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Funds managed by the Global Environment Facility (GEF)

The GEF: financial mechanism of the Convention

The convention on climate change established a financial mechanism to provide funds to help developing countries implement the Convention (See Annex). The Convention assigned the role of operating the financial mechanism to the Global Environment Facility (GEF) on an interim basis and, in 1996, the Conference of the Parties, at its second session (COP2), adopted a memorandum of understanding with the GEF on their respective roles and responsibilities. In 1998, COP4 entrusted the GEF with this role on an on-going basis, subject to review every four years.

The GEF is a multilateral financial institution, with 173 member countries, bringing together development institutions, the scientific community, private sector and non-governmental organizations in behalf of a common global environment agenda. Its secretariat is based in Washington D.C. and managed by the World Bank under the supervision of the GEF Council, which is the GEF's decision-making and control authority. The Council has 32 members, representing 14 OECD countries, 16 developing countries and 2 countries from Central and Eastern Europe. The GEF was established by the World Bank, the UN Development Program (UNDP) and the UN Environment Program (UNEP) in 1991 with a pilot phase up to 1994 to fund certain developing country projects that have global environmental benefits, not only in the area of climate change, but also biodiversity, protection of the ozone layer and international waters. The issue of land degradation is also included in funding as a cross-cutting issue.

The financial mechanism is accountable to the Conference of the Parties, which decides on its climate change policies, program priorities and the eligibility criteria for funding. The COP therefore provides regular policy guidance to the financial mechanism on its climate change work, based on advice from the Subsidiary Body for Implementation (SBI). The Kyoto Protocol will use the same financial mechanism.

The GEF will also manage newly created funds related to climate change and developing countries: the Special Climate Change Fund, the Least Developed Countries Fund and the Adaptation Fund, provided for in the Marrakech Accords.

In 1994, the GEF was granted US$ 2 billion by 34 nations. In 1998, it was granted US$ 2.74 billion by 36 nations. A third replenishment of approximately US$ 3 billion occurred in 2002. The USA announced its participation in the third replenishment. The grants to the GEF, mostly from OECD countries, are additional to official development assistance.

Since 1991, the GEF has allocated a total of US$ 7.1 billion to climate change activities, including US$ 1.2 billion in grants and US$ 5.9 billion leveraged through co-financing from bilateral agencies, recipient countries and the private sector. Between July 1999 and June 2000, total project financing for climate change activities exceeded US$ 1,424 million, of which the GEF provided US$ 199 million in grant financing. The total grants provided by the GEF between 1991 and 2002 for all focal areas amounts to US$ 4.2 billion , divided among 1000 projects in 160 developing countries.

COP 6 had requested that a sufficient amount of resources be placed at the disposal of the Parties not included in Annex I, the developing countries. No agreement was reached on eventual financial penalties for the Annex I countries that exceeded their emission quotas during the course of a commitment period. These penalties could have been earmarked for financing the funds managed by the GEF. The total amount of these funds will therefore largely depend on the good will of the industrialized countries, and, in the case of the Kyoto Protocol Adaptation Fund, on the carbon credits to be generated by the CDM project. In 2001, an annual sum of US$ 410 million by 2005 was announced collectively by the European Community, New Zealand, Japan, Switzerland, Iceland and Canada as extra-funding for developing countries, to be revised in 2008. This comprises subsidies to the GEF, to the new climate change funds as well as bilateral assistance.

The climate change focal area and the multi-focal area of GEF

The GEF Operational Strategy

4 focal areas:

Biodiversity
Climate change
International waters
Ozone depletion
and land degradation as a cross-cutting issue

3 types of projects:

· Enabling activities
 · Short-term activities
 · 13 Operational programs

    Biodiversity
    1. Arid and Semi-Arid Zone Ecosystems
    2. Coastal Marine, and Freshwater Ecosystems
    3. Forest Ecosystems
    4. Mountain Ecosystems
    13. Conservation and Sustainable Use of Biological Diversity Important to Agriculture

    Climate Change
    5. Removal of Barriers to Energy Efficiency and Energy Conservation
    6. Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing . Implementation Costs
    7. Reducing the Long-Term Costs of Low Greenhouse Gas Emitting Energy Technologies
    11. Promoting Environmentally Sustainable Transport

    International Waters
    8. Water body-based Operational Program
    9. Integrated Land and Water Multiple Focal Area Operational Program
    10. Contaminant-Based Operational Program

    Multi-focal Area
    12. Integrated Ecosystem Management

Source: www.gefweb.org

The different focal areas of the GEF allow for the financing of forestry projects. The GEF has provided more than US$ 500 million through its forestry program, and US$ 350 million to projects addressing deforestation and desertification. Fifty-five percent of GEF forestry sector funds are intended for use in Africa.

The projects selected for GEF funding are implemented by multilateral agencies such as:

Project proposals must come from beneficiary countries, from their national offices, non-governmental organizations or the private sector, and must be consistent with national priorities in sustainable development. Projects can deal with economic and social development, as well as environmental protection. A project can be presented as investment and technical assistance, capacity reinforcement, research or as a micro-project.

To be eligible to GEF funds, projects must:

Funding Options

The climate change Focal Area

The budget of the climate change focal area represents a little less than 40% of GEF's endowment. It covers enabling activities, climate change mitigation activities and adaptation activities. Three types of actions are developed:

i) Long term measures in the context ofoperational programs

Operational programs concern activities in the energy and the transport sector. Biomass energy use and efficiency is eligible to OP6 (renewable energy) and OP7 (low-emitting technologies).

ii)Enabling activitieshelp countries to establish national communications for the Convention and to define national priorities.

Capacity reinforcement in sub-Saharan Africa (Ghana, Kenya, Mali and Zimbabwe) in conformity with the United Nations Framework Convention on Climate Change

Project components:
· Systematic inventories of greenhouse gas sources
· Capacity development for the implementation of studies and projects
· Identification of projects in the energy and forestry sectors
· Creating private sector awareness to finance these activities

GEF-UNDP Allocation: US$ 2 million (covering the total cost of the project)
Project control by UNDP

iii)Short- term mitigation projectsinvolve low-cost actions in high priority fields.

Two examples are found in Africa:

These projects, in accordance with GEF policy, concentrate on the environment. Their objective was to allow local communities to acquire know-how regarding the sustainable management of their lifestyle. They therefore relate more to the transfer of skills in forestry techniques than to development as such.

Operational Program 12 of the Multi-focal Area

Operational Program 12 «Integrated ecosystem management»6is more appropriate for activities relevant to both forestry and climate change combining the climate change aspect with other global services offered by forests.

OP12 falls under the multi-focal area of the GEF, covering the GEF's four fields of action as well as land degradation. The undermining principle is that natural resources management must address social and economic issues because humans play a major role in the disturbance of ecosystems. Projects aim to involve and empower a wide range of local residents and to create sustainable livelihood opportunities so as to strengthen local economy and reduce poverty. OP12 covers interventions to create an enabling environment through policies, regulations, and incentive structures, institutional strengthening activities, such as training and logistical support, and investments. Investments under OP12 include the «rehabilitation and/or improved management of a forested watershed or floodplain wetlands through sustainable forest management to achieve multiple benefits, including improvement in soil and water conservation, aquatic biodiversity conservation, flood control, minimization of damage to globally important water bodies, and reduction of net emissions or improved sequestration of greenhouse gases».

In its first year (2000), OP12 was granted US$ 100 million to cover GEF country workshops, small and medium-scale enterprises programs and small grants programs. It is expected to function with US$ 200 million per year.

The GEF announced the supporting of three integrated ecosystem management projects in Africa for a total of US$ 16,8 million, one of them explicitly mentioning carbon sequestration in natural ecosystems.

Financing the cost of protecting the global environment: the incremental cost

Intervention of the GEF in the context of the focal areas is based upon the concept of "incremental cost". The subsidies are allocated in relation to the expenditures for the global environment in a classical development project: they are supposed to fund the transformation of a project with national benefits into one with global environment benefits. In other words, the GEF grants cover the difference or "increment" between a narrower, cheaper, possibly more polluting option and a wider, more expensive, more environment-friendly option. The incremental cost is thus equal to: _the total cost of the project favorable to the environment_ minus _the total cost of the reference project_ minus _the local financial impact_.

The GEF is thus one of the rare examples of a financial mechanism that is specifically focused on the difference between global benefits and local costs involved in protecting the world environment. The process of determining incremental costs can be complicated. Furthermore, it has sometimes led the GEF to favor projects in which the local impacts, and thus local development, are small, in favor of projects centered upon global problems, making it more difficult to find appropriations for such locally beneficial projects.

Three new funds for developing countries: the Special Climate Change Fund, the Least Developed Countries Fund, and the Adaptation Fund

The Marrakech Accords confirmed the creation of three new funds, i.e. the Special Climate Change Fund and the Least-developed Countries Fund under the Convention, and the Adaptation Fund under the Kyoto Protocol.

TheSpecial Climate Change Fundshould finance activities, programs and measures in the following fields:

(a) adaptation,

(b) technology transfer,

(c) energy, transports, industry, agriculture, forestry and waste management,

(d) the diversification of economies that are heavily dependent upon fossil fuels.

The fund will be replenished through voluntary contributions by Parties. Carbon sequestration in forestry and land-use activities should be eligible. It is probable that this fund, together with the Adaptation Fund, shall function as a complement to the CDM in what regards forestry and land-use activities. As technology transfer is one of the fund's priorities, forest industry or reduced-impact logging could possibly benefit from it.

TheLeast-Developed Countries Fundcovers work on least-developed country national action programs for adaptation (NAPA), which have already been financed by the GEF. It aims at helping LDCs to formulate funding demands to the GEF. Land-use and forestry are concerned, among other fields. A LDC executive committee has also been established. The fund will be replenished by GEF.

The Kyoto ProtocolAdaptation Fundshould finance adaptation of developing-country Parties to the Kyoto Protocol. Possible projects include capacity building for adaptation, conservation of tropical forest in vulnerable zones where forests contribute to adaptation, the rehabilitation of degraded lands and the combat against desertification, particularly in Africa. This fund will be financed by a two percent levy, a share of the proceeds, on all CDM project activities, except those in least-developed countries. Industrialized countries are expected to provide complementary funding. The implementation of this fund depends on the ratification of the Protocol. Like the Special Climate Change Fund, the Adaptation Fund should complement the CDM.

These three funds should be operated by the GEF, once they come into function. They should supplement the financial resources of the GEF's climate change focal area and those provided at the bilateral and multilateral levels. Details need to be further developed under the negotiating process at the SBI level. The GEF is charged with proposing modalities for the functioning of these funds at COP9 (2003). Like all other GEF funding, demands must originate from a host country and fulfill criteria which need to be developed.

The French Global Environment Facility (FFEM)

The French Global Environment Facility (FFEM) has complemented the GEF's activities since 1994. Its goal is to finance the additional costs incurred in protecting the global environment in development strategies. It is a bilateral fund financed by the French Government, over and above the latter's development assistance and its contributions to the GEF. The French Development Agency (AFD) in Paris manages the FFEM Secretariat.

The eligibility criteria for the FFEM are the same as for the focal areas of the GEF. The FFEM concentrates on activities in which it has a comparative advantage over the GEF. It supports projects which must be:

The priority directions of FFEM eligible activities are:

The FFEM is also participating in mechanisms such as the CDM.

FFEM subsidies amount on average to € 1 million for individual projects, which represent between 5 to 50 percent (15 percent in average) of projects' total cost. Unlike GEF financing, FFEM support is not directly proportional to the incremental cost. A project's economic and social impact, the risks involved, the direct and indirect costs, etc. are taken into account.

The FFEM's financial resources rose to € 73 million for the period 1994-1999, and were renewed for the same amount for 1999-2002. 116 projects totaling approximately € 114 million have been implemented between 1994 and 2000. Activities involving the combat against climate change represented nearly 34 percent of this amount, and nearly 20 percent concerned mixed activities that involved climate change. Africa benefits from a little less than 50 percent of FFEM means.

6This program was originally to have been called "carbon sequestration", but a number of parties involved feared that certain sequestration activities, such as large mono-specific plantations, would run counter to the biodiversity conservation goals.

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