Operational Strategy
of the Global Environment Facility

Human activities have been substantially increasing the atmospheric concentrations of greenhouse gases. These increases enhance the natural greenhouse effect and will result, on average, in additional warming of the Earth's surface and lower atmosphere, which mayadversely affect natural ecosystems and humankind.

The United Nations Framework Convention on Climate Change (FCCC), which became effective in March 1994, was an international acknowledgment that change in the Earth's climate and its adverse effects are a common concern of humankind and calls for the widest possible cooperation by all countries. While recognizing that various actions to address climate change can be justified economically in their own right and help in solving other environmental problems, the Convention agreed on the need for all countries, especially developing countries, to have access to resources to achieve sustainable social and economic development. As developing countries progress toward sustainable development, and their energy consumption grows they will have to consider ways to achieve greater energy efficiency and control greenhouse gas emissions, including how to apply new technologies in ways that are economically and socially beneficial. [1]

The objective of the FCCC is the stabilization of greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner.[2] Global environmental benefits will be obtained to the extent that the objective of the FCCC is met.

The GEF operates as a mechanism for international cooperation to provide new and additional grant and concessional funding to meet the agreed incremental costs of projects to achieve agreed global environmental benefits in climate change (among other focal areas).[3] The GEF operational strategy for climate change sets out how the GEF, consistent with the guidance of the FCCC, can assist eligible countries to contribute to meeting the FCCC's objective.

CONVENTION GUIDANCE

The GEF operational strategy in climate change incorporates the policy guidance of the FCCC. All GEF-funded activities in climate change will be in full conformity with the guidance provided by the Conference of the Parties (COP) to the FCCC.

Convention context. The most recent guidance of the FCCC was provided by the first COP, which met in Berlin March 28-April 7, 1995. The COP provided initial guidance on eligibility criteria, program priorities, and policies for the financial mechanism, whose operation, on an interim basis, is entrusted to the GEF. [4] The GEF requested additional guidance from the COP on the development of an operational strategy. [5] In response to a specific request, the COP approved:

"a mixed strategy wherein projects will be selected with a double set of programme priorities as described in paragraph 9(c) of the [GEF] report, that is, if they met either one of the long-term programme priorities or one of the short-term programme priorities."[6][7]

This operational strategy for climate change sets out both the long-term and short-term operational programs and is fully consistent with the Convention guidance.

Non-convention context. Only developing-country Parties are eligible to receive funding through the financial mechanism of the FCCC. When the GEF provides assistance outside the Convention's financial mechanism, it will ensure that such assistance is fully consistent with the guidance provided by the COP to the FCCC. [8]

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GEF-FINANCED ACTIVITIES

The overall strategic thrust of GEF-financed climate change activities is to support sustainable measures that minimize climate change damage by reducing the risk, or the adverse effects, of climate change.[9] The GEF will finance agreed and eligible enabling, mitigation, and adaptation activities in eligible recipient countries.

Enabling activities facilitate implementation of effective response measures. The determined the program priorities of these GEF activities: "In the initial period, emphasis should be placed on enabling activities."[10] Some of these will be "agreed full cost" activities in support of country obligations under Article 12.1 of the United Nations Framework Convention on Climate Change (national communications); others will be "agreed full incremental cost" activities for other relevant commitments.[11][12]

Mitigation measures reduce or lead to the reduction of greenhouse gas emissions from anthropogenic sources or protect or enhance removal of such gases by sinks (thus reducing the risk of climate change). The GEF will assist in implementation of national programs by supporting agreed mitigation activities that meet either long-term or short-term criteria.[13][14]

Adaptation activities minimize the adverse effects of climate change. Initially, the GEF will meet the "agreed full costs of relevant adaptation activities undertaken in the context of the formulation of national communications."[15] These are the "Stage I adaptation activities" outlined by the COP. [16] Funding for adaptation activities beyond Stage I will be dependent on COP guidance. In the medium and long term, subject to COP guidance, the GEF could finance agreed and eligible activities, including further capacity building, undertaken to prepare for adaptation, as envisaged by Article 4.1(e), as well as measures to facilitate adequate adaptation, including insurance, and other adaptation measures as envisaged by Articles 4.1 (b) and 4.4.

The operational criteria for these GEF activities will be developed in accordance with this operational strategy and with GEF policies. The initial portfolio of GEF-financed activities will include:

Long-term measures, including long-term mitigation projects and enabling activities to facilitate implementation of effective response measures. These measures will be country driven and prepared in the context of GEF operational programs

Enabling activities that specifically support national communications, including Stage I adaptation activities. These will be country-driven and prepared and scheduled in accordance with GEF operational criteria
Short-term mitigation projects will be country-driven and approved individually on the basis of GEF operational criteria

Because enabling activities are the foundation for much of the GEF portfolio, they will be emphasized initially. As the GEF builds on this foundation, the emphasis will gradually shift to the other types of activities. Long-term measures will constitute the largest share of the GEF climate change portfolio, with enabling activities in support of national communications a relatively small and declining share. Short-term mitigation projects will constitute only a small share of the portfolio, in order to maintain the operational emphasis on long-term measures.

Insofar as it is feasible, projects will be designed and located so as to meet global environmental objectives in other focal areas and to prevent or control land degradation.

Land Degradation

Degrading dryland soils and burning biomass are globally significant sources of greenhouse gas emissions. Prolonged or frequent drought and soil degradation undermine the soil's capacity to store carbon. Frequent and large-scale biomass burning reduces the carbon stored in vegetation and trees, increasing carbon emissions, and can contribute to land degradation. GEF activities in climate change will therefore take land degradation issues into account.[17] The following are illustrative of activities that accomplish this objective:

Rural renewable energy projects (such as solar, wind, and biomass energy for lighting, water heating, cooking, and water pumping) and energy efficiency projects (such as those for increasing the efficiency of wood or charcoal burning stoves) that would help reduce unsustainable use of firewood

GEF biofuel activities that restore degraded land and biomass cover in order to produce, harvest, and utilize biomass in sustainable ways
Stage I adaptation activities that are eligible for GEF financing and that examine and plan for any additional soil protective measures that become necessary under climate change
Carbon sink protection, enhancement, and restoration projects that improve carbon storage in biomass and soils and help to prevent or control land degradation, especially desertification and deforestation.

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LONG -TERM MEASURES

Working Group I of the Intergovernmental Panel on Climate Change has emphasized that it is the cumulation of emissions over time, rather than when emissions take place, that determines the impact of greenhouse gases on climate. Long-term mitigation measures respond to this concern.

GEF-financed long-term measures will be prepared in the context of operational programs. The operational programs in climate change designed to achieve long-term impacts build in part on the proposed approach outlined in the Analytical Framework of the Scientific and Technical Advisory Panel (STAP).[18] STAP recommended promoting the "backstop" technologies--technologies such as renewable energy technology that will in the long run be necessary to prevent greenhouse gas emissions--as a strategy to induce cost reductions. STAP noted that "What is relevant for the GEF ... is not only (a) [backstop technologies'] current cost, but (b) the prospects for reduction in costs of the technologies in question, and (c) the contribution that GEF can make to cost reductions."

In line with STAP's recommendations, operational programs will be developed to expand, facilitate, and aggregate the markets for the needed technologies and improve their management and utilization, resulting in accelerated adoption and diffusion. The emphasis of operational programs will be two-pronged: (a) removing barriers to implementation of climate-friendly, commercially viable technologies, and (b) reducing the cost of prospective technologies that are not yet commercially viable, to enhance their commercial viability.

Removing implementation barriers for technologies. The GEF, in association with the development banks and other development institutions, will contribute to the cultural, institutional, administrative, technical, policy-related, and financial learning processes necessary to remove barriers and promote broad dissemination of commercially available, climate-friendly technologies and measures throughout a country or region. Operationally, "removing a barrier" must promote sustainability; it does not mean merely subsidizing a few projects so that they can surmount a barrier while leaving it in place. GEF activities will therefore mainly involve building endogenous capacity, improving public awareness, and demonstrating and disseminating technologies and measures. The costs of removing barriers, such as learning costs, are incremental costs.

Barriers may include price distortions, regulatory barriers and biases, lack of information, insufficient management capacity, inability to analyze non-traditional projects, higher perceived technology risk of the alternative technology, high transactions costs, high initial costs (inability to amortize, poor access to credit), and appropriation effects (investment benefits cannot be recovered by the agent that bears the costs).

Reducing the costs of promising technologies. Inducing reductions in the manufacturing and implementation (transactions) cost of highly promising, climate-friendly technologies will help to make them economically viable. GEF activities will help move the market for the technologies to the point where market size, prospective market development, and depth of distribution channels will reduce costs, hastening the day when projects using the technologies will become economically viable. In cases in which substantial cost reduction can be achieved through greater use of local manufacturing capacity, the GEF will pursue technology transfer, local procurement, and the development of appropriate industrial infrastructure. The GEF will finance part of the investment, associated preinvestment work, and technical assistance. The incremental cost is the difference in cost between the climate-friendly means of satisfying the country's sustainable development needs and the baseline means.

Operational Programs

In both cases set out above, operational programs will identify measures and technologies that will be funded so as to achieve objectives of the program. The operational programs will provide the context for the investments, capacity building, technical assistance, targeted research, public participation, and enabling activities to be developed, all with the aim of facilitating implementation of effective response measures.

The GEF will make grants for agreed incremental costs. [19] In the long run, the GEF could play an even larger catalytic role through other forms of financial assistance, particularly in relation to operational programs that accelerate implementation of commercial technologies and measures. The success of renewable rural electrification, for example, will be highly dependent on innovative financing. In the future, the GEF might usefully embrace such other forms of financing as concessional and contingent lending, trusts and revolving funds, loan guarantees against specified mitigation-related risks, and temporary equity participation. It would, of course, be necessary for the GEF to show in some detail that such assistance is complementary to that from other channels, such as multilateral banks, and that it is indeed catalytic. However, until the Council approves revisions, modifications, or additional financing modalities, project support will be restricted to grants for incremental costs.[20]

Article 4.1 of the FCCC provides a list of commitments by all Parties, including those that need GEF support. The Article 4.1 commitments concern both anthropogenic emissions by sources and removals by sinks, both mitigation and adaptation, all relevant economic sectors, all greenhouse gases not controlled by the Montreal Protocol, and various types of measures. Over time, additional operational programs regarding issues not addressed by initial operational programs will be proposed to the GEF Council. These programs will be consistent with the guidance of the COP of the FCCC; the most promising technically, in accordance with the latest scientific and technical assessments of the Intergovernmental Panel on Climate Change (IPCC) and STAP; cost-effective solutions to meet program objectives; and consistent with the GEF's other operational principles and strategic objectives.

Developing operational programs will be a dynamic process that emphasizes learning by doing. The lessons concerning effective response measures in recipient countries and by GEF Implementing Agencies will be absorbed, the programs modified, the insights generalized, and accepted good practice applied in new contexts. Future operational programs also will cover the measures that countries identify in their national communications, consistent with Article 4.1 of the FCCC. In the immediate short term, the constraints on programming will be the financial resources available for a given replenishment period and the capacities of the GEF, its Implementing Agencies, and the recipient countries to develop and implement projects.

Three initial operational programs are proposed on the basis of a review of technical assessments, including recent work for the GEF on the cost reductions expected in new energy technologies.[21] These programs are consistent with the guidance provided by the COP and with the most recent findings of the IPCC. The three operational programs that will be developed initially are: [22]

Removal of barriers to energy conservation and energy efficiency
Promotion of the adoption of renewable energy by removing barriers and reducing implementation costs
Reduction of the long-term costs of low greenhouse gas-emitting energy technologies.

Removal of barriers to energy conservation and energy efficiency. The purposes of this operational program are:

To remove barriers to the large-scale application, implementation, and dissemination of least-economic-cost, commercially established, or newly developed, energy-efficient technologies; and to promote more efficient energy use where a reduction in greenhouse gas emissions would result. Such measures could include enhancing demand-side management, particularly in the basic materials industries, transport, and housing; establishing and strengthening integrated resource planning and administration capabilities; and encouraging supportive legal, regulatory, and policy changes.
To help ensure the sustainability of the resulting "win-win" projects by demonstrating cost recovery and facilitating mainstream financial support, including from the multilateral development banks.[23]
To facilitate the learning process required for widespread application of energy conservation and energy efficiency projects in developing countries.

Within this operational program, the barriers in specific markets will be identified and the measures for their removal will be proposed. The programmatic benefits will be the implementation of "win-win" projects following the removal of the barriers. (For example, the GEF could facilitate the establishment and strengthening of energy service institutions able to undertake both demand-side and supply-side measures.) The incremental costs are the costs of removing the barriers to energy-efficient technologies. Measures aimed at removing the barriers to implementation will include assessment and analysis, information dissemination and awareness building, institutional reform and strengthening, policy adjustments, planning, and legislative and regulatory measures. In particular, it will be necessary to:

Assess the economic scope for energy conservation and energy-efficient technologies and programs whose implementation is blocked by barriers.
Estimate the contribution that such projects would make to reducing greenhouse gases.
Identify all barriers, particularly energy pricing distortions.
Propose specific measures to remove barriers.
Estimate the costs of barrier removal.
Demonstrate the sustainability of the "win-win" projects after GEF support has ended, including demonstrations of appropriate cost recovery.
Estimate the financial requirements and time horizon.
Determine how programmatic benefits will be monitored and evaluated.

Promoting the adoption of renewable energy by removing barriers and reducing implementation costs. The purposes of this operational program are to remove barriers to the use of commercial or near-commercial renewable energy technologies; and to reduce high implementation costs of renewable energy technologies due to low-volume or dispersed application.

Examples of such renewable energy technologies are photovoltaics (in both on-grid and off-grid applications); combustion of agricultural residues to generate heat and power, including steam boilers using biomass residues; other technologies for using biofuels; methane-control technologies for waste disposal; and wind power. Supporting measures include organizational reform and innovative financing.

Within this operational program, it will be necessary to:

Assess the economic scope in specified regions for "win-win" renewable energy projects on the basis of renewable energy resource data (for example, for wind, solar, biomass, and micro-hydro) and cost data for the renewable energy technologies and the alternatives.
Estimate the extent to which barriers or high implementation costs hamper cost-effective implementation.
Estimate the contribution that fulfilling the full scope of such projects would make to mitigating greenhouse gases.
Demonstrate appropriate cost recovery, and, hence, the sustainability of similar renewable energy projects after GEF support for removing barriers and reducing implementation costs has ended.
Estimate the financial requirements and time horizon.
Determine how the programmatic benefits will be monitored and evaluated.

It will be necessary to identify all barriers to the use of renewable energy -- including any energy pricing distortions; to propose specific measures to remove the barriers; and to estimate the costs of barrier removal. In addition to removing barriers, it may also be necessary to reduce implementation costs through selected demonstration of the technologies and of cost recovery principles. GEF grants also may be needed to meet the incremental cost of purchased units in order to stimulate demand and thereby achieve economies of scale. Demand must be high enough for local dealer support and marketing infrastructure to expand to the point where unit implementation costs are reduced.

Reducing the long-term costs of low greenhouse gas-emitting energy technologies. This operational program is designed to reduce the cost of prospective technologies that have not yet become widespread least-cost alternatives. Its purpose is to promote the application of specified technologies so that, through learning and economies of scale, the costs of manufacture will tend to be commercially competitive. It will therefore be necessary to specify technologies whose costs will drop greatly with economies of scale in application. Proven but less mature technologies, such as solar-thermal power generation for high insolation regions, grid-connected and household-related solar applications, advanced biomass power and fuel technologies, fuel cells, and advanced fossil fuel technologies may be particularly well suited to this approach. A first step will be to review the proposed technologies, taking into account STAP's advice, to ensure that the essential research and development to make the technologies technically sound has been completed.

The benefits of the program will be the reductions in the costs of applying promising technologies. The GEF will finance the incremental costs of projects that advance application of specified technologies. For each technology, it will be necessary to:

Justify the choice of the technology as a potential mitigation measure based on scientific and technical considerations, the resource base in recipient countries, and prospects for sustainability and replicability.
Set out the cost reduction objective.
Estimate the level of funding required to achieve the programmatic objectives and identify the necessary capacity building, targeted research, and investment needs.
Assess the programmatic impact of the GEF.
Estimate the financial requirements and time horizon of the activities.
Show how the programmatic benefits will be monitored and evaluated

Although applications for this operational program will be sought primarily in countries where the technology will directly replace fossil fuels, no country will be excluded from the program's scope because the technology is the focus of attention, rather than the market or region. The lowest-cost applications, wherever they are, then will help build a market for the technology. The long-term objective is to identify an economically viable technology that will become a "win-win" option for many other countries as well.

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ENABLING ACTIVITIES IN SUPPORT OF NATIONAL COMMUNICATIONS

Enabling activities provide the foundations to address climate change through country-driven activities. They have been defined by the FCCC as "planning and endogenous capacity-building, including institutional strengthening, training, research and education, that will facilitate implementation, in accordance with the Convention, of effective response measures."

Support For the Preparation of National Communications

Among the enabling activities, those that are specifically related to countries' obligations concerning national communications under Article 12.1 of the FCCC are eligible for GEF financing on the basis of "agreed full costs."[24] Such enabling activities will result in plans on which the national communications will be based; these plans will serve as the basis for sustainable and effective response measures. The assistance provided under these enabling activities will conform fully to the guidance of the COP with respect to national communications. Because the format for national communications is still under consideration, the content will, for the interim, be based on the provisions of Article 12.1. The GEF has prepared operational criteria to guide the preparation and scheduling of support for these activities and to ensure:

Coverage without duplication of the efforts of others (including bilaterally financed studies)
Appropriate sequencing of the activities
The use of best practices
Cost-effectiveness (including use of norms)

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SHORT-TERM PROJECTS

The GEF may finance climate change projects that reduce greenhouse gases in the short term, even if they are not part of an operational program. Such projects will be funded if they are country priorities, cost-effective in the short term, and likely to succeed. The rationale for project support is primarily the expected reduction in greenhouse gases rather than its programmatic impact. Careful monitoring will be required to verify that the actual reduction in greenhouse gas emissions meets or exceeds the original expectation.

Short-term projects may be of various types, including initiatives to seize unforeseen opportunities and to meet contingencies. Short-term projects may include, but are not limited to, mitigation measures in areas for which operational programs have not yet been developed -- such as transport, carbon sequestration, and agricultural waste. Experience gained from these projects will be valuable to the future development of such operational programs. Projects that require conducive policies in order to be economic and sustainable will be eligible for GEF financing when such policies are in place.[25]

Criteria for Short-term Projects

In line with the criteria for short-term response measures (see chapter 1), and in accordance with the portfolio emphasis on long-term measures (see page xx), the following considerations will guide project appraisals:

Cost-effectiveness. Cost-effective projects are those that mitigate a specified amount of greenhouse gas emissions for a given cost. These can be identified as projects with low unit abatement cost (UAC), the cost per unit of greenhouse gas emissions abated or sequestered [expressed as US dollars per ton of carbon equivalent ($/tC)]. The criterion is therefore a specified UAC, which will act as a reference value.

One basis for estimating a reasonable UAC reference value for GEF-financed short-term projects is the climate change damage avoided through the project. The IPCC is currently assessing damage cost estimates, and their recommended estimate will be used when available. At present, conservative estimates in the available literature under consideration by the IPCC vary between $5.30 and $10.00 per tc.[26] A conservative approach is to set a UAC ceiling of $10 per tC, ensuring that GEF-financed short-term climate mitigation activities are limited to projects that are cost- effective even under conservative, technically reasonable assumptions about the damage due to future climate change or additional benefits. [27] Pure abatement projects (such as those involving low-cost fuel switching, for example, the use of Liquefied Petroleum Gas (LPG) as a transport fuel) will be expected to be very cost-effective, that is, to have UACs closer to zero than the ceiling. Projects with more than just abatement benefits -- such as "proof-of-concept" projects, or others that also produce valuable lessons in implementation or monitoring, such as a carbon sequestration project -- could be justified even with higher UACs.

Likelihood of success. When a project's funding is seen to be justified primarily in terms of the expected carbon abatement resulting from the project itself, it must have a high probability of success. This is a qualitative criterion, but supporting assessments of technical and institutional risk will be needed.

Country-driven. Proposed short-term projects must be country driven and have the country's highest priority for funding. This may be demonstrated by inclusion of the project in the country's climate action plan; and by support of country-driven policy measures to mitigate greenhouse gases.

Stage I Adaptation Activities

GEF will provide full-cost funding for Stage I adaptation activities undertaken within the context of the formulation of national communications.[28] Such activities may include studies of the possible impacts of climate change; identification of options for implementing the adaptation provisions, especially the obligations set forth in Articles 4.1(b) and 4.1(e); and relevant capacity building. Stage I adaptation activities supported by the GEF will assist the COP to identify countries and regions that are particularly vulnerable to climate change. Funding for subsequent activities will depend on future COP guidance.

Such Stage I adaptation activities will identify options to facilitate adequate adaptation to climate change. These activities could encompass the following:

Assessment of national, regional and/or subregional vulnerability to climate change; where appropriate, rely on related data-gathering systems to measure climate change effects in particularly vulnerable countries or regions and strengthen such systems as necessary; and identify a near-term research and development agenda to understand sensitivity to climate change.
Evaluation of policy options for adequate monitoring systems and response strategies for climate change impacts on terrestrial and marine ecosystems.
Assessment of policy frameworks for implementing adaptation measures and response strategies in the context of coastal zone management, disaster preparedness, agriculture, fisheries, and forestry, with a view of integrating climate change impact information, as appropriate, into national strategic planning processes.
In the context of undertaking national communications, building of national, regional and/or subregional capacity, as appropriate, to integrate climate change concerns into medium and long-term planning.

Other Enabling Activities

The GEF will provide financing for other enabling activities on an "agreed full incremental cost" basis. As with other country-driven initiatives, these activities will be prepared in the context of an operational program to ensure sustainability, continuity, and integration of the enabling activity with follow-up investments, capacity building, technical assistance, targeted research, and public participation.

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APPENDIX A

Initial guidance on policies, programme priorities and eligibility criteria to the operating entity or entities of the financial mechanis [29]

The Conference of the Parties

Recalling Article 11.1 of THE UNITED Nations Framework Convention on Climate Change,

Having considered recommendation 11 of the Intergovernmental Negotiating Committee for a Framework Convention on Climate Change,

1. Decides to adopt the following initial guidance on polices, programme priorities and eligibility criteria to the operating entity or entities of the financial mechanism:

(a) Regarding activities undertaken under Article 11 of the Convention,

Within the framework of the financial mechanism:

(i) The operating entity or entities should, in all funding decisions related to the financial mechanism, take into account Articles 4.1, 4.6, 4.8, 4.9 and 4.10 of the Convention. In particular, in order to take full account of the specific needs and special situations of the least developed countries, funds allocated to their project/programmes should be on a grant basis;

(ii) Projects funded through the financial mechanism should be country-driven and in conformity with, and supportive of, the national development priorities of each country;

(iii) The operating entity or entities should ensure that, with reference to activities involving transfer of technology, such technology is environmentally sound and adapted to suit local conditions;

(iv) As far as possible, due consideration should be given to the following aspects concerning activities undertaken under the financial mechanism. Activities should be:

supportive of the national development priorities which contribute to a comprehensive national response to climate change;

consistent with and supportive of the relevant provisions of internationally agreed programmes of action for sustainable development in line with the Rio Declaration and Agenda 21 and UNCED-related agreements;
sustainable and lead to wider application;
cost effective;

(v) The operating entity or entities of the financial mechanism should strive to leverage other funds in support of the activities of developing country Parties to address climate change;

(vi) In mobilizing funds, the operating entity or entities should provide all relevant information to developed country Parties and other Parties included in Annex II to the Convention, to assist them to take into full account the need for adequacy and predictability in the flow of funds. The entity or entities entrusted with the operation of the financial mechanism should take full account of the arrangements agreed with the Conference of the Parties, which, inter alia, shall include determination in a predictable manner of the amount of funding necessary and available for the implementation of the Convention, as provided for in Article 11.3(d) of the Convention.

(b) Regarding programme priorities,

(i) Priority should be given to the funding of agreed full costs (or agreed full incremental costs, as appropriate) incurred by developing country Parties in complying with their obligations under Article 12.1 and other relevant commitments under the Convention. In the initial period, emphasis should be placed on enabling activities undertaken by developing country Parties, such as planning and endogenous capacity-building, including institutional strengthening, training, research and education, that will facilitate implementation, in accordance with the Convention, of effective response measures;

(ii) In this context, activities aimed at strengthening research and technological capabilities for the implementation of the Convention in developing country Parties should be supported through international and intergovernmental efforts. Such support would include networking and the training of experts and, as appropriate, institutional development;

(iii) Emphasis should also be placed on improving national public awareness and education on climate change and response measures;

(iv) The operating entity or entities should finance the formulation by developing country Parties of nationally determined programmes to address climate change issues which are in accordance with national development priorities. To facilitate the formulation of these programmes, it should finance capacity-building and all other activities related to the formulation, management and regular updating of these programmes, which should, as far as possible, be comprehensive;

(v) The operating entity or entities should, in accordance with the policies, programme priorities and eligibility criteria as established by the Conference of the Parties, be available to assist, if so requested, in the implementation of the national programmes adopted by developing country Parties;

(vi) In the implementation of these national programmes, the operating entity or entities should support agreed activities to mitigate climate change, as referred to in the Convention, in particular in Article 4.1, consistent with Article 4.3.

Eligibility criteria shall apply to countries and to activities and shall be applied in accordance with Article 11.1, 11.2 and 11.3;

(i) Regarding eligibility of countries, only countries that are Parties to the Convention would be eligible to receive funding upon entry into force of the Convention. In this context, only developing country Parties would be eligible to receive funding through the financial mechanism, in accordance with Article 4.3;

(ii) Regarding eligibility of activities,

Those activities related to obligations under Article 12.1 to communicate information for which the "agreed full costs" are to be met are eligible for funding;

Measures covered by Article 4.1 are eligible for funding through the financial mechanism in accordance with Article 4.3. Such measures should be agreed between the developing country Party and the international entity or entities referred to in Article 11.1, in accordance with Article 4.3;
In addition to the above, such measures would be eligible for financial support under Article 11.5.

(d) Regarding adaptation, the following policies, programme priorities and eligibility criteria should apply:

(i) Adaptation to the adverse effects of climate change, as defined by the Convention, will require short, medium and long term strategies which should be cost effective, take into account important socio-economic implications, and should be implemented on a stage-by-stage basis in developing countries that are Parties to the Convention. In the short term, the following stage is envisaged:

Stage I: Planning, which includes studies of possible impacts of climate change, to identify particularly vulnerable countries or regions and policy options for adaptation and appropriate capacity-building;

(ii) In the medium and long term, the following stages are envisaged for the particularly vulnerable countries or regions identified in Stage I:

Stage II: Measures, including further capacity-building, which may be taken to prepare for adaptation, as envisaged by Article 4.1(e);
Stage III: Measures to facilitate adequate adaptation, including insurance, and other adaptation measures as envisaged by Article 4.1(b) and 4.4;

(iii) Based on the outputs of the Stage I studies, as well as other relevant scientific and technical studies, such as those of the Intergovernmental Panel on Climate Change (IPCC), and any emerging evidence of the adverse effects of climate change, the Conference of the Parties may decide that it has become necessary to implement the measures and activities envisaged in Stages II and III, consistent with the relevant conclusions of the Committee and with the provisions of the Convention;

(iv) Funding for the implementation of such adaptation measures and activities would be provided as follows:

For Stage I, the Conference of the Parties at its first session, shall entrust to the Global Environment Facility (GEF) the interim operating entity of the financial mechanism, the task of meeting the agreed full costs of the activities required by Article 12.1 of the Convention. This would include meeting the agreed full costs of relevant adaptation activities undertaken in the context of the formulation of national communications; such activities may include studies of the possible impacts of climate change, identification of options for implementing the adaptation provisions (especially the obligations contained in Article 4.1(b) and 4.1(e) of the Convention), and relevant capacity building;
If it is decided in accordance with paragraph (iii) above, that it has become necessary to implement the measures envisaged in Stages II and III, the Parties included in Annex II to the Convention will provide funding to implement the adaptation measures envisaged in these stages in accordance with their commitments contained in Article 4.3 and 4.4 of the Convention;

In its review of the financial mechanism of the Convention under Article 11.4, the Conference of Parties, taking into account studies conducted and options for adaptation identified during Stage I, any emerging evidence of the adverse effects of climate change, as well as the relevant conclusions reached by the Committee and its own decisions on this issue, must decide on the channel or channels, under Article 11 of the Convention, to be used for the funding referred to in the preceding subparagraph, to implement the adaptation measures envisaged in Stages II and III.

(e) Regarding agreed full incremental costs,

The various issues of incremental costs are complex and difficult and further discussion on the subject is therefore needed. The application of the concept of agreed full incremental costs should be flexible, pragmatic and on a case-by-case basis. Guidelines in this regard will be developed by the Conference of the Parties at a later stage on the basis of experience.

2. Also decides to take a note of the following conclusions of the Intergovernmental Negotiating Committee for a Framework Convention on Climate Change:

(a) Outside the framework of the financial mechanism,

Consistency should be sought and maintained between activities (including those related to funding) relevant to climate change undertaken outside the framework of the financial mechanism and the policies, programme priorities and eligibility criteria for activities as relevant, established by the Conference of the Parties. Towards this end and in the context of Article 11.5 of the Convention, the secretariat should collect information from multilateral and regional financial institutions on activities undertaken in implementation of Article 4.1 and Article 12 of the Convention; this should not introduce new forms of conditionalities.

(b) On transfer of technology, the Committee took note of document A/AC.237/88 prepared by the interim secretariat. The Committee recognized the importance of this subject under the relevant articles of the Convention and concluded that discussions should continue at the Conference of the Parties and its subsidiary bodies with a view to identifying ways and means of operationalizing the transfer of technology under Article 4.5 of the Convention.

(c) The Committee took note of document A/AC.237.Misc.40, an approach paper by the Group of 77 and China on the format of communication of information by Parties not included in Annex I to the Convention.

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APPENDIX B

Report of the Global Environment Facility to the Conference of the Parties
on the development of an operational strategy and on
initial activities in the field of climate change [30]

The Conference of the Parties,

Recalling Article 11.1 of the United Nations Framework Convention on Climate Change,

Having considered the report by the Global Environment Facility (GEF) containing information on the development of an operational strategy in the climate change area and on the initial activities in this field (FCCC/CP/1995/4),

Welcomes the decision of the GEF Council to follow a "two-track" programming approach in 1995: while work is undertaken by the GEF secretariat to develop a long-term comprehensive operational strategy, supported by analytical work and consultations, and allowing for the guidance from the Conference of the Parties (track one), some project activities are to be undertaken to allow a smooth transition between the operations of the pilot phase and the restructured GEF (track two);
Decides to adopt a mixed strategy wherein projects will be selected with a double set of programme priorities as described in paragraph 9(c) of the report, that is, if they met either one of the long-term programme priorities or one of the short-term programme priorities;
Takes note of the report on initial activities;
Invites the GEF in future reports to take fully into account relevant aspects of the modalities for the functioning of operational linkages between the Conference on the Parties and the operating entity or entities of the financial mechanism.

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CHAPTER 3 NOTES

1. See the United Nations Framework Convention on Climate Change (FCCC), especially the Preamble.

2. FCCC, Article 2.

3. Global Environment Facility, Instrument for the Establishment of the Restructured Global Environmental Facility, 1994, Washington, D.C., papa 2(a).

4. United Nations Framework Convention on Climate Change. FCCC/CP/1995/7/Add.1, decision 11/CP.1, June 6, 1995. Hereafter referred to as "Guidance". This decision appears in appendix 3.A.

5. Global Environment Facility, "Report by the GEF to the First Conference of the Parties of the Framework Convention on Climate Change", GEF/C.3/10, Washington, D.C., February 1995.

6. "Report by the GEF to the First Conference of the Parties."

7. United Nations Framework Convention on Climate Change. FCCC/CP/1995/7/Add.1; decision 12/CP.1, June 6, 1995. This decision appears in Appendix 3.B.

8. Guidance, 2 (a).

9. Terminology used in this paragraph has the same meaning as the COP Guidance and the FCCC (in particular, Articles 1, 4, and 12).

10. Guidance, 1(b) (i).

11. Guidance, 1(b) (i), and FCCC, Article 4.3.

12. Guidance, 1(b) (i), and FCCC, Articles 4.1 and 4.3.

13. Guidance, 1(b) (vi). See also FCCC, Articles 4.1 and 4.3.

14. United Nations Framework Convention on Climate Change. FCCC/CP/1995/7/Add.1, decision 12/CP.1, June 6, 1995.

15. Guidance, 1(d).

16. Guidance, 1(d).

17. Global Environment Facility, "Scope and Preliminary Operational Strategy for Land Degradation", GEF/C.3/8.

18. Scientific and Technical Advisory Panel, "Analytical Frameworks," 1993, p.31.

19. Global Environment Facility, "Incremental Costs and Financing Modalities," section I, GEF/C.2/6 Rev.2.

20. A revised paper on financing modalities is scheduled for Council consideration in April 1996.

21. Kulsum Ahmed "Renewable Energy Technologies: A Review of their Status and Costs of Selected Technologies." World Bank Technical Paper 240: Energy Series. World Bank, Washington, D.C.,

22. In the initial phase, these operational programs will not include activities or projects for carbon sinks, transport energy, or geothermal energy. Carbon sequestration will be a factor, however, in short-term response measures and in certain programs in the biodiversity and international waters focal areas that also address issues in land degradation or the preservation of forest habitats, and in such cases special attention will be given to effective baseline definitions and monitoring. An operational program on carbon sequestration will be developed as the basis for Council consideration after GEF experience in these short-term measures has been evaluated. Transport will be fundamental to addressing climate change, and a proposal to develop an operational program in this area will be prepared for Council consideration at a later time when the role and effectiveness of the GEF in this area are more clearly defined. Geothermal heat, as a commercially available technology, may be one among the broad range of technologies that will be stimulated in the program on renewable energy which addresses barriers to these technologies, but will not be identified as a technology for support under the program on greenhouse gas-emitting energy technologies.

23. "Win-win" projects are those that are least economic cost and would normally be chosen solely on the basis of national interest. In addition, these projects also result in global environmental benefits. The choice of energy efficient lighting is an example of a "win-win" activity.

24. Global Environment Facility, Instrument for the Establishment of the Restructured Global Environment Facility, Washington, D.C., 1994, para 6; FCCC, Article 4.3; and Guidance, 1 (b)(i).

25. Carbon sequestration includes carbon sink protection and enhancement and restoration measures that improve carbon storage in biomass and soils. Many of these measures will also contribute to preventing and controlling land degradation.

26. W.D. Nordhaus, Managing the Global Commons: The Economics of Climate Change (Cambridge, Mass.: MIT Press, 1994); W.R. Cline "Optimal Carbon Emissions over Time: Experiments with the Nordhaus DICE Model", Institute for International Economics, Washington, D.C. 1992; W. R. Cline, "modelling Economically Efficient Abatement of Greenhouse Gases", Paper presented at the United nations Conference on Global environment, Energy and Economic Development, Tokyo, September 1993; S.C. Peck, and T.J. Teisbereg, "CETA: A Model for Carbon Emissions Trajectory Assessment", Energy Journal 13, 1992: 55-77; D. Maddison, "The shadow Price of Greenhouse Gases and Aerosols", Centre for Social and Economic Research on the Global Environment, University College London aned University of East Anglia, Norwich, 1993. For a recent literature review, see S. Frankhauser, Valuing Climate Change, (London: Earthscan, 1995).

27. Note that short-term measures can only postpone carbon accumulation because countries will still be emitting greenhouse gases. At the suggested ceiling, every US$200 million spent on short-term projects would delay atmospheric carbon accumulation by about one day.

28. Guidance, 1(d).

29. FCCC/CP/1995/7/Add.1, decision 11/CP.1

30. FCCC/CP/1995/7/Add

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