Loss and Damage: Closing the Finance Gap for the World’s Most Climate-Vulnerable Nations
Parties to the United Nations Framework Convention on Climate Change and the Paris Agreement recognize the importance of addressing loss and damage associated with the adverse effects of climate change. Nations took the momentous decision at COP27 to establish a new Loss and Damage Fund to assist developing countries. The institutional arrangements for this fund are now being implemented, but the lack of an official definition of ‘loss and damage’ is proving an obstacle to governments and international organizations taking appropriate action.
What is ‘loss and damage’?
The concepts of ‘loss’ and ‘damage’ are largely treated as synonymous and can result from the occurrence of sudden-onset extreme weather events – such as cyclones, floods, and heatwaves – as well as slow-onset events, or processes, of which sea level rise and ocean acidification are particularly concerning for Small Island Developing States (SIDS).
Loss and damage can be categorized as economic or non-economic. Economic loss and damage includes loss of physical assets, goods, and services that are commonly traded in markets. Non-economic loss and damage can be considered as the remainder of the impacts and risks that are not commonly traded in markets. Such loss and damage could include loss of life and health; loss of cultural heritage and indigenous knowledge; and loss of biodiversity and ecosystem services.
‘Avoidable’ loss and damage refers to impacts that have or could be averted or minimized through climate change mitigation, adaption, and/or disaster risk reduction (DRR) measures (e.g., building a sea wall). Loss and damage is considered ‘unavoided’ when there are resource and capacity constraints (e.g., lack of finance that limits the ability of SIDS to build sea walls). ‘Unavoidable’ loss and damage refers to those impacts that go beyond existing adaptation and mitigation measures (e.g., the irreversible impacts of glacier melt and sea level rise).
Direct impacts of extreme weather
A total of 10,113 deaths associated with climate-related events were recorded in SIDS. Climate change is responsible for 39% ($41.3 billion) of total economic losses recorded. Storms contribute 77% and floods 23% to total attributable loss and damage.
Annually, economic losses of $1.7 billion on average can be attributed to climate change in SIDS (2000–2022). This constitutes 0.8% of the collective GDP of SIDS (the highest being 9.5% of GDP in 2004). SIDS experience five times more climate change-attributable deaths than non-SIDS in low- and lower-middle-income countries. Average annual attributed economic losses as a percentage of GDP are also significantly higher in SIDS than in non-SIDS.
Indirect economic impacts of extreme weather
An average hurricane in the Caribbean is estimated to reduce local-level income growth by 1.5% and country-level GDP by approximately 0.7%–0.8% in the year of the strike. Based on the analysis of satellite measures of nightlight intensity, economic activity in the South Pacific was reduced by as much as 11% in the first few months in the islands affected by Cyclone Pam in 2015.
Extreme weather events can cause short-term negative effects on the trade balance, such as reductions in exports. In the Eastern Caribbean, hurricanes are estimated to reduce exports of goods by 20% in the first four months. However, severe events can lead to wider and more prolonged effects. For example, Hurricanes David and Frederick in 1979 led to a decrease in banana exports from Dominica over three years.
Implications for loss and damage finance for SIDS
For rapid onset events, addressing loss and damage might mean responding quickly to avoid further losses, recovering and restoring critical services, and ‘building back better’. In addition, responding to loss and damage may also require compensation mechanisms which are unlikely to be needed immediately.
The Loss and Damage Fund is still in the process of being set up under the World Bank and, as yet, no bilateral or multilateral funds have established a specialized financing window for responding to climate-related loss and damage. Nonetheless, funds and financing instruments do exist for managing climate risks – and are used by SIDS.
The Government of Fiji has an ongoing contingency fund for disaster risk which was allocated F$1 million in the 2022/23 and 2023/24 budgets (about $451,000 as per the August 2023 exchange rate). In addition, the 2023/24 national budget includes contingencies for immediate recovery and restoration of services within key sectors. Concessional borrowing, especially through ADB and the World Bank, has been an important instrument to enable rehabilitation work and longer-term post-disaster reconstruction. However, Fiji’s debt level has increased in recent years, reaching 90% of GDP in 2022, due to the impacts of COVID-19 coinciding with severe tropical cyclones.
Future projections
By 2050, the Intergovernmental Panel on Climate Change (IPCC) expects a 10% increase in what are currently 20-year flood events under a 1.5°C warming scenario, and a 22% increase under a 2.0°C warming scenario. Tropical storms are expected to increase by 13% under a 2.0°C increase in global temperature. Total cumulative climate-attributable loss and damage from floods and storms is predicted to amount to $56 billion in SIDS under a 2°C warming scenario by 2050 – and these projections are likely to be an underestimation.
Given the existing shortfalls in post-disaster finance available for SIDS, the Loss and Damage Fund and other funding arrangements currently being developed will be critical. As well as additional funding that can be delivered quickly with pre-arranged triggers, SIDS need more reliable, low-cost funding for long-term recovery, as well as long-term funding schemes to help coastal communities respond to the various adverse impacts of slow-onset events.
Based on the STA25 chapter ‘Loss and Damage’ by Emily Wilkinson and Vikrant Panwar (ODI), and Ilan Noy (Victoria University of Wellington)
The ideas presented in this article aim to inspire adaptation action – they are the views of the author and do not necessarily reflect those of the Global Center on Adaptation.
