute. In an interesting twist, the United States suggested that the board of the fund should have 29 representatives, with four of them coming from contributor countries based on the scale of their contribution. This has been interpreted as an indirect way of coercing wealthier developing countries to contribute and for them to have influence over the direction and management of the fund.

In relation to scaling up existing “funding arrangements”, there was talk about the extent to which the committee and COP could issue directions to external organisations, such as Multilateral Development Banks (MDBs). For example, Egypt suggested it was "imaginary" to think that the UN could mandate non-UN bodies to do what they wanted.⁸ In any event, NGOs have argued that MDBs were inappropriately placed to distribute funds given their legacies in the provisions of loans and the ensuing power imbalances that they generated.

Political Statements that Have Influenced Discussions

Although the Transitional Committee has demonstrated perseverance in its work on the fund, high-level officials have not been as clear about their support for the endeavour. In July this year, during the course of a hearing before the US House of Representatives, US Climate Envoy John Kerry was asked whether he intended for the US to pay climate reparations, to which he replied: “No, under no circumstances.”⁹ This echoes his similar statement at the African Climate Summit in September. This was interpreted as meaning that the US would no longer contribute to any Loss and Damage Fund.¹⁰ A better interpretation, however, is thatthe US has always refused to provide finance under any agreement or terminology that uses the language of “reparations”. This term denotes legal responsibility for historic harms and associated liability for climate change, something the US has always feared, as it may amount to potentially endless financial liability. While not indicative that the US will no longer support a Loss and Damage Fund, it may suggest that the US will only agree to replenish it if its terms are clear that this will not invoke any legal liability for nations that contribute.

In August, Kenyan President and current chair of the Conference of African Heads of State on Climate Crisis (CAHOSCC) William Samoei Ruto stated in an interview with the Financial Times that the loss and damage conversation was “useless talk”, mooting that the Loss and Damage Fund will never happen.¹¹ His view was that the national self-interest of contributor countries, who would be taxed to finance the fund, would always outweigh the moral imperative towards a global good and that national interest would “always win”.¹² His preference is to establish a new green bank, financed by a global carbon tax and other tax and levy initiatives that finance development, and to some extent, mitigation. This approach would incentivise heavily emitting countries to contribute more finance based on the volume of their emissions.

Notwithstanding Ruto’s sentiments, the latest Nairobi Declaration of the African Climate Summit calls for the implementation of all COP27 decisions, including the decision to pursue a new Loss and Damage Fund. Moreover, both the African Ministerial Conference on the Environment (18 August 2023)¹³ and CAHOSCCand the African Union (19 February 2023)¹⁴ have urged for the full operationalisation of the Loss and Damage Fund by COP28, with AMCEN urging for the fund to be financed by new and additional resources taken exclusively from developed countries.

Latest Developments Going into COP28

The Loss and Damage Transitional Committee recently concluded its work by arriving at a set of recommendations to the COP at a meeting held in Abu Dhabi on 3-4 November 2023. This meeting was convened following the disappointing outcomes of higher-level ministerial consultations on Loss and Damage at the UN General Assembly in September. It was intended to be the fourth and final meeting of the Transitional Committee on 17-20 October 2023. One of the more contentious outcomes of this meeting was the recommendation that the fund adopt the form of a Financial Intermediary Fund (FIF) hosted by the World Bank for an interim period of 4 years. This would be accountable to its own board under the guidance of the UNFCCC’s COP and the governing body of the Paris Agreement known as the CMA. Although they conceded to this outcome, developing countries are concerned about the bank’s loan approach to finance, its developed-country shareholder driven model, its operational culture, its independence and the fact that the United States appointed the bank’s president.¹⁵ Moreover, with a potential 17% hosting fee, the World Bank would emerge as the largest beneficiary of the fund.¹⁶ A compromise was reached on an allocation mechanism that would determine which developing countries could benefit from the fund. It ensures a minimum amount of finance for LDCs and SIDs but does not ring-fence funds exclusively for them. Moreover, developed countries succeeded in ensuring that the fund’s board is represented by a majority of representatives from developing countries. Disappointingly, the language in the recommendations only “urges” them in this direction and does not commit developed countries to financially contribute to the fund. There is also no minimum amount that they are committed to paying. With the volume of pledges to the proposed fund already low, there are concerns that it will lack the funds to fulfil its mandate. Despite the weakness of the text, the drafters within the committee opted to not include additional language which would clarify that contributions from developed countries would be entirely voluntary. As a result, the United States was the sole abstainer of voting in support of the text. This again relates to concerns by the United States that the final document will be interpreted as a concession of liability for loss and damage. As a result, the recommendations do not currently represent a consensus text. Achieving alignment on these issues will necessitate skilful and pioneering political negotiations in the upcoming weeks and at COP28.

Olivia Rumble

Olivia is a Director of Climate Legal with more than thirteen year’s experience specialising in global and national climate change policy and law, climate finance and carbon tax. She is an Adjunct Senior Lecturer in environmental law at the University of Cape Town (UCT) and remains a visiting law lecturer at UCT’s African Climate and Development Initiative. Olivia advises multiple governments, philanthropies and industries on the evolving international climate legal and geopolitical landscape, including on loss and damage, climate finance, trade, adaptation and mitigation. She is responsible for drafting the South African Climate Change Bill, 2018, for the (then) Department of Environmental Affairs, together with related legal instruments. She was extensively involved in South Africa’s adaptation legal and policy alignment process. She was on the drafting team of the Intergovernmental Panel on Climate Change’s (IPCC’s) Sixth Assessment Report, writing on climate change legislative developments internationally and on the African continent. Olivia has also been recognised as a leading environmental lawyer by Best Lawyers 2020 & 2021 and by Chambers and Partners 2021 - 2023 (Environment, South Africa).