How it will work is yet to be decided, so what happens now?

On the first day of the COP28 Summit, a deal to “operationalise” the long-talked about Loss and Damage fund was reached. The UN General Secretary called the deal “historic,” but its critics say it is only the start of a process that should have begun years ago.  

The Loss and Damage fund agreement is a promising development in an issue that has been contentious for the last 30 years. The success of this fund depends on world leaders’ ability to seize the momentum gathered at the Summit. If the necessary details can be finalised promptly to allow projects to begin, this fund could become a much-needed climate finance success story. 

In the days after the announcement, pledges to the fund totalled over $700 million. Controversy soon followed though as the amounts pledged by some countries raised eyebrows. The hosts, United Arab Emirates (UAE) and Germany both committed $100 million towards the fund whilst the US only pledged $17.5 million. This is despite the fact the US has produced the most carbon emissions and is the largest producer of oil and gas.

Japan, the world’s third largest economy, pledged $10 million. To put these into context, Ireland, with a population of 5 million and the 26th largest economy, contributed $27 million.

The paltry pledges provided by some countries is especially disappointing given the vast resources required for the fund. Estimates for the cost of climate change related loss and damage vary between $100 to $580 billion per year. Simon Stiell, the Executive Director of COP described the pledges as “an initial downpayment” to get the fund started. Fundraising efforts will have to be scaled up and sustained if the Loss and Damage fund is to be fit for purpose.  

For some developing nations though, the deal to operationalise the Loss and Damage Fund will be met with a degree of relief. The idea of the fund was first proposed by Vanuatu, the South Pacific Island nation, in 1991. The philosophy behind the fund was that developed countries should compensate developing countries for the harm caused by climate change. Developed countries exploited fossil fuels to power their economic progress making them responsible for most of the world’s historic emissions.

For example, the US alone is responsible for 20% of the world’s carbon emissions since 1850 according to a 2021 study. However, it is often developing countries that suffer the most devastating consequences of climate change despite them being the least responsible for global warming. Pakistan is responsible for less than 1% of the world’s emissions yet in 2022, widespread flooding devastated the country, leaving millions requiring aid.

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Despite the just premise behind the fund, it has taken 30 years for countries to begin pledging money towards it. For most of this period, developed countries have resisted calls for such a fund fearing legal challenges over their possible liability for historic carbon emissions. This issue was addressed in the 2015 Paris Agreement. Article 8 states “parties recognise the importance of averting, minimising and addressing loss and damage associated with the adverse effects of climate change.” A caveat was added though which prevented this article being used for liability or compensation claims. This paved the way for countries to agree to establish a fund for loss and damages at COP27 in Egypt.  It was on the back of this agreement that led to the announcement at COP28 being made. Since the 2022 Summit, five meetings were held that resulted in over $700 million being pledged to the fund this year.

The relative speed of these latest developments provides possible reasons to be optimistic. However, expect disputes in the coming negotiations. A critical issue negotiating the fund was deciding how it would be governed and who would host it. In the end, the World Bank was chosen as the temporary host for four years despite objections from developing countries. Concerns were raised about the World Bank’s independence given the influence of the US over its Presidency and operations. The World Bank also has a history of negatively affecting local residents during their projects in developing countries.  

To counter these fears, the Loss and Damage fund will be governed by a board with developed and developing countries represented equally. Statements from the World bank’s President, Ajay Banga, suggest they are willing to reform their policies to avoid repeating previous failures. He stated they are working towards adding debt repayment suspension clauses to existing contracts with developing countries. This is in addition to the World bank’s previous pledge to include these clauses in all new deals.

Sadly though, the role of the World Bank is unlikely to be the only area of contention in negotiations.  A potentially bigger issue could be who donates to the fund and who receives money from it.  The categories that define developed and developing countries were established in 1992.  This means countries like China, India and Saudi Arabia are eligible for funds despite generating the first, third, and ninth most emissions in 2022. Additionally, they also have the second, fifth and nineteenth largest economies respectively. 

Developed countries believe such developing and emerging countries that have large economies and produce high volumes of emissions should also contribute to the fund. Countries like China, India and Saudi Arabia argue their emissions are small and recent compared to developed countries that began industrialising in the mid-1800s. They also argue inaction over climate finance meant they couldn’t develop without burning fossil fuels. Whilst arguments over who donates and receives are likely to rumble on, there are signs of compromises being made. The UAE made the joint largest contribution to the fund, alongside Germany, despite the petrostate being classified as a developing country.

What Happens Next…

Now COP28 is finished, the next question for environmentalists is how the money pledged will lead to projects happening on the ground in climate-vulnerable areas. In his interview with the Financial Times, the President of the World Bank predicted money from the Loss and Damage fund would start being used for projects sometime next year. 

It is positive that a roadmap is appearing for the operationalizing of climate finance, but any delay will likely increase the work that is required by the fund.  Disasters caused by climate change are becoming more frequent and more severe, running up a larger bill for the Loss and Damage fund to cover.  Therefore, it is critical that the actioning of the fund is treated with urgency.

Whilst a timescale for funding is beginning to appear, plans for how to raise these funds are still uncertain. There is widespread agreement that the private sector must be included in fundraising efforts due to the vast amounts of money required.

One proposal for doing this is having regions pool funds together to cover the costs of disasters that strike the region. This is a common insurance strategy that works on the assumption that within a certain region, only some countries within it will be affected by a particular climate disaster.  If all countries pool their money, countries affected by a climate disaster have a larger pool of money to draw from for their recovery and reconstruction efforts.  

An alternative proposed by developing countries is levying taxes on global carbon and methane emissions. Industries like aviation, shipping and agriculture contribute most to global emissions and so it seems just that these emissions should be taxed. The taxes raised would be reserved to cover the costs of loss and damages caused by the effects of climate change.

Progress was made at COP28 on a variety of key issues, including the Loss and Damage fund.  However, the money pledged to the fund is only a starting point and is a long way off providing the scale of finance it requires. It is also unclear how the fund’s money will be used and even who will decide how it operates. These details must be confirmed before projects can begin. There is also the fact that it has taken 30 years from Vanuatu suggesting a Loss and Damage fund to money being pledged by developed countries. Future developments must happen faster than this if the fund is going to be effective.

Despite the legitimate concerns, there are causes for optimism.  The Loss and Damage fund announced on the first day of COP28 built momentum for climate diplomacy.

Signs of this gathering momentum can be seen elsewhere. The World Bank has agreed to reform its policies to accommodate developing countries’ green transitions. Furthermore, deals have become more common and more significant in COPs since the Paris Agreement. More frequent and severe climate disasters and their devastating impacts has sharpened world leaders’ desire to address climate change. 

It should also be commended that an agreement on the environment was reached during an era where global politics is as unstable as it is now. This somewhat eases fears that international conflicts would create a barrier to climate agreements. 

If this momentum can be seized and harnessed, the next few years could see significant progress in restricting global warming. However, climate change is a time-critical issue and the longer it takes for Loss and Damage fund projects to start, the more resources it will need to achieve its objective.