Bibhuti Pati states that it’s time from reconsider to reimagine for climate change funds
After extensive discussions, nations reached a consensus to create a fund aimed at addressing losses and damages resulting from climate change during the 27th Climate Conference of Parties (COP27), held under the UNFCCC in 2022. At that moment, the fund’s creation was celebrated as an acknowledgment of the disproportionate effects of global warming on less affluent nations. However, three years later, the Fund for Responding to Losses and Damages (FLRD) is still in its early stages and facing challenges in securing financial support.
Currently, the FLRD has received voluntary pledges totaling $768 million from 28 nations. Among these, 22 countries have formalized contribution agreements, and 19 have initiated their funding commitments. Nevertheless, these pledges fall significantly short: The true cost of disasters is projected to exceed $2.3 trillion each year when considering cascading effects and ecosystem costs. A new round of funding requests for the FLRD is set to commence in mid-December, with disbursements anticipated to begin by June 2026.
A novel proposal put forth by Nobel Laureates Abhijit Banerjee and Esther Duflo, along with Michael Greenstone, a Professor of Economics at the University of Chicago, seeks to rethink the methods of raising climate finance for loss and damage, as well as for climate adaptation. This proposal suggests the integration of taxation, direct benefit transfers, and insurance to generate funds, distribute them promptly and fairly, and encourage mitigation efforts in impoverished nations.
Dubbed the “grand bargain for climate mitigation, adaptation and compensation,” this initiative aims to tackle various issues within the governance of climate finance. These include reducing future emissions in developing nations, ensuring that funds are allocated appropriately, determining the calculation of these funds, and identifying their sources.
“We are not suggesting this as a substitute for anything. The aim is to establish a system that is appealing enough on one hand, for nations to genuinely pledge to lower carbon emissions, and sufficiently enticing on the other hand, to encourage wealthy countries to agree to provide funding,” stated Banerjee.
Estimating Damages and Dispensing Funds
Despite the goal of generating $1.3 trillion in climate finance over the next decade, wealthy nations have traditionally opposed the concept of compensatory payments for damages caused by climate change. They have committed to mobilizing only $300 billion in climate finance by 2035. “At present, affluent countries are diverting funds from other climate programs to tackle loss and damage, indicating that the funding is not additional,” remarked Ritu Bharadwaj, an economist at the International Institute for Environment and Development, who was not part of the proposal.
The proposal indicates that voluntary contributions to the UNFCCC funds are “minimal, and we could expect this trend to persist.” The initial component of the “grand bargain” involves assessing the financial obligations of wealthy nations to poorer countries for the damages they have caused. By utilizing mortality rates from heat as a metric, the researchers determine the social cost of carbon in Low Middle Income Countries (LMICs) for each tonne of carbon dioxide or its equivalent released by OECD nations. “Temperature-related mortality constitutes the majority of the estimated damages in LMICs, and quantifying it is relatively straightforward. Furthermore, limiting the calculations to this specific category renders our estimate conservative, safeguarding it from claims of climate alarmism,” the proposal states. Based on this assessment, emissions from OECD countries in 2022 are projected to result in at least $1.8 trillion in mortality damages within LMICs, equating to approximately $130 per tonne.
The second component involves distributing funds to impacted individuals and communities via direct benefit transfers. The initial tier is designated for the regions most severely impacted, granting all individuals access to a Universal Basic Income. The subsequent tier pertains to other affected nations, which receive a weather-triggered basic income that is automatically disbursed when specific heat wave-related thresholds are surpassed in designated areas.
In addition to income-based transfers, the proposal encompasses the allocation of community grant transfers, enabling communities to implement adaptive strategies, such as safeguarding households, repairing damages, and installing air conditioning in educational institutions. Lastly, the proposal also incorporates a provision for disaster insurance, which would partially cover the costs associated with the damages incurred.
The overall estimated expenses for executing this system, referred to as Foreseeable, Automatic, Immediate, Regular (FAIR), are anticipated to be $737 billion, significantly lower than the total amount owed, and is considered a feasible starting point, according to Banerjee.
“Our aim was to emphasize automaticity for LMICs, as a significant worry among donor nations is that funds do not reach their intended destinations after being disbursed,” he stated, further noting, “When payments are automated, they are directed precisely where they should be. The recipient nation also gains advantages, as it alleviates internal conflicts regarding expenditure on alternative priorities. Additionally, it serves as an effective method to influence behavior. We aspire for individuals to express, ‘We will not be working today due to excessive heat,’ and the assurance of payment is crucial to this.”
The Time to Negotiate For Emerging Nations
To engage in the scheme, LMICs must, however, pledge to allocate the funds via the FAIR mechanism and consent to implement a progressive carbon price or tax, according to the proposal. Such a tax would “act as an indication of the commitment to undertake significant measures in reducing emissions,” which is essential as LMICs are anticipated to produce the majority of carbon emissions throughout the rest of the century during their development. To enhance the political appeal of this proposal, the researchers recommend that the revenues generated remain within each LMIC nation.
Rather than concentrating on a target based on “needs,” the “grand bargain” suggests that wealthy nations should commit to establishing consistent funding sources that can be designated for climate-related damages. The researchers contend that these funds must originate from public sources, as “there is no private profit to be gained in compensating the world’s most impoverished for the climate damages they endure.”
Potential funding sources for the FAIR mechanism may derive from two taxes: The Pillar 2 OECD tax, which guarantees that large multinational corporations pay a minimum tax rate on the income generated in each jurisdiction where they conduct business, and a suggested billionaire’s tax, which would impose a 2% tax on the income of the 3,000 wealthiest billionaires. “These two sources alone could generate $500 billion annually at present, sufficient to meet current spending requirements,” states the proposal.
Execution Experiments
The proposal represents a significant departure from the operational methods of current funds under the UNFCCC. The Fund for Addressing Losses and Damages, currently in its initial phase, has consented to disburse grants ranging from $5 million to $20 million for each proposal or funding request submitted by developing nations, ensuring that at least 50% of the funds are designated for least developed countries and small island states.
“There is a pressing need to rethink climate finance, as currently, these funds operate in isolation, and the governance framework surrounding them consumes a significant portion of the available finance. The establishment of boards, modalities, and management structures contributes to a process that is both inflexible and ineffective,” stated Bharadwaj. She has previously discussed how direct benefit transfers could facilitate overcoming these obstacles by leveraging the existing social welfare systems in low- and middle-income nations.
Nevertheless, she remains skeptical that the suggested agreement will generate the required funds. “The issue lies in the reluctance to contribute even a minimal amount. A potentially effective approach to encourage countries to contribute is through legal action,” she remarked.
Bibhuti Pati
(Bibhuti Pati is a Senior Bilingual Media Person ( Print and Electronic ) from Odisha who is known for his insightful and serious writings.)
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