Climate loss and damage funding: a mechanism to make it work
|23 November 2023
Last year, at the 27th Conference of the Parties (COP27), developed countries acknowledged their responsibility in causing most of today’s climate change and formally agreed to financially aid developing countries for their climate change-related losses (of ecosystems, heritage and culture) and excess damages (from the excess losses from extreme weather events). This is widely referred to as the UN ‘loss and damage’ fund. Bert Kramer, lecturer at FEB and head of climate research at Ortec Finance, together with co-authors from Ortec Finance, Cadlas, the International Centre for Climate Change and Development, and QuTec Srl, published an opinion piece in 'Nature' on a mechanism to make this climate loss and damage funding work.
The article by Richard H. Clarke, Noah J. Wescombe, Saleemul Huq, Mizan Khan, Bert Kramer and Domenico Lombardi outlines a practical approach on how the ‘loss and damage fund’ agreed at the 2022 COP27 can be executed to allow funding to commence. The authors state that the process on how to execute the fund is currently unclear, they argue that clarity is urgently required at the COP28 (which starts on 30 November 2023), so support funding can commence and the mounting demands arising from climate change-related disasters can be addressed.
Assess the role of climate change in loss and damage
Kramer and co-authors seek to show that funding could be based on a dynamic, forward-looking assessment of future climate change-related impacts using physical risk modeling. They also discuss the merits and drawbacks of widely debated, backward-looking (historical emissions-based) assessments and argue that the successful execution of the loss and damage fund requires three steps. First, A suitable approach to determine which part of a country’s damage-related losses can be attributed to climate change. Second, a suitable way to translate those losses into monetary figures. And finally, the commitment to other ongoing related methodology initiatives and the appointment of an appropriate party, or group of parties, to execute the fund.
According to the authors, there is not enough historical data available in the climate-vulnerable countries to objectively ascertain what proportion of losses can be ‘attributed’ to climate change. This is due to the lack of current weather monitoring resources in these countries. To overcome this data-gap, Kramer and co-authors propose using a proxy-driven acute physical risk model for these calculations.
Criteria for calculating financial support
The authors' proposed methodology shows how current and future losses can be translated into funding figures by factoring-in a country’s compounding economic impacts from supply chain disruptions, urbanization, population growth, migration as well as a country’s GDP, and its ability to adapt to future events and rebuild from disasters. The authors argue that, to help establish the fund, the methodology should be the same for all countries, should be granular and should evolve over time. As losses will differ between cities within a country, even in economically developed countries, they state that funding figures will need to be calculated at a city or sub-regional level, rather than based on country-level data.
Kramer and co-authors stress that a UN protocol, independent from the global financial system, should manage the fund. They suggest that to determine the levels of funding support required, climate-economic risk models can be used to calculate future expected losses on a forward-looking basis. This would ensure efficiency in delivering payments. In their proposed methodology, the final calculation of whether a city/region receives or sends funding should be based on an economic vulnerability ratio (the expected economic physical risk impacts to its local GDP). Those regions below a global threshold would pay while those above it would receive payments.
The aforementioned climate-economic risk models are already in development by Ortec Finance and other partners. The authors hope to contribute to further developing open-source climate risk models within the not-for-profit organization called OS-Climate and hereby support a number of climate-aligned finance initiatives.
About the authors:
Bert Kramer is head of climate research at Ortec Finance in Rotterdam, the Netherlands, and a lecturer at the University of Groningen’s Faculty of Economics and Business.
Richard H. Clarke is a specialist in acute physical risk and climate at Climate and ESG Solutions, Ortec Finance, London UK.
Noah J. Wescombe is a specialist in climate resilience at Cadlas, Tramshed Tech, Cardiff, UK.
Dr. Saleemul Huq was director of the International Centre for Climate Change and Development, Dhaka, Bangladesh. Sadly, Dr. Huq, who was a visionary leader and tireless champion of the loss-and-damage fund, suddenly passed away during the writing of this article.
Mizan Khan is deputy director and programme director of the Least Developed Countries Universities Consortium for Climate Change at the International Centre for Climate Change and Development, Dhaka, Bangladesh.
Domenico Lombardi is founder and chief executive of QuTec Srl, Benevento, Italy.