TWN Info Service on Climate Change (Sept23/02)
4 September 2023
Third World Network

Diverging views over loss and damage fund at transitional committee

4 Sept, Penang (TWN) - Negotiations proved difficult at the third meeting of the UNFCCC’s Transitional Committee (TC), which convened in Santo Domingo in the Dominican Republic from 29 Aug-1 Sept. There were several areas of contention between developing and developed country members on the TC on the operationalization of the loss and damage fund and funding arrangements.

 (At the UNFCCC’s COP 27 held last year in Sharm el-Sheikh, Egypt, in what was viewed as a historic decision, governments had agreed to establish a fund on addressing loss and damage. The TC was established and tasked with the operationalisation of new funding arrangements for responding to loss and damage and the fund, and to make recommendations for Parties to consider and adopt them at COP 28, to be held in Dubai, United Arab Emirates.)

The TC is expected to come up with recommendations on establishing institutional arrangements, modalities, structure, governance and terms of reference for the fund; defining the elements of the new funding arrangements; identifying and expanding sources of funding; and ensuring coordination and complementarity with existing funding arrangements. Differences of views emerged as members discussed some of these issues in depth.

There were divergent views as regards the fund, on whether the it should be designated as an operating entity of the financial mechanism of the Convention (similar to the Green Climate Fund and the Global Environment Facility); whether it would receive guidance from both the COP (Conference of Parties to the UNFCCC) and CMA (Conference of Parties to the Paris Agreement) or just the CMA alone; whether it would be a standalone institution or housed in an existing institution; the principles of the fund; who is eligible to receive funding; the scope of the fund itself; and the functioning of its board, among other issues.

Whether the fund is to be an operating entity of the financial mechanism?

Developing country TC members were in favour of the fund being designated as an operating entity of the financial mechanism of the Convention. They had in their submission on the launch of the fund and funding arrangements, had stated that the fund is to be designated as an operating entity of the financial mechanism in accordance with Article 11 of the Convention, and that it shall also serve the Paris Agreement. During the discussions, several developing country members spoke about this.

(Article 11(1) of the UNFCCC states as follows: “A mechanism for the provision of financial resources on a grant or concessional basis, including for the transfer of technology, is hereby defined. It shall function under the guidance of and be accountable to the COP, which shall decide on its policies, programme priorities and eligibility criteria related to this Convention. Its operation shall be entrusted to one or more existing international entities”).

Developed country TC members however, led by United States (US) and Germany, wanted to condition the discussion on the designation of the fund as an operating entity on the outcome of discussions on the “contributor base”, i.e. as to who would contribute resources to the fund. (According to observers familiar with the negotiations, the attempt by developed countries is to widen the contributors to the fund to include “developing countries who are in a position to do so”, and not have it limited to only developed countries as is provided for in the Convention and the Paris Agreement).  (See highlights of exchange below).

Guidance from governing bodies

Developing country members made it clear that the fund should receive guidance from both the COP and the CMA. However, Heike Henn (Germany) said that the fund should receive guidance only from the CMA, (thus delinking the fund from the COP and the Convention).

In response, the TC Co-chair Richard Sherman (from South Africa) clarified that the decision on establishing new funding arrangements and the fund came from two bodies viz. COP 27 and CMA 4, and therefore, reflecting just one governing body i.e. the CMA only in the report of the TC would not be possible. He also said that if Parties want to maintain the position that it is just one governing body, that discussion needs to happen at the level of the COP and CMA, and not at the TC and that committee members need to respect the fact that they would have to report to both the bodies (as is the mandate).

Whether the fund is to be a standalone institution?

On whether the fund should be housed in an existing institution or be a standalone institution, developed countries led by the US spoke in favour of the fund being housed in the World Bank to achieve “speed” and “efficiency”.  The US in its proposal called for the fund to be hosted by the World Bank as a Financial Intermediary Fund (FIF).

Developing countries, however, expressed their preference for a standalone independent institution that is fit for purpose and is well-crafted. They disagreed with the FIF model (proposed by the US and supported by other developed country members) saying that there had concerns around who would be eligible countries; the ease of access for particularly those countries that were not members of the World Bank; and independence of the fund’s policies.

Ambassador Mohammad Nasr (Egypt) said that if the fund is hosted by another institution, “we might be going in a direction that some developing countries won’t get funding. The safeguard is it has to an operating entity of the financial mechanism of the Convention.”

Principles

On the principles which are to be applied to the fund, developing country members said that the principles of UNFCCC and the Paris Agreement should apply to the new fund and highlighted the principle of equity and common but differentiated responsibilities (CBDR).

Yingzhi Liu (China) said climate change is a global environment and development issue, involving every country and person, adding that following the CBDR principle, all countries should shoulder their respective responsibilities, which reflects the balance reached under the Paris Agreement. He added that the emergence of climate change had a clear historical context and that since industrialization, human activities led to the emission of carbon dioxide and other greenhouse gases, which is the leading cause, and that the Intergovernmental Panel on Climate Change (IPCC) and other bodies have also demonstrated with more facts that developed countries’ historical emissions are the main cause of climate change and that developed countries have the main responsibility, including for loss and damage.

Some of the other principles highlighted in the developing country members submission includes that the fund has to be responsive to country needs and circumstances; the fund’s resources should be predictable, new, additional, adequate, and significant; the fund will operate in a transparent and accountable manner through effective and efficient arrangements, seeking to minimize transaction costs; that it will be primarily sourced through grant-based public financing in a predictable and additional manner, among others.

Developed country members, however, said the key principle of the fund is to focus on the priority gaps and for it to complement funding arrangements and deliver for particularly vulnerable countries. Heike Henn (Germany) gave the example of a “programmatic approach” as a key principle.

Christina Chan (US) said that the US agreed to the agenda item on loss and damage in COP 27 with the understanding that “this is about cooperation and it does not involve liability and compensation” and that the US did not see any reference to historical responsibilities in the outcome of the TC’s work, “regardless of principles”. She further said she would like to understand the context in which equity was being used, adding that the CBDR principle was linked to other parts of negotiations. She also said that if by the CBDR principle, the reference is to different capacities, the US agrees with the approach, but if CBDR is linked to the donor base, “we cannot decide that without other aspects being resolved”.

In response, Matheus Bastos (Brazil), and supported by other developing countries, said that the CBDR principle also applies to sources of funding, adding that according to the Convention and Paris Agreement, developed countries must be the primary providers of finance.

Eligibility

On eligibility to receive funding, there were interventions by developed countries to determine the scope of who is eligible to receive the fund’s resources. David Higgins (Australia) said that his interpretation of the COP 27 decision was that it referred to particularly vulnerable countries, which was different from the interpretation of developing countries that all developing countries are particularly vulnerable.

Co-Chair Sherman (South Africa) flagged that the language (on who is particularly vulnerable) is from the Convention, while Nasr (Egypt) said what he was hearing from the developed countries’ interventions was the countries like Pakistan (which suffered major losses and damages from a flood last year) were not eligible. He further added that institutions such as the World Bank did not consider middle-income countries eligible for support, and reiterated his understanding that all developing countries are particularly vulnerable.

Angela Rivera Galvis (Colombia) said no one must be left behind and that targeting support should be based on an “event-based approach” rather than basing it on groups of countries.  Yingzhi Liu (China) also stressed that all developing countries are eligible for the fund, adding that each individual life is the same everywhere and everyone had the same human rights. Eligibility should be determined by the Convention and Paris Agreement, he added.

(According to reliable sources, during discussions in the sessions which were closed to observers, Jean-Christophe Donnellier (France) had hinted that the fund should serve only the Small Island Developing States [SIDs] and Least Developed Countries [LDCs]. This elicited sharp responses from Colombia and other developing countries to not take the discussions in a direction where there could not be any fruitful outcomes. Most of the first two days of the meeting were closed to observers.)

Scope of the Fund

Differences also emerged on what the scope of the fund should be. According to the developing countries’ submission on the issue, “the scope of the fund shall be based on the mandate established by the Sharm El-Sheikh decision (i.e. Decision 2/CP.27 and Decision 2/CMA.4) and comply with existing principles and provisions under the Convention and its Paris Agreement.”

Nasr (Egypt) said the decision was clear about the scope and there is no need to be prescriptive. The fund will provide new and additional resources to respond to economic and non-economic loss and damage from slow and extreme weather events; this is the scope, said Nasr.

According to the US submission however, the fund is to comprise three sub-funds: Slow Onset Events (SOE) Sub-fund (to fund activities to respond to slow onset events); Recovery and Reconstruction Sub-fund (to provide funding for eligible countries that need additional, or more concessional, funding for recovery and reconstruction,); and Small Markets Sub-fund (to finance activities to respond to the adverse effects of climate change for countries with populations of five million or fewer).

According to sources, during discussions at the closed sessions, disagreements also arose over the suggestions of Donnellier’s (France) and Jaime de Bourbon de Parme’s (Netherlands) and supported by some developed countries that the fund should focus on pre-arranged financing and capacity building support for developing countries and to help them make plans to address loss and damage. This drew sharp responses from developing countries that the fund was established to help developing countries address loss and damage, and not get into capacity building or preparatory activities support. They also said that it would be impossible to prepare fit for purpose plans to prepare for such events.

Developing countries were also concerned about earmarking finances as regards the sub-funds. They said they would not entertain the idea where countries are allowed to earmark their contributions to the sub-funds and that resources must be channeled into the main fund, according to sources. Sources also said that Liu (China) said that there were serious concerns around earmarking policies and establishment of sub-funds could lead to fragmentation and differentiation among developing countries. 

Differences also arose over discussions on funding arrangements and sources. A key disagreement was how could the fund can exercise any control over institutions that are outside of the UNFCCC, like the World Bank for instance, and how would the fund ensure that institutions change their policies to respond to loss and damage. On sources, the primary disagreement was over developing countries’ position that developed countries would be the primary providers of funding for addressing loss and damage, whereas the US came up with a proposal that Parties in a position to do so or ready to do so would provide financing (thus diluting differentiation in the process). (Further articles to follow on these topics.)

Highlights of exchange on designation status of the fund

Nasr (Egypt) asked developed countries why the fund should not be designated as an operating entity, given that Article 11 of the Convention which provides clarity in relation to policies, eligibility and programme priorities. In response to France’s suggestion that designating the fund as an operating entity would slow down the operations, he asked why should that be the case. In response to Australia’s suggestion that such designation would constrain contributions to the fund, Nasr said that the GCF is open to contributions from anyone even though it is an operating entity of the financial mechanism of the Convention, adding that an operating entity status would give the assurance that the programme priorities, policies and eligibility of the fund are in coherence with the Convention and the Paris Agreement, and not some other institution’s policies. He also said that the operating entity status would also assure of predictability of funding.

Michai Robertson (Antigua and Barbuda) said designating the fund as an operating entity of the financial mechanism would send the right signal in terms of appendaging the fund to the foundation of the UNFCCC regime. He also reminded that the world had moved much in the context of the regime in that Parties have to focus not just on mitigation and adaptation but also acknowledged that the entire regime needs to also have funding for addressing loss and damage. He also added that the regime will set a bad example if the fund is not designated as an operating entity of the financial mechanism, resulting in it not being able to attract ambitious contributions.

Sumaya Zakieldeen (Sudan) said if the fund is an operating entity of the financial mechanism, then the eligibility criteria of the Convention would apply, and emphasized the issue of all developing countries being covered by the fund.

Adao Soares Barbosa (Timor Leste) said the fund should be accountable to Parties and in order for the fund to get clear guidance from the COP, it needs to have the status of an operating entity of the financial mechanism of the Convention.

Heike Henn (Germany) said the starting point was to operationalise the fund quickly and designating the fund as an operating entity was dependent on other decisions of the fund design.

Donnellier (France) said he was reluctant to designate the fund as an operating entity, adding that it was more important for the fund to be flexible and operate at speed, which funds like the Green Climate Fund did not afford. In response to Nasr, he said that the flexibility was not a strong feature in the GCF.

Higgins (Australia) said if guidance is the reason espoused for the fund to be designated an operating entity, it could still get guidance from the COP and CMA, even without such designation. He said further that designating the fund as an operating entity could pose “constraints” on the contributions to the fund.

Chan (US) said they do not see the practical need to designate the fund as an operating entity of the financial mechanism and added that the US proposal was in line with the key elements that the members were talking about, including eligibility, equitable and transparent governance, policies, programmes, etc. She also said that the conversation of designation is tied to “other aspects”.

Georg Børsting (Norway) said he too did not understand the pressing need to designate the fund as an operating entity and it is more important to focus on the design and placement of the fund, adding that he supports the idea of a FIF model under the World Bank over a standalone fund.

The TC will meet for its 4^th and final meeting from 17-20 Oct in Aswan, Egypt.