The World lies at an intertwined juncture where climate atrocities meet financial bottlenecks and the environmental commitments have shaped into a convoluted narrative. The vulnerable sections continue to experience the inequitable impacts of climate change. An analysis by Climate Watch, considering the cumulative emissions since 1850 (i.e. advent of industrial revolution), shows the USA ranks at the top with 573.31 gigatonnes (Gt) CO2e as of 2023, followed by the European Union with 407.22 Gt CO2e, and China with 398.74 Gt CO2e. The developed nations who have historically contributed to the greenhouse gas (GHG) emissions are attempting to reduce their current emissions with large capital infusion toward adopting cleaner technologies. However, the developing and least developed countries with relatively much lower contribution to global emissions - historically and current - are facing disproportionately adverse consequences of climate change without major means - financial and technical - to address them. Ironically, majority of these countries are from the Global South.

Amidst such circumstances, the very essence of climate justice can possibly be questioned given the prevalence of extreme vulnerabilities for the developing and least developed countries. This underscores the importance of financial requirements for tackling such adverse climate impacts with the aspect of reparation coming into play. As a climate conscious responsibility, developed nations should compensate the low emitting but vulnerable countries. While attempts have been made earlier regarding such a reparation system to be in place, failure in climate negotiations acted as a hindrance. In this context, the notion of loss and damage have recently been attempted to address the financing challenges of developing and least developed countries to tackle the menace of climate impacts.

Defining Loss and Damage

Although the definition for loss and damage is yet to be formalized, there exists diverse perspectives that could establish a broad understanding of the same. The United Nations Environment Programme (UNEP) attempted to define loss and damage, which can be considered as the adverse consequences of climate change that prevail regardless of adaptation and mitigation attempts. Loss and damage engage with the inevitable and irreversible effects of the climate catastrophe, whereas adaptation deals with its effects (e.g., constructing sea walls to safeguard against floods) and mitigation deals with its causes (e.g., lowering GHG emissions). When negative effects have measurable costs, like destruction of infrastructure or decreased crop yields, they are referred to as economic loss and damage. The term "non-economic loss and damage" emphasises adverse effects including cultural loss, ecological services loss, and displacement that are difficult to quantify in monetary terms and are not readily sold in markets. These are typically more severe and irreparable.

Following years of unwavering persuasion by developing and less-developed countries who are most affected by climate change, the Loss and Damage Fund was established at the COP27 in Sharm El Sheikh in 2022. Thereafter, the Fund for Responding to Loss and Damage (FRLD) was established at COP28 in Dubai in 2023 to oversee the Convention's financial system and advance the Paris Climate Agreement’s goals. With the professed goal of "avert, minimize, and address" loss and damage related to the adverse consequences of climate change, the decision to operationalize the fund on January 1, 2025, was made during the COP29 in Baku in 2024.

Twenty-four major economies have committed about US$800 million, but it is felt that the figure may be considerably less than what is required to efficiently tackle the extent of loss and damage that vulnerable countries face. In order to address climate effects, a recent report by the United Nations Environment Programme highlights that developing countries would require finances ranging from $215 billion and $387 billion over the course of this decade.

Challenges facing the Loss and Damage Fund

The absence of a precise and consensus definition of "Loss and Damage" in the United Nations Framework Convention on Climate Change (UNFCCC) or the Paris Climate Agreement is one of the systemic issues. Drawing a distinct boundary between loss and damage, adaptation, and resilience measures is made extremely difficult by this uncertainty. The development of targeted policy responses, efficient resource allocation, and accurate impact assessment are all directly hampered by this misconception. The persistent ambiguity around loss and damage is not only a scholarly or technological flaw; it also appears to be a politically useful tactic used by developed countries to avoid making clarifications regarding their financial responsibilities and to avoid addressing compensation.

Additionally, the fund's operating effectiveness is hampered by several unresolved issues and queries. In fact, challenges are predominantly driven by deeply ingrained political dynamics and a persistent failure to acknowledge historical culpability, rather than being only a technological problem. A primary concern pertains to the nature of funding being "voluntary," deliberately disregarding words like "compensation" and "liability." This strategy compromises the fundamental idea of addressing loss and damage as well as the premise that the offender ought to compensate the victims.

There are primarily two factors which create attribution-related issues in loss and damage. The first focuses on determining which elements of loss and damage are caused by climate change. Determining who is responsible for loss and damage is the second challenge with a more controversial issue being the actor who is eventually responsible for making these payments. The Paris Climate Agreement, which supports the UN principle of "common but differentiated responsibilities and respective capabilities," served as the framework for the Fund's creation. This principle recognizes that distribution of responsibility should depend on economic capacities and contributions to climate change. By allocating funding in accordance with capability, capacity, responsibility, and justice, the Fund ought to embody this idea.

Furthermore, the assessment of loss and damage remains a subject that has received little attention in academic and policy settings, reflecting limited efforts to develop a robust framework for equitable distribution of Loss and Damage Fund. Thus, a crucial query emerges pertaining to the aspect of establishing guidelines with respect to a concrete mechanism in place.

The issue of payment also remains contentious with large economies calling for a larger contributor pool that includes growing economies like China and the Gulf states. However, developing countries maintain that developed countries should bear the majority of the culpability for historical emissions rather than passing on to them. This political impasse over responsibility makes it more difficult to raise adequate and steady funding.

The Path Ahead

In order to ensure the effectiveness of the Loss and Damage Fund, the first and foremost step should be to address the definitional ambiguities. At this point, misinterpretation seems to be unavoidable and hence, there needs to be a standardized definition which clearly distinguishes the idea from pre-existing climate terminologies. Moreover, a well thought out system needs to be in place given the prevalence of framework-specific concerns. In fact, quantification and valuation of loss and damage be it economic or non-economic measures requires clarifications to address the complexities. There is a need for a standardized methodology for comprehensive valuation that caters to the prevalent dynamics in quantifying values especially non-economic valuation. Furthermore, effective mobilization of resources across the right kind of channels remains the key for any plan on paper to be implemented with utmost effectiveness.

The Loss and Damage Fund's potential will remain largely untapped unless there is a shift in perception that acknowledges loss and damage funding as a historical and ethical obligation founded on justice and equity rather than charity. Strong attribution and valuation procedures alongside a simpler and direct access method is needed for effective implementation of the same. A sincere commitment in giving priority to the needs of the most impacted communities on the ground, and accelerating grant-based financing from previous emitters are all necessary to close this implementation gap. In fact, integration of innovative financing mechanisms should also be taken into the debate with inclusion of a basket of financing instruments for a flexible and conscious approach.

There also needs to be more discussion regarding loss and damage among financial and policy institutions alongside relevant research work, which can prove to be beneficial to address much of the prevailing concerns. All concerned stakeholders must align climate priorities in a manner which is inclusive, fair, transparent, and responsive to vulnerable groups. Moving beyond the rhetoric is the need of the hour.

The article was first published in TerraGreen - Volume 18, Issue 4, July 2025.

Author

Pritish Kumar Acharya

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