Loss and damage: Who pays for climate change?

Fossil fuels powered the industrial revolution and the economic success of many countries. But burning oil, gas and coal produces greenhouse gases that warm the atmosphere and warp the climate.

Advanced industrialized nations have historically contributed most to the human-induced climate crisis because they've burned fossil fuels for so long to grow their economies.

And many analysts, activists and heads of state in low-income countries argue big historical emitters like the United States and Europe should largely foot the bill for climate change.

But what does that mean exactly?

What is climate finance?

One of the ideas behind climate financing is to support developing countries in steering their economies clear of climate-wrecking fossil fuels. Another is that wealthy nations should help poorer ones hit hardest by global heating to adapt to the changing climate. 

These ideas have been central to global climate negotiations in some form or another since the 1992 World Climate Summit in Rio de Janeiro.

But climate financing is perhaps most commonly associated with the pledge made by industrialized countries at the 2009 Copenhagen UN Climate Summit to raise $100 billion (€95 billion) a year by 2020. In 2015 in Paris, delegates agreed to keep paying this amount annually until 2025 and then set a new figure.

How climate financing will be implemented

To implement the $100 billion pledge, industrialized countries are primarily committing public funds. But increasingly they want to raise cash through private investment.

Public funds from donor countries account for the largest share of climate financing. About half of this flows bilaterally from donor to recipient state, largely in the form of development aid. The other portion is multilateral money, meaning that multiple states give money to multiple other states.

This money either comes from climate programs run via multilateral banks, like the World Bank and the African and Asian Development Banks. Or the money is allocated through multilateral climate funds.

Green Climate Fund

The most prominent of the multilateral money pots is the Green Climate Fund (GCF). Its resources are intended both for measures to slow climate change, such as the expansion of renewable energy, and for adapting to extreme weather and other impacts of planetary heating. 

To date, donor countries have pledged about $20 billion. So far, $12.8 billion of has been approved for projects and $3.6 billion has already been spent on specific programs.

Most of the projects are in Africa and Asia, but there are also some in Latin America, the Caribbean and Eastern Europe. Every four years, donor countries are expected to replenish the fund.

Just under half of the money is given in the form of favorable loans, and the second half as direct grants that recipient states do not have to repay.

Adaptation Fund

Another fund that receives money from the $100 billion pledge is the Adaptation Fund. It's a relatively small pot of money with no fixed replenishment cycles — donor countries pay whenever they can or wish to.

Its goal is to support projects that help countries adapt to the consequences of the climate crisis. These could be measures against flooding, for example, or planting heat-resistant crops.

Developing countries receive the money as a subsidy, rather than a loan. This is advantageous as action on adaptation doesn't usually generate any profit, unlike climate protection measures, such as building wind turbines or solar panels which generate electricity that can be sold.

Least Developed Countries Fund

This Least Developed Countries Fund (LDCF) covers the world's 46 poorest nations. Operating solely on grants, which do not have to be repaid, it is intended to finance emergency climate adaptation.

So far, the LDCF has financed more than 360 projects, totaling about $1.7 billion.

Is the $100 billion climate finance promise being met?

No. Figures from the Organization for Economic Cooperation and Development show that only around $83 billion flowed into international climate financing in 2020.

"At first, $83 billion sounds like an enormous sum of money, but the needs of poorer countries in the Global South go well beyond that," said Jan Kowalzig, climate change and climate policy officer at Oxfam Germany.

"We know from studies that the cost of just adapting to climate change in these countries will exceed $300 billion a year by 2030. And that doesn't include the costs of climate mitigation in those countries," he said.

Even this $83 billion figure has been embellished, according to international development organizations. Oxfam calculates that a maximum of about $24.5 billion in real climate aid was provided in 2020.

This is because many officially listed projects would have had little climate impact, Oxfam said.

"Moreover, industrialized countries have credited many loans to their $100-billion promise," said Sabine Minninger from German aid organization Bread for the World. Developing countries would have to repay these loans.

"That's a sham," she said.

The repayments increase the debt burden of poorer countries in the Global South, added Oxfam's Kowalzig — "all for a crisis to which they have contributed little or nothing."

Loss and damage: A sticking point in climate financing

For decades, developing, newly industrializing and industrialized countries have argued about who should pay for loss and damage caused by the climate crisis — including the heat waves and droughts destroying crops or making areas of land uninhabitable. Developing countries want additional funds for this purpose.

Donor countries fear they could be sued for damages beyond the scope of international climate financing, said Kowalzig. They want economically strong emerging economies, such as world's biggest CO2 polluter China, to pay up as well.

COP27 in Egypt produced what was deemed a "historic agreement" to establish a fund for loss and damage. Since then, a transitional committee has produced recommendations to be presented to delegates at the climate conference in Dubai. 

But many questions remain unanswered when it comes to loss and damage, added Kowalzig.

Global Shield against Climate Risks

The Global Shield against Climate Risks was launched in 2022 at COP27 by the G7 industrialized nations and the V20, a group of around 70 countries particularly at risk from climate change. 

The shield allocates a predetermined sum of money to be disbursed quickly in the wake of a climate catastrophe. So far, more than €210 million ($228 million) has flowed into the fund, with Germany providing around €170 million.

The shield can step in when there is no other help, said Kowalzig. It also finances climate risk insurance, which small farmers can use to insure themselves against crop failure, for example.

However, development organizations have argued that climate-risk insurance is not always the right tool for tackling climate disaster. That's because insurance policies generally cover relatively unlikely events that cause major damage. But such damage is not unlikely in a warming world. It will definitely occur, said Kowalzig.

"For example, the slow drying up of an entire area of land, which can be predicted, or the rise in sea level," he said, adding that no regular insurance would cover such foreseeable damage.

This article was originally written in German.