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Climate Change Information Sheet 28
Financing action under the Convention

Developing countries need financial resources so that they can address the causes and consequences of climate change. The Climate Change Convention therefore states that developed countries should provide "new and additional" funds to help developing countries meet their treaty commitments. Support can come from both bilateral and multilateral sources.

The Convention’s "financial mechanism" is a major source of funding. Its role is to transfer funds and technology to developing countries on a grant or concessional basis. The mechanism is guided by, and accountable to, the Conference of the Parties (COP) to the Convention, which decides on policies, programme priorities, and eligibility criteria. The Convention states that the operation of the financial mechanism can be entrusted to one or more international entities with "an equitable and balanced representation of all Parties within a transparent system of governance". The COP has given this responsibility to the Global Environment Facility (GEF).

The Global Environment Facility was established in 1991, before the start of the Convention negotiations. The idea of an international mechanism to support projects benefiting the global environment was first discussed in 1987 by the Brundtland Commission. The GEF was launched several years later with the World Bank, the United Nations Development Programme (UNDP), and the United Nations Environment Programme (UNEP) as implementing agencies. By the time the Earth Summit was held in 1992, the GEF was considered a possible source of funds for implementation of the biodiversity and climate change conventions.

The GEF pays the "agreed full incremental costs" of projects to protect the global environment. GEF funds complement regular development assistance, offering developing countries the opportunity to incorporate environmentally-friendly features that address global environmental concerns. For example, if a country invests in a new power plant to promote economic development, the GEF may provide the additional, or incremental, funds needed to buy equipment for reducing the emissions of greenhouse gases. In this way, GEF funds normally cover only a portion of a project’s entire costs. The GEF also funds enabling activities, including the "agreed full costs" of preparing national communications.

The available funds are based on voluntary contributions from governments. During the "pilot phase" of 1991-94, the GEF trust fund contained $800 million from participating governments. When the GEF was later restructured to make it more universal, democratic, and transparent, it was replenished from July 1994 through June 1998 with $2 billion. The second replenishment for the four-year period ending June 2002 was based on pledges totaling $2.75 billion. Pledges for the four-year period starting July 2002 total $2.92 billion from 32 donor countries.

Projects must be country-driven and based on national priorities that support sustainable development. The GEF covers four focal areas: climate change, biological diversity, international waters, and (for East European and Central Asian countries only) protection of the ozone layer. In addition, activities to combat land degradation (primarily desertification and deforestation) have been approved for funding since they are relevant to some focal areas. (The GEF Council agreed in 2001 to consider setting up new focal areas for the Convention to Combat Desertification as well as the Stockholm Convention on Persistent Organic Pollutants.) Also eligible are the agreed incremental costs of other activities under Agenda 21, insofar as they achieve global environmental benefits in the focal areas. Since 1991, the GEF has allocated some US$1.5 billion in grants to climate change projects and activities; this funding has leveraged an additional $5 billion in co-financing contributions. Climate change now represents about a third of the GEF’s portfolio.

In addition to technical assistance and investment projects, the GEF supports various "enabling activities." These activities help countries to develop the necessary institutional capacity for developing and carrying out strategies and projects. In particular, the GEF pays the full costs of preparing the national communications that are required by the Climate Change Convention. Projects relating to grassroots action sponsored by non-governmental organizations are supported through a Small Grants Programme managed by UNDP, while medium-sized projects (under $1 million) can be financed through UNDP, UNEP, or the World Bank. Besides directly providing grants, the GEF facilitates other bilateral, co-financing, and parallel financing arrangements. It also promotes the leveraging of private-sector participation and resources.

Funding proposals are submitted to the GEF through one of the three implementing agencies. UNDP, UNEP, and the World Bank each has its own special role to play in promoting projects and supporting the GEF process. The GEF Secretariat oversees the work programme and helps to ensure that projects comply with COP decisions and with GEF programming strategies and policies. Once approved, projects are carried out by a wide range of agencies, such as government ministries, non-governmental organizations (NGOs), UN bodies, regional multilateral institutions, and private firms. The final authority for all funding decisions and operational, programmatic, and strategic issues is vested in the GEF Council. The Council consists of 32 of the GEF’s 166 members and meets semi-annually, while the Assembly of all participating countries meets every three years.

In 1998, the Parties to the Convention asked the GEF to continue operating the financial mechanism. They decided to review the financial mechanism’s effectiveness again within four years; this second review is expected to conclude by November 2002. As required by the Convention, the Conference of the Parties continues to provide guidance on the GEF’s policies, programme priorities, and eligibility criteria relating to climate change projects. It has emphasized that projects funded by the GEF should be cost-effective and supportive of national development priorities, and that they should focus, at least initially, on enabling activities that help developing countries prepare and submit information about their implementation of the Convention.

In July 2001, the COP created three new funds to further assist developing countries. A Special Climate Change Fund and a least developed countries fund are being established under the Convention to help developing countries adapt to climate change impacts, obtain clean technologies, and limit the growth in their emissions. In addition, an Adaptation Fund is being set up under the Kyoto Protocol to finance concrete adaptation projects and programmes (The COP will guide the Fund until the Protocol enters into force). Many developed countries also pledged a combined contribution of €450 million per year by 2005 through these funds plus existing avenues to help developing countries manage their emissions and adapt to climate change.

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