Financing strategies for climate-related loss and damage

Coastal erostion through sea level rise, Carteret Islands, Papua Neuguinea, Photo: Tulele Peisa

Climate-related loss and damage is one of the most contentious issues of international climate policy. Essentially, it comes down to how to share the burden in a manner commensurate to responsibility if the worst comes to pass – if climate-related losses or damages requiring financial compensation occur despite the realization of adaptation measures.

In view of its far-reaching financial and legal implications, this debate is highly sensitive and therefore unfortunately particularly vulnerable to exploitation or escalation. At the same time, ignorance and misunderstandings hamper possible solutions. For many years, industrialized countries successfully extricated themselves from this conflict by flatly denying any claims for support or compensation.  This defensive strategy has no longer been tenable since the Warsaw climate conference in 2013 at the latest, however. At that time, developing countries succeeded in implementing the Warsaw International Mechanism for addressing climate-related damages and losses in the wake of the destruction caused by super-typhoon Haiyan. And while industrialized countries were once again able to counter the moves of the least-developed countries (LDCs) and the Alliance of Small Island States (AOSIS) to formalize loss and damage as an element of the Paris climate agreement in Lima in December 2014, it is unlikely that they will be able to maintain this stance at the Paris conference – at least not without undermining the substance of the Paris agreement in its entirety. It is therefore difficult to understand why the EU has duped the LDCs and AOSIS – in fact its closest allies – time and again by denying them even the most basic recognition of loss and damage as their core concern in the Paris treaty.

The most recent occasion was the publication of the EU’s Paris package in late February, as the package does not even mention the controversial subject. The fear of entering into international commitments for potentially incalculable compensation payments apparently weighs too heavily.  This is reinforced by the worry that such a move could give a fresh boost to the demands of Bolivia and others for compensation for the industrialized countries’ “historical carbon debt”, or the “climate debt” that the South Centre estimated at $600 billion per year until 2050.

Beyond the rhetoric, damages caused by climate change are very real: According to the reinsurer Munich Re, extreme events were responsible for the loss of 1.875.000 human lives and property damage at the scale of $2.85 trillion, with climate or weather-related events responsible for the majority thereof. Furthermore, climate-related damages – unlike other damage events – have quadrupled in the last three decades and continue to grow. The insurance industry figures are consistent with the findings of climate scientists in the Special Report on Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation (SREX) published in 2012 by the International Panel on Climate Change (IPCC) that both the frequency and the intensity of extreme weather events are increasing.

In addition, the creeping loss of land due to coastal erosion and rising sea levels is forcing more and more people to migrate. Last year, Fiji relocated its first community, Vunidogoloa, and at least 42 more settlements are to follow. In Bougainville, an autonomous province of Papua New Guinea, at least 4,000 people on the Carteret and Mortlock Islands are in jeopardy and urgently need to be relocated. The island nation of Kiribati recently purchased a considerable land area on the second largest island of Fiji, Vanua Levu, to be ready for a possible future relocation.

None of the above-mentioned states have asked the international community for support or moved to take legal action before an international court. In all cases, they used their own financial resources – either those of the state (Kiribati), the affected parties (PNG) or a combination thereof (Fiji). In this respect, there is no empirical evidence supporting the concern of many industrialized countries that “loss and damage” is just another word for additional climate finance. Even the often-heard argument that compensation for climate damage may reduce the willingness to adapt appears groundless: anyone who has ever spoken to people who have had to give up their homes and livelihoods due to climate change know how far-fetched this idea is. Migration is the last possible means and is only considered once all other options for adaptation are really exhausted.

Developing countries and small island states are overwhelmed by the burden of responding to growing climate damage. They need international support to minimize damage (climate risk prevention and reduction) or compensate it (climate risk transfer). This applies both to damage to critical infrastructure (schools, roads, bridges, etc.) and that to households, which can rapidly become life-threatening for poor families. Insurance solutions, public disaster funds and reconstruction assistance are suitable instruments here. They cost more, however, than those affected can raise on their own. The widespread polluter-pays principle, as well as the principle of solidarity enshrined in both the UN Framework Convention on Climate Change and relevant human rights and humanitarian conventions, stipulate that the international community shall provide affected states with technical, political and financial support, provided that they have exhausted their own resources in standing by their people in emergencies and ensuring their fundamental rights. It is therefore high time to recognize the shared responsibility of the international community in fundamentally addressing the issue of loss and damage in the climate negotiations.

However, that does not necessarily mean providing dedicated funding in addition to climate finance. In order to move ahead with the question of finance issue could initially be decoupled from the issue of responsibility. Once there is a common understanding on the responsibility of the international community and mechanisms for risk management and reduction are established the question of finance should be targeted in a constructive way. Whether the funding necessary will have to be raised as part of climate finance or in addition to it is open for negotiation. In my opinion, it would be quite possible for Germany to earmark part of its international climate finance resources for climate risk management (including compensation for damage) as is already being done for REDD+, mitigation and adaptation. Insurance solutions in which public funds for climate finance are specifically used to leverage additional private investment would be conceivable, particularly in the area of climate risk transfer. Such leverage could also be applied to the climate risk bonds currently being discussed that would serve to keep developing countries afloat in the event of disaster. Alternatively, major polluters could be subjected to a levy on the extraction of fossil fuels that would flow into a fund to finance increased climate resilience or compensate for damage. Heinrich Böll Foundation has recently published an interesting proposal on this.

Climate risk management is a global policy issue that the international community will not be able to avoid indefinitely. The industrialized countries are bound morally and by international law to make an appropriate contribution in this regard. The time has come to develop suitable strategies within the context of climate finance and to provide initial funding for pilot projects. Germany should move forward in this matter in order to maintain its climate policy credibility. Developing countries will appreciate it.

Thomas Hirsch, Climate & Development Advice