Unpacking Finance for Loss and Damage: Lessons from COVID-19
Updated: Sep 4
Resetting Our Level of Ambition
In the face of the COVID-19 pandemic, the world witnessed an unprecedented mobilization of resources. By October 2020, countries had taken fiscal action amounting to a staggering $12 trillion, nearly 12 per cent of global GDP, to respond to the crisis. The International Monetary Fund (IMF) quickly secured $1 trillion in lending capacity to meet immediate global demands.
This rapid, massive deployment of capital teaches us a vital lesson: when a crisis is treated as a true emergency, the necessary funds can and will be found. The first briefing in the Unpacking Finance for Loss and Damage series, produced by Stamp Out Poverty, Heinrich Böll Stiftung, ActionAid International, Bread for the World, and Practical Action argues that we must apply this exact level of ambition and global solidarity to the climate crisis. While COVID-19 was an acute shock, catastrophic climate change is a long-lasting challenge that is already causing irreversible loss and damage to lives, livelihoods, and ecosystems in vulnerable developing countries.
The Scale of the Loss and Damage Crisis
Loss and damage refers to the impacts of climate change that can no longer be avoided by mitigation or adaptation, ranging from extreme weather events like super storms to slow-onset processes like rising sea levels. Developing countries have long stressed that these impacts require targeted support, leading to the official inclusion of Loss and Damage as a distinct article in the 2015 Paris Agreement.
The financial toll is escalating rapidly. Studies estimate that the economic cost of loss and damage in developing countries alone will reach between $290 billion and $580 billion annually by 2030. By 2050, that figure could soar to between $1 trillion and $1.8 trillion. To meet this need, the briefing proposes a "fast start" commitment of $75 billion between 2020 and 2023, scaling up to at least $150 billion a year by 2030 from public sources.
Six Innovative Finance Solutions
To raise an additional $150 billion a year by 2030, the international community must harness innovative alternative financing tools. The briefing identifies six highly promising mechanisms:
Special Drawing Rights (SDRs): The IMF could issue and reallocate unused SDRs (foreign exchange reserve assets) to free up fiscal space for developing countries. A new $1 trillion to $2 trillion allocation would help nations build long-term climate resilience.
Redirecting Fossil Fuel Subsidies: In 2017, global fossil fuel subsidies reached a massive $5.2 trillion (6.5 per cent of global GDP). Redirecting just a fraction of this such as a 4 per cent annual decrease by G-20 nations could raise $245 billion by 2030 for loss and damage efforts.
Financial Transactions Tax (FTT): A modest levy on trades of stocks, bonds, and derivatives could raise tens of billions. Expanding this to the $6.6 trillion-a-day foreign exchange market could yield up to $297 billion annually.
Climate Damages Tax (CDT): Also known as a Robin Hood tax on polluters, this fee on the extraction of coal, oil, and gas is based on embedded carbon emissions. Increasing annually, the CDT could raise an estimated $210 billion in its first year alone while incentivizing the phase-out of fossil fuels.
Air Passenger Levy: Modeled after the successful French-led UNITAID initiative, a small tax on international airfares (e.g., up to $6 for economy class and $62 for business/first class) could generate $8 billion to $10 billion annually.
Debt Relief: Developing countries spend $300 billion annually on debt repayments. Canceling debt or utilizing debt-for-climate swaps would immediately free up domestic resources, allowing vulnerable countries to fund their own resilience and recovery efforts rather than servicing external creditors.
The pandemic proved that we can unite to tackle monumental global challenges. We invite you to read the full briefing to explore how establishing an international solidarity facility funded by these innovative mechanisms can safeguard the most vulnerable communities from the escalating climate emergency.
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