Climate change is disproportionately impacting the poorest populations
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Creating funds for climate loss and damage

Climate change disproportionately affects poor communities. How can the victims of climate change get the financial support they deserve?

Climate change is disproportionately impacting the poorest populations and those who have contributed the least to the problem. In 2022 alone, record floods affected 33 million people in Pakistan, and 22 million people in the Horn of Africa are at risk of starvation due to recurring droughts. These communities not only suffer from pain and trauma, but they also lack the financial resources to recover from the effects of climate change and rebuild their homes and livelihoods. They are now calling on the countries and companies that are the largest polluters to compensate them financially for the losses and damages caused by their actions.

Reparations for losses and damages have long been taboo in international climate negotiations. Yet, in November 2022, after decades of advocacy by civil society and small island states,  vulnerable communities finally obtained recognition by creating a dedicated multilateral fund for loss and damage. 

However, there is no guarantee that the fund will succeed. For now, the fund is only an empty shell on paper. This year, countries will have to agree on what the fund will look like and how it will function. Our research, led by the Stockholm Environment Institute, finds that the loss and damage fund should serve the needs and priorities of communities hit the hardest by climate change. Climate change is unfair from its roots to its consequences. The act of building back must repair these injustices. This means prioritising the most vulnerable and marginalised groups, such as women, indigenous people, people with disabilities, and ethnic, religious and LGBTQ minorities, and letting these communities decide how the fund will operate and how it is used. In 2022, we led a series of interviews with key stakeholders to identify what characteristics the new loss and damage fund could adopt to live up to these expectations. Based on these conversations and the relevant literature, we identified six principles to underpin the design of the loss and damage fund.

Historical Responsibility and “Polluter Pays”

Climate change worsens as greenhouse gas emissions accumulate in the atmosphere over time. Therefore, the responsibility of paying for loss and damage should fall on those who have emitted the most. This concept of climate justice is called historical responsibility, or the polluter pays principle. Responsibility can be attributed to polluting countries, companies, or individuals. Developed countries have contributed the most to the total global emissions. It is also thanks to the exploitation of coal, oil and fossil gas – the main causes of climate change – that they have accumulated their wealth and ‘developed’ their industries and societies. 

Since the loss and damage fund is a multilateral fund relying on countries’ participation, it should largely be funded through public finance from developed countries. Developed countries could then raise funds for loss and damage by applying the “polluter pays” principle domestically, such as through implementing a climate damages tax on their most polluting industries or by sanctioning polluting behaviours with a frequent flyer passenger levy, for instance.

Figure 1: Guiding principles to support climate justice in loss and damage finance.
(CreditBakhtaoui et al. 2022)

Equitable and Targeted Support

Existing financial support meant to help people respond and adapt to climate change often doesn’t reach the communities that need it the most. This money is sometimes even used in ways that worsen their situation. The loss and damage fund should avoid reproducing the same mistakes and ensure that this time these communities receive the support they need to recover and that their human rights are protected.

Funders could look into distributing funding as small grants or unconditional cash transfers that directly target these communities and give them sufficient autonomy over how the funding is used according to their needs. The GEF/UNDP small grants programme could serve as an example.

Grant-Based Programmatic Finance

Polluting countries have a moral debt towards the victims of climate change and a responsibility to pay for its consequences. It, therefore, makes sense that the money is provided without obligations for recipients. Yet, most climate finance is still in the form of loans instead of grants, which exacerbates the financial struggles of recipient countries and leaves them with less fiscal space to pursue their development goals. When a country is dealing with massive floods, loan-based climate finance can become a vulnerability trap. The loss and damage fund should therefore disseminate grants-based finance. Climate finance is also conventionally distributed through projects. A recipient submits a project – building a dam, for instance – and receives the funding to implement only this project. This means that communities are often left without support once projects end. When it comes to loss, and damage, the steps towards recovery are often uncertain, and the process takes time. Appropriate finance for loss and damage should guarantee long-term funding for many projects.

Accessibility

It is currently extremely burdensome for a country or a community to access funding for climate action. This is partly due to the project-based model described previously and the very high criteria and requirements they must meet to be considered trustworthy. These barriers lead to long lag times before finance reaches the ground, making them unsuitable for rapid recovery following losses and damages. When a hurricane hits a Caribbean island, its population cannot afford to wait for its government to be approved by a fund board.  Instead, the loss and damage fund should prioritise simplified and rapid procedures that deliver funding directly to communities. The Green Climate Fund and Adaptation Fund’s enhanced direct access pilot programmes could be examples to emulate.

Recipient Ownership

Climate finance is often associated with conditionalities and is not distributed and utilised according to recipients’ needs. For instance, the project funded often must align with the political or economic priorities of the funder, even if these go against the recipient’s needs. The loss and damage fund must ensure that affected communities have sufficient decision-making power over how funds are used to enable their recovery. 

This could involve devolving decision-making to the lowest level and enabling community representatives to manage project budgets. Community representatives could also sit on the fund board at the global level.

Transparency and Accountability

Transparency and accountability requirements are currently burdensome for recipient countries. They are expected to report regularly on their activities and spending, primarily for the funder to control how its money is being used. These reports are often also the only source of information on the results and impacts of the projects funded. But they are biased towards the funders’ priorities and tend to omit the failures and negative impacts, limiting the capacity for improvement. 

The loss and damage fund should embed independent and participatory approaches to monitoring and evaluation in their structures and create accountability mechanisms that empower recipient communities. This could include ensuring affected communities have access to information on processes of accessing funds and on how decisions are made. 

The net loss and damage fund has the potential to make history and transform climate finance for the better.  But it can only happen if the people who design it put vulnerable communities’ needs and demands front and centre. Climate negotiators should interact with civil society and community representatives from climate-vulnerable countries to ensure their views are at the heart of the fund’s design.

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Journal reference

Bakhtaoui, I., & Shawoo, Z. (2022). Operationalizing finance for loss and damage: from principles to modalities, Stockholm Environment Institute, Stockholm. http://doi.org/10.51414/sei2022.045

Zoha Shawoo is a Scientist at the Stockholm Environment Institute, working in the Equitable Transitions program. Her research focuses on the relationship between climate change, sustainable development and inequality, including how national climate policies can be designed without generating tradeoffs for particularly vulnerable and marginalized populations. Zoha also co-leads SEI’s work on loss and damage finance, which investigates how a new loss and damage fund can be designed to best serve the needs and priorities of local communities

Inès Bakhtaoui is an independent researcher dedicated to issues connecting inequity, finance, effectiveness, and governance in climate change adaptation and loss and damage. She co-led the Stockholm Environment Institute's work on finance for loss and damage and focuses on ways to operationalize and monitor this new finance window in alignment with climate justice principles. She has experience collaborating with the UNFCCC Secretariat, policymakers, and civil society. She has a specific interest in the role of monitoring, evaluation, and learning activities in the effectiveness and transformative capacity of climate-related interventions, especially in relation to equity, justice, and power dynamics.