Image credit: The University of Cambridge Institute for Sustainability Leadership
This briefing offers a breakthrough in the design of the global financial architecture for Loss and Damage. It demonstrates how the economic efficiency of risk-sharing systems can convert modest annual financial flows from donors into major contractual entitlements from the risk capital markets for vulnerable countries when disasters strike, now and through to 2050.
• Risk-sharing systems, supported by donors, that transfer the financial burdens of climate risks from the Global South to the international risk capital markets should be a central pillar of the L&D architecture.
• As an immediate step to establish a L&D global risk- sharing mechanism, LDCs, V20 and donor-qualifying SIDS should be allocated USD 10 million annually in premium support from L&D related funds. Each country would receive on average USD 200 to 300 million in pre-arranged annual protection to support their highest priority needs for more frequent climate shocks: eg humanitarian response; recovery of schools, hospitals and critical infrastructure; sovereign debt repayments; agricultural support; and restoration of marine and terrestrial ecosystems. Across 100 countries, this would provide approximately USD 25 billion of pre-arranged finance for an annual cost of around USD 1 billion.
• Using the economic efficiency of risk-sharing systems for climate risks, the international community should commit to an L&D strategic objective of introducing umbrella stop-loss mechanisms to protect the national economies of vulnerable countries in the Global South, with thresholds set at appropriate levels depending on the size of the economy and levels of risk.
• As an initial umbrella stop-loss commitment, the smallest and most vulnerable countries, such as those under one million population, should be protected from losing more than 10 per cent of their annual GDP
from climate-related events. At present, most of these countries are at risk of losing more than 100 per cent of their annual GDP from climate shocks.
• These L&D interventions could be implemented through existing institutions including national governments, development institutions, regional risk pools, international donors and global risk capital markets.