Financial mechanism on Loss and Damage

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer- client relationship. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 09/11/2021

1. Which aspects (if any) of the Paris Agreement 2015 (Paris Agreement) or the United Nations Framework Convention on Climate Change (UNFCCC) support the establishment of a financial mechanism on loss and damage such as that contemplated in the Stockholm Environment Institute’s paper[1] (SEI Proposal) and which goes beyond insurance?

2. Does paragraph 51 in Decision 1 of the Report of the 21st Conference of the Parties (1/CP21)limits the mandate or functions of such a financial mechanism if it were established?

Background:

The SEI Proposal states that “efforts to mobilise finance for affected countries remain stalled, mainly due to disagreements over liability and compensation.”[1] Given this, the SEI Paper offers an alternative framework to the WIM, to mobilise loss and damage finance in the near term on the basis of solidarity, while leaving open the possibility of creating a more formal, equity-based L&D financing mechanism within the UNFCCC in future.

The five principles suggested by the SEI Paper to extend common but differentiated responsibilities and respective capabilities (CBDR + RC) to loss and damage are:

  • solidarity, rather than strict liability and compensation;
  • accountability, with an emphasis on historical responsibility, capacity to pay and the “polluter pays” principle;
  • compensation where necessary, given the extent of loss and damage finance required is unlikely to be met by solidarity based finance alone;
  • self-determination, rather than project based models managed by external parties which dominate mitigation and adaptation.  Loss and damage finance should engage national or local systems to identify relevant loss and damage and disburse support which is accessible at a granular level to help communities and individuals; and
  • additionality, in that loss and damage funding needs to be additional to the funding commitments developed countries have already made for mitigation and adaptation in developing countries.

The SEI Proposal does not suggest disestablishing or abandoning the WIM.  Instead, it offers a novel solution to loss and damage, diverging from the traditional approach to insurance based on liability and compensation which has so far resulted in a stalemate between countries – all of which is within the mandate of the WIM and within the spirit of Article 8 of the Paris Agreement. 

It proposes mobilising L&D finance through a number of avenues, including:

  • Immediately, on the basis of “solidarity, accounting for local needs, historical responsibility and the ‘polluter pays’ principle, and the well-established notion of ‘common but differentiated responsibilities and respective capabilities’.”[2]
  • At COP26, by securing pledges of bilateral L&D finance and by the WIM ExCom initiating a process to “identify the most viable near-term options for channelling finance“.[3]
  • Long-term goals of establishing “national-level loss and damage systems“, and also via a long-term goal of a “formal, dedicated loss and damage finance mechanism” situated within the WIM, GCF or external to the UNFCCC architecture such as through a solidarity fund.[4]  
  • We refer you to LRI’s previous advice on the shortcomings of insurance mechanisms as a comprehensive source of L&D financing.[5]

Advice:

1. Provisions supporting the establishment of a financial mechanism on L&D

1.1 Article 8 on loss and damage

Article 8 of the Paris Agreement acknowledges the need to consider loss and damage caused by the impacts of climate change.  Under Article 8(1), parties recognise the importance of averting, minimising and addressing loss and damage associated with the adverse effects of climate change, including extreme weather and slow onset events, and the role of sustainable development in reducing the risk of loss and damage.

The key obligation associated with loss and damage is set out in article 8(3): parties should enhance understanding, action and support, on a cooperative and facilitative basis. Article 8(4) then goes on to list a non-exhaustive list of areas of cooperation and facilitation to enhance understanding, action and support.  One of those areas is “risk insurance facilities, climate risk pooling and other insurance solutions.”[6]  Given that art. 8(4) is non-exhaustive, potential finance mechanisms under art 8 are not limited to insurance solutions.

The relevant test for whether a particular mechanism, proposed to be established under the Paris Agreement, is consistent with article 8, is whether a mechanism proposed under article 8 is consistent with the obligation in article 8(3).  To the extent that a financial mechanism incorporating a solidarity fund would be consistent with that mechanism, it will be permissible.

Article 8 of the Paris Agreement focuses on L&D and establishes a flexible framework for long-term cooperation and facilitation to “enhance…action and support[7]for the activities outlined at Article 8, para 4.

  • The opening language “may include” at Article 8, para 4 indicates that the areas of cooperation and facilitation include, but are not limited to, those activities listed and could therefore be broadened.
  • Together with Article 8, para 2 of the Paris Agreement, which empowers the CMA to enhance and strengthen the WIM, the CMA has a broad mandate to extend the list of L&D areas for cooperation and facilitation.
  • Article 8, para 3 contains robust language regarding Parties’ obligations to augment action and support on L&D on a cooperative and facilitative basis: “Parties should enhance understanding, action and support, including through the Warsaw International Mechanism, on a cooperative and facilitative basis with respect to loss and damage.” (Emphasis added.)

1.2. Other provisions

There are no express provisions in the UNFCCC and Paris Agreement that clearly establish a financial mechanism on L&D which goes beyond insurance. The language of the Paris Agreement in particular was carefully crafted to avoid creating a separate pillar of financial commitments beyond mitigation and adaptation on the part of developed countries.

However, the below provisions across the UNFCCC and Paris Agreement may provide support for arguments to mobilise the types of L&D financial mechanisms proposed in the SEI Paper:

  • Article 2, para 1 c) of the Paris Agreement: this provision mandates making “finance flows consistent with a pathway towards…climate-resilient development”. To the extent that climate-resilient development can be framed as a means of avoiding L&D, Article 2, para 1 c) may provide support for financial mechanisms that rely on redirecting finance towards L&D responses, e.g. “innovative” L&D mechanisms where certain levies and taxes are automatically directed into national level disaster funds (as proposed in the SEI Paper).[8]
  • Article 9, para 3 of the Paris Agreement: this provision indicates that developed country Parties should take the lead in mobilising climate finance to assist developing country Parties, “including supporting country-driven strategies” and “taking into account the needs and priorities of developing country Parties”. This language may prove helpful in directing attention to the growing priority of climate finance towards L&D responses, especially in respect of long-term national level L&D strategies.[9]  However, such arguments are likely to be subject to resistance noting that Article 9, para 1 of the Paris Agreement clarifies that financial resources are to be balanced between adaptation and mitigation.[10]

1.3 Decisions by the parties

Prior to the Paris Agreement, the WIM was established in 2013 during the 19th Conference of the Parties (COP) as the main vehicle under the UNFCCC to promote the implementation of approaches to address loss and damage associated with the impacts of climate change.

The WIM’s purpose is broad – to address loss and damage in developing countries particularly vulnerable to the adverse effects of climate change, by undertaking the following functions:

  • enhancing knowledge and understanding of comprehensive risk management approaches to address loss and damage associated with the adverse effects of climate change;
  • strengthening dialogue, coordination, coherence and synergies among stakeholders by providing leadership, coordination and oversight under the UNFCCC on the assessment and implementation of approaches to address loss and damage associated with climate change impacts; and
  • enhancing action and support, to enable countries to undertake actions to address loss and damage.

Consequently, the purpose and functions of WIM do not limit it to considering traditional insurance-based methods of loss and damage compensation.  The WIM’s mandate is simply to address loss and damage in developing countries through comprehensive risk management approaches in a comprehensive, integrated and coherent manner.

In addition, Decision 2/CMA.2 on the Warsaw International Mechanism for Loss and Damage associated with Climate Change Impacts and its 2019 Review specifically supports arguments to mobilise the types of L&D financial mechanisms proposed in the SEI Paper:

  • para.32  : “Urges the scaling-up of action and support, as appropriate, including finance, technology and capacity-building, for developing countries that are particularly vulnerable to the adverse effects of climate change ….”
  • para.35: “Urges the broad range of bodies, organizations and funds under and outside the Convention and the Paris Agreement to scale up support, including finance, technology and capacity-building, for developing countries that are particularly vulnerable to the adverse effects of climate change …”
  • para.36: “Invites Parties to make use of available support relevant for averting, minimizing and addressing impacts related to extreme weather events, slow onset events, non-economic losses and human mobility and for comprehensive risk management from a wide variety of sources, public and private, domestic bilateral and multilateral, under and outside the Convention and the Paris Agreement, including through the operating entities of the Financial Mechanism, as appropriate, to an extent consistent with their mandates;”
  • para.37: “Requests the Executive Committee to further engage and strengthen its dialogue with the Standing Committee on Finance by providing input in line with decision 2/CP.19, paragraph 5(c)(ii), to the Standing Committee on Finance when, in accordance with its mandate, it provides information, recommendations and draft guidance relating to the operating entities of the financial mechanisms under the Convention and the Paris Agreement, as appropriate;”

2. Limit of mandate

CP21, the Report of the 21st Conference of the Parties, was published in concert with the Paris Agreement.  With regards to loss and damage, paragraphs 47-51 of Decision 1/CP21 clarify that at the COP, the parties decided on the continuation of the WIM following its review in 2016; and requested that the WIM create a clearing house for information and a taskforce on displacement.

Para.51 Decision 1/CP.21 then states that the Conference of the Parties: “Agrees that Article 8 of the [Paris] Agreement does not involve or provide a basis for any liability or compensation.” Decision 1/CP21 does not create any obligations with regard to the form of a loss and damage fund. It simply clarifies the interaction between the WIM and the Paris Agreement (between paragraphs 47-50), and the operation of Article 8 of the Paris Agreement (at paragraph 51). It may, however, operate to limit the ability to structure any proposed L&D financial mechanism around strict liability or compensation. Any attempts to do so are likely to encounter considerable resistance at a legal and political level.

Other commentators have explained that paragraph 51 “does not preclude the WIM or the parties to the Paris Agreement from agreeing over time to a legal regime which might resemble a liability scheme or which may provide some kind of monetary pay out or financial support in case of actual damage – whether or not the terms liability and compensation are used.[11]  We have not assessed the merits of this statement in this advice, but it shows that para 51 will be subject to greater focus as financial mechanisms develop over time.

We set out at Schedule 1 other examples of supporting party proposals.

SCHEDULE 1: SUPPORTING PARTY PROPOSALS AND LITERATURE
Paper / articleSummary
Alliance of Small Island States: Multi-Window Mechanism to Address Loss and Damage from Climate Impacts[12] This supports the SEI Paper’s alternative mechanism.  The proposal suggests an interdependent approach to loss and damage which contemplates that many small island developing states cannot access insurance or find it difficult to afford insurance, the polluter pays principle, CBDR + RC, and the establishment of a Convention Adaptation Fund which includes assessed contributions based on the level of Annex I parties’ greenhouse gas emissions taking into account their respective levels of development and ability to pay as well as historical responsibilities.
Submission by the Republic of Vanuatu to the WIM Executive[13]   This submission states that existing climate funds could be used to provide loss and damage finance but it is likely that other specialised instruments will be necessary. This supports the SEI Paper’s notion of additionality.  The submission also supports the SEI Paper’s polluter pays principle as a form of CBDR + RC, as well as self-determination when developing loss and damage mechanisms.
Financing Options for Loss and Damage: A Review and Roadmap[14]  This literature review provides an overview of how international risk pooling in other contexts can be used to address climate-related loss and damage.  The review also canvases the concept of a “solidarity levy”.
Munich Climate Insurance Initiative submission[15]  This submission supports the principle of solidarity and the allocation of responsibility for climate change impacts, and uses the Africa Risk Capacity as an example of where solidarity in the creation of a disaster risk pool has been financially effective and efficient.
International Institute for Environmental Development article[16]  This article considers how national solidarity funds for loss and damage could deliver new and additional finance to countries that have suffered adversely due to climate change impacts.

[1] https://cdn.sei.org/wp-content/uploads/2021/10/211025c-davis-shawoo-loss-and-damage-finance-pr-2110l.pdf, at page 4.

[2]  SEI Paper, page 4.

[3]  SEI Paper, page 4.

[4]  SEI Paper, page 4.

[5] https://legalresponse.org/legaladvice/insurance-as-a-response-to-loss-and-damage/

[6] Paris Agreement, art 8(4)(f).

[7] Article 8, para 4 of the Paris Agreement.

[8] SEI Paper, page 11.

[9] SEI Paper, page 4.

[10] Article 9, para 1 of the Paris Agreement.

[11]  M J Mace and Roda Verheyen “Loss, Damage and Responsibility after COP21: All Options Open for the Paris Agreement” (2016) 25 Review of European Community and International Environmental Law 197 at 206 (emphasis added).

[12]https://unfccc.int/files/kyoto_protocol/application/pdf/aosisinsurance061208.pdf, at pages 2-3.

[13]https://unfccc.int/files/adaptation/workstreams/loss_and_damage/application/pdf/vanuatu_submission.pdf, at page 5.

[14]https://unfccc.int/files/adaptation/groups_committees/loss_and_damage_executive_committee/application/pdf/browncdl-icccadfinancinglossanddamagepaperdraft.pdf, at page 7 and 13.

[15]https://unfccc.int/sites/default/files/mcii_submission_loss_and_damage_cop_18.pdf, at page 10 and 20-21.

[16] https://www.iied.org/new-solidarity-funds-could-ringfence-finance-for-loss-damage


[1] https://cdn.sei.org/wp-content/uploads/2021/10/211025c-davis-shawoo-loss-and-damage-finance-pr-2110l.pdf.