How to Make the UN Climate Change Conference (COP 28) Loss and Damage Deal More Viable?

The United Nations Climate Change Conference COP 28 took place in Dubai in December 2023. The conference is the world’s only multilateral decision-making forum on climate change with almost complete membership of every country in the world.  Countries come together each year to agree on ways to limit the rise in average global temperatures to no more than 1.5C by the end of the century and help vulnerable regions to handle the negative effects of climate change.

One of the first significant deals which was reached at the summit was compensation for losses and damages from developed countries that primarily produce greenhouse gas emissions to countries that are intensely suffering from the effects of climate change as a result.

The UAE and Germany have already donated $100m to the loss and damage startup fund. The initial funding is close to US$429m. €225m ($245m) will come from the EU, £60m ($75m) from the UK, $24.5m from the US and $10m from Japan. Funding should further lead to the signing of an agreement, since the decision on losses and damages does not mention specific rules regarding the amount and frequency of funding, therefore raising the question of the long-term sustainability of the fund.

The loss and damage in developing countries is already estimated by some studies to be greater than 
$400bn annually – and expected to rise.  Going forward, loss and damage costs will depend on the effectiveness of climate mitigation and adaptation efforts.

However, a recent scientific article questioned the effectiveness of interstate climate change compensation based on the principles of tort liability. There are at least four structural differences between traditional conceptions of liability and the basic characteristics of climate change as a public policy issue that pose significant obstacles to the application of tort law to climate change.

Firstly, the concept of liability is traditionally based on an assumption, that cause of the injury or damage should be linked to the series of actions and events.  Climate science treats cause and effect in probabilistic terms, that is, with some degree of probability. Therefore, it is impossible to strictly prove the cause.

Secondly, it is difficult to clearly define negligence in relation to the duty of care due to the diversity of activities associated with GHS emissions and the incomplete linkage of such activities to climate change.

Thirdly, a certain amount of time must pass between causing harm and unlawful behaviour (in our case, activities related to climate change). But climate change is a continuum problem caused by the accumulation of greenhouse gases and other warming pollutants over decades. The time delays inherent in climate change conflict with the time requirements required by tort liability law.

And finally, the high scale of claims that can be made in climate change liability cases can undermine the economic foundations of the societies that tort systems are designed to serve. Worst-case climate change scenarios could even lead to the risk of virtually unlimited damage.

To solve the above-mentioned inconsistencies between damage from climate change and the tort liability system, the author of the article proposes a parametric (index) insurance system. With this type of insurance, payment can be made automatically from an insurance fund (maybe an insurance company, a multi-country risk pool, etc.) provided that certain weather parameters are triggered. We can still see successful parametric risk financing schemes in operation on both a meso and macro levels, for example through the Rural Resilience Initiative and the Acre Fund in Africa, and with the Caribbean Catastrophe Risk Insurance Facility.

Despite society’s movement towards risk pooling mechanisms for catastrophic risks such as drought, heat stress, floods, hurricanes, there is still an opportunity for private markets to provide additional capacity at all levels (micro, meso and macro) and additional financing of risks on the terms of participation in catastrophic securities and insurance (reinsurance) using parametric (index) contracts.