Loss and Damage: Caught between a financial devil and the deep, blue sea

Imagine you are the president of a beautiful, small, island nation.

You must address the immediate existential threat from climate change that your people face. Even though your country has historically contributed the least to climate change, your Nationally Determined Contribution (NDC) toward addressing climate change reflects ambitious mitigation targets with a focus on a gender-responsive, just transition that empowers youth and vulnerable communities. To achieve this ambitious transition, you will need considerable amounts of investment and financial resources.

Unfortunately, it’s not just your future ambitions that are heavily dependent on international climate finance. You are already trying to cope with the rising costs of loss and damage (L&D) from slow onset events, such as sea level rise, as well as extreme weather events—such as increasingly severe and frequent tropical cyclones. L&D is broadly understood as the economic and non-economic losses associated with slow onset events and extreme weather events caused by climate change.

Your territory, heritage, and cultural identity are being lost, and your citizens are being forced to migrate. Furthermore, extreme weather events spell disaster for your economy, which is heavily reliant on tourism, by damaging natural resources, transportation, and critical infrastructure such as power and water supplies. Coping with these recurrent catastrophic events undermines the possibility of foreign investment and sustainable development, such as job creation and improvements in the health and education of your people. But the biggest losses your country suffers are lives and livelihoods.

The grand dilemma

As your nation’s head of state, you must decide if and how much public funding you should allocate to address L&D. To do this you must consider the following:

If you decide to provide financial relief, you will be diverting limited resources from efforts of adaptation, resilience and sustainable development, which then creates vulnerabilities in the system to future extreme weather events and additional L&D — The IPCC calls this the “unvirtuous cycle of climate-induced erosion of development and resilience.” As such, you must seriously consider the tradeoffs between investing in long-term sustainable development or in the short-term recovery and rehabilitation costs after every event. Essentially, the limited resources you have make it impossible to address L&D and development goals at the same time. All of this is extremely worrisome since climate change is already making current development projects even more expensive.

International financing as a solution

One way to address your dilemma and overcome your limited financial resources is to receive more support from the international community. However, more often than not, the tools used for climate finance make it harder for many small island developing states (SIDS) like your own to overcome the most severe climate impacts and achieve long-term sustainable development.

For instance, your income status renders your government ineligible for concessional financing for official development assistance from the United Nations. Despite estimates of your gross domestic product (GDP) loss due to climate change being as high as 80 percent by the end of the century, financial tools offered still only consider current economic status. Furthermore, agencies that determine sovereign credit ratings now include climate change vulnerabilities. Regardless of your nation’s income status, a lower credit rating makes it even more difficult to have access to concessional financing or borrow external funds. Therefore, even if you have access to these financing tools, there are constraints as to which sectors you can use it for, which is usually dictated by donors’ interests and profitability rather than your national needs.

The shortcomings of borrowing more money

Unfortunately, you also have debts piling up from previous loans, such as the debt your nation incurred to recover from the COVID pandemic. If you use your national capital reserves to address and respond to the costs of L&D, you are depleting the money and ability to repay external debt, which then renders your country ineligible for future access to funding.

The choices you have are narrow. You desperately need the money to help your country recover from the climate-induced L&D, but the solutions offered are forcing you to choose between sustainable development and overcoming climate impacts, while simultaneously constraining any prospect of receiving more help in the future. You might be tempted to not address L&D this time, but that does not mean the problem will go away. It only gets worse. As a head of state, what would you do?

The latest news on the cost of L&D is sobering. A report by Climate Action Network found that L&D estimates dramatically increase every decade. While the estimated costs of L&D in 2020 was between US$116 billion and $435 billion, in 2030 they are anticipated to be between $290–$580 billion. Those costs will grow to between $551 billion and 1.016 trillion in 2040 and  between $1.13 trillion and 1.741 trillion in 2050.

Furthermore, a report from the International Institute for Environment and Development (IIED) found that 30 of the world’s poorest and most vulnerable countries can borrow less than 15 percent of the finance they need for climate adaptation before they hit the limit of being unable to repay their debts. The report also found that more than 70 percent of climate finance is provided as loans, usually without concessional terms.

Even though SIDS are the least responsible for climate change, the financing tools they are being offered undermine current and future prospects of recovery from climate impacts, sustainable development and prosperity. These vulnerable nations are already losing their land, livelihoods and lives. They should not be forced to take on more debt to address a problem created by the carbon emissions of rich countries that still don’t show the climate ambition necessary to keep alive the goal of limiting global warming to 1.5 degrees Celsius.