Will COP26 deliver on funding for loss and damage?

Finance is a critical issue for this COP. President Biden’s recent announcement provides some very welcome good news at a key moment. It needs to help build momentum because much more is needed. Key negotiating demands from more than 100 developing countries are more funding overall, more funding for adaptation, and a step change on addressing loss and damage. Without progress on these points, they say that COP26 will be worthless and will end in failure. Finance is a dealbreaker for trust in the process.

Loss and damage has been recognised in the UNFCCC negotiations since the early 1990s and the Warsaw International Mechanism for Loss and Damage was agreed in 2013, yet there is still no clarity on loss and damage finance in terms of sources, scale, and institutions.

Funding for crises is insufficient and late

Meanwhile, the human and economic costs of disasters are mounting. Detailed research on funding for nine recent disasters finds that it was both insufficient and late. Two months into the crises, UN appeals are funded at only 30%–40%, meaning that responders have to ration funds and assistance, making hard choices about who gets support and who does not. After six months, only 41% of total response funding had been committed, meaning that governments and responders were still largely unclear what funding would be made available. And after 18 months, generous pledges of funding for reconstruction had not been followed up by cash.

The picture for droughts is particularly bad. This is extremely worrying as the IPCC report warns – with high confidence – that “more regions are affected by increases in agricultural and ecological droughts with increasing global warming”.

Are loans the answer to climate disaster losses?

Developed countries committed to jointly mobilise $100bn of climate finance a year by 2020. The OECD found that only $80bn was provided in 2019, but a major proportion - around 80% - of this is loans, and this proportion is increasing.

Research on recent crises finds that just over half (53%) of total crisis funding committed was in the form of loans. Even Mozambique - a country in debt distress – took out loans for 13% of its funding for response to Cyclones Idai and Kenneth in 2019; subsequently public debt was pushed to almost 110% of GDP. While disasters are clearly not the only contributor to debt, studies find that large disasters do increase debt; often the hardest hit are Small Island Development States. This raises real questions of climate justice.

Insurance is not a panacea

While there are several possible responses to Loss and Damage, the key one favoured by higher-income countries is insurance, with Official Development Assistance (ODA) provided as funds for development and capitalisation of insurance schemes, and for premium subsidies.

There is no doubt that insurance has its place. Insurance can provide funds extremely quickly after disaster - the Caribbean regional risk pool CCRIF pays out in less than two weeks. And the latest report from the independent evaluation of the African Risk Capacity (ARC) finds that while support received by households in Senegal from the ARC payout was relatively limited and short term, it did reduce the need to resort to negative coping strategies.

But insurance can only cover a small portion of disaster costs. For example, Madagascar which is on the brink of the world’s first climate change-induced famine, received an ARC payout in 2020 of only $2.13m. CCRIF’s biggest climate-related payout - to Haiti for Hurricane Matthew in 2016 – was US$23.4m, only 1% of total loss and damages of $2.72bn. Indeed, regional risk pools explicitly recognise that payouts are only intended to provide rapid liquidity, not cover total costs.

There are further complexities too. Insurance cannot be used for slow-onset impacts of climate change – such as rises in sea level and ocean acidification – as these are certainties not risks. And a rule of thumb for practitioners is that disaster insurance is not likely to be very cost-effective for disasters that occur more frequently than about once in seven years. And as climate change continues to bite, making disasters more frequent and more severe, the costs of insurance will inevitably rise.

As such, insurance can only be a very partial response to loss and damage. A more rounded package of support is needed, that would include insurance alongside grant-based finance for disaster risk reduction, preparedness, early warning systems and shock-responsive social protection.

More radical solutions needed

As the Independent Expert Group on Climate Finance says, billions must turn into trillions. They view a strong programme of support to tackle the debt and financing needs of developing countries as a win-win proposition for the global economy and for the climate, with a crucial role for international public climate finance.

This kind of radical action was undertaken as a response to Covid-19; US$650 billion in IMF Special Drawing Rights (SDRs) were issued this year. While helpful, the distribution was heavily skewed towards the bigger and richer countries that arguably have the least need for it; just a tenth of this will go to 75 lower-income countries.

If such radical solutions can be found to support primarily higher-income countries for Covid-19, can they not also be found for developing countries facing the already crippling impacts of climate change? There are already a number of proposals on the table, including debt cancellation and different approaches to climate damages taxes. These will not necessarily be easy, but if not now, then when?

All eyes on Glasgow

Finance is the first thematic area under discussion, on day three of the COP, and a lot will hinge on how well those negotiations go. This needs to include real commitments on new and additional sources of finance for loss and damage, and a diversification of support beyond insurance. Together, these can ensure that the financial burden of climate change – overwhelming caused by higher-income countries – does not rest solely on those at most risk from its impacts.

About the author:

Debbie Hillier is a Principal Consultant for Climate Change & Disaster Risk at Oxford Policy Management.