Loss and damage financing — funding dedicated to providing financial assistance to least developed countries (LDCs) suffering from adverse effects of climate change — is a mechanism that has the potential to make substantial improvements in the current fight against climate change. It can also interact significantly with geopolitical competition in under-considered ways by pitting the United States and China against each other in a competition to make gains on a currently open playing field for global leadership. This competition has the potential to revolutionize climate financing and climate support.

Despite the weight the four words “loss and damage financing” carry for the planet, there is minimal public understanding of what exactly the term means and how the idea can play out in the real world. Like all areas of international law, there is rarely ever consensus and almost always opposition on the issue.

Since the initial discussion of loss and damage at the 18th Conference of Parties (COP18) in 2012, it took the international community more than a decade to fully embrace its significance. At COP27 in 2022, in a major breakthrough, the parties committed to setting up a loss and damage fund.

Despite the absence of a universally accepted definition of the term “loss and damage,” the United Nations Framework Convention on Climate Change (UNFCCC) states that it relates to the adverse consequences of climate change events such as episodes of extreme weather and the slow onset of rising sea levels. Although climate change affects all countries, LDCs are particularly and disproportionately affected. The 46 current LDCs have contributed the least to climate change but suffer the greatest ramifications. Hence, the LDCs demand financing to compensate for adverse consequences in the form of loss and damage financing. The establishment of a loss and damage fund and a Transitional Committee to guide its creation is a critically important step in the right direction.

However, the strategic interests of the world’s largest powers — the United States and China — intersect with the concept of the fund. Despite climate being an area of historical collaboration between both countries, this paper will argue that loss and damage financing may become an important area of strategic competition, in which the United States and China, two countries fighting to consolidate leadership in the international arena, will vie for the title of “loss and damage leader.” This contest for leadership could benefit loss and damage financing as each country attempts to “out contribute” the other — leading to significant financial inflows to the loss and damage fund.

Loss and damage is a relatively new concept in international climate conversations. It was initially discussed in 2012 at COP18 in Doha, Qatar, with a decision to “establish, at its nineteenth session [COP19], institutional arrangements, such as an international mechanism … to address loss and damage.”

The first formal outline of loss and damage was in the Warsaw International Mechanism for Loss and Damage under the UNFCCC at COP19 in Warsaw, Poland, 2013, which created three broad criteria for response:

1. Enhance knowledge and understanding of comprehensive risk management approaches.
2. Strengthen dialogue, coordination, coherence, and synergies among relevant stakeholders.
3. Enhance action and support, including finance, technology, and capacity building.

Loss and damage was discussed again at COP21 in 2015. In the Paris Agreement, the landmark instrument arising from the discussion, Article 8 was dedicated entirely to loss and damage. This was symbolically important, as loss and damage was no longer synonymous with adaptation or mitigation but had become an independent issue. Built into the decision text of the Paris Agreement is paragraph 51, which states: “Article 8 of the Paris Agreement does not involve or provide a basis for any liability or compensation.” However, countries such as the United States continued to view loss and damage as synonymous with liability and compensation — a view that negated progress on establishing a fund as the United States did not want to be risk being held liable for historic emissions and pressured to pay compensation.

The 2017 COP23 in Bonn, Germany, was the next major convention where loss and damage was addressed. COP23 had a Fijian presidency; since Fiji is a smaller island nation at high risk from climate change, loss and damage was brought to the forefront of discussions. COP23 yielded the “Suva expert dialogue,” which sought to “organize … an expert dialogue to explore a wide range of information, inputs and views on ways for facilitating the mobilization and securing of expertise, and enhancement of support, including finance, technology and capacity-building, for averting, minimizing and addressing loss and damage associated with the adverse effects of climate change.” Additionally, it launched the “Fiji Clearing House for Risk Transfer,” aiming to encourage parties to develop and implement risk management strategies in addition to serving as a repository for information on insurance and risk transfer. Finally, a displacement task force was created to adapt to and mitigate against displacement effects. Despite technical reports presented as evidence to further the case for needed action, developed countries once again hindered any meaningful progress on formalizing a plan for loss and damage.

At the 2018 COP24 in Katowice, Poland, loss and damage was included as a component of the “global stock take,” which aims to keep countries aligned with Paris Agreement goals. It was also included in the transparency outcome whereby countries may provide information about loss and damage when reporting on climate metrics. The progress on loss and damage stopped here and did not extend to any financial discussion or plan, even though COP24 was convened after the Intergovernmental Panel on Climate Change (IPCC) report highlighting the significant impacts that a 1.5-degree rise in temperature would have on island nations in particular.

COP25, in Madrid, Spain, in 2019, once again failed to secure any form of commitment financing for loss and damage. Developed countries continued to push back and argued instead for the creation of expert groups to assist in investigating other methods of support. The Santiago Network was launched at COP25 and paragraph 43 of the UNFCCC Conference of the Parties serving as the meeting of the Parties to the Paris Agreement:

establishes, as part of the Warsaw International Mechanism, the Santiago Network for averting, minimizing and addressing loss and damage associated with the adverse effects of climate change, to catalyze the technical assistance of relevant organizations, bodies, networks and experts, for the implementation of relevant approaches at the local, national and regional level, in developing countries that are particularly vulnerable to the adverse effects of climate change.

At COP26, in Glasgow, Scotland, in 2021, talks were initiated but failed to secure the establishment of a dedicated new damages fund. Financial considerations were a significant concern for developed countries at COP26. They failed to meet the $100 billion climate finance target they set in 2020, which reinforced the lack of consideration given to developing countries in need of monetary support. Scotland’s First Minister Nicola Sturgeon pledged £2 million ($2.48 million) to create the first dedicated national funding scheme for loss and damage. However, this fell far short of developing nations’ expectations.

By the time of COP27 in Sharm El Sheikh, Egypt, in 2022, there was such a push to place importance on loss and damage by LDCs that it became a stand-alone agenda item. At the 11th hour, the United States reversed its decision to vote against the creation of a loss and damage fund. A Transitional Committee was established and tasked with operationalizing the fund by working out all the logistical concerns, including who is to pay and how much and who receives the funds. Viewed as a “win” for developing countries, they now had a formal process to advance loss and damage financing.

The Transitional Committee is composed of 24 members: 10 from developed countries and 14 from developing countries. The developing country participants were selected using the following criteria:

[T]hree members from Africa, including a representative of the President of COP 27; three members from Asia and the Pacific, including a representative of the incoming President of COP 28; three members from Latin America and the Caribbean; two members from small island developing States; two members from the least developed countries; one member from a developing country Party not included in the categories previously listed.

Given the importance of loss and damage financing for developing countries, and especially for LDCs, it was imperative to prioritize their representation on the body.

The committee will report findings and recommendations at COP28 to be held in Dubai in the United Arab Emirates in December 2023. However, between now and then, a series of meetings will convene to consolidate the fund’s purpose, governance, and implementation structure. At its first meeting in March 2023 in Luxor, Egypt, the committee approved its work plan and appointed two co-chairs: Outi Honkatukia (Finland) and Richard Sherman (South Africa).

As these developments show, addressing the challenge of climate change can be an area for cooperation within the international community. However, recent actions by countries such as the United States and China can also belie that collaborative spirit.

China is in a unique position. On the one hand, it is a developing country and needs support as it makes a clean energy transition while dealing with the impacts of climate change. On the other hand, as the world’s second-largest economy and leading carbon emitter, China’s own actions drive the international community’s concerns with issues of loss and damage.

Former U.S. President Donald Trump withdrew the United States from the Paris Agreement in 2017. This decision met with fierce criticism from the international community, which questioned the point of international environmental law if the world’s largest powers could withdraw at any time. Justifying the withdrawal, Trump said it was due to “the unfair economic burden imposed on American workers, businesses, and taxpayers by U.S. pledges made under the Agreement.” Additionally, concerns were raised over China’s “developing” country classification, which subjects it to different rules and accountability standards. Despite President Joe Biden’s rejoining the agreement in 2021, the damage was done regarding the perception of U.S. leadership on climate change engagement.

As a result of the United States missing critical years of international climate involvement, China saw an opportunity and capitalized on it. At the domestic level, China’s Five-Year Plans prioritized the environmental agenda, and government agencies concerned with energy and environment were expanded, as were commitments to peaking carbon emissions by 2030 and achieving carbon neutrality by 2060.

However, when it comes to loss and damage financing, China has not yet been a strong advocate. Under China’s status as a developing country, it is protected under the principle of “common but differentiated responsibility and respective capabilities” set out under the UNFCCC. The principle states that “developed country Parties are to provide financial resources to assist developing country Parties in implementing the objectives of the UNFCCC.” As China is not a developed country by United Nations standards, it uses this to excuse itself from contributing to a loss and damage fund, despite its economic power. This was reinforced at COP27 by China’s climate envoy Xie Zhenhua, who stated that China did not have any responsibility to make contributions for loss and damage. Xie did not mention whether China would still contribute.

COP27 was also a defining moment for the U.S. stance on loss and damage. The country moved from being a strong opponent of the fund for 30 years to being the deciding “yes” vote to establish it. However, the United States and the European Union are pushing for assurances that China will eventually contribute to any fund created — and that China would not be eligible to receive money from it. Under the current structure, China’s developing country status means it would be eligible for climate financing. However, its eligibility is viewed as politically unacceptable in Washington and elsewhere. Chinese efforts to gain loss and damage funds would undoubtedly cause major rethinking in the United States and other countries in the developed world about their willingness to make contributions.

We saw a potential shift to a frame of strategic competition regarding climate change in 2022, when China halted climate talks with the United States in response to House Speaker Nancy Pelosi’s high-profile visit to Taiwan. The halt came 100 days out from COP27, which concerned the international community, given that for the climate agenda to be advanced, cooperation between the two largest emitters had to happen. These and other actions by the United States and China demonstrate that the two countries are often at odds over the specifics of how to combat climate change.

Given the likelihood of continuing rivalry between the United States and China, what could a more competitive approach look like moving forward in the context of loss and damage financing? Unlike other long-standing issues of disagreement between the two, loss and damage financing is a relatively new area of competition. This offers an opportunity to consider why both countries would want to compete and how they would go about it.

The U.S.-China relationship has generally been categorized as one of strategic competition. Each country is aware of the strengths the other has as well as the places where the other can capitalize. The United States and China have typically competed more in areas of trade, energy, technology, and security, leaving climate, education, and people-to-people exchanges as areas of greater cooperation. However, as their competition broadens and intensifies, climate change — and specifically loss and damage financing — may become the newest area of contestation. In fact, as loss and damage financing becomes a more important international issue, albeit one that lacks a clear leader, it may become a prime opportunity for the two sides to assert themselves as part of their larger strategic rivalry.

What does competition look like in this area? The next section of this paper responds to that question by exploring the following possibilities in addition to examining the ramifications for LDCs:

1. A giving contest: whereby each country tries to “out contribute” the other.
2. Propagandized generosity, in which both attempt to develop and solidify new bilateral and multilateral relationships using this funding.
3. Advancing new initiatives and integrating them more prominently within preexisting ones such as the Quadrilateral Security Dialogue (Quad) and the Belt and Road Initiative (BRI).

Monetary contributions into the fund by both the United States and China would be the strongest possible display of commitment to the loss and damage fund. However, it is unlikely either country would jump straight into such a move. A way to begin this conversation would be for both countries to issue a joint statement on the importance of loss and damage financing — one that acknowledges the contributions of the United States and China to emissions but also recognizes the need to commit to action to support those countries that need it most. Going a step further, the statement would need clear commitments from both sides as to what exactly each would contribute to the fund. In this way, there would be a clear signal to the international community that both countries, despite not converging on all areas, are still able to work together on climate issues.

The loss and damage fund has the potential to be transformative for LDCs that are currently suffering from the adverse impacts of climate change. Having the United States and China jointly take charge of ensuring that funds are given to these countries would be one of the biggest signs of cooperation in recent years.

Given the relative newness of loss and damage as a topic for international consideration, the foundations and frameworks are still being designed. This presents a unique opportunity for both countries to collaborate to provide a global public good. This would also signal to the international community a shift in the direction of future U.S.-China relations.

Despite this ideal scenario, that both countries cooperate and jointly lead the fund, it is important to consider a more likely scenario: one country moves, in its own self-interest, to take leadership on the issue. Either the United States or China may realize that in the current state of geopolitical tensions, taking leadership of the loss and damage fund is a way to solidify its own quest for stronger international leadership.

Both countries have an interest in asserting leadership in the international community. For the United States, this looks like consolidating leadership, especially in climate policy, an area that stagnated during the Trump administration but has taken on new importance under the Biden administration.

For China, this looks like developing more of a reputation as a budding alternative leader. Recent actions by China, including the role it played in the brokering of the Saudi-Iran deal and issuance of a 12-Point Peace Plan for Ukraine, have indicated a shift in China’s desire to be perceived internationally as a leader. It seeks greater recognition as a mediator and peace arbiter while building a profile as a positive international player. Given the current lack of leadership in loss and damage financing, tapping into this area would be a way to further demonstrate commitment to the international cause and could be a strong strategic move for China — strategic in the sense that should China make this move, it could garner itself additional diplomatic support from LDCs and the broader developing world. In this way, China has an additional incentive to compete that extends beyond care for the climate. However, capitalizing on this would require a pivot from China’s current attitude toward loss and damage financing, whereby it acknowledges the importance of the fund but does not wish to contribute monetarily by virtue of being classified as a developing country.

The United States is currently the largest monetary contributor to the UN, providing on average 20%–22% of the organization's total budget. China comes in second with about a 12% contribution. The dominance of the U.S. financial contribution already makes the United States a leader in this area. Building on its contributions to the UN to a specific loss and damage fund is a way for either country to further reinforce this image in the international community.

Both countries would benefit from having stronger relations with LDCs, especially given the historical disregard shown to them regarding climate financing. Most of the current 46 LDCs are in the African and Asian regions. Building up stronger relations with these nations may also bring the potential for cooperation in other areas. As the United States and China look to bolster their international reputations and garner closer partnerships in the developing world, loss and damage financing presents an opportunity.

Another fact to consider, however, is the net positive benefit that strategic competition in this area may bring to climate issues. If the United States and China adopt a “who can contribute more” approach to loss and damage leadership, then, irrespective of which country becomes the “leader,” more money has been put into the fund. In this way, despite both countries looking to “buy” influence, the result is that there is more money available to redirect to LDCs.

Strategic competition in loss and damage financing is likely to advance new and preexisting initiatives such as the Quad and the BRI. In the readout for the Quad meeting, held on the sidelines of the G7 in Hiroshima, Japan, May 2023, climate and clean energy were prioritized. The Quad countries identified the need to work together to optimize clean energy supply chains and address gaps in current manufacturing capacities. Additionally, the countries committed to a Climate Information Services Initiative (CIS) to build capacity, cooperation, and information-sharing mechanisms for climate data in the Indo-Pacific. Within these initiatives is an area for the United States in particular to further advance this work with additional funding from the loss and damage fund. The Quad countries remarked that the goal of the initiatives is to help Pacific Island countries better adapt to climate change. The United States can put forward a proposal to the Quad to contribute monetarily to the loss and damage fund to better support the adaptation of countries to climate change, especially those in the Pacific Islands.

China has the potential to increase its loss and damage leadership by integrating funding into its initiative: the BRI. The BRI already targets many of the LDCs identified by the UN and a significant portion of the BRI is devoted to “green” initiatives such as energy finance, transport, infrastructure, and innovation. China has an opportunity to advance BRI initiatives by contributing monetarily to the loss and damage fund. By doing so, recipient countries that are also part of the BRI can accelerate initiatives and projects to speed up the response to the ongoing effects of climate change. In this way, China becomes a leader in loss and damage financing but also strengthens its implementation of the BRI.

Both countries are significant emitters and their continuing resistance to leading reparations efforts, including loss and damage financing, will have detrimental impacts on the international community, and therefore potentially the diplomatic reputations of both countries. If the United States and China cannot cooperate on this issue, they are signaling to LDCs that they cannot put aside their own issues for the greater good of the international community. Further obstinacy does not paint either country in a favorable light and could impact attitudes to decision-making at the multilateral level.

The international community has come a long way in its acknowledgment of loss and damage financing as an important mechanism in combatting climate change. Leadership is needed to take the fund to the next level to deliver much needed relief to LDCs. However, it is unclear where that leadership will come from.

With growing geopolitical instability and intensifying great power rivalry, loss and damage financing presents new areas for global leadership and transformative change. Given the state of their relationships, it seems unlikely that the United States and China will join forces to drive progress on loss and damage financing. Instead, a more realistic outcome lies in understanding — or even encouraging — the possibility of a competitive approach to loss and damage financing, with the United States and China vying for global leadership in this area.  This may be a strategic opportunity — for both countries and for the rest of the world.

Loss and damage financing — four words that carry the ability to make a substantial improvement in the current climate change landscape — presents an opportunity for global leadership, and perhaps climate progress, through strategic competition.