NO other climate issue has divided the Global South and Global North in international climate negotiations as much as the question of setting up of the loss and damage fund (LDF). Developed and developing countries have shouted at each other in a dialogue of the deaf because the two subscribe to two distinct principles, if not paradigms. Developing countries have traditionally argued for ‘shared but differentiated responsibility’, enunciated as Principle 7 of the Rio Declaration of 1992, arguing that industrialised countries responsible for emissions in the atmosphere since the Industrial Revolution have a historical responsibility to support developing countries. Led by America, developed countries have traditionally rejected this responsibility and refused to engage in discussions on liability or compensation.

Dr Saleemul Haq, my friend from Bangladesh and lifetime warrior for loss and damage who, sadly, just left this world, exercised leadership and struggled to ensure that the Paris Agreement recognised “the importance of averting, minimising, and addressing loss and damage associated with the adverse effects of climate change”. The EU and US have, however, insisted on extending support to only the least developed countries. The EU also made its contributions to the fund conditional on contributions from China. It was a coded way of diluting the principle of historical responsibility by engaging China and other emerging economies, as well as oil-rich economies such as Saudi Arabia and the UAE, as contributors. The EU and US positions were based on Principle 6 of the Rio Declaration that recommends ‘special priority’ be given to LDCs.

The emphasis on LDCs excludes middle-income countries such as Pakistan that are disproportionately exposed to climate risks and disasters. As chair of the Group of 77, Pakistan drew attention to the country’s climate vulnerability and argued that loss and damage support should also be extended to vulnerable countries even if they were not LDCs. Pakistan’s advocacy to set up the LDF was successful at COP27 held in November 2022. A transitional committee was created to resolve fundamental issues to operationalise the LDF. The key questions included:

i) allocation, ii) governance, iii) scale of funding, and iv) eligibility criteria for recipient countries.

Loss and damage funding is not aligned with the aspirations of developing countries.

The basic differences between developed and developing countries are rooted in two distinct standpoints. The transitional committee failed to resolve them in its four meetings but eventually a special meeting in Dubai resolved the issue as follows:

Allocation: Developed countries have agreed to make financial contributions to the LDF on a voluntary basis only. There will be no obligatory contributions. Additionally, it is agreed that the LDF will seek contributions from philanthropists, bilateral and multilateral institutions, the private sector and, possibly, from carbon markets, pricing mechanisms, and other such instruments that can serve to complement grants and concessional loans from public and private sources. It is agreed that financing instruments, such as social protection, contingency finance, catastrophe-risk insurance, and catastrophe bonds will be used. This wide-ranging menu will enable the LDF to use grants, concessional loans, and blended lending.

Governance: Developing countries have grudgingly accepted the American proposal to let the World Bank host the LDF for the first four years. They had initially argued the bank was not independent enough to administer the fund, and that it would give donor countries outsized influence over decision-making. The governance system for the LDF is, however, not fully determined yet, as the transitional committee charged with making recommendations for the fund could not agree on key aspects of the board and its role.

Scale: The proposed amount for the fund is not yet clear as sources of funding and types of financing have not been agreed upon thus far. It is still expected that the LDF will add a third pillar to the global climate finance landscape, as the other two pillars — mitigation and adaptation — are operational. Developing countries have proposed at least $100 billion by 2030 to address irreversible damage caused by climate change. Globally, climate economists have estimated that the measurable annual cost to developing nations will reach over $400bn by 2030, and above $1 trillion by 2050.

Eligibility: The eligibility criteria for prioritising financing has not yet been finalised and the final decision will hinge on several factors particularly sources of funding and the type of funds made available to the LDF. It is, however, certain that LDCs and small island developing countries will be given the first preference, while for other developing countries special-purpose windows are expected to be established. For countries such as Pakistan that experience large-scale rehabilitation, resettlement and reconstruction challenges (as seen after last year’s floods), some trigger-based mechanisms could perhaps be developed for fast-track support in case of disasters. The LDF could use a combination of ‘needs-based’ (a country’s economic and financial limitations and vulnerability) and ‘performance-based’ (a country’s ability and performance in utilising the allocated finances) criteria to assign funds.

Several operational elements of the LDF remain to be negotiated. Yet, it is clear the LDF is not aligned with the aspirations of those developing countries who were seeking financial flows based on the principles of climate justice. From our point of view, the fund will take time to be operationalised, giving Pakistan time to prioritise the loss-and-damage-related commitments made in its revised Nationally Determined Contributions and augment its eligibility to receive LDF financing.

The consensus reached on operationalising the fund is precarious and this, together with the war in Gaza, will cast a long shadow on the climate summit later this month. The proposed fund has potentially become entangled with several central issues of the climate summit, particularly the phasing out of coal and other fossil fuels, approval of the Global Stocktake report, carbon trading mechanisms, and mobilising private sector finance for both adaptation and mitigation. It will now influence the main negotiating text and the outcomes of the Conference of the Parties.

The writer is an expert on climate change and development.

Published in Dawn, November 9th, 2023