Loss and Damage Finance Becomes Reality

In late November this year’s global climate conference, COP 28, will begin in Dubai. The headline issue at COP will be the global stocktake, which is a country-by-country review of progress toward fulfilling emissions reduction pledges under the Paris Climate Agreement.

Yet while much attention at COP will be focused on emissions reductions, a second issue, and one that has long been critical to developing nations, will finally and concretely share the limelight. The issue is that of loss and damage finance, or financial support for developing countries that sustain damage resulting from a changing climate. In Dubai negotiators are expected to endorse a financing framework, and purpose-built fund, to explicitly address the recovery needs of countries impacted by climate change.

Michael Franczak, a research fellow at the International Peace Institute, explores loss and damage finance and the race to deliver a formal finance mechanism in time for COP28. He also explains why the issue of loss and damage finance has been so contentious and discusses innovative means to provide loss and damage funding on the scale that’s needed.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. In late November, this year’s global climate conference, COP 28, will begin in Dubai. The headline issue at COP will be the global stocktake, which is a country-by-country review of progress toward fulfilling emissions reduction pledges under the Paris Climate Agreement.

Yet while much attention at COP will be focused on emissions reductions, a second issue, and one that has long been critical to developing nations, will finally and concretely share the limelight. The issue is that of loss and damage finance, which is financial support for countries that sustain damage resulting from a changing climate. This year in Dubai, countries are expected to endorse a financing framework and purpose-built fund to explicitly address the recovery needs of countries impacted by climate change.

Here to discuss loss and damage finance and frameworks to deliver it is today’s guest, Michael Franczak. Mike is a Research Fellow at the International Peace Institute and the author of a recent paper that explores loss and damage funding mechanisms. In the podcast, we’ll discuss why the issue of loss and damage finance has been so contentious and explore the key elements to be included in this year’s financing framework. Mike, welcome to the podcast.

Michael Franczak:  Thank you, Andy. I’m glad to be here.

Stone: So Mike, you and I met at COP 27 in Egypt last November, when you were working there on the issue of loss and damage finance. You taught me a whole lot about it, and I still have a lot more to learn, but I thought we could start this conversation with a little bit of history. Tell us what happened at COP 27 that was so significant regarding loss and damage finance.

Franczak: Sure, so the decision on loss and damage finance at COP 27 was possibly the most consequential climate decision since Paris. What was decided at COP 27 was to establish a new dedicated fund for addressing loss and damage, as well as recommendations for additional funding arrangements. So the decision does these two things: It says there will be a new loss and damage fund, and there should be enhanced arrangements outside of the UNFCCC space to support it. The idea is to link the inside and outside. I like to say the politics of climate change are inside the conference or the parties or the COPs that we go to every year, but the money for climate change is outside that. It’s in the international financial institutions and development banks and capital markets, and so on.

So the decision sets up the task for a transitional committee of 24 developed and developing countries to work out what that fund will look like. And the transitional committee is tasked with delivering these plans to COP 28 in Dubai in November and December, so they had less than a year to work. They have roughly five months left to prepare these recommendations, and then countries will discuss them, negotiate them, and hopefully agree on them so that the fund can be operationalized as soon as possible.

Stone: So Mike, let’s take a step back here. Could you define for us what specifically is loss and damage, and by extension, what is loss and damage finance?

Franczak: “Loss and damage” refers to the impacts of climate change that will not be or have not been avoided through mitigation or adaptation. There is not a formal definition anywhere, in part because it has been such a contentious issue, but I can give kind of a consensus definition, which would be: Loss and damage includes climate-related impacts and risks from both sudden-onset events such as floods and cyclones, and slower-onset processes, like droughts, sea level rise, glacial retreat, and desertification. So when we think about what are the losses and damages, we look to economic losses and damages to households, communities, to infrastructure, to industries like agriculture, forestry, fisheries, and tourism. But we also look to so-called “non-economic losses,” which are kind of nonmarket-traded damages, and that can include a wide variety across lives, cultures, territories, health, and education. The idea with non-economic losses is not that they have no monetary value, but that they’re not assigned one by the market. And the risk is that if you don’t put a value on it, it won’t be addressed.

So what countries are saying is they need support to address the economic losses, to infrastructure and to industries, but also support to address these “non-economic losses,” so-called, to health to livelihoods, to education, which one can argue have a very strong economic dimension.

Stone: This issue has long been contentious, and loss and damage finance finally made it onto the agenda at COP 27. Can you give us a little bit of the background? Why has it been contentious, and I believe there’s a fairly strong political component to that?

Franczak: That’s correct. Loss and damage is not a new issue. It’s something like 30 years old. Vanuatu had a proposal back in 1992, when the U.N. Framework Convention was established, to provide money for addressing loss and damage. Why it has been so contentious is because the discussions have been seen as involving liability and compensation for past climate harms. What has happened lately are two things. One is an incredible developing-country unity around the issue, which we saw first in Glasgow at COP 26. The second is a broadening of the understanding of what counts as loss and damage.

So before, instead of a small, restricted discussion about liability and compensation or about payments, it was very much in the interest of developed countries to continue the discussions that way because they weren’t really getting anywhere.

Stone: To not put anything in concrete terms, right?

Franczak: Yes, but now that’s being done, so we had an extraordinary thing; for instance, now debt is considered part of loss and damage. Addressing loss and damage would involve reducing the debt that has accrued from these climate impacts. To me, that’s a massive step forward.

Stone: Interesting. So again, I met you last November in Egypt. You were working on the issue of loss and damage. What is your involvement professionally with loss and damage, and who are you working on behalf of, with IPI?

Franczak: Sure, so my professional involvement with loss and damage is two-fold, one as a researcher. I’m a Research Fellow at IPI and produce research reports on climate finance and loss and damage. The second is as an advisor to the delegation of the government of the Maldives. The Maldives is a low-lying island state. Loss and damage is a top issue for Maldives and other small island developing states. In particular for Maldives, the issue is slow-onset damages from sea level rise, which have zero funding, or virtually zero funding.

So what I do is support their ministers in negotiations by helping prepare positions and having conversations with other delegates. But it’s a very unique position to be in, in the COP process. But it’s mostly me lending support to the ministers and negotiators.

Stone: Jumping back to the issue of loss and damage finance here, where we were before: There are three elements to the global climate effort. One is mitigation. One is adaptation. One is loss and damage. And there has been so much to focus on financing for mitigation, which is avoiding having emissions go into the atmosphere. Adaptation is buttressing communities, cities, and coastlines against the damages of climate change. And then there’s loss and damage, right? And loss and damage has been, until very recently, somewhat of an afterthought, potentially deliberately. Where has the financing for loss and damage traditionally come from, and what has it looked like?

Franczak: The financing for loss and damage has traditionally come from the humanitarian sector. We have a very robust and long-standing multilateral, humanitarian system through the United Nations. And most of the funding that countries would receive right now to address loss and damage would come through that. The problem is that the humanitarian system is not designed to help countries address problems of this size, scale, and scope. The humanitarian system is designed to help people meet basic needs during times of emergencies. It’s not designed to rebuild countries to either their previous state of development or a higher state, a stronger state, where they’ll be able to “build back better,” as the phrase in the U.N. has taken off, too.

So we have mitigation, which is averting loss and damage. We have adaptation, which is minimizing loss and damage, but addressing is this new category, and it’s very difficult to find straight-forward investments in loss and damage. Mitigation has a return on it. Adaptation — there are more project-based scenarios, where you can find adaptation funding. Loss and damage is very difficult because the kind of funding that we’re envisioning with this fund, for instance, would involve policy support, which is very different.

There is some funding from the development system and from international financial institutions, but it’s very small, and it’s limited to kind of one-off payments. So there’s not the kind of long-term support that countries really need to rebuild after an extreme weather event, like a cyclone, or to rehabilitate and import the expensive technology needed to restore their drinking water and arable land, and so forth.

Stone: So financial aid for countries that have suffered through an environmental or a climate-related disaster has been very limited, as you’ve mentioned. That money has generally been dedicated or directed towards food and survival needs. I think there’s a saying that it goes “to rice and tents.” I believe that’s the saying. But that money has not been there for longer-term rebuilding, again, as you’ve said.

Franczak: That’s correct, “Rice, water, and tents.” But really that next step is absent. You might imagine that the World Bank, with the International Bank for Reconstruction and Development is active here, but they’re only just beginning to be. So these are a few major priority finance gaps. Not only is there not a lot of support for loss and damage, but there are these priority finance gaps within the system for slow-onset, for that early reconstruction phase, for displacement, and for the non-economic losses that I mentioned.

Stone: So then we come to the loss and damage agreement that was agreed upon at COP 27, which is supposed to be “operationalized,” is the term, by COP 28. And that COP 27 agreement called for the mobilization of “new and additional funding arrangements for loss and damage.” It further says these arrangements will be made “inside and outside the convention and Paris Agreement.”

So these are vague yet critical details. What new and additional arrangements are we looking at specifically?

Franczak: That’s a great question, and those are critical phrases there. “New and additional.” Why “new and additional?” The concern is that if we task another existing institution with addressing loss and damage, say the Green Climate Fund, you’re not going to get an equivalent additional lump of money to the pot. That is, it’s going to take money away that already exists and is allocated for mitigation and adaptation.

So that is the concern and why “new and additional” is such an important phrase. So what are the new and additional arrangements? Well, the transitional committee is yet to elaborate those. Mostly those will come from the institutions that the COP has no authority over. So that will come, for instance, from the World Bank. At the Summit for a New Global Financial Pact in Paris last week, the World Bank announced that it would be including climate-resilient debt clauses in all its new lending. This pauses the interest payments on a loan when a weather threshold is hit. So this is an important change.

What it’s not so far is new money. So that’s really where the fund is coming in, and the fund is passed not just being this new fund that’s going to address the priority gaps that I had mentioned earlier, but it’s going to do so at scale. And that requires raising resources in new ways, like innovative finance. So that gets to the inside and outside. This was a really, really important part of the agreement that we fought hard for. There are a few paragraphs, I think paragraphs 12, 13, and 14 in the agreement, which instruct the IMF and World Bank and Secretary General to take specific actions to start gearing these institutions to address loss and damage in their own programming.

So that was a really important part of the arrangement. You have the fund, which the COP is going to establish and elaborate, and then you have the funding arrangements, which can work with the fund in a new, coherent way to address loss and damage. One fund on its own is never going to do it, but a new fund with new enhancements to the existing system — that’s how we can get from billions to trillions.

Stone: And that’s such a critical issue that I want to jump in on here. The amount of financing here will be huge, and as we see more damages due to climate change, the amount of finance that’s going to be needed is just going to grow, I would imagine. So in your recent paper that came out in May, which is titled “Financing Loss and Damage at Scale: Toward a Mosaic Approach,” you introduce or discuss this idea of a mosaic approach to loss and damage finance. What is this mosaic approach, and how is it supposed to deliver the scale of L&D financing we’re going to need?

Franczak: So the mosaic approach is an idea of addressing the adverse impacts of climate change at scale by enhancing the system that we have, while building the system that we need. So it recognizes that — take the case of Pakistan. Forty billion dollars are needed for reconstruction. A single fund alone is never going to do that. Even if we got a fund with $40 billion, it would all be gone in the first crisis. So that’s not going to work. What we need to do is to start having institutions address loss and damage with their own resources and work with the fund in new ways to coordinate and scale and leverage across institutions. So this is what the mosaic is about.

The mosaic would establish the loss and damage fund as a central part of a new system, and that loss and damage fund would focus on the priority gaps that other arrangements are not addressing. The other part of the mosaic is those institutions. And what ties it all together is a new loss and damage coordinating council or coordinating mechanism — and this is what we are proposing right now, at the Secretary General’s level — which would have the authority to coordinate institutions so that they’re coming in at the right times. There’s a lot of duplication in the existing system. That’s a lot of waste. There are a lot of opportunities where if you come in at this inflection point, you can really change the development trajectory, but we don’t have an institution doing that, and we don’t have a coordination system beyond the humanitarian. So the mosaic is really extending this, thinking like a bird’s-eye view of the global financial landscape, everything that we have to address loss and damage, and making sure that institutions are meeting countries’ needs in new ways and raising money in new ways because the problem is only going to get bigger.

Stone: So Mike, I just want to jump back to this question. I wonder if you could give me an example. Obviously when we were talking about mitigation, there’s a chance for investors — private investors, private money — to earn a return on that investment. In loss and damage, that opportunity is a little bit less obvious. Can you explain to me how private investors or private investment may be attracted to the issue of loss and damage?

Franczak: Sure, so there are some ways that the private sector could invest in loss and damage. Of course countries need loans to rebuild, so that’s one way. But the problem is the borrowing rate for developing countries is so much higher that it’s very difficult to find a match between a loan that a country can actually afford, and an investor willing to offer it. The opportunities for investing in loss and damage — they exist in certain projects like infrastructure, and I think livelihoods is another area. Jobs and small businesses are destroyed by extreme and slow-onset events, and there needs to be support to rebuild those. There is a compelling, I think, return in investing in those critical sectors.

The problem with the private sector investing in loss and damage is a scale issue, so there are some small areas where they can do it, and they need to be doing it more. But if we rely on private investment to fill this gap, then we’re never going to get there.

Stone: So the transitional committee has been tasked with operationalizing the financing mechanism and the fund itself by COP 28, which again, begins in November. There was a meeting in Bonn. It’s an annual meeting, but the Transitional Committee did quite a bit of work at Bonn in June on loss and damage finance. Can you tell us briefly what was accomplished at Bonn, and what still needs to be accomplished? What are the hurdles that need to be overcome before arrangements are agreed upon in Dubai?

Franczak: So at Bonn every year, the UNFCCC secretariat is there, and delegates meet to come up with the agenda for COP 28 and work out some other agreements on the sides. This year, for loss and damage, there was something called the “Glasgow Dialogue” being held, something that started at COP 26. And the Transitional Committee used it as an opportunity to source ideas for what the fund should be doing.

I think two concrete things came out of those discussions. One is an agreement among North and South that there needs to be a new coordinating mechanism or coordinating function. Where that is, is unclear to me right now. We have ideas, but it is still to be determined. The other is that there are some priority areas where the fund could be especially useful. And as I noted earlier, those are in the areas of funding for slow onset, for early reconstruction efforts, for displacement and for some non-economic losses.

What do they need to do before COP 28? Well, a lot of things. They have to deliver on two sides of this decision. One is the fund. The other is the funding arrangements. I would say we’re farther along on elaborating the fund structure than we are recommendations for the funding arrangements, but that might be where the coordinating issue comes in. The other thing that needs to happen is to start arrangements for innovative finance. Now this is really important for the loss and damage fund. Innovative finance refers to basically any money for development that is not overseas development assistance, so what we think of when we think development aid to multilateral organizations. It’s anything beyond that.

So what this means for the fund is different funding sources. You have two options if you start a new fund and want to raise money. One is to ask, to ask developed countries, or just countries and philanthropies and NGOs, or you can tax. The organization Unit Aide, which the French led and founded in the mid-2000s, relies for half of its funding on a levy, a nationally collected airline levy, in about a dozen countries. To do that, however, you need to start organizing now, and you need to have political leadership happening.

One opportunity right now at the International Maritime Organization, they’re discussing a carbon shipping levy. What that’s going to look like, and whether the proceeds will go toward addressing loss and damage is to be determined, but there are these other discussions happening on innovative finance, on global economic reform, like the Bridgetown discussions. And the TC is going to need to respond to these in some way and incorporate some of those actors and make some linkages, if they want to have the robust funding that the fund will need.

Stone: Mike, a final question for you here. You just mentioned the airline industry, the shipping industry. This is an energy policy podcast. Those are very energy-intensive industries. I think the final question here is: Energy comes up obviously in discussions of mitigation. Does the energy industry have a meaningful role when it comes to addressing loss and damage finance?

Franczak: Yes, I think they have an absolutely critical role. The most important principle to global climate negotiations is CBDR, common but differentiated responsibility. And there are many different understandings of it, but the basic idea is that the countries that caused the damage need to take the responsibility in leading the solution. This includes the industries that profited from causing the damage. So I think when it comes to taxes, it’s really critical to have that justice component.

On the other hand, you have a lot of developing countries that export fossil fuels. So this throws an additional complication into designing a tax that all countries can agree on to pay for the fund. For instance, last week in The Wall Street Journal, one of the cover stories was Guyana. Guyana received an invitation to join OPEC Plus. Now why would OPEC Plus want Guyana? Because Guyana has lots of oil, and they have a new strategy to maximize the profits from it, which is to get it all out of the ground now.

So both the old-guard fossil fuel exporting countries and the new-guard can have an interest in avoiding a tax on some of these things, but it’s absolutely critical if you want less loss and damage in the future, to mitigate. And if you’re doing a tax on something like shipping, which has been exempted from past climate agreements, and 90% of world trade moves on ships, then you can actually effect a pretty big reduction in emissions while raising a pretty big chunk of money.

The issue, as I said, is the incidence of the tax and where it will fall, and that’s when the justice component comes in in the politics, and it gets really tricky.

Stone: Mike, thanks very much for talking.

Franczak: My pleasure.

Stone: Today’s guest has been Mike Franczak, a Research Fellow at the International Peace Institute. Check out the Kleinman Center for Energy Policy website for our archive of more than 150 episodes, as well as research in upcoming in-person and virtual events.