International Environmental Financing: The Global Environment Facility (GEF)
Released: 2013-06-03T00:00:00

Introduction

Many governments acknowledge that environmental degradation and climate change pose international and trans-boundary risks to human populations, economies, and ecosystems that could result in a worsening of poverty, social tensions, and political stability. To confront these global challenges, countries have negotiated various international agreements to protect the environment, reduce pollution, conserve natural resources, and promote sustainable growth. While some observers have called upon developed countries to take the lead in addressing these issues, efforts are unlikely to be sufficient without similar measures being implemented in developing countries. Developing countries, however, focused on poverty reduction and economic growth, may not have the financial resources, technological know-how, or institutional capacity to deploy such measures. Therefore, international support for these areas has remained the principal method for governments to assist developing country action on global environmental problems.

The United States and other industrialized countries have committed to financial assistance for environmental initiatives through several multilateral agreements (e.g., the Montreal Protocol (1987), the United Nations Framework Convention on Climate Change (1992), United Nations Convention to Combat Desertification (1994), and the Copenhagen Accord (2009)). International financial assistance takes many forms, from fiscal transfers to market transactions, and includes foreign direct investment (FDI), bilateral overseas development assistance (ODA), and contributions to multilateral development banks (MDBs) and other international financial institutions (IFIs), as well as the offering of export credits, loan guarantees, and insurance products.

Error! Reference source not found. outlines recent U.S. financial support for multilateral environmental initiatives. Congress is responsible for several activities in this regard, including (1) authorizing periodic appropriations for U.S. financial contributions to the institutions, and (2) overseeing U.S. involvement in the programs. Issues of congressional interest include the overall development assistance strategy of the United States, U.S. leadership in global environmental and economic affairs, and U.S. commercial interests in trade and investment. As Congress considers potential authorizations and/or appropriations for initiatives administered through the Department of State, the Department of the Treasury, and other agencies with international programs, it may have questions concerning the direction, efficiency, and effectiveness of current bilateral and multilateral programs. This report provides an overview of one of the oldest, largest, and most comprehensive multilateral programs to date—the Global Environment Facility (GEF)—and analyzes its structure, funding, and objectives in light of the many challenges within the contemporary landscape of global environmental finance.

The Global Environment Facility

The Global Environment Facility (GEF) is an independent and international financial organization that provides grants, promotes cooperation, and fosters actions in developing countries to protect the global environment. Established in 1991, it unites 182 member governments and partners with international institutions, nongovernmental organizations, and the private sector to assist developing countries with environmental projects related to six areas: biodiversity, climate change, international waters, the ozone layer, land degradation, and persistent organic pollutants (POPs). GEF receives funding from multiple donor countries —including the United States—and provides grants to cover the additional or "incremental" costs associated with transforming a project with national benefits into one with global environmental benefits (e.g., choosing solar energy technology over coal technology meets the same national development goal of power generation but is more costly, excluding long-term environmental externalities; GEF grants aim to cover the difference or "increment" between a less costly, more polluting option and a costlier, more environmentally sound option). In this way, GEF funding is structured to "supplement" base project funding and provide for the environmental components in national development agendas. Since its inception, GEF has allocated $11.5 billion—supplemented by more than $57 billion in co-financing—for more than 3,200 projects in over 165 countries.

Background

The idea for a Global Environment Facility was proposed in a September 1989 meeting of the joint International Bank for Reconstruction and Development (the World Bank)—International Monetary Fund Development Committee after recommendation by a World Resources Institute report commissioned by the United Nations. The fund was established in 1991 as a pilot program within the World Bank, and many observers saw it as the beginning of an important shift in multilateral policy toward incorporating environmental concerns into development assistance. GEF, however, quickly ran into some operational challenges. These included (1) problems with communication among the implementing agencies (i.e., among the World Bank economists, the United Nations Development Program engineers, and the United Nations Environment Program environmentalists), (2) problems with differing agendas among the donor countries (i.e., between environmental idealism in Europe and economic pragmatism in the United States and United Kingdom), and (3) problems with differing perspectives among developing countries (i.e., between an emphasis on economic growth or environmental initiatives).

Initially, GEF had been opposed by developing countries who believed that a program established and controlled by higher-income donor countries under the framework of the Multilateral Development Banks was not in their best interest. They remained committed to a governing structure and a cooperative partnership founded on a U.N.-style majority-based decision. After three years of debate, GEF was restructured in 1994 to address many of its institutional challenges. GEF moved out of the World Bank to become a separate and permanent institution with enhanced involvement from developing countries in decision making and implementation. A new governing structure was instituted, the first operating procedures ("the Instrument for the GEF") were documented, and the funding cycle ("the GEF Replenishment") commenced. The World Bank took on the provision of the Trust Fund. The United Nations Development Program, the United Nations Environment Program, and other international organizations contributed to project development, management, and delivery.

Organizational Structure

International Agencies: GEF currently partners with 10 international agencies: the World Bank; the United Nations Development Program (UNDP); the United Nations Environment Program (UNEP); the United Nations Food and Agriculture Organization; the United Nations Industrial Development Organization; the African Development Bank; the Asian Development Bank; the European Bank for Reconstruction and Development; the Inter-American Development Bank; and the International Fund for Agricultural Development. Procedurally, the World Bank administers funding, UNDP oversees project development, and UNEP serves as the scientific and technical advisor. The remaining agencies contribute to the management and delivery of projects.

International Conventions: GEF is the primary fund administrator for four Rio (Earth Summit) Conventions, including the Convention on Biological Diversity (CBD), the United Nations Framework Convention on Climate Change (UNFCCC), the Stockholm Convention on Persistent Organic Pollutants (POPs), and the United Nations Convention to Combat Desertification (UNCCD). GEF also establishes operational guidance for international waters and ozone activities, the latter consistent with the Montreal Protocol on Substances that Deplete the Ozone Layer and its amendments.

Internal Organization: GEF's main decision-making body is the GEF Council, which is an independent board of governors responsible for developing, adopting, and evaluating operational policies and programs. The Council is composed of 32 appointed members—16 from developing countries, 14 from developed countries, and 2 from among the countries of Central and Eastern Europe and the former Soviet Union. The balance between donor and recipient countries was negotiated and agreed to by Member countries after the pilot phase of the program. The Council meets approximately every six months and allows non-governmental organizations and private individuals to attend most sessions. Formal voting goes before the GEF Assembly, which is composed of representatives from all Member countries and meets every four years. During these times, the Assembly reviews general policy for operations, membership, funding, and amendments. The GEF Secretariat, based in Washington, DC, services and reports to the Council and the Assembly and formulates the work program, oversees implementation, and ensures that operational policies are followed.

Voting: The Assembly and the Council make decisions and adopt regulations through the process of consensus . GEF defines consensus as an agreement reached by all participants which includes the resolution or mitigation of all minority objections. If, in the case of the Council, all practicable efforts have been made and no consensus appears, Members may request a formal vote . The GEF formal vote is a double weighted majority; that is, an affirmative vote that includes both a 60% majority of the total number of Participants and a 60% majority of the total amount of contributions. This format arose through a coordinated agreement between developed and developing countries in an effort to give facility to both donors and recipients in the decision-making process. A formal vote has never been taken at Council.

Funding

Replenishments: GEF is funded by donor countries, which pledge money every four years through a process known as GEF Replenishment. The process of Replenishment was designed to allow for program flexibility, strategic planning, and periodic performance evaluations. The original GEF pilot program of $1 billion has been replenished five times with $2.01 billion in 1994, $2.67 billion in 1998, $2.93 billion in 2002, $3.13 billion in 2006, and $4.34 billion in 2010. Financial commitments by donor country to the GEF pilot program and the five GEF replenishments can be found in Figure A-1 of the Appendix .

U.S. Commitments: The United States supported the establishment of GEF in 1991. While the United States did not provide direct funding to the pilot phase of the program (1991-1993), it has made commitments and contributions to all five GEF replenishments. U.S. commitments to the various four-year Replenishment cycles have been $430 million in 1994, $430 million in 1998, $430 million in 2002, $320 million in 2006, and $575 million in 2010, for a total of $2.185 billion. U.S. commitments correspond to 13.9% of total contributions for GEF during the history of the program, or, more specifically, 21.3% of total contributions for GEF-1, 16.1% for GEF-2, 14.7% for GEF-3, 10.2% for GEF-4, and 13.2% for GEF-5.

U.S. Contributions: Payments made by the U.S. Treasury to the International Bank for Reconstruction and Development (the World Bank) as trustee for GEF have varied widely over the years due mainly to budget trends. Recent contributions include the following:

For FY2010 , P.L. 111-117 was enacted in December 2009 with a budget authority of $86.5 million to GEF, of which $80 million was for the final GEF-4 contribution and $6.5 million was for a portion of arrears. For FY2011 , the U.S. Budget for Fiscal Year 2011, released in February 2010, had originally set forth a U.S. commitment of $680 million for the Fifth Replenishment, to be paid in four equal installments of $170 million from FY2011 through FY2014. The FY2011 Budget had included $170 million for the first installment of GEF-5 and $5 million for a portion of U.S. arrears, for a total request of $175 million. However, in reaction to lower-than-expected pledge levels by other donor countries during the GEF-5 negotiations in May 2010, the U.S. delegation reduced its pledge to $575 million, to be paid in four equal installments of $143.75 million from FY2011 through FY2014. The U.S. pledge represents an 80% increase over the GEF-4 Replenishment. The increased pledge was precipitated in part by the U.S. Administration achieving certain policy reforms designed to improve GEF's overall effectiveness, particularly with regard to country-owned business plans for funding and resource allocation. P.L. 112-10 was enacted in April 2011 with budget authority of $89.82 million to GEF, some $53.93 million in arrears of the FY2011 pledge. For FY2012 , P.L. 112-74 was enacted in December 2011 with a budget authority of $89.82 million to GEF, some $53.93 million in arrears of the FY2012 pledge. However, P.L. 112-74 included a provision under "Economic Support Fund" "that in consultation with the Secretary of the Treasury, the Secretary of State may transfer up to $200,000,000 of the funds made available under this heading to funds appropriated in this Act under the headings 'Multilateral Assistance, Funds Appropriated to the President, International Financial Institutions' for additional payments to such institutions, facilities, and funds enumerated under such headings." The Administration used this provision to transfer an additional $30 million to the GEF in FY2012. For FY2013, P.L. 113-6 was enacted in March 2013 with a budget authority of $129.4 million to GEF, some $14.35 million in arrears of the FY2013 pledge. For FY201 4 , the U.S. Budget for Fiscal Year 2014, released in April 2013, requested $143.75 million for the FY2014 contribution to GEF, equivalent to the FY2014 pledge.

Arrears: As of September 2012, direct payments to the trustee of GEF have totaled close to $1.8 billion over the past two decades. Further, in July 2011, the United States had cleared a portion of its GEF-3 arrears in the amount of $11.9 million through a retroactive early encashment of its GEF-4 contributions. With these payments, the United States is currently $258.9 million in arrears of its pledged commitments. As of the latest "Trustee Report" furnished to GEF in November 2012, the United States is joined in arrears status by three other countries: Egypt ($0.8 million), Nigeria ($1.0 million), and Spain ($3.1 million).

A summary of U.S. commitments and contributions to GEF is shown in Table 2 . The financial status of the GEF Trust Fund and the summary of arrears by country can be found in Figure A-2 of the Appendix .

Congressional Jurisdiction : All U.S. funding is subject to annual congressional approval. Authorizing legislation is managed by the House Financial Services Committee and Senate Foreign Relations Committee. The House and Senate Appropriations Subcommittees on State, Foreign Operations, and Related Programs have jurisdiction over appropriations.

Project Areas

GEF funding is provided to recipient countries for projects and programs in six areas: biodiversity, climate change, international waters, ozone layer depletion, land degradation, and persistent organic pollutants. For examples of the types of projects funded by GEF, see the text box below .

Biodiversity: GEF is the financial mechanism of the 1992 United Nations Convention on Biological Diversity. The goal of GEF's program is the conservation and sustainable use of biodiversity, the maintenance of the ecosystem goods and services that biodiversity provides to society, and the fair and equitable sharing of the benefits arising out of the use of genetic resources. To achieve this goal, the program has several objectives including sustainability initiatives in protected areas, conservation measures in production sectors, capacity building to implement the Cartagena Protocol on Biosafety (CPB), and capacity building to support the implementation of the Bonn Guidelines on Access to Genetic Resources. Biodiversity projects constitute the largest percentage of GEF's portfolio, making up 36% of total grants.

Climate Change: As the financial mechanism of the 1992 United Nations Framework Convention on Climate Change, GEF allocates and disburses funding for projects in climate change mitigation (i.e., reducing or avoiding greenhouse gas emissions in the areas of renewable energy, energy efficiency, and sustainable transport), and climate change adaptation (i.e., increasing resilience to the adverse impacts of climate change of vulnerable countries, sectors, and communities). GEF projects in climate change help developing countries contribute to the overall objective of the UNFCCC to achieve a "stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system." Moreover, GEF manages two special funds under the UNFCCC—the Least Developed Countries Fund, to assist in adaptation strategies for the most vulnerable countries; and the Special Climate Change Fund, to assist in mitigation and adaptation programs for countries that are heavily reliant of fossil-fuel technologies.

International Waters: GEF's international waters focal area does not serve as a financial mechanism for a specific convention. Through an association with regional agreements, it targets trans-boundary water systems, such as river basins with water flowing from one country to another, groundwater resources shared by several countries, and marine ecosystems bounded by more than one nation. GEF grants help countries collaborate with their neighbors to modify human activities that place stress on trans-boundary water systems and interfere with downstream uses of those resources. Some of the issues addressed include trans-boundary water pollution, over-extraction of groundwater resources, unsustainable exploitation of fisheries, control of invasive species, and balancing the competing uses of water resources.

Ozone Layer Depletion: GEF, in partnership with the 1985 Vienna Convention for the Protection of the Ozone Layer and the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer, has aimed to safeguard the earth's protective ozone layer after the discovery that certain compounds were found to deplete it, posing substantial risks to human health and the environment. GEF has allocated funds to assist in phasing out ozone-depleting substances (ODS) and curbing the rising production and use of hydrochlorofluorocarbons (HCFCs). GEF's aim is to protect human health and the environment by assisting countries in phasing out consumption and production of ODS while enabling alternative technologies and practices, according to countries' commitments under the Montreal Protocol. The long-term goal of GEF interventions is to contribute to the return of the ozone layer to pre-1980 levels.

Land Degradation: In 2002, the GEF Assembly expanded GEF's mandate by adding land degradation to the portfolio and designating it the financial mechanism of the United Nations Convention to Combat Desertification. GEF focuses on sustainable agricultural practices (e.g., crop diversification, crop rotation, water harvesting, and small-scale irrigation schemes), sustainable rangeland management, and the preservation of viable indigenous forests and woodlands. GEF projects aim to integrate sustainable land management into national development priorities, and to strengthen human, technical, and institutional capacities.

Persistent Organic Pollutants: GEF is the interim financial mechanism of the 2001 Stockholm Convention on Persistent Organic Pollutants, a global and legally binding agreement to reduce and eliminate pollutants including pesticides (e.g., DDT and mirex) and industrial chemicals (e.g., PCBs) as well as unintentionally produced POPs (e.g., dioxins and furans). GEF's involvement in tackling the threats posed by POPs dates back to 1995, with the introduction of the International Waters Operational Strategy and its contaminant-based component. In this framework, GEF began to develop a portfolio of strategically designed projects including regional assessments and pilot demonstrations that addressed a number of pressing POPs-related issues.

Current Issues

Each year, billions of dollars in environmental aid flow from developed country governments—including the United States—to developing ones. GEF is one mechanism in the larger network of international programs designed to address environmental issues. While the efficiency and the effectiveness of these programs are of concern to donor country governments, a full analysis of the purposes, intents, results, and consequences behind these financial flows has yet to be conducted. International relations, comparative politics, and developmental economics can often collide with environmental agendas. Critics contend that the existing system has had limited impact in addressing major environmental concerns—specifically climate change and tropical deforestation—and has been unsuccessful in delivering global transformational change. A desire to achieve more immediate impacts has led to a restructuring of the Multilateral Development Banks' role in environmental finance and the introduction of many new bilateral and multilateral funding initiatives.

The effectiveness of GEF depends on how the fund addresses its programmatic issues, reacts to recent developments in the financial landscape, and responds to emerging opportunities. The future of GEF remains in the hands of the donor countries that can choose to broaden the mandate and strengthen its institutional arrangements or to reduce and replace it by other bilateral or multilateral funding mechanisms. The following section investigates some of the current strengths and challenges facing GEF and summarizes some of the responses initiated by the program.

External Challenges for GEF

Rise of Climate Change Issues and Funding: The past decade has seen a rise in the significance of global environmental issues—particularly climate change—on the political agendas of many countries. Proposed policies have not only attempted to address the environmental implications of greenhouse gas mitigation and climate change adaptation, but have become linked to energy and infrastructure issues through international economic, trade, and geo-political concerns. To address these issues, governments have begun to incorporate many global environmental objectives into their sustainable growth and development strategies. Funding for these activities has increased, and various institutional responses for this extensive portfolio are under consideration. Some critics contend that existing environmental funds (e.g., GEF) are unsatisfactory because they do not have experience managing investments of this scope. The Changing Role of Multilateral Development Banks in Environmental Funding: Multilateral Development Banks (MDBs) are key actors in the global system of environmental financing. As commercial lending institutions, some have argued that they dispense funds more efficiently than many institutional programs such as GEF; but as primary mechanisms for economic development, their past environmental lending practices have produced perceived conflicts of interest. Objectives began to shift in 2005 when MDBs were encouraged by the G-8 leaders to play a more leading role in sustainable development and environmentally friendly technologies. Since this time, MDBs have launched many new initiatives to address the environment, including efforts to (1) account for GHG emissions and improve energy efficiency; (2) support renewable energy; (3) manage forests sustainably; (4) promote carbon finance; and (5) adapt to climate change. GEF programs now find themselves in competition with many of the new initiatives in MDB portfolios. Increase in New Bilateral, Multilateral, and Private Funding Mechanisms: Many donor governments perceive that the existing environmental finance system has not produced satisfactory results. In searching for new and effective approaches to environmental funding, donors have sought options that can be organized quickly, administered directly, and be demonstrated to produce a more significant impact on the environment. Many have turned to highly specified multilateral programs, bilateral or even private sector measures to accomplish these aims, and no fewer than 15 environmental finance mechanisms have been announced since 2007. GEF is in competition with many of these new initiatives for a share of environmental funding.

Internal Challenges for GEF

Low Level of Funding by Donor Countries: Donor countries never intended GEF to cover all the financing needed to achieve developmental objectives. Rather, it was designed to be a catalyst for additional measures to address global environmental problems. As such, historical funding provided by donor countries was never at the level required to produce significant progress in reversing global threats. This experience has demonstrated that the initial assumptions underlying GEF—that relatively small amounts of incremental grant financing could leverage multilateral investment for transformational change—may be flawed. Limits of Grant-based Instruments: GEF was set up mostly to finance grants. Grants have proven to be inefficient in many development contexts given the greater leveraging and enhanced financial sustainability obtained from loan-based instruments. Such loans also provide reflows which can be lent again. Difficulties in Defining "Incremental" and "Additional": As stipulated in the "GEF Instrument," grants cover the "incremental" or "additional" cost of "transforming a project with national benefits into one with global environmental benefits." Incremental cost calculations have also been used as preference in project selection. Historically, GEF's implementing agencies have had difficulty producing a coherent methodology for calculating incremental cost, slowing the rate of project development. Furthermore, countries continue to argue over the requirements of additionality (i.e., whether or not the global environmental elements of a project would have taken place in the absence of GEF funding). Difficulties with Adaptation: GEF was established to finance global environmental benefits, which has made it difficult to justify GEF financing of climate change adaptation projects, which moreover provide local benefits. Inefficient Procedures and Legal Status: GEF's two-layer structure means that all funding must be approved twice (by GEF and the relevant GEF Agency), leading to inefficiencies. GEF's lack of legal status (the trust is held by the World Bank) prevents it from disbursing funding directly to countries with a one-step approval process. Slowness of GEF Project Initiation and Implementation: Since its inception, most note that GEF's project approval process has been long and complex. A 2006 internal report found a 66-month lapse between entry of a concept into the project pipeline and its initiation. Significant effort has been exerted to reduce the duration of the approval process, and the interval currently stands at 16 to 22 months. Bureaucratic structures, work program frequencies, Council deliberations, and consensus politics have all factored into delays. Lack of Strategic Approach: Historically, GEF has adhered to a project-by-project approach to allocating funds, wherein over 95% of pledges have been allocated to individual countries and less than 5% have been set aside for regional or global programs. The dynamic assumes that ongoing negotiations and incremental adjustments could foster transformational change in economies over time. While a project-by-project approach has allowed GEF to fulfill the mandates of many of its conventions, large-scale environmental issues such as climate change and biodiversity may demand more strategic and programmatic funding modalities. Unsuccessful History of Leveraging the Private Sector: While GEF has long recognized a need to mobilize investment resources in the private sector, successful collaboration may require a degree of experience and commitment that GEF cannot achieve under its existing structure. The length and uncertainty inherent in the GEF project cycle may make participation less attractive to the private sector, and the organization's emphasis on government entities at the expense of forming relationships with investors and manufacturers may serve as a further impediment.

GEF Reforms

GEF 4

During the 2006 Replenishment meetings, GEF worked to address many of its program deficiencies. The Council aimed to streamline costs and management fees, ensure project quality upon proposal, and reduce the length of the project pipeline. A Sustainability Compact was enacted that would oversee several issues, including (1) the shift away from a project-oriented approach to a strategic and programmatic one; (2) a concentration on financing pre-market innovation in an attempt to leverage private capital; (3) a heightened dedication to transparency, accessibility, and equitability; and (4) a renewed focus on country-driven ownership through the implementation of a Resource Allocation Framework (RAF) wherein funding is determined by a country's potential to generate global environmental benefits and its capacity to successfully implement GEF projects. Further, in 2007, GEF initiated a pilot public-private partnership (PPP) initiative called the "Earth Fund" to enhance engagement with the private sector. Internal assessment of these reforms has shown promise.

GEF 5

Meetings leading up to the Fifth Replenishment of GEF in 2010 saw the development of policy recommendations along two lines:

1. Enhancing Country Ownership: A key finding in GEF's recent performance evaluation was the relationship between country-driven strategic development and project success rate. Recommendations to strengthen country ownership include (1) reforming in-country corporate programs to include greater project portfolio identification and enhanced stakeholder coordination, (2) developing a more flexible and transparent resource allocation framework, and (3) broadening access to the GEF partnership to include national development agencies in developing countries. 2. Improving the Effectiveness and Efficiency of GEF Partnerships: Recommendations to strengthen GEF partnerships include (1) enhancing accountability to the conventions and protocols; (2) streamlining the project cycle and refining the programmatic approach; (3) enhancing engagement with the private sector; (4) implementing the results-based management framework; (5) clarifying the roles and responsibilities of GEF entities, agencies, and conventions; and (6) enhancing engagement with civil society organizations.

GEF 6

Meetings for the Sixth Replenishment of GEF began on April 3, 2013, and continue on September 10, 2013. Policy recommendations are currently under development.

Appendix. Global Environment Facility Trust Fund