COP28 opened in Dubai this week with an agreement that climate negotiations have struggled towards for decades. Governments formally operationalised a new Loss and Damage Fund intended to provide financial support to developing countries facing severe climate impacts, and countries immediately announced roughly $300 million in initial pledges. The decision is significant because climate policy has historically concentrated on two objectives: mitigation, meaning reducing the emissions causing future warming, and adaptation, meaning preparing societies for climatic changes that can no longer be prevented. Loss and damage recognises a third reality. Some climate impacts have already become severe enough that neither reducing tomorrow’s emissions nor adapting today’s infrastructure can prevent every economic and human loss.
Consider a small island state losing habitable territory to rising seas, a farming community whose crops repeatedly fail as climatic conditions shift, or a low-income country rebuilding infrastructure after increasingly destructive extreme weather. Adaptation can reduce future vulnerability, but it cannot necessarily restore a destroyed home, recover a lost harvest or recreate land that becomes permanently uninhabitable. The Loss and Damage Fund attempts to address precisely that residual category: costs remaining after prevention and adaptation have reached their limits. The principle sounds straightforward until we ask the question underneath it: who owes whom how much?
Developing countries have a powerful historical argument. Industrialisation in Europe and North America began emitting large quantities of greenhouse gases long before most developing countries became significant contributors. Carbon dioxide accumulates in the atmosphere over time, meaning today’s warming reflects cumulative emissions rather than only what countries emit this year. Rich countries also became wealthy partly through energy-intensive industrialisation during a period when carbon constraints were effectively absent. Asking poorer countries now to bear climate losses produced substantially by that historical development creates an obvious distributive problem.
The economic concept is an externality. Firms and consumers burning fossil fuels receive benefits from energy while part of the resulting climate cost falls on people elsewhere and in the future. Because those costs are not fully incorporated into the price of fossil-fuel consumption, markets produce more emissions than they would if emitters paid the complete social cost. Climate change is an unusually difficult externality because the people creating it and the people paying for it can be separated by thousands of kilometres and several generations.
Ordinary pollution policy can often apply a relatively simple polluter-pays principle. If a factory contaminates a river, identify the factory, estimate the damage and make the company pay for cleanup. Climate change resists that simplicity. Billions of people have emitted greenhouse gases through electricity, transport, industry and agriculture over more than two centuries. Emissions produced economic activity that benefited consumers as well as firms. Scientific attribution can increasingly estimate how climate change alters the probability or severity of certain events, but assigning a precise monetary share of one flood or drought to one country’s historical emissions remains enormously complicated.
This is why loss and damage has always been politically sensitive. Wealthy governments worry that accepting broad legal liability could create effectively unlimited claims for compensation. Developing countries worry that refusing the language of responsibility allows countries that benefited most from historical emissions to treat climate disasters as unfortunate acts of nature for which nobody owes anything. The new fund therefore attempts to create financial solidarity without necessarily resolving every philosophical or legal question about reparations.
That ambiguity may be politically necessary. International institutions often become possible only when governments can agree on practical transfers before agreeing completely on moral responsibility. One country can contribute because it accepts historical responsibility. Another can contribute because preventing economic collapse in vulnerable states serves global stability. A third can frame the payment as development assistance. The recipient still receives finance even though governments disagree over why it is owed.
The scale, however, will determine whether the institution becomes meaningful. Roughly $300 million in opening pledges is politically significant but tiny relative to the potential losses climate-vulnerable countries face. A single major natural disaster can produce economic damage larger than the fund’s initial capital. The danger is therefore that governments create an institution impressive enough to announce at COP28 but too small to change outcomes materially.
This is a recurring problem in international development. Institutional creation is easier than institutional capitalisation. Governments can negotiate governance boards, secretariats and eligibility rules because those commitments distribute political costs relatively diffusely. Writing large cheques requires finance ministries to transfer resources that could have been spent domestically. Climate solidarity therefore encounters national budget constraints the moment diplomatic language becomes money.
Rich-country voters may reasonably ask why their taxes should finance reconstruction thousands of kilometres away while they face housing shortages, healthcare costs or their own climate adaptation needs. Governments cannot answer simply by saying climate change is important. They need to explain why international climate finance serves both justice and national interest. Unmanaged climate damage can increase humanitarian crises, economic instability, food insecurity and migration pressures, all of which cross borders eventually.
Climate finance can therefore be understood partly as global insurance. Countries contribute resources before or after disasters because allowing highly vulnerable states to absorb catastrophic losses alone can generate larger costs later. Insurance pools risk across actors whose individual exposure differs. The complication is that climate insurance is not actuarially neutral because the countries paying and receiving have contributed very differently to creating the underlying risk.
This brings us to China, India and the changing meaning of climate responsibility. The original climate politics of the 1990s divided the world relatively clearly between industrialised countries responsible for most historical emissions and developing countries whose emissions remained comparatively small. That distinction has become less complete as emerging economies have grown. China is now the world’s largest annual emitter, while India is also among the largest in absolute annual terms, although India’s emissions per person and historical contribution remain substantially lower than those of many developed countries.
Should China therefore contribute to loss and damage as a developing country, a major emitter or both? Should India eventually face similar expectations as its economy grows? These questions expose the limitations of treating countries permanently according to categories created decades ago. Responsibility changes over time even while historical responsibility remains historical.
A fair system probably needs several variables simultaneously: cumulative emissions, current emissions, income per person and capacity to pay. No single metric captures climate justice adequately. Historical emissions measure contribution to the existing stock of greenhouse gases. Current emissions measure contribution to the problem going forward. Income measures the economic capacity to finance solutions. Population matters because comparing India and Luxembourg through national emissions alone obviously ignores enormous differences in the number of people whose economic activity those emissions support.
This is why climate negotiations become arguments about denominators. China can emphasise historical Western emissions. The United States can emphasise China’s current annual emissions. India can emphasise per-capita emissions and development needs. Small island states can emphasise vulnerability despite negligible contributions to warming. Each metric reveals something real while distributing responsibility differently.
There is no scientifically determined answer because science can estimate emissions and climate impacts but cannot determine how much weight justice should assign to each variable. That is a normative political choice. Climate economics can clarify trade-offs. It cannot decide whose claim is morally superior without assumptions about equity.
The developmental dimension is especially important. Hundreds of millions of people still lack the consumption levels citizens in wealthy countries treat as ordinary. Economic development will require more electricity, transport, housing and industrial production. Telling developing countries simply to consume less carbon therefore risks turning historical inequality into permanent inequality. Rich countries used fossil fuels to reach high living standards and would then effectively tell poorer countries that the atmospheric capacity enabling the same development has disappeared.
The answer cannot be that developing countries should reproduce Western fossil-fuel industrialisation either. The remaining carbon budget makes that physically incompatible with global climate targets. The economically coherent solution is therefore making low-carbon development cheaper than high-carbon development, allowing poorer countries to raise living standards without repeating the emissions trajectory of today’s rich countries.
That requires technology and finance. Solar power, batteries, grids, nuclear energy in appropriate contexts, public transport and industrial decarbonisation all require enormous capital investment. Developing economies frequently face much higher borrowing costs than advanced economies, meaning an identical renewable project can be substantially more expensive to finance in a poorer country even when the underlying technology is the same. COP28’s presidency itself has highlighted the disparity in the cost of capital between the Global South and advanced economies.
This is why climate finance should not be treated primarily as charity. A tonne of carbon avoided in India affects the atmosphere exactly as much as a tonne avoided in Germany. If financing clean infrastructure is cheaper per tonne in a developing economy, international capital can reduce global emissions more efficiently by flowing there. The national location of mitigation differs from the global location of the benefit.
Loss and damage is different because the objective is not preventing emissions but distributing costs already produced. Yet the same inequality in financial capacity matters. A wealthy country hit by a flood can borrow cheaply, insure property and finance reconstruction through a large tax base. A small developing economy hit by an equivalent shock can see public debt rise dramatically and years of development spending diverted towards rebuilding.
The same physical disaster therefore creates different macroeconomic disasters depending on the balance sheet of the country it hits. Climate vulnerability is partly meteorological and partly financial. Two countries can experience identical storms while the poorer one suffers much larger long-term developmental damage because it cannot finance recovery without sacrificing investment elsewhere.
This creates a debt-climate feedback loop. A vulnerable country borrows after a disaster, increasing debt. Higher debt raises borrowing costs. Higher borrowing costs reduce investment in climate adaptation. Weaker adaptation increases losses during the next disaster. The country then borrows again. Climate vulnerability becomes fiscal vulnerability, which produces more climate vulnerability.
Loss-and-damage finance can interrupt part of that cycle if it provides grants or sufficiently concessional resources rather than simply adding more debt. Asking a country to borrow at high interest rates to repair damage from a global externality it contributed little to creating can deepen the underlying inequality.
This is also why adaptation remains economically superior to repeated reconstruction where prevention is possible. Strengthening drainage, improving early-warning systems or reinforcing infrastructure can cost far less than rebuilding repeatedly after disasters. But adaptation spending suffers from the political problem we have encountered repeatedly this year: its benefit is a catastrophe that does not happen.
A bridge rebuilt after a flood produces photographs.
A drainage system preventing the flood produces nothing visible.
Governments systematically underinvest in prevention because success is politically quiet.
International climate finance should therefore avoid creating incentives where countries receive more support after disasters than they can obtain before them. Loss and damage must complement adaptation rather than make adaptation comparatively less attractive.
This creates another moral-hazard problem, although it should be discussed carefully. Vulnerable countries do not choose hurricanes or sea-level rise, and describing climate finance as encouraging irresponsibility can become an excuse for withholding necessary support. Yet every insurance system needs incentives for risk reduction. Funding mechanisms should reward credible adaptation and resilient reconstruction so that financial support reduces future vulnerability rather than repeatedly restoring the same fragile infrastructure.
The principle should be build back differently, not simply build back identically.
Libya’s Derna disaster demonstrated why. Reconstructing a dam without reforming the institutions responsible for maintaining it would restore the physical asset while preserving the governance risk. Climate finance therefore cannot be separated entirely from state capacity. Money produces resilience only when institutions can convert financing into functioning infrastructure.
This creates a difficult tension for donor governments. They want safeguards ensuring funds are not lost through corruption or poor administration. Recipient governments can interpret extensive conditions as another form of wealthy-country control. Too little oversight wastes resources. Too much conditionality makes finance slow and inaccessible.
Again, the optimal institution lies between two failures.
The Loss and Damage Fund’s governance will therefore matter almost as much as its headline capital. COP28’s decision establishes a dedicated fund with its own board and institutional arrangements, building on recommendations negotiated through the transitional process during 2023. The challenge is designing access rules rigorous enough to protect resources while simple enough that countries facing disasters can actually receive money before bureaucratic delay makes assistance irrelevant.
Speed matters because climate disasters create liquidity crises immediately. Governments need money for emergency housing, infrastructure and essential services within days or weeks, not after multiyear project approval. Development institutions designed primarily around carefully planned long-term investments may therefore need different procedures for loss and damage.
The private sector can absorb some climate risk through insurance, but markets also have limits. Insurance works when risks are uncertain and sufficiently diversified. As climate impacts become more predictable in particular regions, insurers can raise premiums or withdraw coverage altogether. A coastal property facing near-certain repeated flooding is not an attractive insurable risk at an affordable premium.
At that point, climate change begins making assets economically uninsurable before they become physically unusable.
That can affect mortgages, property values and municipal tax bases long before sea levels literally submerge communities.
Loss and damage therefore includes financial repricing of geography.
Some places become more expensive to inhabit because climate risk increases.
Governments then face politically brutal questions about whether to defend communities indefinitely, subsidise insurance or finance relocation.
Small island states face the extreme version because relocation can threaten national territory, culture and sovereignty rather than merely property values.
Money cannot compensate perfectly for those losses.
This is another limitation of the phrase “loss and damage”. Economists naturally convert damage into monetary values because finance requires numbers. Some losses resist meaningful pricing: cultural heritage, ecosystems, ancestral land or lives lost during disasters.
A fund can finance recovery.
It cannot restore everything.
This is why mitigation remains the first-best strategy. Every fraction of a degree of warming avoided reduces future losses that adaptation and compensation would otherwise need to address. Loss-and-damage finance should not become a political substitute allowing high emitters to continue emissions while paying poorer countries afterwards.
Compensation is not permission.
A company cannot justify polluting indefinitely simply because it pays damages, particularly when some damages are irreversible. Climate policy therefore needs all three pillars simultaneously: mitigation to reduce future harm, adaptation to reduce unavoidable harm and loss-and-damage finance for harm that remains.
COP28’s location makes that point unusually uncomfortable. The summit is being hosted by the United Arab Emirates, one of the world’s major oil producers, and its president, Sultan al-Jaber, is also chief executive of the Abu Dhabi National Oil Company. Critics see an obvious conflict between leading climate negotiations and overseeing expansion in fossil-fuel production. Supporters argue that energy producers need to participate in the transition because excluding them does not make oil demand disappear.
Both points deserve attention. Fossil-fuel producers are economically central to the problem and therefore inevitably central to any realistic transition. That does not eliminate conflicts of interest when the people negotiating climate ambition also benefit from continued hydrocarbon production.
The deeper problem is structural rather than personal. The world still consumes enormous quantities of fossil fuels because transport, industry, electricity and petrochemicals remain dependent on them. Oil companies produce because consumers and economies demand the product.
Climate politics becomes too easy when responsibility is concentrated entirely on producers.
Producers respond to demand.
Consumers respond to prices and infrastructure.
Governments determine regulations and subsidies.
Banks finance projects.
Everyone occupies part of the causal chain.
That does not distribute responsibility equally.
It makes the system harder to change than replacing one executive.
The energy transition therefore needs to alter incentives across the entire chain until low-carbon alternatives become economically preferable at scale. Carbon pricing, clean-energy subsidies, infrastructure, regulation and technological innovation all attempt to shift relative prices.
The objective is eventually making decarbonisation less dependent on moral sacrifice.
Policies survive politically when the clean option becomes cheaper, more convenient or more productive than the carbon-intensive one.
This is where technological progress creates genuine grounds for optimism. Solar and battery costs have fallen dramatically over recent decades, electric vehicles are expanding and investment in clean energy has grown substantially. The climate problem remains severe, but the economic choice is no longer simply prosperity through fossil fuels versus poverty through decarbonisation.
The challenge is speed, distribution and financing.
Who pays the transition costs?
Who loses fossil-fuel employment?
Who finances new infrastructure?
Who compensates countries experiencing damages before the transition is complete?
Those are fundamentally distributional questions.
Climate change may therefore be the largest collective-action problem humanity has attempted to govern. Every country benefits from a stable climate, but each receives only a fraction of the global benefit produced by its own emission reductions. That creates incentives to free-ride on other countries’ mitigation.
Loss and damage adds another layer because countries disagree over responsibility for costs generated historically.
International institutions exist to make cooperation possible despite those incentives.
Their effectiveness depends ultimately on whether governments believe others will contribute fairly.
Trust therefore becomes another scarce climate resource.
Developing countries remember the wealthy world’s $100 billion annual climate-finance pledge, whose delivery was delayed beyond the original 2020 target. That history affects how new promises are interpreted. A fund announced dramatically at COP28 will not rebuild trust if contributions remain far below need or become difficult to access.
Credibility accumulates through delivery.
This may be the most important standard for judging the Loss and Damage Fund. Its creation is genuinely significant. Countries spent decades resisting the political implications of formally recognising loss and damage as a distinct financial problem, and COP27’s agreement followed by operationalisation in Dubai represents institutional progress.
But institutions do not compensate anybody merely by existing.
Money has to enter.
Countries need to access it.
Projects and recovery programmes need to work.
The financing needs to become predictable enough that vulnerable governments can incorporate it into planning rather than treating every disaster as another diplomatic fundraising exercise.
Climate justice ultimately becomes real through budgets.
The moral argument is important because it tells us why resources should move.
The economic design determines whether they actually do.
That is why the opening of COP28 should be treated as a beginning rather than a victory. The world has moved from debating whether loss and damage
