Financing Loss and Damage: A Look at Governance and Implementation Options

Flooding in Punjab Province, Pakistan in 2010. UN Photo/Evan Schneider. This image is licensed under Creative Commons License.

In 2013 countries agreed to establish the Warsaw International Mechanism for Loss and Damage (WIM) and agreed that it would do three things: a) enhance knowledge; b) strengthen dialogue and coordination and c) enhance action and support, including finance for loss and damage. This third element of its mandate has been sorely neglected. Almost no work has been done on how to fund loss and damage, how it fits with other streams of climate finance, and how loss and damage finance should be channeled to vulnerable countries. We are no closer now than we were in 2013 to vulnerable people and countries receiving loss and damage finance.

The Heinrich-Böll-Foundation has recently published a study exploring a number of elements that urgently need to be addressed with regard to loss and damage. When it comes to implementation, loss and damage overlaps with adaptation, humanitarian disaster recovery, disaster risk reduction (DRR), migration programs and so on. It is important that loss and damage strategies and programmes are as impactful as possible for people on the ground. To avoid duplication and unnecessary complication, political and institutional coordination in these various areas will be needed.

Funding criteria for loss and damage

When it comes to financing loss and damage activities, experience in adaptation finance shows that it will be useful to be clear what we mean by loss and damage. A review of existing working definitions of loss and damage and a range of illustrative examples, highlights what makes loss and damage different from adaptation, disaster risk reduction, disaster response and development. The delineation of loss and damage could be achieved by establishing a set of criteria, or guiding questions, as follows:

• Was the impact likely caused by, or made worse by, climate change?
• Does the impact require a significant change to traditional or existing livelihoods, going beyond adjustments and instead require an altogether different order of magnitude in the reaction?
• Does it involve loss of something the community values and depends on?

Teamed with an illustrative, but not exhaustive, positive list (see box) which can be complemented over time, this could be a first start. The Paris Agreement contains the beginnings of a positive list which are discussed and expanded in the study. Positive examples are:

• Early warning systems;
• Emergency preparedness;
• Slow onset events;
• Events that may involve irreversible and permanent loss and damage;
• Comprehensive risk assessment and management;
• Risk insurance facilities, climate risk pooling and other insurance solutions;
• Non-economic losses; and
• Resilience of communities, livelihoods and ecosystems.

A proportion of an activity that meets the criteria of loss and damage should be able to qualify as loss and damage, whilst allowing a proportion of the project or activity to fit within other categories (e.g. adaptation). Whilst country-driven, the determination as to whether loss and damage finance is justified should also be assessed by panel authorized under the WIM.

Funding for loss and damage needs to be upscaled

What stands out most clearly is that there currently is not enough funding to even begin thinking about financing loss and damage, with available climate, development, risk reduction and disaster recovery financing all falling short by an order of magnitude. A few illustrative examples of current loss and damage already highlight the potential magnitude of financing:

• Damage from supercharged typhoon: In November 2013 Typhoon Haiyan (or Yolanda as it was called locally) devastated the Tacloban region of the Philippines. The International Disaster Database (EM-DAT) quantified the damage of Typhoon Haiyan at USD10 billion.
• Relocation forced by rising sea levels and loss of land: The 6,000 people who live on the Carteret Islands of Papua New Guinea are finding their home increasingly untenable due to rising sea levels which are leading to loss of land, and damage from salt water inundation is leading to food insecurity as traditional crops won’t grow. It was estimated that USD5.3 million is required from 2009 to 2019 to ensure the basic needs for a successful resettlement are met – USD6,500 for land and housing for each family.
• Loss and damage from increasing drought: Climate change poses an ongoing and serious threat to Kenya’s economy. Already, it accounts for a loss of approximately US0.5 billion per year, which is equivalent to 2% of the country’s GDP. From 2008 to 2011 the Horn of Africa suffered the worst drought in 60 years. At its peak it left 13.3 million people with food shortages and led to a large number of people dying. Across the four year period of drought, the Government of Kenya estimated losses of USD12.1 billion in total.

Whilst there is more that should be done in the name of ‘solidarity’, it is very unlikely that developed countries will step up and fulfill their obligations under the UNFCCC as elaborated under long-term financing goals, let alone all of the additional loss and damaging needs. Therefore, for the generation of international financing for loss and damage – also as a matter to facilitate accounting and to ensure additionality to current funding streams – new sets of finance that come from outside traditional reliance on ODA and treasuries are needed. Innovative financing (in the form of a carbon levy, aviation levies, financial transaction taxes etc) if implemented well, can fairly and predictably fill much of the loss and damage finance gap. Innovative sources of finance should be able to provide scaled-up financing of USD 200-300 billion per year by 2030.

When considering various options for a possible international financing mechanism for loss and damage finance, such a discussion must be informed by a set of principles which consider the provision of international finance for loss and damage not as ‘charity’ but as ‘climate justice’. Thus, a fund under the UNFCCC and serving the financial mechanism of both the UNFCCC and the Paris Agreement should be considered.

Use and expand existing climate funds instead of creating new funds

While it is conceivable that the UNFCCC could decide the development of a new UNFCCC Loss and Damage Fund, the experience of the GCF, which took five years to its first funding decision, shows that the path forward for a new global climate fund is lengthy and complex. The alternative would be to elaborate the comparative advantages of existing UNFCCC climate funds, in particular the GEF and the GCF, and their potential to channel international financing of loss and damage.

Both funds have the capacity to receive dedicated loss and damage financing for example under a separate trust fund, clearly delineating inputs and disbursals on loss and damage from other climate finance disbursements. However, there are significant differences between the funds which make the GCF the more suitable candidate at the moment. The GCF for example has a mandate in its governing instrument to consider financial inputs from alternative sources, and the GCF Board could address the issue of alternative financing sources as a matter of priority. This could also be in time for its first formal replenishment to start in 2018 when its current initial resource mobilization period ends.

The study, while not presenting the final word on a range of issues related to international loss and damage financing, nevertheless outlines some concrete steps forward over the next two years. Further analysis and discussion is clearly needed, and we welcome future contributions and comments.

Loss and damage finance needs to complement climate finance

In order to make up for lost time, the negotiations under the WIM should treat finance as a priority for the coming two years, and, with the Standing Committee on Finance, work to ensure that by the time the Paris Agreement comes into effect in 2018 it is clear how finance for loss and damage will be provided and how much finance will be available.

In the end, while technical discussions and the development of criteria and methodologies matter, ultimately, this is a highly political and deeply moral issue. Political leadership will also be key to this process. We need Ministers and Heads of State to engage in the solution to this funding gap. And to understand that we have choices. We can take strong mitigation action to minimize loss and damage, we can properly fund adaptation strategies, which will also minimize loss and damage from climate change and we need to generate the resources needed to buffer the impacts which will still hit the poor and vulnerable. Or we can continue to delay and obfuscate – which will not only raise the cost of loss and damage, but will rather cause unimaginable suffering and guarantee a less stable and sustainable and more poverty and inequality stricken world.

Julie-Anne Richards, Consultant, and Liane Schalatek, Heinrich Böll Stiftung North America