Agreement on the Loss and Damage Fund – A Compromise by Developing States?

Introduction

Climate change has severely impacted the environment and human societies and has caused enormous losses and damage, especially in developing countries. The Intergovernmental Panel on Climate Change (IPCC) Working Group II has noted the disparity in the distribution of losses and damages across systems, regions, and sectors. Despite increased global climate funds, small island states face issues in acquiring funding for handling slow and rapid-onset events.

The decision adopted at the 27th meeting of the Conference of the Parties to the United Nations Framework Convention on Climate Change in Egypt stated that action is needed to shut down these financial gaps. The first Glasgow Dialogue, held in Bonn in June 2022, focused on funding arrangements for addressing climate change’s adverse impacts. Over 100 party representatives submitted in-depth reports but not a single piece of information that was provided was included in the broader UNFCCC negotiations.

The final agreement was signed in late 2022. The second and third Glasgow dialogues were decided to be held in June 2023 and 2024 among parties, stakeholders, observers, government officials, international industry leaders, youth, women, indigenous people, NGOs, etc. who are meant to inform the work and recommendations of the transitional committee.

What Is Loss and Damage?

“Loss and damage” refers to the way that climate change is already having major, often irreparable effects on people all around the world, especially in vulnerable populations. For instance, more frequent and severe extreme weather events are resulting in property and agricultural damage as well as fatalities.

Establishment of Transitional Committee

The G77 and China suggested a proposal for the loss and damage fund (LDF) at COP27 which included the creation of a transitional committee, comprising 24 members from Africa, Asia, Latin America, and the Caribbean and developing countries to tackle loss and damage. The committee was established to serve as an integrated system to conduct workshops in 2023, preparing an overall report on current funding arrangements and seeking inputs concerning how United Nations agencies, intergovernmental organizations as well as financial entities could improve access to finance for climate mitigation activities.

According to the agenda, the transitional committee met four times and conducted two workshops in Egypt, Germany, Thailand, and the Dominican Republic during March-October 2023. It held its first meeting in Luxor, finalized a work plan for COP28, and established a Technical Support Unit in order to offer technical assistance. The committee was charged with proposing suggestions for the Loss and Damage Fund, taking into consideration its finance sources, operations, and structure.

After being evaluated, various suggestions by civil society and countries were incorporated into the text for further assessment. In its fourth meeting (TC4), the committee failed to reach a consensus mainly due to the obstructive and rigid stance of developed countries over certain things. Due to this, it rescheduled its fifth meeting (TC5) in Abu Dhabi on November 2023 to try to reach an agreement prior to the COP28 summit. The agreement reached at the final meeting of the Transitional Committee (TC5) on recommendations to operationalize the loss and damage fund is fragile—a delicate compromise around eligibility, location, scale, and responsibility.

Settlement over Eligibility Criteria for Funds

At TC4, nations agreed to create a fund to assist developing nations, especially for those particularly vulnerable to climate change. However, the meaning of “particularly vulnerable” continued to be debated. US and EU members stated that least developed and small islands countries should receive funds while totally neglecting middle-income and low-income states. The developing nations, including middle-income and low-income countries, also wanted to have equal access to the Loss and Damage Fund. Being a middle or low-income country does not mean that they are not vulnerable to climate-related disasters. For example, Libya and Pakistan faced severe floods in 2022.

At TC4, developing countries rejected the developed countries’ proposal for an allocation system with criteria for prioritizing vulnerabilities and called for allocation based on programmatic or trigger-based support. The final meeting, TC5, concluded that the board will have the power to decide the eligibility criteria by developing a “resource allocation system” based on vulnerability confirmation and a certain amount of funds will be given to least developed countries and small island states. Developing nations stated that they accepted the current text “with a spirit of compromise.”

Achieving Consensus over Funding Sources

At the draft meeting (TC4), just a small percentage of “Annex II” nations, which are considered to be “developed” decided to contribute as their historical obligation. US and EU countries said that they were not obligated to contribute and demanded a shared load with prosperous rising economies, particularly mentioning China and Gulf states such as Saudi Arabia. According to the final comments of the committee (TC5), rich countries were asked to take the lead but it also listed an extensive variety of funding sources and asked for voluntary contributions from other countries.

Developing states considered this to be a major compromise during the meetings of the transitional committee. Developed countries included in Annex II are required to provide climate financing under the UNFCCC’s equality principle. However, the committee’s draft text leaves this open-ended and welcomes contributions from a wide range of funding sources including grants and low-interest loans from innovative, public & private sources.

Settling Agreement on Fund’s Location

The primary concern emerged related to the fund’s location at TC4. The US and the EU’s idea for the management of funds by the US-based World Bank was strongly disapproved by G77 and China. Developing countries wanted the fund to be accessible to as much of the Global South as possible and did not want it to be housed at the US-dominated World Bank.

Instead, they demanded the creation of a new, independent fund with an independent international legal personality and a dedicated secretariat. They pointed out the bank is not equipped to offer quick, simple help—which is precisely what is needed in the event of an urgent climate crisis. They argued that granting loans and even concessional ones, as well as World Bank’s conditioned-based loans system, will leave nations with more debt and worsen the debt stress that several nations are already facing due to COVID-19, etc.

At TC5, developing countries came to the final meeting stating that they would accept the World Bank as the host on an “interim” basis but only on certain conditions. The World Bank would have to provide small grants and also have to assure its access to nonmember parties. Developing states stressed that they were making a “huge concession” in doing so. So, the World Bank decided to be a temporary host for four years by the committee.  

Aligning on the Financial Scale

At TC4, developing countries also highlighted the need for urgent and immediate new, additional, predictable, adequate, and significant financial resources and that the LDF should be able to operate at scale with at least USD100 billion a year by 2030. They said that this would have to be potentially scaled up since this amount is not meant as a ceiling but as a minimum commitment given that the Loss and Damage Fund should be prepared to adapt to the increasing loss and damage needs of developing countries. Developed countries, especially the US, however, did not want any text or reference to a scale, stating that it is out of the TC’s mandate. In the end, the final recommendations of the TC5 removed any mention of the funding scale.

Conclusion

In conclusion, the compromises achieved by developed nations during the final meeting of the transitional committee about the recommendations to operationalize the loss and damage fund are unstable. It is a careful balance regarding eligibility, location, size, and accountability. Developed countries have a disproportionate impact on global agreements as evidenced by the essential compromises made by developing countries during the TC5 sessions. Underscoring the power inequality in international discussions is frequently the requirement of developing nations to make compromises.

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