The COP27 summit in Egypt has invigorated debate over “loss and damage”, with several developing nations renewing calls for financial support for “loss and damage” they have suffered due to the consequences of climate change from industrialised nations as a matter of urgency. The issue is likely to feature prominently on the agenda at COP27, with the UN Secretary-General stating recently that “This is a moral imperative that cannot be ignored and COP27 must be the place for action on loss and damage.”
The private sector will be following discussions with interest, given the potential for increased legislation in this area. Developed nations may seek to bridge the financing gap by ensuring that those responsible for “loss and damage” in the private sector contribute to paying for it.
What is “loss and damage”?
“Loss and damage” is an emotive topic. Put simply, the term refers to the negative consequences of climate change on people and the planet. Extreme weather events, such as floods, and ‘slow-onset’ events, such as desertification, can result in both economic and non-economic loss and damage. Approaches to “loss and damage” under international law focus on “averting, minimizing and addressing loss and damage associated with the adverse effects of climate change […]”.
For developing countries who are often on the sharp end of climate events – a particularly poignant example being the recent flooding in Pakistan – but who produce fewer greenhouse gas emissions than developed countries, the issue of “loss and damage” is akin to ‘reparations’, that is, allocating liability to the causers of the damage. Developed countries are hesitant to assume liability for historic emissions, particularly given the difficulties in attributing a causal link between emissions and the damage caused. Any “loss and damage” financing would be provided in addition to the USD 100 billion annual climate finance commitment made by developed countries in 2009 (a goal that has yet to be met).
What progress has been made under international law to date?
The theme of “loss and damage” is not new. COP19 (held in 2013) saw the introduction of the Warsaw International Mechanism for Loss and Damage associated with Climate Change Impacts (the “Warsaw Mechanism”), which seeks to enhance “action and support, including finance, technology and capacity-building, to address loss and damage”. However, almost ten years after the creation of the Warsaw Mechanism, few concrete steps have been taken.
At both COP25 and COP26, developing countries called for the Warsaw Mechanism to be strengthened. Discussion focused on whether it should shift from its current advisory role (such as sharing best practice in the area, and issuing recommendations) to actually providing compensation, via the creation of a finance facility. At the heart of this debate sits the idea that not all climate change impacts can be averted or minimised; some are now simply unavoidable, and must therefore be addressed.
Discussions are set to continue at COP27, with parties also likely to consider the operationalisation, funding and governance of the Santiago Network on Loss and Damage, which was established in 2019 as a supplement to the Warsaw Mechanism. However, such mechanisms can only be fine-tuned and made operational once the fundamental principles are agreed upon.
Will there be an impact on business?
Whilst the focus of discussion to date has been on the need for states to act to redress historical emissions, any meaningful commitments on “loss and damage” may have far-reaching impacts. Developed nations, particularly those facing an economic downturn, may seek to expand the “polluter pays” principle, already an established feature of environmental law, to ensure that heavily polluting industries contribute to any “loss and damage” bill. Calls have already been made by NGOs to expand the “polluter pays” principle to cover greenhouse gas emissions, which may be amplified by the growing prominence of the “loss and damage” debate.
At its most basic, this could take the form of a carbon tax. In an address to the UN General Assembly in September, the UN Secretary-General called for developed economies to tax the windfall profits of fossil fuel companies, stating that “Those funds should be re-directed in two ways: to countries suffering loss and damage caused by the climate crisis; and to people struggling with rising food and energy prices.” In response to the global energy crisis, we are already seeing extraordinary measures such as windfall taxes being applied. It is possible that, in the face of significant sector profits, these taxes may be extended and/or a portion of the funds recovered re-directed to financing “loss and damage” compensation payments. Alternatively, states may look to other mechanisms such as levies or the revenues from emissions trading schemes to fund “loss and damage” payments.
It is worth noting that the USA and EU currently oppose establishing a “loss and damage” financing facility at COP27. But, if governments do make “loss and damage” financing commitments, and in turn plan to fund payments by an extension of the “polluter pays” principle, consideration ought to be given to the approach taken. It may not be appropriate to penalise companies who are proactively engaging in the energy transition for their historic emissions. But the presence on the COP27 agenda of “loss and damage”, and the possibility that this may ultimately result in recognition of causation and/or responsibility for climate-related harms whether at the state or non-state actor level, should give pause for thought in the climate litigation and climate legal risk arena.