Breakthrough in loss and damage financing at COP27

Developing countries are already suffering from climate induced loss and damge. Photo: Muhammad Amdad Hossain Climate Visuals

COP27, which took place in November in Sharm el-Sheikh, Egypt, was characterized by one theme in particular: the increasingly frequent cases ofLoss and Damage related to climate change and its corresponding finance. So far, there is no clear finance structure in place for Loss and Damage. However, thanks to the persistent demands of the Global South and international civil society, decisions on financing arrangements took center stage at COP27. While COP27 also resulted in other financially relevant decisions, this article will focus on Loss and Damage finance.

Adoption of the agenda item on financing loss and damage

In the run-up to the negotiations, the Egyptian presidency appointed German State Secretary Jennifer Morgan and Chilean Environment Minister Maisa Rojas as co-facilitators to guide the countries toward a decision on Loss and Damage finance. This posed a major challenge, as the sides were firmly entrenched before COP27.

Yet the facilitators’ groundwork contributed to an initial success at the beginning of the COP: After thirty years of lobbying by the Alliance of Small Island Developing States (AOSIS), Least Developed Countries (LDCs) and the G77-China negotiating group – we will refer to these heavily overlapping groups as the “Global South” – the topic of climate change-related Loss and Damage finally featured on the agenda at COP27, in the form of agenda item 8f, “Matters relating to funding arrangements for addressing loss and damage”. This can be seen as a historic milestone for more climate justice that had been blocked for decades by the Global North (referring here to the traditional industrialized countries within the meaning of the Convention). However, the initial euphoria quickly subsided as Global North and South took strongly divergent positions in the negotiations. While the Global South initially called for a Finance Facility for Loss and Damage, the Global North rejected it, citing existing financing options (within and outside the UNFCCC), gaps that still need to be closed, and a combination of different solutions. However, all parties to the agreement reiterated the urgency of addressing Loss and Damage and acknowledged the funding gaps.

Historic breakthrough: the establishment of a fund and funding arrangements for loss and damage

After intense negotiations and two proposals from the G77 and China and the European Union (EU), the Parties reached the historic decision to establish a fund and associated funding arrangements for Loss and Damage. This was made possible by the tenacity and unity of the countries of the Global South and belated but influential support from the EU. The latter, also with the help of Germany, had moved forward very strongly and had persuaded the other countries of the Global North to agree to the final resolution. The constellation following the mid-term elections in the United States and increasingly visible losses and damages, as in the case of the monsoon-induced floods in Pakistan, likely had a positive influence here, and helped create a window of opportunity.

The approved fund is to be established next year. However, who will pay into it and who is entitled to receive and to what extent has yet to be decided. In the negotiations, the Global North aimed to focus on the most vulnerable countries, but without specifying it in more detail. This was vehemently opposed by the G77 and China. Such a focus, if interpreted very strictly, would have risked excluding countries such as Pakistan or Honduras, even though they are also heavily impacted by Loss and Damage. Ultimately, the decision used the relatively vague term “particularly vulnerable developing countries”, which is generally consistent with the approach to financial assistance already laid out in the UNFCCC. However, there is still a need for specification here and it would be useful to include prioritization and a comprehensible differentiation according to capacities for action, historical responsibility and vulnerability.

The countries of the Global South also insisted that the new financial commitments should be provided additional to adaptation finance, development cooperation and humanitarian assistance, and should be realized as grants, not loans. It is hoped that a dedicated fund for Loss and Damage will provide greater transparency on the contributions of contributor states and institutions and funds. With regard to contributor states, the discussions to date suggest that there could be an expansion of the usual contributor structures. This is also reflected in the text of the resolution, which names “expanding sources” and “other sources” as financing options (which also opens up options for innovative financing sources such as levies on CO2, fossil fuels, aviation and shipping), while not explicitly naming the traditional industrialized countries as primary contributors. This is underscored by the fact that the decision falls under both the United Nations Framework Convention on Climate Change (COP) and the Paris Climate Agreement (CMA). In the event of a double decision, the latter, more recent agreement is deemed to be the more legally relevant one. While the Paris Agreement continues to emphasize the fundamental financing obligations of the so-called developed countries in Article 9, it no longer specifies them in the country lists in the Annex to the Convention itself. Moreover, Article 9 refers only to climate finance for mitigation and adaptation, but not for Loss and Damage per se. It follows that the subdivision of funding responsibility could well differ for Loss and Damage. Central to this contributor-state discussion is the question of the role of relatively wealthy and, at the same time, emissions-relevant countries in the Global South such as China and the Gulf states.

China in particular is in a difficult position, as it sees itself as a “developing country” but is currently the largest emitter and also the second largest economy. In general, it would be plausible to use wealth and historical responsibility as determinants of contributions to international climate finance (as is vaguely enshrined in the Convention). Since 1992, however, external circumstances have changed, and some oil states are now among the richest countries in the world by per capita income. Moreover, China will have overtaken the EU in terms of historical responsibility in the near future. The equity approach should therefore be subject to dynamic interpretation and adapted to current circumstances. In addition to a possible expansion of contributors, innovative sources of financing should also play a prominent role as a supplement, but not a substitute, for the special responsibility of the so-called industrialized countries. A levy on international air travel or skimming the massive profits of the fossil fuel industry would be conceivable here. It will also be interesting to see to what extent the international financial architecture, including multilateral development banks and the International Monetary Fund, can contribute.

A dedicated Transitional Committee was established to find initial answers to these many open questions. It is to meet for the first time before the end of March 2023 and at least three times this year. The COP decision explicitly lists the following tasks:

• establishing the institutional design, modalities, structure, governance and role of the fund
• defining new elements of the financing arrangements
• identifying and expanding funding sources
• ensuring coordination and complementarity with existing financial arrangements

The basic idea of such a committee follows a similar approach that worked to a large extent for the development of the initial parameters of the Green Climate Fund in 2011. The 24 members (10 of which will be from the Global North and 14 of the Global South) of the Transitional Committee will have the daunting task of developing proposals for operationalizing the fund, which Parties will then be asked to finalize and adopt at COP28. So far, a number of members have been announced, including from the African States, the Small Island Developing States or the Latin American and the Carribbean States. The group of the so called developed countries has not yet announced its members, but is expected to do so soon.

Operationalization of the Santiago Network for Loss and Damage

The second major achievement of COP27 in the context of Loss and Damage can be found in the Santiago Network for Loss and Damage (SNLD). There has been significant progress in the negotiations on the SNLD, which was agreed on at COP25.

Efforts to operationalize the SNLD and agree on a structure succeeded in the second week of negotiations. It now encompasses a secretariat, an advisory body and a network of Organisations, Bodies, Networks and Experts (OBNEs). The advisory body in particular can be seen as a success for the Global South, which had called for it. Its role is to ensure that the SNLD works on the actual needs of those affected on the ground. To ensure this, however, funding commitments to the SNLD must increase substantially, as they have fallen far short of needs to date. Nevertheless, the SNLD represents a concrete implementation arm to provide technical advice to the Global South, which could be fully operational within 2023.

The negotiations to this end were not without difficulties. The United States and other countries of the Global North sought to weaken the structure and political relevance of the network. However, a robust structure was adopted after vehement protests from the Global South and international civil society prompted the North to abandon its blockade. Unfortunately, there is only an implicit reference to human rights in the text of the decision, which was hard-won by civil society. This impressively illustrates the ongoing struggle around human rights in the negotiations to ensure that they are securely anchored despite the growing number of authoritarian states, particularly in the Global South.

Financial commitments outside the official negotiations

On the sidelines of the negotiations, there were several funding commitments from countries of the Global North (e.g. Belgium, Spain, Canada and the UK). The majority of these related to the Global Shield Against Climate Risks initiated by Germany as part of its G7 presidency together with the group of the most vulnerable countries, the Vulnerable 20 (V20) and the Climate Vulnerable Forum (CVF). The Global Shield is designed to help the most vulnerable populations cope with climate impacts, making an important contribution to the coordination of the Climate and Disaster Risk Finance and Insurance architecture. Germany provided 170 million euros for this purpose. During the negotiations, the reception of the Global Shield was mixed. Some countries of the Global South were concerned that the initiative would be used to distract from Global South demands within the negotiations. The German government and CVF disagreed, pointing to complementarity with the negotiated outcomes. After the fund and the financing arrangements were approved, the Global Shield was welcomed by all countries and even featured in the final text. One sour note with regard to the financial pledges, however, is that presumably the vast majority of countries will count them as adaptation funding, thus not meeting the requirement of truly additional funding for Loss and Damage (see above). Admittedly, climate finance reporting under the UNFCCC to date does not provide for financing to deal with Loss and Damage. This gap needs to be closed as soon as possible.

Moreover, Loss and Damage, especially as concerns of the poorest and most vulnerable states, must not be instrumentalized to advance other important issues. After COP27, some voices could be heard positing that the fund was adopted at the expense of mitigation. This is not the case: Firstly, the most vulnerable countries are those that have been pushing for mitigation decisions consistent with the 1.5°C target for years (while no developed country, nor the EU, has put forward 1.5°C-compatible climate policies to date). Secondly, it is highly unlikely that the states that stood in the way of stronger resolutions to move away from fossil fuels – primarily fossil-based petrostates such as Saudi Arabia, Egypt and Russia – would have been more progressive here had it not been for the debate over the climate damage fund, especially since the industrialized countries as a whole have also delivered little in the way of climate finance. And the fact that the issues are closely linked and subject to horse-trading toward the end of the negotiations is unfortunately part of the rite of the multilateral process from various sides.

Lisa Schultheiss, Germanwatch
Sabine Minninger, Brot für die Welt
Sven Harmeling, CARE
David Ryfisch, Germanwatch
Petter Lydén, Germanwatch