As communities in countries rich and poor face soaring costs from extreme weather and rising seas, governments are grappling with how to set up a new fund to tackle “loss and damage” driven by global warming.

The topic was for years controversial at U.N. climate talks, as wealthy nations rejected demands for “compensation” for the impacts of their high share of the planet-heating emissions that are turbo-charging floods, droughts and storms around the world.

However, at the COP27 climate summit in Egypt last November, a group of 134 African, Asian and Latin American states and small island nations finally won agreement on a new fund that will pay to repair devastated property, or preserve cultural heritage before it disappears forever.

But the details of where the money will come from and how it will be disbursed were left to be worked out by this December’s COP28 conference in Dubai.

As mid-year U.N. climate talks got underway in Bonn in June, Saleemul Huq, director of the Dhaka-based International Centre for Climate Change and Development, called on the United Arab Emirates to declare its intention for COP28 — which it will host — to create the “Dubai Loss and Damage Fund.”

Here’s why the issue of “loss and damage” has grown in importance this past decade — and where the sticking points in finding finance to address it could lie.

What is climate change “loss and damage”?

“Loss and damage” refers to the physical and mental harm that happens to people and places when they are not prepared for climate-driven impacts, and are unable to adjust the way they live to protect themselves from longer-term shifts.

It can occur both from fast-moving weather disasters made stronger or more frequent by warming temperatures — such as floods or hurricanes — as well as from slower-developing stresses like persistent drought and sea levels creeping higher.

A large share of “loss and damage” can be measured in financial terms, like the cost of wrecked homes and infrastructure.

But there are other non-economic losses that are harder to quantify, such as graveyards and family photos being washed away, or Indigenous cultures that could disappear if a whole community must move because their land is no longer habitable.

A June 2022 report released by a forum of 55 climate-vulnerable countries — from Bangladesh to South Sudan — found they would have been 20% wealthier had it not been for climate change and the $525 billion in losses inflicted on them by shifts in temperature and rainfall over the past two decades.

Often the poorest people lack the means to recover what they have lost, particularly as aid fails to keep up with growing needs, as seen with last year’s huge floods in Pakistan or the drought that has left tens of millions hungry in the Horn of Africa.

What funding is on offer when loss and damage happens — and how can more be raised?

So far there has been very little money available apart from aid provided through the international humanitarian system to respond to disasters — which every year faces shortfalls.

A 2022 study by anti-poverty charity Oxfam found that aid needs in response to weather disasters had skyrocketed more than eightfold in the last 20 years.

But U.N.-coordinated humanitarian emergency appeals are, on average, only 60% funded.

“There is not enough money for humanitarian action — even to do the first-phase response [to disasters], never mind the preparedness, resilience [and] longer-term early recovery piece,” said Debbie Hillier, who manages flood resilience programs for Mercy Corps.

According to a 2018 study by researchers at the Basque Centre for Climate Change, the costs of loss and damage in low- and middle-income countries could reach between $290 billion and $580 billion a year by 2030.

But rich countries are already struggling to meet a goal to channel $100 billion annually to vulnerable countries for reducing emissions and adapting to climate change.

Some donor countries, including a few European nations, Canada and New Zealand, have already agreed to provide loss and damage funding to poorer nations – although so far, those pledges total only about $275 million.

Given this, climate justice activists have long argued for the need to find innovative sources for loss and damage funding, based on levies and taxation.

Those include a controversial proposal — backed by the U.N. chief — for rich governments to tax the windfall profits of fossil fuel companies.

Other ideas that have gained ground include levying a small fee on international flights – which contribute to climate-heating emissions – and a global tax on financial market transactions, which could be distributed by the new fund.

The most concrete loss and damage funding scheme so far, the “Global Shield Against Climate Risks”, aims to boost insurance coverage for vulnerable countries and communities, attracting about $200 million at its COP27 launch, largely from Germany.

It will expand initiatives — from subsidized insurance coverage to stronger social protection schemes and pre-approved disaster financing — that can swiftly channel support to disaster-hit poorer countries’ own contingency plans.

But many climate campaigners say insurance cannot be a lasting answer, with losses expected to soar and even become uninsurable as climate disasters intensify.

What are the obstacles to setting up a loss and damage fund?

A “Transitional Committee” is meeting regularly this year to work out the form and scope of the new loss and damage fund, and how to fill its coffers.

Observers say the discussions have progressed constructively — and are hoping this month’s Bonn climate talks will add political momentum. But there is disagreement on which parts of loss and damage finance should fall under the new fund’s remit.

Some countries, notably the United States, want the fund to focus tightly on two key areas less well-covered by humanitarian agencies — “slow onset” disasters, from desertification to islands sinking as seas rise, and “non-economic losses”.

That would also include support for communities — or even whole island nations — to relocate should they no longer be able to continue living in their current homes.

Climate justice campaigners and others, meanwhile, are pushing for the new fund to have a broader scope, which would include helping finance the humanitarian response to climate disasters as well as efforts to cover gaps, especially in terms of building resilience.

A report last month by the Zurich Flood Resilience Alliance outlined lessons learned by the aid sector that could help the new loss and damage fund operate effectively.

Its recommendations included a warning to donors not to re-label their humanitarian aid as loss and damage funding, and to find new sources of finance.

It also stressed the need to use existing systems to deliver aid on the ground fast, find ways to get funding to fragile and conflict-hit states, and work with local groups.

The key will be to agree on how loss and damage action can both benefit from — and amplify — the work already being done by humanitarian agencies to protect vulnerable communities, experts say.

“We can’t allow the accountability to be shifted outside the [U.N. climate] system — for a very simple reason: 90% of disasters we are facing today are climate-related,” said Harjeet Singh, head of global political strategy for Climate Action Network International.

“The loss and damage fund has to be the top-level mechanism that should have oversight on whether people are getting sufficient support or not.”
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