International climate finance / Loss and Damage / UNFCCC

Operationalize and capitalize the Loss & Damage fund – key tasks for COP28

The newly created fund must support the most vulnerable population groups in dealing with climate change induced loss and damage. Photo: S.Minninger, Brot für die Welt

On the home stretch to COP28, a compromise has been reached on the structure of the new fund for dealing with loss and damage. However, COP28 still has to formally adopt it. Will Germany and other countries bring their first commitments to Dubai?

The historic breakthrough at the UN Climate Change Conference COP27 at the end of 2022 to set up a new multilateral fund to help developing countries cope with the loss and damage caused by the climate crisis was more than overdue. This decision was preceded by more than 30 years of demands from countries of the Global South for financial support in dealing with loss and damage – and an equally long blockade by many countries of the Global North on the other side.

In 2023, the specially established Transitional Committee (TC) was tasked with structuring the fund (and other arrangements for financial support). After this was not achieved in four planned working sessions of the TC due to fundamental differences on key issues, the negotiators have now agreed on the core areas of the fund in a fifth working session (TC5) convened at short notice and agreed on joint recommendations. Major concessions were demanded from developing countries in particular.

At the upcoming UN Climate Change Conference COP28, a decision must now be made on the agreement reached at TC5 and the capitalization of the fund must also be launched. For the necessary adequate capitalization of the fund, strategic alliances between progressive industrialized, developing and emerging countries are needed to overcome the division into camps and, on the contrary, to move forward with those who really want to advance solutions and support the most vulnerable. Both are crucial for progress to be made in other areas of the negotiations – and thus for the success of the conference as a whole.

Hosted by the World Bank

The institutional location of the fund was the subject of much controversy right up to the end, with almost opposing positions between the industrialized and developing countries. The latter called for an independent fund as part of the financial architecture of the UN Framework Convention on Climate Change (UNFCCC). They rejected the industrialized countries’ counter-proposal to install the fund at the World Bank due to the high fees and the in many respects unsuitable framework conditions, including the World Bank’s focus on loans instead of grants. The agreement that has now been reached provides for a 4-year interim solution that makes the World Bank the trustee and establishes a transitional secretariat under the World Bank. However, the compromise is linked to a number of conditions, including the guarantee of direct access for recipient countries and vulnerable communities as well as access for those UNFCCC Parties that are not members of the World Bank. It also made clear that, in cases of doubt, the provisions of the Governing Instrument (the fund’s basic set of rules) should take precedence over existing World Bank regulations if they deviate from these This is intended, among other things, to ensure that the fund can operate in accordance with the principles of the UNFCCC and the Paris Agreement.

The interim solution is to be evaluated after four years. If the World Bank meets all the conditions, the arrangement will remain in place. However, it is questionable that there is no concrete strategy for finding an alternative home if the evaluation after the interim period is negative for the World Bank. It is a good thing that the fund is set up as part of the financial mechanism (“an entity entrusted with the operation of the financial mechanism entity”) under the UNFCCC and the Paris Agreement despite its domicile at the World Bank. The central principles of equity of the UNFCCC and the Paris Agreement therefore also apply to the fund, including in particular the principle of “common but differentiated responsibilities and respective capabilities” and the polluter pays principle.

Who pays?

The discussion surrounding the question of who will contribute to the fund was and remains politically charged. It also has implications for areas that go far beyond the fund, such as the negotiations on the new global target for climate financing (New Collective Quantified Goal, NCQG). Here, too, it is important that the UNFCCC principles mentioned above are applied. It is clear that the industrialized countries must lead the way due to their historically greatest responsibility. However, there is no binding obligation to pay into the fund. The industrialized countries are merely “invited” to make contributions. Other countries are “encouraged” to do the same “on a voluntary basis”. The fund therefore gives the most vulnerable people and communities no assurance that they will actually receive adequate support from the fund in coping with loss and damage. Future contributions to the fund will remain a voluntary act of solidarity. Climate justice is not promoted in this way as the people who suffer the most from loss and damage are those who have contributed the least to climate change.

This means that the industrialized countries in particular bear the main responsibility. However, it is also true that economically strong emerging economies – including the rich oil and gas-producing countries – should contribute to support in dealing with loss and damage and specifically to the new fund. This includes at least those that have comparable responsibility for the climate crisis and comparable economic performance to industrialized countries.

In this respect, it is an omission that the compromise reached lacks a clear reference to the equity principles of the UNFCCC and the Paris Agreement. It is merely emphasized that the industrialized countries should take the lead for the financial contributions – but initially only for the operationalization and not the capitalization of the fund. The fund is also open to innovative sources – instruments could come into play here, such as levies for the large fossil fuel companies (the “carbon majors”) on the extraction of coal, oil and natural gas or international shipping and air traffic.

Eligible for support: particularly vulnerable developing countries

The discussions surrounding the question of which countries should receive support from the fund ultimately went back to the wording already used in the COP27 resolution in Sharm el Sheik and refers to all “particularly vulnerable developing countries”. Even if low-income island states (Small Island Developing States, SIDS) and the Least Developed Countries (LDCs) play a special role here (the fund is to reserve minimum amounts for them), other severely affected countries also have access. A system of resource allocation and prioritization to be developed by the fund’s board must ensure this.

Broad spectrum, but unclear endowment

It is to be welcomed that the fund now covers a broad spectrum of loss and damage, including economic and non-economic loss and damage – triggered by both extreme weather events and slow-onset changes. This is very satisfying in that too little funding has been available for all these types of damage to date.

However, the question of the scope of the new fund remains a complete blank. There is no reference to estimates of future needs, despite corresponding demands from developing countries. According to current estimates, damage in developing countries will already amount to 109 billion US dollars in 2022. For 2030, scientists estimate the annual damage for developing countries alone at 400-580 billion US dollars. This does not include non-economic damage and losses due to slow-onset climate change. UNCTAD (United Nations Conference on Trade and Development) recently proposed filling the new fund with an initial 150 billion US dollars and allowing it to grow to 300 billion by 2030.

And another disappointment: there is no reference to human rights in the fund’s governing instrument. This is unacceptable. Human rights principles and standards should underpin all of the Fund’s activities (and loss and damage in general). The Fund aims to support the most vulnerable and marginalized populations at the frontline of the climate crisis. Here, measures to protect and promote human rights are essential.

As far as the Board of Directors is concerned, the composition of the Fund’s steering committee will give developing countries a narrow majority with a total of 26 seats. Demands for additional seats on the Board of Directors, for example for representatives of marginalized groups, indigenous peoples or migrants, as well as for civil society, were not met. However, their participation in Board meetings is to be guaranteed. The Board will continue to play a central role in the coming months, as it will be responsible for the further development of the fund – such as the very critical issue of a system for allocating resources.

COP28 must launch the endowment of the fund

For COP28, the decision on operationalization is now central – but at the same time, concrete preparations must also be made for capitalization. UN Secretary-General Antonio Guterres has already announced his expectation that the heads of state and government should come to COP28 with contributions, commitments and pledges to support the fund.

In a situation where, on the one hand, the industrialized countries have still not fulfilled their promise to provide 100 billion US dollars in annual climate financing and, at the same time, debates are being held on expanding the number of contributing countries, a clear signal and strong pioneers are needed to ensure that the capitalization of the fund is not postponed and the most vulnerable people are not left in the lurch.

Germany and other industrialized countries, but also for example the United Arab Emirates as host of COP28, should lead the way here and generate acceptance in their respective country groups to establish an effective group of the willing. The European Commission has already announced that it will provide a significant amount of money. Germany should announce at least EUR 300 million at COP28 and develop a plan by next year to increase the German contribution for start-up financing of the fund to an initial EUR 1 billion.

Vera Künzel & Laura Schäfer, Germanwatch
Sabine Minninger, Brot für die Welt
Jan Kowalzig, Oxfam