The world agreed to a climate reparations fund. Now comes the hard part

This story was originally published by Grist and appears here as part of the Climate Desk collaboration.

After three decades of work, advocates for developing countries scored a major win at last year’s United Nations climate change conference in Dubai: World leaders unanimously agreed to set up a climate reparations fund. As the planet warms, the poorest nations are being hit hardest by drought, rising sea levels, hurricanes, and a slew of other climate impacts — even though these countries did the least to cause global warming, compared to their early-industrializing peers. Enter the so-called loss and damage fund, which is supposed to compensate them for the unavoidable effects of climate change. So far, the international community has pledged more than $650 million to the venture.

Now the tedious, unsexy — and often boring — work of setting up the fund is just beginning.

At the end of April, a 26-member board met for the first time to discuss the administrative and institutional policies required to operationalize the fund and dole money out to developing countries in need. The board’s to-do list is long. It ranges from the procedural — selecting co-chairs and agreeing on a host country for the fund — to the more substantive: deciding which countries are eligible to receive funding, how to fundraise and replenish the fund, and whether or not the World Bank will help manage the fund.

The board was supposed to hold its first meeting at the end of January, but a stalemate among wealthy countries, including the U.S. and those of the European Union, about who to nominate to the board led to delays, putting the meetings three months behind schedule. Much of this work must be completed in just over six months, before the next United Nations climate conference, known as COP29, in Baku, Azerbaijan.

“There’s a very large work plan for the year,” said Brandon Wu, director of policy and campaigns and head of international climate justice work at the non-profit ActionAid USA. “They are still trying to squeeze in three meetings before COP29 to be able to stay on schedule.” Wu attended the board meeting as an observer.

The stakes are high. The roughly $650 million that has been pledged so far is a sliver of the estimated need — which researchers have pegged at as much as $580 billion per year by 2030 — and is broadly seen as startup money sufficient only to establish the fund. As the main contributors to the climate crisis, wealthy countries are expected to be the primary donors to the fund. But before the fund can begin allocating money to poorer nations in need, a number of decisions need to be made.

Key among them is whether the World Bank will serve as a trustee and help manage the operations of the fund. Wealthy nations believe that the bank, which houses several other environmental and climate funds, has the experience, reputation, and administrative know-how to best manage a financial endeavour of this size. But developing countries were initially opposed to the idea, citing the failures of the bank’s past programs and its role worsening debt crises in poor countries.

Ultimately, developing countries reluctantly agreed to allow the World Bank to host the loss and damage fund on an interim basis. But that decision was contingent on the bank meeting 11 conditions, including allowing recipients to directly access money from the fund instead of requiring that money pass through an intermediary international institution, such as a United Nations agency or multilateral development bank. The World Bank has until June to deliberate and report on whether or not it can meet those conditions.

Initial discussions about those conditions have already hit snags, according to reporting by E&E News. The loss and damage fund’s board and the bank can’t seem to agree on who should sign off on financial agreements when money is disbursed. The World Bank has a number of policies in place to ensure that the money it doles out isn’t misused and meets various environmental and social safeguards. Since the loss and damage fund is expected to hand out money to a range of national and subnational groups as a result of the direct access condition, the bank will likely work with hundreds of entities. That increases the chances that a recipient misuses the money or fails to pay back a loan, putting the bank on the hook. As a result, the bank wants the responsibility — and liability — to lie with the board, while the board has argued that as trustee, the bank should have final signing authority.

If a project that receives money from the fund is unable to pay the bank back, the bank’s credit rating could be affected, which in turn could lead to a decrease in the bank’s borrowing power, said Michai Robertson, a lead negotiator for the Alliance of Small Island States, a group representing 39 island nations. “They see this as a big cluster of issues,” he said. “If you have one entity from each developing country, that’s 140 countries that can access the fund directly and not use a go-between. The bank sees this as a huge risk.”

If the bank ultimately reports that it cannot meet the 11 conditions, countries will go back to the drawing board to establish an independent fund. Those decisions will be made at COP29 in Azerbaijan.

Even if the stalemate between the board and bank is resolved, the board will still have many more thorny questions to work out, including which countries will be eligible to receive money from the fund. In the agreement inked in Dubai last year, countries agreed that the fund’s resources are meant for “developing countries that are particularly vulnerable to the adverse effects of climate change.” But the agreement did not define which countries qualify as “particularly vulnerable.” The phrase has typically referred to small island states and those classified as “least developed countries” in climate talks — but that leaves out countries like Pakistan, which faced catastrophic floods in 2022, and others that are widely seen as appropriate recipients for loss and damage funding.

Hanging over these discussions is also the question of how the fund will raise the trillions of dollars that will be required in the coming years to address the loss and damage countries will face due to climate change.

“There’s sort of the elephant-in-the-room question, which is when is the fund actually going to get meaningful amounts of money,” said Wu. If the fund receives very little money, the board will end up designing policies meant to facilitate the transfer of millions of dollars — not the trillions that are needed, he said.

“The scope of the ambition of the fund is a big question,” he said.