Historic? Revisiting the COP27 Agreement on a Loss and Damages Fund

If there is anything we've learned over the past decade of climate finance commitments, it's that the devil is in the details.

After turning the page on 2022, it is time to analyze the highly-discussed 27th Conference of the Parties (COP27) agreement on a loss and damages fund.

In 2021, COP26 ended in a cacophony of calls to increase climate finance for the adaptation of vulnerable countries to extreme climate events like droughts and floods. As if to further prove the point, last year we witnessed many extreme climate events which caused severe damages in vulnerable countries. 

The United Nations estimates that vulnerable countries need USD$70 billion per year to cover the costs of adaptation efforts, and that by 2030 they will need between USD$140 billion - USD$300 billion. It is therefore no surprise that the “historic” COP27 agreement on the establishment of a Loss and Damage Fund for vulnerable countries was so widely covered in the media. While this was no doubt a win for vulnerable countries and for climate diplomacy more broadly, several questions remain.

What exactly does a loss and damages fund mean? What does this historic agreement entail? And most importantly, why should vulnerable countries trust that richer countries will follow through on climate finance commitments?

Over the past decade, parties have been working towards better addressing the climate-induced losses and damages of vulnerable countries. Though rich countries originally committed in 2009 to channeling USD$100 billion per year by 2020 to vulnerable countries for this purpose, analysis from Oxfam shows that funds only reached roughly USD$20 billion by 2019. 

Some of the top reasons for these shortcomings included: contention surrounding who should pay, and how much; lack of standardized climate finance counting and reporting; and a lack of access to these funds by communities in vulnerable countries. 

Once countries announced their own politically palatable contribution pledges, they had hoped others would simply follow suit. This strategy clearly failed. Instead, questions were raised about whether contributions should be proportional to some kind of well-documented metric, such as per-capita wealth or per-capita past CO2e emissions. If either of these metrics were used, however, it would mean the United States is falling short on its contributions while countries like Japan, Germany, and France have been overpaying. *Politics has entered the group-chat*

Oxfam also estimated that bilateral climate finance was only about a third of OECD estimates, and that grant equivalents may have been less than half of what was reported by developed countries. These bilateral and grant discrepancies can be attributed to three main accounting issues. 

Firstly, while concessional loans are an important tool in the climate finance toolbox, counting them at face value can lead to overestimates of how much aid is being received by developing nations. Secondly, current aid counting systems allow for overestimation of climate-relevant contributions via the Rio Marker system of the UNFCCC. Thirdly, private climate finance contributions remain a blind spot due to a lack of transparency by developed countries on the amount of private finance mobilized in developing countries, and there has been disagreement about whether mobilized climate finance in the form of “blended finance” counts towards bilateral commitments.

While much of the focus on climate finance mobilization is on aggregate amounts, it is necessary to consider how much aid is actually getting to the most vulnerable communities. In 2019, only 25% of reported public climate finance was for adaptation, and only 20.5% of reported finance went to Least Developed Countries (LDCs) while 3% went to Small Island Developing States (SIDS). Moreover, most of the aid that went to LDCs, and roughly half of what went to SIDS, was in the form of loans and non-grant instruments (many countries could not access loans below 18% interest rates).

It seems fair to say that any successful strategy aiming to mobilize climate finance at the speed and scale required must, at a minimum, address these concerns.

So what does the COP27 agreement on a loss and damages fund entail? The most significant decision was on:

“funding arrangements for responding to loss and damage associated with the adverse effects of climate change, including a focus on addressing loss and damage”.

The decision begins with an acknowledgment of the “urgent and immediate need for… financial resources to assist developing countries that are particularly vulnerable to the adverse effects of climate change”. This is followed by language calling for (1) the establishment of a new fund, (2) a transitional committee to operationalize the funding arrangements that will exist for such fund; and (3) recommendations to help determine the funding arrangement.

But while these are all necessary pieces, the agreement feels wholly incomplete. It appears the most difficult negotiations are still to come. The decision’s recommendations on operationalizing funding arrangements include: establishing institutions; identifying and expanding funding sources; and coordinating with existing funding arrangements—all by COP28. Considering the fact that a universal definition for what counts as climate finance does not currently exist, negotiators have their work cut out for them between now and the Fall of 2023.

It should also be noted that these efforts fall against the backdrop of added global fiscal and monetary challenges that are anticipated over the coming year. High inflation, high interest rates, and increased pressure to invest in departments like healthcare and defence are all expected to clash with climate finance goals. 

With immense political challenges ahead and fresh climate finance failures behind us, it appears this historic agreement can only be as historic as the next year of negotiations. The countdown is on.