Loss and Damage Financing Must Push Beyond Market-Based Measures

A technical debate flowing out of last year’s UN climate conference in Bonn could help determine the global response to the unavoidable loss and damage developing countries will experience as a result of climate change.

“By now it is clear that climate change is as much an economic problem as it is an environmental one,” Climate Analytics states in a new blog post. For developing countries, in particular, “rising temperatures slow economic growth, [and] devastating climate-related impacts leave large negative imprints on economic development.” While “financial instruments that transfer risks can provide some relief,” add research analysts Olivia Serdeczny and Luis Zamarioli. “these too will reach their limits as the risks of loss and damage turn into certainties under mounting climate change.”

The Suva Expert Dialogue, convened at the behest of COP 23 delegates, is expected to reflect a shift “from the notion of loss and damage as ‘harm’ (think of early calls for compensation) to the less contentious notion of ‘risk,’” they note. It’s a reframe that “has landed the question of finance for loss and damage in the waters of financial instruments to prepare for or deal with risk. And this is where the problem is perhaps not very well framed, leading to odd solutions on the table.”

The blog post inventories nearly a dozen approaches to financing for loss and damage—from non-repayable micro-grants to support climate resilience, to disaster relief and contingency funds, to repayable or non-repayable bonds, to insurance schemes. The problem is that “most of the instruments on the table are of little use in solving the problem of climate change.”

Climate Analytics looks back 20 years, to the impact of Hurricane Ivan on the Caribbean island of Grenada, recalling that the country lost 80% of its buildings and incurred damages more than twice its GDP. After Hurricanes Irma and Maria last year, Dominica had lost 90% of its buildings. “Put bluntly, hurricanes hurt small island economies badly,” Serdeczny and Zamarioli write. “Add to this the effects of consecutive storms and sea level rise, and a bleak picture emerges.”

And immediate, severe storms aren’t the only challenge. “Slow-onset changes such as temperature rise also leave negative, lasting effects on low-income economies,” they note, and “just as with extreme events, the effects are long lasting.”

The net result: “Loss and damage means that developing countries are and will continue to be overburdened by climate change. They are already disadvantaged to cope with a problem they have hardly contributed to. Economic growth and stability—both much needed to cope with climate-related disasters—will be hit hard.”

Which means the problem with most of the financial instruments on offer is that they still leave the risk associated with loss and damage with the world’s most vulnerable economies—and the measures that do transfer risk “will at some point be unaffordable or hardly feasible. Why would an insurance [company] insure against sea level rise when it knows the impacts will come? Risks will no longer be insurable. And who will want to buy a catastrophe bond when the chances of not having it paid back are foreseeably high and rising?”

Climate Analytics’ challenge to the Suva Expert Dialogue is to come up with solutions that fit the purpose. “Instruments that incorporate triggers of debt relief like catastrophe bonds or repayments conditional on economic growth in recipient countries ought to point the way forward,” Serdeczny and Zamarioli write, but those market-based measures will ultimately be limited.

“It is almost too obvious to point out that we need to talk about international tax-based systems that could leverage the funding that is needed to jump in where the market options dwindle,” they conclude. “Taxing those who contribute the most would coincidentally and neatly also address the question of fairness.”