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GEF Documentation
The Global Environment Facility (GEF) assists developing countries to protect
the global environment in four areas: global warming, pollution of international waters,
destruction of biodiversity, arid depletion of the ozone layer. The GEF is jointly implemented
bythe United Nations Development Programme, the United Nations Environment Programme,
and the World Bank.
GEF Working Papers - identified by the burgundy band on their covers - provide
general information on the Facility's work and more specific information on methodological
approaches; scientific and technical issues; and policy and strategic matters.
GEF Project Documents - identified by a green band - provide extended project-
specific information. The implementing agency responsible for each project is identified by
its logo on the cover of the document.
Reports by the Chairman - identified by a blue band - are prepared by the Office of
the GEF Administrator in collaboration with the three GEF implementing agencies for the
biannual Participants' Meetings.


Implementing the Framework Convention on
Climate Change Incremental Costs and the Role of the GEF



GLOBAL
ENVIRONMENT
FACILITY
Implementing the Framework Convention on
Climate Change Incremental Costs and the Role of the GEF
Irving M. Mintzer
Working Paper
Number 4
0e e
UNEP
THE WORLD BANK


© 1993
The Global Environment Facility
1818 H Street, NW
Washington, DC 20433 USA
All rights reserved
Manufactured in the United States of America
First printing September 1993
The views expressed in this paper are not necessarily those of
the Global Environment Facility or its associated agencies.
ISBN 1-884122-03-5
ISSN 1020-0894


Implementing the Framework Convention on Climate Change:
Incremental Costs and the Role of the GEF
This paper is the first among a series of GEF Working Papers to deal with the Program for Measuring
Incremental Costs for the Environment (PRINCE). The GEF is a financial mechanism that provides grants
to developing countries for projects aimed at protecting the global environment.
PRINCE was initiated in February 1993 at a workshop held at the Tata Energy Research Institute in New
Delhi. It covers methodological studies, field tests, and dissemination related to the technical issues of
measuring incremental cost. This is a concept central to the GEF; the two Conventions to which it is linked-
the Framework Convention on Climate Change and the Convention on Biological Diversity; and the
Montreal Protocol dealing with ozone depletion.
Participating governments provided US $2.6 million from the Core Fund for a three-year program. It builds
on existing work concerning the phase-out of ozone-depleting substances and concentrates on the
incremental costs of reducing the emissions of greenhouse gases. Parallel work will extend the concept of
incremental costs to the protection of international waters and the conservation of biodiversity.
This paper provides the scientific background to the issues of global warming, proposes a calculus for
estimating incremental costs, and highlights some of the key operational issues which the GEF must address
in order to achieve the overall objectives of the Framework Convention on Climate Change.
The other Working Papers currently in the PRINCE series are numbers 5, 6, 7 and 8.
Irving M. Mintzer is Senior Research Scholar at the Center for Global Change, University of Maryland, and
Coordinator of the Climate Program at the Stockholm Environment Institute.
V



Contents
1       Context: the Framework Convention on Climate Change                                  1
2       The Responsibilities of the Financial Mechanism                                      3
3       Global Warming: Implications of the Science                                          7
4       Global Warming: Operational Considerations                                          13
5       The Calculus of Incremental Costs                                                   20
6       Issues Shaping the GEF Portfolio                                                    26
7       Proposed Work Program                                                               29
8       Conclusions and Recommendations                                                     31
References



Abbreviations
CFC           Chlorofluorocarbon
CGIAR         Consultative Group for International Agricultural Research
CH4           Methane
CO            Carbon monoxide
CO2           Carbon dioxide
FCCC          Framework Convention on Climate Change
GHG           Greenhouse gas
GWP           Global warming potential
INC           Intergovernmental Negotiating Committee for the Framework
Convention on Climate Change
IPCC          Intergovernmental Panel on Climate Change
N20           Nitrous oxide
OECD          Organization for Economic Cooperation and Development
PRINCE        Program for Measuring Incremental Costs for the Environment
UIAC          Unit Incremental Abatement Cost
UNCED         United Nations Conference on Environment and Development
UNDP          United Nations Development Programme
UNEP          United Nations Environment Programme
USAID         United States Agency for International Development



Context: the Framework
Convention on Climate Change
In June 1992, the Framework Convention on Climate  its supreme governing body. The first meeting of the
Change (FCCC) was signed by 154 countries and one  Conference of the Parties must be held within ninety
organization for regional economic cooperation at the  days of the legal entry into force of the Convention.
United Nations Conference on Environment and  Until this first meeting, the Convention's financial
Development (UNCED) in Rio de Janeiro, Brazil.  mechanism will be guided by rules of operation that
This Convention was the first of a new generation of  are to be worked out between the GEF and the INC.
international environmental agreements that obligate
developed countries to provide new and additional  The objectives of the Convention and its
funds to developing countries to achieve global  financial mechanism
environmental benefits.                       The fornal objective of the Convention is quite broad.
It is given in Article 2 as follows:
Article 21, paragraph 3, of the FCCC entrusts the
Global Environment Facility (GEF) with the opera-  The ultimate objective of this Convention and
tion, on an interim basis, of the financial mechanism  any related legal instruments that the Confer-
necessary for mobilizing and distributing these funds.  ence of the Parties may adopt is to achieve, in
Article4 outlines the specific responsibilities ofdevel-  accordance with the relevant provisions of the
oped countries and of the financial mechanism for  Convention, stabilization ofgreenhouse gas con-
implementing this agreement. This paper explores  centrations in the atmosphere at a level that
some of the issues facing the GEF as it takes up  would prevent dangerous anthropogenic inter-
its responsibilities to fulfil the objectives of the  ference with the climate system. Such a level
Convention.                                       shouldbeachievedwithina timeftame sufficient
to allow ecosystems to adapt naturally to climate
The Climate Change Convention will legally enter  change, to ensure that food production is not
into force after it is officially ratified by at least fifty  threatened, and to enable economic develop-
countries. During the interim period between the  ment to proceed in a sustainable manner.
signing of the Convention and its legal entry into
force, all activities associated with the Convention  The language ofArticle 2 suggests that the implemen-
will be guided by the Intergovernmental Negotiating  tation of the Convention should be based on the
Committee for the Framework Convention on Cli-  Precautionary Principle which states that actions should
mate Change (INC), and by the Climate Change  be taken in the present to avoid dangerous conditions
Secretariat appointed by the Secretary-General of the  that might otherwise occur in the future. Furthermore,
United Nations. Once the Convention officially enters  in implementing the provisions of the Convention and
into force, the Conference of the Parties will become  any measures taken by the Parties to achieve its


objectives, Article 3, paragraph 2, specifies that the  operation can strengthen the overall process of
Parties shall be guided by a continuing concern for the.  implementing the Convention
special circumstances of developing countries and  * Chapter 8 summarizes the conclusions, recom-
their vulnerabilities to the adverse future effects of  mendations, and unresolved issues that emerge
rapid climate change.                             from this analysis.
The implementation of the Convention during the
interim period has begun with the establishment of the
financial mechanism and the reorganization of the
INC. The GEF, in its role as the financial mechanism
of the Convention, is charged with distributing the
"new and additional resources" promised to develop-
ing countries during the course of the negotiations.
Fulfillment of the main objective of the Convention
-the stabilization of greenhouse gas (GHG) concen-
trations in the atmosphere--can only be achieved
through international cooperation on an unprecedent-
ed scale. In operational terms, the GEF's role in
promoting this participation translates into using the
funds raised from developed countries to underwrite
some of the costs of measures undertaken by develop-
ing countries to reduce GHG emissions, or to enhance
GHG sinks beyond the levels that would have been
achieved without outside financial support.
The following chapters highlight some of the key
operational issues which must be addressed by the
GEF in order to achieve the overall objectives of the
Convention:
* Chapter 2 summarizes the responsibilities of the
financial mechanism for funding the full cost of
some measures and the incremental costs of other
measures specified in the Convention
* Chapter 3 discusses those elements of the science
that determine the essential context in which mea-
sures to achieve the Convention's objectives must
be placed
* Chapter 4 highlights some of the limitations of
current scientific knowledge about global warm-
ing and their operational implications for the future
GEF portfolio
* Chapter 5 proposes a simple calculus for estimat-
ing incremental costs
* Chapter 6 explores the issue of project criteria and
the need for better information
* Chapter 7 discusses the proposed work program of
the GEF on climate change and examines how its
2


The Responsibilities
2        of the Financial Mechanism
Article 4 of the Convention lays out the specific but  These inventories will include all GHGs not covered
differentiated commitments that apply to devel-  by the Montreal Protocol on Substances that Deplete
oped and developing country Parties under the  the Ozone Layer.
Convention. Developed country commitments in-
clude the contribution of funds laid out in Article  In addition, Article 12, paragraph 1, indicates that
4, paragraph 3, which stipulates that developed  developed country Parties shall bear the full costs
country Parties shall:                        incurred by developing country Parties in the prepara-
tion of national reports describing steps taken or
provide new and additionalfinancial resourc-  envisaged by the developing country Parties to inple-
es to meet the agreed full costs incurred by  ment the Convention, and any other information that
developing country Parties in complying with  the developing country Parties consider "relevant to
their obligations under Article 12, paragraph  the achievement of the objective of the Convention."
1. They shall also provide such financial re-
sources, including (those) for the transfer of  The key clause of Article 4, paragraph 3, refers to the
technology, needed by developing country  provision by the financial mechanism of the Conven-
Parties to meet the agreed full incremental  tion of the full incremental costs of measures under-
costs of implementing measures that are cov-  taken by developing country Parties to:
ered by paragraph 1 of this Article, and that
are agreed between a developing country Par-  - Develop, update, and publish the national invento-
ty and the international entity or entities re-  ries of sources and sinks mentioned in Article 12
ferred to in Article 11, in accordance with that  - Formulate, implement, publish, and update nation-
Article. The implementation of these commit-  al programmes to mitigate climate change by ad-
ments shall take into account the need for  dressing either sources or sinks, and to facilitate
adequacy and predictability in the flow of  adaptation to climate change
funds.                                    - Promote and cooperate in the development, appli-
cation, and diffusion of technologies, practices,
The measures specified underArticle 12, paragraph 1,  and processes that control, reduce, or prevent an-
for which the full costs will be provided, refer to  thropogenic emissions of GHGs not covered by the
activities associated with the preparation of national  Montreal Protocol
inventories of:                                 Promote sustainable management, including the
conservation and enhancement of sinks and
* Anthropogenic GHG sources                      reservoirs of GHGs not covered by the Montreal
b GHG sinks.                                    Protocol
3


* Prepare adaptive responses to climate change,  As the concept of the financial mechanism evolved
including the development of integrated man-  during the negotiations, all Parties recognized that
agement plans for coastal zones, water resources  developing countries would be asked to take actions
and agriculture; and protect and rehabilitate ar-  designed to reduce the risks of rapid climate change.
eas affected by drought, desertification, and floods  Both developed and developing countries agreed
* Take climate change into account in social, eco-  that actions aimed at achieving global benefits
nomic, and environmental policies; and use ap-  would impose costs on developing countries which
propriate methods to minimize the adverse effects  they would not otherwise have bore in order
of measures implemented to mitigate or adapt to  to meet merely their own national development
climate change on national economies, public  objectives.
health, and the environment
* Promote scientific, technological, socioeconom-  This realization provoked negotiations on several
ic, and other research intended to further the  related issues. The first was the question of whether
understanding of climate change and the social  developed countries would make available "new and
and economic consequences of various response  additional resources" to cover these costs or whether
strategies                                 the costs would be covered by existing flows of
* Promote the exchange of relevant scientific, tech-  Official Development Assistance (ODA). In Decem-
nological, technical, socioeconomic, and legal  ber 1991, at the Fourth INC Session, the Ghanaian
information related to the climate system and  Chairman of the Group of 77 and China issued a
climate change                              statement proposing that the article of the Convention
* Promote education, training, and public aware-  dealing with the Specific Commitments of Developed
ness related to climate change and to "encourage  Country Parties include the following language about
the widest participation in this process, including  how developed country Parties should:
that of non-governmental organizations"
* Communicate to the Conference of the Parties    through their assessedcontributions totheInter-
information related to implementation.          national Climate Fund, specific to this Conyen-
tion, expeditiously mobilize and provide on a
Paragraphs I to 3 in Article 11 define how the    grant basis new, adequate, andadditionalfinan-
financial mechanism will relate to the Conference  cial resources to meet thefull incremental costs
of the Parties during the interim period. Article 11,  of developing country Parties to take measures
paragraph 4, specifies that, at its first session, the  provided for in this Convention; to cover the
Conference of the Parties will evaluate the arrange-  costs ofadaptation andmitigation measures that
ments made by the GEF during the interim period   may be needed as a result of the adverse effects
and decide if these arrangements are to be main-  of climate change; and the direct and indirect
tained. Within four years thereafter, the Conference  social and economic costs, including opportuni-
of the Parties will conduct an overall review of the  ty costs, to developing countries that may result
financial mechanism and make any adjustments      from the implementation of the Convention.
deemed appropriate.
During the remainder of the Fourth Session and
Negotiating history of the incremental        throughout the first part of the Fifth Session of the
cost clause                                    NC, held in New York in February 1992, the debate
The text of the Convention dealing with financial  on the financial mechanism focused on a series of
mechanisms was negotiated at length over the full  questions raised by the December statement of the
course of the INC process. It is important to review the  Group of 77. These included:
evolution of the language concerning the financial
mechanism that remains in the agreed text of the  - Should the contributions by developed countries
Convention in order to understand the cost compo-  be voluntary or obligatory?
nents and the range of measures that the Parties  0 Should there be a separate climate fund or should
intended to be financed by the GEFd an existing entity (or entities) be designated as the
4


financial mechanism of the Climate Change  At the resumption of the Fifth Plenary Session of
Convention?                                the INC in New York at the end of April, Jean Ripert
Should the developed countries pay the full costs,  presented a Chairman's Draft of the proposed
the incremental costs, or the agreed costs of mea-  convention. A complex series of compromises coy-
sures undertaken by developing country parties to  ering many of the outstanding issues in the negoti-
the Convention?                            ations had been formulated by Ripert. This draft on
the financial mechanism became the text of Articles
During the first part of the Fifth Session in February  4, 11, 12, and 21. It stipulated that in light of the
1992, Portugal, speaking on behalf of the European  common but differentiated responsibilities of the
Community, linked its support of "new and additional  Parties, developed countries would pay, through
resources" to the use of GEF as the financial mecha-  the financial mechanism of the Convention, the
nism under the Convention, and to limitations placed  agreed full costs of reporting measures and the
on the powers of the Conference of the Parties. The  "agreed full incremental costs of other measures
British delegate urged that the provision of additional  taken by developing countries to implement the
resources be conditional on developing countries  provisions of the Convention," and to advance the
meeting the reporting requirements outlined in other  overall objectives of the Convention. The draft
articles of the Convention. These issues were not  noted that the developed country contributions
resolved, and at the close of the February session,  would represent "new and additional" funds and
square brackets still remained in the draft text  that the GEF would be designated as the financial
surrounding alternative wording on the following  mechanism on an interim basis. It did not foreclose
issues:                                      the option that another entity (or entities) could be
similarly designated in the future. This compromise
* Whether developed country contributions to the  text also indicated that the Conference of the Parties
financial mechanism would be voluntary or as-  would evaluate the performance of the GEF, its
sessed on a mandatory basis                criteria for project selection, and its modalities of
* Whether these contributions would be clearly sep-  operation.
arate from and additional to ODA
* Whetherthe developed country contribution would  In the final compromise on financial aspects of the
cover the full incremental costs or only the agreed  Convention, all parties achieved some of their orig-
part of those costs                       inal objectives. Developed countries were satisfied
* Whether or not these funds would be made avail-  that the GEF would be designated as the financial
able on a grant basis                      mechanism, centralizing control of the funds,
* Whether they would be designed to cover both  assuring efficiency in operations, and reducing the
adaptation and mitigation costs due to climate  likelihood that facilities and administrative efforts
change                                     would be duplicated-as might occur if several
* Whether other parties and international organiza-  entities were designated to implement the financial
tions would provide additional contributions on a  aspects of the Convention simultaneously. The
voluntary basis.                           developed countries were also pleased that there
would be no specific assessment of contributions to
In April 1992, the Organization for Economic Coop-  a separate climate fund -either within or outside
eration and Development (OECD) held an informal  the GEF
meeting in Paris to try to agree on a common position.
This was followed by an invitation from the INC  For their part, developing countries were satisfied
Chairman, Jean Ripert, to the Expanded Bureau of the  that the funds available to them to meet the de-
INC to resolve the remaining differences before the  mands of the Climate Change Convention would be
resumption of the Fifth INC Plenary Session. During  new and additional resources, and not funds
this meeting of the Expanded Bureau, the outlines of  redirected from other flows of ODA. They were
a number of fundamental compromises began to  also encouraged by the broad language committing
emerge.                                      the developed country Parties to provide the agreed
5


full incremental costs of "implementing measures"
to achieve global environmental benefits and to
advance the overall objectives of the Convention.
All parties approved the plan to review the arrange-
ments periodically, beginning at the first Confer-
ence of the Parties.
6


Global Warming:
3        Implications of the Science
The "greenhouse effect" is the name given to a geo-  periods. Most of these changes have been slow
physical process that has been essential to the evolu-  transitions that often spanned thousands of years.
tion of life on earth. For two billion years, natural  These gradual transitions have allowed life on earth
background concentrations of certain gaseous com-  to adjust relatively smoothly to each new climatic
pounds have trapped heat close to the earth's surface,  equilibrium. Nonetheless, during these transitions,
warming the planet. These gases, principally water  the boundaries of tcological communities have
vapor, ozone, and carbon dioxide, are transparent to  shifted; the associated human cultures have flour-
incoming sunlight in the short-wave portion of the  ished and, occasionally, disappeared.
electromagnetic spectrum. But they absorb and re-
emit some of the outbound, long-wave, infra-red  But recently something important has changed. Dur-
radiation from the earth's surface, Part of this infra-red  ing the last two centuries, the natural greenhouse
radiation is re-emitted upward toward outer space; the  effect has become the "greenhouse problem." In the
remainder is re-emitted downward toward the plan-  foreseeable future, rising concentrations of green-
et's surface.                                  house gases (GHGs) threaten to induce rapid shifts in
global and regional climate regimes, disrupting eco-
For millennia, this downward re-emission has been  systens and inflicting significant economic damage
sufficient to raise the average temperature at the  on the affected societies.
surface by about 330C (590F) above what it would
otherwise have been. Without this natural greenhouse  Ane situation with ncertain and perhaps unpredict-
effect, the average temperature on earth would have  able levels of danger has evolved. Since the beginning
been about -18oC, and water would have been present  of the Industrial Revolution, GHG emissions from
only as ice. The natural greenhouse effect allowed  human activities have grown steadily. Because the
liquid water to remain stable over most of the earth's  rates of emissions of these gases have exceeded the
surface, providing the fundamental substrate for bio-  ability of natural processes to remove them from the
logical activity as we know it.                atmosphere, their atmospheric concentrations have
increased, enhancing the naturalI greenhouse effect
Greenhouse gases and the                       (Houghton, Jenkins and Ephraums 1990). The build-
climate problem                                up of these gases creates the greenhouse problem and,
Climate changeper se is not a problem. Climate has  if cunent trends continue, may warm the planet at an
been changing constantly for hundreds of millen-  unprecedented rate. Mostbusiness-as-usual scenarios
nia. As a result of the slow advance of natural  suggest a warming of between 20 and 50C during the
processes, the planet has warmed and cooled, pass-  next century. This could change traditional regional
ing regularly from ice ages to warm, interglacial  cimates dramaticaily in as lite as a few decades.
7


Although the precise local manifestations of global  stand the historical pattern of past emissions. King and
warming due to GHG buildup cannot be predicted  Munasinghe (1992) point out that, in tryg to establish
with any confidence today, the potential magnitude  responsibility for the risks of global warning, "part of
and rate of change threaten extensive damage to  the equity questionwill be the pastor historical respon-
vulnerable areas, especially in developing countries.  sibility of countries for the present accumulation."
The scale of damage and the associated "adjustment
costs" are difficult to calculate. The problem is com-  Who contributes to the increasing risks?
plicated because in many cases, unmanaged ecosys-  GHG emissions occur in all countries and in all sectors
tems and human communities will find it difficult or  of national economies. Because the gases are relatively
impossible to abandon their traditional homes and  long-lived (and thus well mixed) in the atmosphere, the
migrate to more hospitable conditions at a rate that is  risks associated with a unit of emissions are irrelevant
commensurate with the changes happening around  to the location of the source or the type of activity that
them.                                           generated the pollutant in the first plae.
Global warming: an accumulation problem         Nonetheless, emissions are not evenly divided among
Although most of the international debate has focused  countries, regions, or ethnic groups. Historically, more
on emissions of carbon dioxide (CO02)s several other  than 75 percent of all anthropogenic GHG emissions
anthropogenic compounds also contribute, albeit to a  have resulted from activities in the developed world.
lesser degree, to the risks of rapid climate change.  Today, about two-thirds of all anthropogenic emis-
These include methane (CH4), nitrous oxide (N20),  sions originate in the industrialized countries; the per
tropospheric ozone, and the chlorofluorocarbons  capita emission rates of developed countries are from
(CFCs).                                         five to one hundred times higher than those of develop-
ing countries. However, due to the faster rate ofgrowth
Greenhouse gases have some of the characteristics of  of population and the ongoing pattern of industrializa-
both stock and flow pollutants, but on a time scale of  tion in developing countries, their aggregate annual
relevance to investment decisions and public policy,  emissions may exceed those of developed countries by
they are best treated principally as stock pollutants.  some time in the twenty-first century.
The main risks of global warming stem from the
effects of the long-term increase in their atmospheric  Greenhouse gas emissions occur during nearly all
stocks and not from their short-term, month-to-month,  economically important activities. The largest propor-
or year-to-year fluctuations.                  tion of these emissions is produced during the extrac-
tion, transport, and use of commercial fuels.
The continuing disequilibrium in the climate system,  Approximately 75 percent of current global energy use
caused by the heat-trapping effect ofthe accumulation  involves fossil fuels. Whenever these fuels are burned,
of various GHGs could, in a period of several decades  CO2 is released into the atmosphere.
to a century, exceed some critical but as yet indetermi-
nate threshold of sensitivity and push the system into  Traditional fuels such as fuelwood, crop waste, and
adangerousdomainofrelativelyrapidclimatechange.  dung constitute approximately 12 percent of global
This triggering could be characterized by non-linear  energy use. The combustion of fuelwood is often done
responses to even small additional changes in GHG  in an unsustainable manner, leading to additional net
concentration; changes which could induce dispro-  emissions of CO,. Crop waste and dung, on the other
portionate regional shifts in precipitation, runoff, and  hand, are usually cycled on an annual basis between the
the frequency of what are termed extreme-weather  atmosphere and the biosphere, thereby causing no
events.                                         net release of C02* Hydropower and nuclear electric
systems account for most of the remainder of the
The fact that the risks are associated with the accumu-  world's annual use of commercial energy; these two
lation of GHGs in the atmosphere suggests that it is  technologies also contribute GHGs to the atmosphere
necessary to see the problem in a context that goes  in amounts that are relatively small but not in them-
beyond the pattern of current emissions, and to under-  selves insignificant.
8


But GHG emissions are not caused only by energy   Housing and households are also major emitters of
use. An increasing proportion of emissions occurs in  GHGs. Residential combustion for heat and light
the transport sector. Automobiles and airplanes are  results inemissions of CO, GO2, and ozone precursors.
responsible for large quantities of emissions of C2,  Household refrigeration and the fabrication of many
carbon monoxide (CO), and the chemical precursors  household goods also involve CFCs, and the decom-
of tropospheric ozone.' Rising demands for personal  position of organic wastes from household activities
mobility have led to the expanding use of automobiles  ultimately produces methane.
and airplanes in the last several decades. This continu-
ing trend is likely to result in increasing emissions  Since the activities that produce GHGs are so perva-
from the transport sector for at least the next thirty  sive in modem and traditional economies, it will be
years.                                            difficult to control and impossible ever to phase them
out completely. Indeed, emissions are likely to rise in
Agricultural activities are another major contributor  aggregate and on a per capita basis as incomes rise,
of GHGs, being responsible for a large fraction of the  especially in developing countries. The only plausible
anthropogenic emissions of methane. Principal meth-  short-term  objective for developing countries
ane sources include the anaerobic digestion of organic  with regard to the climate problem is to slow, to the
material in wet soils (for example, during paddy rice  extent possible, the rate of growth in these emissions
cultivation), and the enteric fermentation of grains and  while meeting national objectives for economic
other plants in the gut of domestic ruminants. Nitrous  development.
oxide emissions result mainly from bacterial denitri-
fication of certain types of fertilizers, especially those  The different fates of greenhouse gases in
synthesized from anhydrous ammonia.               the atmosphere
The chemical, physical, and biological properties of
Activities in the forestry sector also contribute to  each of the GHGs in the atmosphere are different.
GHG emissions. The decomposition of forest litter  The processes by which they are taken up by the
produces emissions of both CH4 and CO.. Inefficient  terrestrial and aquatic biota or converted to different
burning of biomass fuels under less than stoichiomet-  chemical species vary widely. The average resi-
ric conditions results in emissions of CO2, CH4, and  dence time of these pollutants ranges from a few
Co.                                               years for methane to several centuries for N2 O'C C2'
and the CFOs.
The activities of government agencies are themselves
important sources of GHG emissions. Through the   The radiative effect of their buildup also varies from
utilization of large vehicle fleets, and the maintenance  gas to gas. The relative strength of this time-
of office buildings, manufacturing facilities, military  integrated effect can be compared for each gas to the
bases, and other operational units, government de-  radiative effect of a unit increase in the concentra-
partments are the largest single emitters of GHGs in  tion of GO2' This relative strength is measured by an
many countries.                                   index called the global warming potential (Hough-
ton, Jenkins and Ephraums 1990). The aggregate
Industry also contributes to GHG emissions, being the  effect of increasing emissions of any number of
principal user of CFCs. However, the most dangerous  GHGs can be roughly estimated by applying the
of these will soon be controlled by the terms of the  global warming potential (GWP) index to the build-
Montreal Protocol. Industrial processes are major  up of each gas, aggregating the results, and estimat-
consumers of commercial energy and thus a major   ing the equivalent level of buildup for GO2 alone,
source of CO, CO, N20, and the chemical precursors  which would have about the same overall warming
of ozone.                                         effect.
Although not itself a greenhouse gas, carbon monoxide is important to the greenhouse problem because of its effect on another
atmospheric constituent: the hydroKyl radical (OH). Hydrxyl is the principal sink for methane (and many other pollutants) in the atmosphere, but
it reacts preferentially with CO. By scavenging OH from the atmosphere, emissions ofCO increase the residence time and the effective rate ofbrildup
of atmospheric methane.
9


In practice, the calculation is more complicated than  five to fifteen decades. Human and other natural sys-
the above statement suggests. This is because in the  tems have not substantially increased their adaptive
real atmosphere, the overall radiation balance is a  abilities. Thus the extent of the economic damage and
complex non-linear function of a set of closely cou-  the disruption of ecosystems which could result from
pled elements whose relationships are not well under-  the associated changes in seasonal temperatures, wind
stood at this time. Some recent evidence suggests, for  regimes, ocean currents, and precipitation patters will
example, that the estimated GWP of each GHG is  be determined by a combination of the rate and the
sensitive to:                                   magnitude of future effects.
" The time horizon of integration               The severity of the effects of global warming will not
" The assumed trajectory of future emissions of that  be evenly distributed geographically. The IPCC anal-
gas                                           ysis suggests that the warming at the poles will be two
b The assumed background concentrations of other  to three times the global average, while warming in the
greenhouse gases.                            tropics will be only 50 to 75 percent of the global
average. This does not mean that the effects of the
As a consequence of these and other interactions, we  warming will necessarily be less severe in the lower
may use the GWP to estimate an approximate carbon-  latitudes. Indeed, some suggest that the direct effects of
equivalent concentration, if we recognize that the  warming may be worse in these areas because human
resultant value is only a rough approximation of the  and other systems are already stretched closer to the
relative strength of the effects on the atmosphere.  limits than can readily be tolerated.
The vulnerability of developing countries       In any event, as mentioned before, some of the effects
The global warming due to anthropogenic emissions  of global warming will depend principally on the
of GHGs will be small relative to the natural back-  magnitude of the change, and others on the rate.
groundgreenhouseeffect(330C). Thisenhanced warm-  On average, the extent of global sea-level rise will
ing could, however, still have a significant impact on  principally be a function of the magnitude of the
local and regional climates. The Scientific Working  warming. Sea-level rise will occur as a function of two
Group of the Intergovernmental Panel on Climate  processes:
Change (IPCC) estimates that, if current trends con-
tinue, the planet will be committed to a warming of  a Thermal expansion of the upper mixed layer of the
between 20 and 5  by the middle of the next century  ocean
(Houghton, Jenkins andEphraumns 1990). This change    Melting of landed glaciers.
in average global surface temperature is only an index
of the scale of future changes in climate. A change of  The IPCC estimates that a eustatic or average sea-level
20 or 30C may not seem like much but its effects could  rise of between 20 and 70 centimeters is likely to occur
be quite dramatic. As a comparison, the climate of the  in the next century (Houghton, Jenkins and Ephraums
Little Ice Age of the fourteenth to seventeenth centu-  1990).
ries occurred in conditions that, in terms of the global
average surface temperature, differ from today by  Most of the world's population lives within 75 kilome-
only about 1 lC. Nonetheless, during some particular-  ters of the coast and would thus be exposed to great risk
ly cold bouts in this medieval period, the water in the  from sea-level rise. But it is not the global average sea-
Baltic Sea froze over, allowingNorthem Europeans to  level rise which will determine the extent of damage in
cross the Baltic by foot or sled from the Continent to  most countries. It is the low-lying island states and
Scandinavia.                                    countries with large, flat deltaic regions facing the sea
which will be especially vulnerable. Developing coun-
The world has survived climate changes of up to SOC  tries as a group are likely to be the worst affected.
in the past. But these were usually spread over periods
ranging from five to fifty centuries. The current debate  The extent and severity of the damages foreach country
centers on the effects of such changes in a period of  will be determined by a combination of regional factors
10


and local conditions. Geologically speaking, some  models for future climate change. Nonetheless, it is
coastlines are rising while others are subsiding. In areas  impossible today to predict the timing, severity, or
where tectonic movements are causing an upthrust of  pattern ofthe regional distribution ofimpacts with any
the underlying geological formations, the effects of  certitude. Despite the additional resources that will be
sea-level rise will be minimal. Furthermore, even for  devoted to research on these issues in the near future,
countries like Bangladesh, where a large proportion of  this uncertainty is likely to persist fordecades to come.
the population lives in a very exposed deltaic plain, the
extent of the damage will be a complex function of the  Whether or not the world is on the edge of dramatic
state of human preparedness, the nature of develop-  change in global climate, it is certain that droughts,
ment along the coast, the kinds of natural ecosystems in  floods, typhoons, cold snaps, hot spells, and wind
coastal regions, and the types of coastal defenses that  storms will continue to occur in the future. Prudent
are erected (Warrick and Rahman 1992).          public policy can, however, reduce their damage by
moving national economies toward greater prepared-
Other physical impacts of global warming will depend  ness and resilience. In addition, the rate at which the
more critically on the rate of change than on the  risk is increased by GHG buildup canbemoderatedby
absolute magnitude. Global warming will cause alter-  policies that slow emissions growth. Measures can be
ations in the patterns of upper atmospheric winds and  taken now, as the FCCC suggests, to reduce future
ocean currents in ways which may alter the timing,  GHG emissions andto enhancenatural sinks. Careful-
availability, and distribution of precipitation. This, in  ly selected, these measures will bring economic re-
turn, may affect the regional availability of freshwater  wards to the implementing country even if past GHG
resources in significant ways. For regions with shared  emissions do not pose a threat.
international freshwater resources and, in particular,
where the average runoff is already committed and the  The situation is comparable to that facing a young and
demand for freshwater is rising, changes in precipita-  healthy family. It is fairly certain that in the years to
tion may significantly increase cross-border tensions  come, some members of the family will fall ill; yet it
between states. It is unlikely that climate change will  is impossible to predict who it will be, or how severe
cause wars over water, but for regions like the Jordan-  or long-lasting the illness will be. Statistically, we can
Litani River system, any future shortfall-even one of  determine which individuals are most likely to be
limited duration-could instigate the onset of hostili-  affected by different types of disease. But in practical
ties that have been simmering for years due to relations  terms, only two precautions can be taken to reduce
strained over other issues (Gleick 1992).       the expected value of damage from illness. Both
strategies involve an application of the Precautionary
Perhaps the most important impact of global warming  Principle.
on developing countries will be the frequency, severity,
and duration of extreme-weather events. Based on  The first strategy is to promote good health for each
available data, their frequency and the economic dam-  family member through nutrition, education, and ex-
age caused by them have been increasing steadily in  ercise. These measures are most likely to succeed if
this century for all types of weather related disasters  complemented by the avoidance of habits that are
except hurricanes (Mintzer 1990). Some recent analy-  known to increase risks, such as smoking, excessive
sis suggests that the severity of hurricanes too could  drinking, and the use of dangerous drugs. And wheth-
increase in a world warmed by the enhanced green-  er or not any individual suffers from disease in the
house effect. Developing countries are often ill-pre-  future, these measures will add to the economic value
pared for such occurrences and could, partly as a result,  of his or her productivity.
suffer disproportionately more damage than would a
developed country (Mintzer 1990).               The second strategy is to spread the risk over a pool of
individuals larger than a single family by buying
The unpredictability of regional Impacts        health insurance. In this way, even if an extreme
Much time, money, computer resources, and talent  eventuality befalls one individual, the financial dam-
have been invested during the last decade in creating  ages will be cushioned by contributions from others.
11


The Climate Change Convention argues for a
similar application of the Precautionary Principle at
the global level. The GEF is charged with making
investments to strengthen national programs of
economic development, improve resilience to
unexpected weather conditions, alter patterns of
industrialization to reduce the rate of emissions
growth, and develop adaptive responses to condi-
tions that could be triggered by anthropogenically
induced climate change or by other more "natural"
causes. Given the fundamental and irreducible
uncertainty in the present situation, the specific
challenge assigned by the Convention to the GEF is
to underwrite the agreed full incremental costs of
such investments, leaving the basic investment
(the part which delivers benefits captured solely by
a local economy or enterprise) to be covered by
local resources.
12


Global Warming:
4        Operational Considerations
The complex multi-dimensional risks of rapid climate  The GEF is charged in Article 4, paragraph 1,
change pose a difficult challenge to the GEF. The  sections b, c, d, e and f, with the responsibility for
greenhouse problem is not simply a technical ques-  underwriting all three types of response strategies.
tion. There exists no single "best-valued" response to  This taxonomy of response strategies need not be
the uncertain future changes in global and regional  considered mutually exclusive. Some of the projects
climate regimes.                             implemented by the GEF will have elements drawn
from more than one type of strategy. A project
No single best strategy                       designed to breed and plant drought-resistant trees,
Several response strategies are available to reduce  for example, would also include abatement (sink
the risks of rapid climate change, three of which  enhancement) and mitigation (adaptation) aspects.
can readily be identified (King and Munasinghe  Projects with multiple components could have
1992):                                       aspects which fall into different categories. For
example, a project to develop and demonstrate an
* Abatement strategies. These include measures  advanced biomass gas turbine, or a solar photovol-
which:                                     taic power plant to replace a conventional coal
(i) Reduce GHGs (or lead to a shift from high to  electric plant, may contain some components that
relatively low GWP gas emissions); and  constitute abatement measures and others which
(ii) Enhance GHG sinks.                     represent a compensation scheme to promote
* Mitigation strategies. These include measures  technology transfer (King and Munasinghe 1992).
which prepare societies to:
(i) Control future damages, for example, the con-  The benefits of responses to
struction of coastal defenses to protect against  global warming
sea-level rise; and                     Responses to global warming can generate a wide
(ii) Adapt to new conditions, for example, the  range of benefits atthe national and local levels, not all
cultivation of drought-resistant cultivars.  of which can be readily quantified or monetized. An
* Compensation strategies. These allow the bene-  afforestation project, for example, in addition to se-
ficiaries of activities which have historically  questering atmospheric carbon, can lead to progress
contributed to the accumulation of GHGs to  toward other development goals, such as the improve-
offset the damage borne by those affected by the  ment of agricultural productivity through reduced
impacts of climate change. Examples include  downstream soil erosion and the sustainableprovision
subsidies for the transfer of new technologies, or  of fuelwood. These secondary benefits may have no
incentives for their introduction in developing  obvious links with the principal purpose of the carbon
countries.                                 sequestration project.
13


In some cases, the secondary benefits could be more  Harder still to assess are projects that create what
important to the local economy than the effects of  Pearce has characterized as "existence value"-the
GHG reduction. The principal benefit of a project to  value of just knowing that some traditionally impor-
develop a drought-resistant cultivar in a region where  tant element of national culture has been maintained.
rainfall is unreliable could be the stabilization of  If a deforestation project promotes sustainable man-
annual agricultural yiIlds in a decade or less. A project  agement of renewable outputs from a fragile rainfor-
to provide an early flood-warning system in a deitaic  est that harbors a number of endangered species, the
region prone to typhoons and storms could produce  project may capture an important social benefitjust by
most of its observed benefits during annual periods of  reassuring the citizenry that the rainforest will remain
stormy weather that show no historical pattern of  intact. If a geothermal development proJect allows a
correlation to the buildup of GHGs. The benefits to be  government to forestall strip-mining of surface coal in
derived from adapting to futuffe global warming might  an ecologically sensitive area that also contains the
remain unrecognized and seem unnecessary for an-  ancient religious ruins of an indigenous civilization,
other thirty to forty years.                   the project may capture a benefit for the descendants
of that civilization by providing the assurance that
After this period, however, the value of such projects  their ancient holy places and traditional culture can
might be critical to local survival in a warmer  survive (at least temporarily) the onslaught of modem
world. How then should the costs of such projects (and  civilization. Again, how can the existence value of the
their benefits) be accounted for today? Should a  rainforest or the ancient relics be incorporated into the
(speculative) estimate of future benefits in a highly  calculus of incremental costs?
uncertain but potentially more hostile environment be
discounted back to the present at the social rate of  The inadequacy of conventional cost-
discount? Or is some other measure of their value  benefit analysis
more appropriate?                               For all these reasons, projects designed to respond to
the risks of global warming must be evaluated with
Projects originally conceived to respond to global  special care. At the project or enterprise level, conven-
warming may have other values equally hard to quan-  tional methods of cost-benefit analysis may give an
tify but just as real from a policy standpoint. Some  incomplete and distorted estimate of the value of such
projects could provide direct and indirect "use value"  projects (Howarth and Monahan 1992). Even beyond
to a local economy by introducing a valuable technol-  the difficult valuation issues outlined above, persis-
ogy that would not othervise be established in a  tent uncertainty across all dimensions--scientific,
particular country or region (Pearce 1992). It is not  economic, financial, and political-complicates the
obvious how one might quantify and integrate consid-  cost-benefit calculus. Scientific uncertainty about the
erations of such value into the standard methods of  relationships between future emissions and GHG
project evaluation.                             concentrations, and between concentrations and
regional impacts, makes it difficult to estimate the
Other benefits are even harder to monetize. An abate-  expected value of damages that could result if the
ment project that opens up o: maintains the option of  proposed project were not undertaken.
deploying an advanced technology could provide
information to governments on the structure of suc-  Economic uncertainty about the baseline scenario
cessful policies and on institutional changes that could  makes it difficult to estimate the marginal economic
improve the efficiency of domestic resource utiliza-  costs of various responses to the marginal damages
tion, both technically and economically. This "option  that would have resulted in the absence of the project.
value" is a very real national benefit that may or may  It is similarly difficult to estimate the marginal
not have global ramifications (Pearce 1992). Should  benefits of implementing the project because the
this "option value" be recognized and somehow in-  analysis requires the evaluation of a hypothetical,
cluded in the calculation ofnet incremental costs?  counterfactual situation.
2      Ken King, conversation with kuthnr, 1t 99s
14


Financial uncertainty about the appropriate allocation  The problem of conflicting criteria
of joint products-both joint costs and joint bene-  International concerns about the risks of global warm-
fits- makes rigorous allocation of benefits and costs  ing embodied in the Convention introduce multiple
between environmental problems wholly arbitrary.  criteria that could generate irresolvable conflicts at the
For example, how much of the benefits and costs of  level of operational decision-making. The Conven-
CFC-reduction measures should be allocated to re-  tion recognizes international concerns about cost-
sponses to the global warming problem as opposed to  effectiveness in the allocation of scarce financial
the ozone depletion problem?                    resources. It stresses the importance of economic
efficiency in choosing strategies to stabilize future
Similarly, the allocation of joint benefits (or costs)  GHG concentrations while maintaining the prospect
from a particular project between the national and  of sustainable economic development. And it empha-
global levels must also be somewhat arbitrary. The  sizes equity considerations that are sensitive to the
allocation must depend in part on what is assumed not  special concerns of developing countries and econo-
just about the project or the national program of which  mies in transition. If any one of these factors were
it is a part, but also on the assumptions about what the  given primacy, the overall objectives of the Conven-
rest of the world is doing at the time that the project is  tion could not be achieved.
undertaken.
If the financial mechanism of the Convention were to
Finally, uncertainty about the policy environment in  apply only the narrow criterion of cost-effectiveness
which the project will be implemented makes it  in allocating resources, projects would be selected on
difficult to evaluate "systemic effects." If the project  the basis of producing the lowest average cost per ton
is an isolated demonstration, it will have less impact  of carbon-equivalent emissions reduced. This would
than if it is the vanguard of a major policy reform. If  create a portfolio composed of cheap, currently cost-
it establishes new institutional relationships (for ex-  effective projects (the so-called Type I Projects de-
ample, by improving coordination among the activi-  fined in chapter 6). Most funds would be oriented
ties of the agriculture, forestry, and energy sectors) or  primarily to "leak-plugging" and "good housekeep-
alters traditional planning practices in an existing  ing" projects designed to improve the efficiency of
institution (by introducing, for example, least-cost,  currently operational "dirty" facilities. (Indeed, if the
integrated resource planning in an electric utility), the  estimated internal rate of return on such projects is
project could have long-term effects on the macro  high enough before consideration is given to their
economy that are very difficult to capture in a cost-  global environmental benefits, some of these projects
benefit analysis. Nonetheless, these systemic effects  might be implemented even without GEF subsidies,
may be more important in the long run than any of  and could appropriately be counted in the baseline
the project-specific benefits that are more easily  menu of national activities.) However, a rigid empha-
quantified.                                     sis on simple cost-effectiveness would reward the
country or countries which have done least to be good
A third important problem with the traditional cost-  environmental citizens to date and have, as a result,
benefit approach is the need to choose a discount rate  the largest reservoir of past inefficiencies and the
for comparing future economic costs and future envi-  greatest variety of easy fixes. Indeed, to minimize
ronmental benefits. Norgaard and Howarth (1992)  the total transaction costs of a GEF program with
have argued that there is no simple and consistent way  limited funds, one might argue that the entire portfolio
to choose an appropriate discount rate that reflects the  should be composed of leak-plugging projects in a
objectives of sustainable development as understood  single country, probably one that has been especially
in the Climate Change Convention. They suggest that  inattentive to the environment.
in the case of long-term global environmental prob-
lems, a discount rate of zero or even a negative value  Given the current size of the Global Environment
may be justified. However, it is not clear what the  Trust Fund and the scale of the expected replenish-
meaning of a negatively discounted ton of future CO2  ment, itis possible that the greatest benefits could then
emissions realiy represents.                    be achieved by investing only in the simplest and
15


cheapest projects in one or two of the largest and most  term marginal abatement costs, and also equal long-
polluting countries. Such a strategy would clearly  term mitigation costs. This theoretically optimal value
produce large carbon emissions reductions in the short  is remarkably difficult to calculate when the benefits
term. But it could also lead to over-investment in  of avoided emissions as well as the damages due to
inexpensive measures with few long-term benefits.  future emissions are both uncertain and essentially
unknowable.
The opportunities for energy conservation and reduc-
tion of aggregate GHG emissions in developing coun-  The evaluation of marginal costs necessary to apply
tries are numerous and critically important, but they  this criterion is further complicated by the fact that any
are also unfortunately limited. Since per capita de-  estimates are also likely to change dramatically during
mand for energy and associated GHG emissions will  the period of interest for today's investments. Some
inevitably rise with the growth of industrialization in  evidence suggests that these future changes in expect-
many developing countries, and since many national  ed costs will vary according to the strategy chosen to
populations are unlikely to stabilize before the middle  respond to the risks of climate change. Systemic
of the next century, aggregate emissions in these  effects that reflect the impacts of integrating a new
countries will almost certainly increase. This increase  type of technology into an existing institution or
will be unavoidable unless substantial investments are  national infrastructure may significantly affect the
made not only in efficiency-improving technologies  observed costs and benefits. And these systemic ef-
but also in low-emissions technologies that utilize  fects may differ radically among countries and even
annually-cycled flows of renewable energy.      among institutions within a single country. In a nation-
al utility grid, for example, the introduction of inter-
Furthermore, concentrating investments in one or  mittent renewables may have one effect in a system
even a few countries with a wide range of cheap  served mainly by intermediate-load, oil- or gas-fired
opportunities for emissions reductions would do little  thermal power plants, and another quite different
to advance the Convention's long-term objective of  effect in a system consisting mainly of baseload
stabilizingfuture concentrations andmaintainingbroad  geothermal, hydro, or nuclear plants.
participation in the process. If many countries see
themselves excluded from future investment, they  At the global level, decisions that seem completely
will undoubtedly question their own efforts to save the  irrelevant to the project in question may strongly
global environment at the cost of more pressing  affect the cost and benefit functions. The long-term
national development concerns.                  carbon abatement costs of solar photovoltaic systems,
for example, may be quite sensitive over the next
The IPCCScientificAssessment makes clear that from  several decades to the decisions made in the next three
a scientific standpoint, the overall objectives of the  to five years that affect the rate of development of
Convention can only be achieved through the widest  niche markets. Decisions made today to support the
possible cooperation in an international strategy to  purchase of significant quantities of photovoltaic
reduce the risks of rapid climate change. Any policy,  devices to displace the use offossil fuels in developing
protocol, procedure, or operational guideline which  countries could significantly reduce future production
decreases the likelihood of sustained participation in  costs.
the process by a significant fraction of the world's
population will necessarily reduce the probability of  But the value of these solar devices and the size of the
fulfilling the Convention's objectives. Concentrating  niche markets they penetrate may themselves be quite
GEF investments in one or two countries could have  sensitive to other, seemingly unrelated decisions,
exactly this result.                            such as the design and manufacture of key end-use
devices. For example, the decision to encourage the
A second alternative is to be guided by the principle of  production in China of inexpensive, high-efficiency
economic efficiency. This would suggest thatthe GEF  refrigerators that do not use CFCs may affect the
seek to invest up to the point where the long-term  future rate of release of ozone-depleting substances,
marginal benefits of future emissions just equal long-  the level of baseload energy demand, and the average
16


rate of CO2 emissions from the power sector in China.  response to global warming-highlights the impor-
The decision to fund the development of this innova-  tance of equity considerations in the operation of the
tive refrigerator technology is likely to be taken quite  financial mechanism. Although the contribution to
separately from the decision about energy supplies  global warming varies across countries (and across
and global warming. It is more likely to be made in  sectors within countries), and the damages from glo-
response to a "separate" atmospheric problem-the  bal warming will vary among regions and across
risks of stratospheric ozone depletion.         generations, it is politically important for the success
of the Convention process for GEF investments to
However, recent research suggests that ignoring the  support measures taken in each region and in many
connection between the physical aspects of these two  countries and sectors.
problems by selling inefficient refrigerators in devel-
oping countries and fueling them with coal-fired  In practice, each developing country that signs the
electricity could make both the ozone and the climate  Convention will expect to receive a share in the
problems worse. In China, for example, approxim-  financial support offered by the GE. However, not
ately 7 percent of urban households had refrigerators  all countries will be able to present investment
in 1975. In 1989, the figure was almost 40 percent. If  opportunities which would lead to an economically
this trend continues, and relatively inefficientrefriger-  efficient portfolio in the long term. Nonetheless, the
ators using CFCs are fueled by inexpensive coal-fired  GEF will have to develop-with the support and
electricity, the emissions of both CO2 and CFCs will  guidance of the NC-criteria for future investments
inevitably rise in the country.                 that represent a compromise between short-term
cost-effectiveness, economically efficient industrial
The rapid, non-linear response of the atmospheric  development, and broad political support.
system could significantly increase the costs of future
responses to both problems. A recent analysis sug-  A taxonomy of countries and projects
gests that tropospheric warming due to CO 2 emissions  To achieve this balance, the GEF may need to
from fossil fuel use is likely to create conditions which  develop a taxonomy of countries and projects that
could give rise to an Arctic ozone hole unless both CO2  would allow itto allocate funds equitably. Although
and chlorine emissions are curbed. The combination  not all countries have the same mix of project
of ozone depletion in the northern hemisphere and  opportunities, early screening activities indicate
global warming due to the buildup of GHGs could  that all countries do have a number of abatement
cause economically significant damage in China as  and mitigation opportunities that can be exploited at
well as in many other countries.                relatively low direct costs. Early experience with
the Pilot Phase of the GEF has identified a large
Since the risks of global warming are tied to this type  number of projects which can be grouped into
of non-linear response mechanism in the atmosphere,  distinct classes. These projects share the potential to
special consideration must be given to those invest-  reduce emissions or enhance sinks at total direct
ment strategies that minimize the likelihood of cross-  costs (annualized capital charges plus rinning costs)
ing the uncertain but expected threshold of     of about US $10 per ton of carbon equivalent
concentrations that could trigger rapid climate change  avoided or absorbed.3
(or ozone depletion). The GEF must, in project selec-
tion, emphasize options that provide an alternative to  The GEF could further classify such "inexpensive"
the use of fossil fuels in the long term. This is neces-  projects in terms of their ability to address tradition-
sary even if it leads to investment decisions that are not  al externalities and to acquire knowledge that would
the cheapest, most cost-effective sources of carbon  reduce the cost of future projects. The overarching
reductions in the short term.                   rationale for project selection within this class of
opportunities could be to gain information which
The implicit objective of the Convention-to achieve  has value beyond the cost of damages avoided due
the broadest possible participation in the international  to COf2 abatement. GEF projects could be evaluated
g                                              tKen Newcombe, conversation with author, 1992.
17


for the information they provide about ways to limit  * Increase the efficiency of water use and the efficacy
future transaction costs by:                      of international agreements concerning the sharing
of freshwater resources
* Eliminating institutional obstacles to efficient mar-  * Increase the effectiveness of coastal protection
kets                                            systems and minimize the vulnerability of coastal
* Reducing the costs of entry into new markets    zones to weather related damages
* Providing a better understanding of the available  * Reduce the vulnerability of human communities to
resource base of solar, wind, hydro, biomass, or  the vectors of diseases that might proliferate in a
geothermal energy                               warmer world
* Capturing economies of scale in production    * Increase the level of education and awareness
through mass manufacture                        among the populations of vulnerable areas in order
* Providing an improved understanding of related  to improve their capacity to identify, develop, and
problems or eliminating in part their adverse  implement responses, as well as learn from locally-
environmental impacts                           adapted response strategies in other regions.
* Establishing new institutional relationships, for
example, through new forms of private-private  Beyond grouping projects in these or similar classes,
or public-private partnerships that facilitate the  it may be operationally important for the GEF to
development of advanced technologies specifi-  establish a taxonomy of host countries that share
cally adapted to the circumstances of developing  common characteristics. By classifying countries in
countries                                     this way, it would be easier to avoid subsidizing the
* Improving the ability of existing institutions to  replication of each type of project in different coun-
manage small decentralized projects by bundling  tries. For this purpose, countries could be grouped
or packaging them into programs that could be  along several interactive dimensions which could
implemented with a regional institution serving as  include some or all of the following:
a central link between local authorities and enter-
prises in different areas                     * Geographic distribution
* Increasing local institutional capacity to monitor,  * Income per capita and its rate of change
review, evaluate, and adjust projects to the physi-  * Stage of market development, including such as-
cal, biological, and social environments in host  pects as the tradition and history of market mech-
countries.                                      anisms, economic efficiency of national policies,
and degree of price liberalization
Similarly, the GEF could identify and categorize  * Availability of energy resources, current mix of
adaptation projects as potential investments. This  fuels, and principal patterns of consumption
class of projects has a value beyond the estimate of  * Degree of urbanization
damages avoided. These projects make national econ-  * Average educational level, particularly for women
omies more resilient to those weather related hazards  * Rate of growth in population.
that may increase in frequency or severity as a result
of global warming, but which can be expected to recur  Such a grouping of projects and countries would
even without any dramatic change in climate. In this  facilitate coordination in project selection and help
regard, the GEF could seek to stimulate learning about  to develop a balanced portfolio. The GEF can do
preventive activities, including measures to:   most to advance the overall objectives of the
Climate Change Convention by supporting a mix of
* Improve productivity in agriculture and forestry in  projects ranging from those which offer inexpen-
the face of uncertain climatic conditions in the  sive, short-term carbon reductions, to others which
future such as droughts, floods, storms, and ex-  lay the foundation for capturing more substantial,
treme variations in temperature              long-term benefits. These larger, long-term global
* Improve food productivity by reducing crop losses  benefits will result from shifting national econo-
due to pests and predators whose destructive  mies to development trajectories along which GHG
capacity could increase in a warmer world    concentrations can be stabilized at levels that do not
18


exacerbate the risks of anthropogenically-induced
climate change. But affecting this shift in trajectory
will, in some cases, require institutional restructur-
ing, policy reform, and capacity building, as well
as the development of technologies to improve
efficiency and emit less GHGs.
Meeting this challenge and making a smooth transi-
tion to a sustainable, low-emissions trajectory will
require the development of a comprehensible and
transparent calculus for estimating the agreed incre-
mental costs of appropriate measures, and distributing
the necessary resources to developing countries as an
incentive to implementing them.
19


5        The Calculus of Incremental Costs
Before estimating the incremental costs of a measure,  of global warming will devolve to other regions of the
project, or program, it is necessary to develop a  global economy and the global environment, and will
framework within which to place specific elements of  be essentially invisible to the local economy of the
total costs. This chapter proposes some simple oper-  implementing country.
ational definitions along with a taxonomy of costs and
benefits. It then discusses some of the constraints  Forreasons discussed before, itis extremely difficultto
in characterizing the damage function associated  estimate with any confidence the value of either the
with rapid climate change, identifies the cost frontier  global environmental benefits, or the long-term indi-
for GEF projects, and finally highlights some of the  rect benefits to the local economy. It is, however,
special considerations applicable to developing  possible to estimate today the cost of proposed invest-
countries.                                      ments and alternatives. It may also be possible to
estimate the direct short-term benefits to the local
A taxonomy of costs and benefits                economy.
As the negotiations concerning the financial mech-
anism of the Climate Change Convention proceed-  Incremental costs
ed, there was a general realization that "new and  The Convention does not obligate the GEF to under-
additional funds" would have to be made available  write the full cost of measures taken by developing
to developing countries as an incentive for mea-  countries in fulfillment of their obligations under the
sures to provide global environmental benefits above  Convention. (An explicit exception is made in the case
and beyond those actions required to meet their  of measures taken to provide national emissions inven-
national development goals. It was also recognized  tories and certain other reports.) The GEF is, however,
that some of the measures that might be taken for the  charged with the responsibility of financing the incre-
purpose of achieving global environmental benefits  mental cost of measures taken by developing countries
might simultaneously generate local benefits-both  to achieve the overall objectives of the Convention. In
economic and environmental.                     order to fulfill this responsibility, a proposal follows
for an operational definition of incremental costs as it
In the case of many abatement and mitigation mea-  may be applied to proposed GEF projects.
sures, some of these economic and environmental
benefits will be appropriated as short-term direct  Because the economic value of the mix of global and
benefits by the local economy in the implementing  local benefits resulting from GEF investments are
country, creating valuable goods and services in an  difficult to determine, the GEF could use a method
efficient and cost-effective manner. But most of the  for analyzing incremental costs that focuses strictly
long-term benefits that result from reducing the risks  on the estimated costs of proposed projects and
20


compares them to the costs of the next best alternative  improve the efficiency of an industrial installation
that delivers the same service to the local economy.  and, in the process, to substitute natural gas for coal in
Specifically, the gross incremental cost of a proposed  on-site boilers, will have several important benefits. It
GEF project could be defined as the difference be-  will reduce CO2 emissions as a result of both fuel
tween the total cost of measures taken to implement  substitution and improved efficiency. In addition, it
the proposed project (which will deliver a mix of local  will generate a direct financial benefit to the enterprise
and global benefits) and the cost of the least expensive, -the economic value of the fuel saved. The GEF
locally available alternative that could deliver the  should pay the cost of the improvements in efficiency
same principal service to the local economy, and  and the boiler retrofits, as well as any training neces-
which would be implemented absent an international  sary to use the new devices. But it would only seem
subsidy, being part of the country's baseline develop-  fair that the estimated net present value of the direct
ment plan.4                                       economic benefits from the GEF project that are in
excess of the net present value of the direct economic
Let   TC   =  Total discounted cost of       benefits of the baseline alternative, such as the avoid-
the proposed GEF project       ed cost of the unburt fuel, should be deducted from
the GEF subsidy to the project. Thus the gross incre-
TCA =    Total discounted cost of the   mentzl cost of the project less the direct economic
least expensive alternative    benefits to the implementing country or enterprise
project capable of delivering  could be defined as the net incremental cost orjust the
the same principal service to  incremental cost for the purposes of the financial
the economy                    mechanism of the Convention. Thus,
GIC   =aNet present value of the             Let GIC    s  Net present value of the gross
gross incremental cost of the                    incremental cost of the GEF
proposed GEF project                              project
Then GICg =     TCe - TCA                              DEB      =Net present value of the direct
economic benefits of the GEF
King (1992) offers an alternative similar to this pro-              project in excess of the direct
posed definition of gross incremental cost that is                  economic benefits of the
applicable at the project level (noting that it only                baseline alternative
applies fully to mutually exclusive sets of alternative
projects). He notes that many analysts have focused  t       C   =  Incremental cost of the GEF
attention on the net cost of proposed projects (total               project
costs minus domestic benefits) and mistakenly iden-
tified these as the incremental costs. He then proposes  Then  IC  =  GIC  - DEB d   e
a refinement to the concept of incremental cost as
being the incremental cost less the incremental do-  The advantage of this incremental cost approach
mestic benefits.                                  compared to the net cost approach is that it can be
applied equitably with information that is likely to be
There is much merit in King's approach. Recognizing  available to task managers and project developers. It
that projects funded by the financial mechanism of the  does not rely on a speculative estimate of uncertain
Convention can, like many other public works, have  future damages or unknowable global benefits. To the
multiple benefits, it is important to separate those  extent that this approach ignores the unquantified (and
benefits that are inextricably connected to the objec-   often unquantifiable) value of the systemic effects of
tives of the Convention from the benefits that devolve  the GEF project, it may overstate the incremental costs
solely to the local economy. For example, a project to  and the appropriate GEF subsidy.
It is implicit in this context that the least-costalternative project would be unlikely to deliverthe same benefits as the proposed GEFproject
to the global economy or the global environment.
21


Unit Abatement Cost and Unit Incremental        The UIAC concept, King suggests, may be used to
Abatement Cost                                  justify the choice of the more expensive of two
King (1992) has proposed several useful metrics for  mutually exclusive projects, if
comparing the relative cost-effectiveness of pro-
posed GEF projects. He suggests the concept of            GV   >  UJAC.
Unit Abatement Cost as a measure of the overall
economic attractiveness of a proposed project.  Direct, indirect, and joint project costs
The Unit Abatement Cost is defined by King as   Article 4, paragraph 3, of the Convention stipulates
follows:                                        that the GEF will pay the "agreed full incremental
costs" of measures taken by developing countries to
Let UACP =    Unit abatement cost           meet the objectives of the Convention. The introduc-
tion of the word "agreed" into this paragraph was
TCP =   Total discounted project cost  intended to indicate that the developing country and
the GEF would need to reach consensus on the pro-
DBP =    Total discounted domestic    posed project and its estimated incremental costs.
benefits
In addition to the direct costs of a proposed project-
AE   =  Physical quantity of emissions  capital and running costs of the hardware, software,
avoided or absorbed by the    and personnel training-the Convention suggests a
project                       number of other indirect and joint costs that can
appropriately be included in the financing arrange-
GV   =  Total value of one unit of    ments. Indirectcosts include the measures oractivities
GHG abatement or absorption   that might be undertaken in conjunction with a pro-
posed project in order to facilitate the later deployment
Then UACP =    (TCP - DBP)/AE.               atlowercosts of similar technologyinrelated applica-
tions. These indirect costs are associate d with mea-
King suggests that the project is economically  sures to eliminate market failures, including actions
attractive if:                                  taken to improve the flow of information, lower
barriers to market penetration, and improve the effi-
GV   >  UACP                          ciency of local markets or institutions.
King proceeds to refine this metric further by defining  Some of these measures may, however, generate
the Unit,Incremental Abatement Cost (UIAC) for  important short-term benefits to the local economy or
projects in which incremental benefits exceed incre-  relieve other local environmental problems. The Con-
mental costs, as folloWS:5                      vention was not intended to underwrite oese strictly
local benefits. The part of the indirect costs which
Let   ICt =   Incremental cost of project P  generate these additional benefits may be treated, in
accounting terms, as joint costs.
IDBP =   Incremental domestic benefits
of project P                  One of the factors which complicates the calcula-
tion of such joint costs is the presence of systemic
IAEi =   Incremental quantity of       effects resulting from the introduction of the project.
emissions avoided or absorbed  Systemic effects are the impacts of specific projects
by the project                or measures on the existing institutional infrastruc-
ture which change the value (and potentially the
Then UIAC   =  (ICn - IDBa)dtAEi. cost) of a project over time. For example, a project
In this context, the incremental project cost, IC., is not defined as net of incremental domestic benefits.
22


which introduces energy-efficient lighting into a  as the expeditious development of new partnerships
utility service territory may change both the scale  between governments and enterprises which would
and magnitude of the future load curve. It may also  facilitate the transfer of advanced technologies.
change the planning practices of the utility in ways  Article 4 also empowers the GEF to finance the
which open up previously "forbidden" or invisible  implementation of resource surveys and the analyses
options. The presence of these new options and the  of existing resources, the formulation of innovative
altered shape of the load curve may change both the  policy initiatives to integrate considerations of the
estimated value and the cost of the energy-efficient  climate issue into national development strategies,
lighting. Since the size of future benefits and the  and the establishment of broad educational programs
precise magnitude of joint costs will be difficult to  to heighten public awareness of the implications
determine in an objective fashion a priori, an arbi-  of rapid climate change. Such programs can, and
trary rule is proposed below for allocating the  should, be designed to encourage the broadest possi-
associated costs between the GEF and the country  ble participation in these processes, including that of
or enterprise implementing the project.         non-govemmental organizations (United Nations
1992).
Before taking up the allocation rule, however, it is
important to establish the accepted range of indirect  Since some of the activities listed above will haveboth
costs that can appropriately be introduced into the  national and global benefits, it is necessary to weigh
economic calculus of GEF-supported projects. These  carefully the share of gross incremental costs that
include, inter alia, the following elements:    should be agreed for financing under the Convention.
Few of the shared benefits of these activities will have
* Activities to promote and cooperate in the "devel-  easily measurable direct economic effects on the local
opment, application, and diffusion, including trans-  economy. To avoid an extended analytic process that
fer, of technologies, practices and processes that  might lapse into an intellectual quagmire, one possible
control, reduce, or prevent anthropogenic emis-  rule for dividing such joint costs couldbeto split them
sions of greenhouse gases"                   in half. If the implementing country wished to include
* Activities and measures to promote "sustainable  such activities as part of the agreed incremental costs,
management, and promote and cooperate in the  the estimated investment could be divided equally
conservation, and enhancement...of sinks and res-  between the GEF and the host government. Compared
ervoirs of greenhouse gases...including biomass,  to the financing of hardware and equipment, such an
forests, and oceans as well as other terrestrial,  arrangement might more easily be implemented for
coastal, and marine ecosystems"               underwriting these "soft"costs because theycan often
* Activities that "take climate change considerations  be paid in local currency rather than from scarce
into account, to the extent feasible, in...social,  foreign currency reserves.
economic, and environmental" policy formulation
* Measures that "promote and cooperate in scientif-  Calculating the shadow price for GHG
ic, technological, socio-economic and other re-  abatement
search, systematic observation, and development  Anderson (1992) has suggested two alternatives for
of data archives related to the climate system"  calculating the value of GHG emissions which can be
* Initiatives that "promote and cooperate in educa-  avoided or reabsorbed. The first approach is best
tion, training, and public awareness related to cli-  applied when a clear threshold of danger or vulnera-
mate," including those activities that promote the  bility from GHG accumulation has been conclusively
"full, open, and prompt" exchange of scientific,  established through a consensus among the scientific
technological, socioeconomic, and legal data or  community or the through the political process of the
expertise.                                   negotiations of the Convention. Anderson estimates
the value of one unit of GHG abatement as the cost of
These aspects of Article 4, paragraph 1, suggest that  deploying a backstop, low-emissions technology for
GEF project loans should support the building of  a period long enough to postpone crossing the agreed
institutional capacity in developing countries, as well  threshold of danger by one unit of time. He treats this
23


parameter as a proxy for the size of the carbon tax that  including the future price and availability of fossil
would be needed to bring forward the date of full  fuels, the Research & Development policies of gov-
deployment of renewable or zero-emissions technol-  ernments, and the investment strategy of the GEF
ogies to replace fossil fuels. Following the Hotelling  itself. Based on a series of simulation studies of
rule for valuing depletable resources, he estimates this  different distributions of investments in solar, wind,
proxy for the carbon tax, C, as follows:       biomass, and other renewables, Anderson estimates a
stream of values for avoided emissions starting at US
Let    n1t  =  Marginal cost of non-fossil,  $35 per ton of avoided carbon emissions today, rising
backstop technology in year T  at a rate of approximately 10 percent per year to a limit
of approximately US $600 per ton in then current
fT =  Marginal cost of fossil       dollars. Alternatively, he suggests a constant figure of
technology in year T          US$35 per ton, so long as this figure is not discounted
in cost comparisons based on net present value anal-
T  =  Year in which the baseline or  ysis. Although other analysts have suggested possibly
business-as-usual scenario   lower costs for solar and other backstop technologies,
would cross the threshold of  these estimates could serve as a useful upper limit on
dangerous accumulations       Unit Incremental Abatement Costs funded by the
GEF.
r = Real discount rate
Uncertainties, non-linearities, and surprises
Then     C, =  (nT - fT)(1 + r)r-t.          As the Danish atomic physicist Nils Bohr once noted,
the only thing which is certain about the future is the
In this formulation, Ct represents the shadow price  persistence of uncertainty. With respect to climate
of measures to delay the crossing of the danger  change, the main uncertainties pertain to regional
threshold. It also represents the upper limit on the  impacts. Scientists cannot yet predict these with any
reasonable value that could be set for the UIAC.  confidence and are unlikely to be able to do so for
This innovative approach is elegant and intrinsical-  many decades. The same can be said of any estimate
ly attractive. But it is difficult to apply at present  of the value of expected future damages.
when there is no consensus on either the magnitude
or the expected date of crossing the danger thresh-  What is perhaps equally troubling is the inability of
old in the baseline scenario.                   scientists to identify orquantify theprincipal feedback
mechanisms that could trigger an accelerated
The second approach offered by Anderson for esti-  response to future emissions. The threshold of con-
mating the shadow price of emissions reductions is  centrations marking the danger point before rapid
more easily applied in present circumstances, and  climate change and the extent of future damages
does not require a direct estimate of the damages due  cannot be determined. Most scientists agree that there
to global warming. This alternative does, however,  may be feedbacks, both positive and negative, that are
require two other pieces of relatively uncertain infor-  still unknown, but which could significantly alter the
mation, being critically dependent on:          response of the climate system in the future.
* The prospective costs of solar or other non-carbon  Absent this information, but aware that local and
backstop technologies                        regional climates are the physical manifestation of
- The time profile of future investment in these  interactions between a complex set of closely coupled
technologies,                                 non-linear systems, it is highly probable that there
could be major surprises ahead in terms cf climate.
Anderson notes that the future costs of the backstop  It could be that all the unknown factors will be
technologies will vary over time, depending on their  negative feedbacks that damp out the effects of global
application or market niche. The profile of future  warming due to the continued accumulation of GHGs.
investments will be determined by a variety of factors  It is more likely that some of the feedbacks will be
24


positive and, at some future point, may trigger (at least  will be more responsive to such environmental
temporarily) a rapid deterioration of some regional  requirements if:
climate regimes.
* They are subsidized by the GEF
The uncertainty regarding the threshold of dangerous  * The domestic share can be contributed in local
accumulations and its rate of approach affects the  currency
estimates of the value of avoided emissions. Anderson  * The domestic share can be used to cover the indi-
estimates that a delay of one decade in crossing the  rect costs that will make direct investments more
threshold (for example, if it were fifty years hence  effective.
instead of forty years) would lower the value of
avoided emissions to about US $12 per ton. By con-  The GEF can facilitate their involvement by:
trast, an acceleration in crossing the threshold would
raise the value of avoided emissions to approximately  * Including some of the indirect costs in the project
US $75 per ton.                                    package
* Encouraging policy reform
The optimal value and the most appropriate rate of  * Providing training and support to local managers.
discount to apply will remain a matter of judgement.
Only the results of future climate research and inves-
tigations into the manufacture and deployment of
backstop technologies will allow a refinement of these
estimates in the future.
Special concerns of developing countries
As developing countries consider measures to ad-
dress the risks of global warming, they are confront-
ed by several hard choices. The immediate pressures
of survival caused by crises in health, education,
nutrition, energy, and sanitation outweigh any com-
peting claims on the limited funds available.
Some of the largest consumers of capital in the
developing world are electric utilities. These institu-
tions are also a major source of GHG emissions.
Like many institutions in developing countries, the
electric utilities are in a triple bind (Jhirad and
Mintzer 1992):
* They are chronically short of capital, especially
hard currency
* They are suffering from declining technical and
economic performance
* They face calls for increasingly stringent environ-
mental regulation.
Like other institutions in this predicament, electric
utilities will be reluctant to invest scarce hard cur-
rency in new emissions-reducing technologies. They
25


Issues Shaping
6        the GEF Portfolio
Several issues will shape the portfolio of the GEF as  Anderson emphasizes the important differences in the
it moves beyond the Pilot Phase to GEF II. A key  implications and roles of the two types of projects:
question relates to the balance to be achieved between
so-called Type I and Type II projects.            Type Iprojects. These are likely to have a predom-
inant effect on local environmental problems and
Type I and Type II projects                       are critical for meeting the needs of national eco-
During the pilot period, a distinction was established  nomic development. They are projects of the kind
between Type I and Type II projects. In Type I    typically financed by Official Development Assis-
projects:                                         tance.
Type II projects. These principally address global
* Domestic benefits are greater than national costs  environmental problems. They are more specula-
* Distinct global benefits also exist.            tive in their economic returns and less likely to
be funded by traditional forms of development
Examples include waste-reduction and efficiency-  assistance.
improving projects, and cover measures such as
the capture and commercial sale of flared gas.  As Anderson notes, Type H projects are appropriately
These projects usually have low UIAC and are, in  a higher priority for the GEF Although they are
principle, economically attractive for the imple-  typically more complex and more expensive per unit
menting country or enterprise even without GEF  ofemissions reduction orsink expansion, theseprojects
support.                                        have the potential to reduce the long-term costs of the
required transition to non-fossil fuels. Type 11 projects
In Type II projects:                            may also open up new markets for joint commercial
development by enterprises in developing and indus-
* National costs exceed direct domestic economic  trialized countries. Thus, if supported by the GEF in a
benefits                                      way which encourages participation by private enter-
* The sum of global and domestic benefits exceed  prises, such projects can be a fulcrum for sustainable
national costs.                               development in many countries.
Projects of this type include most photovoltaic  Contributions by the GEF to Type  o projects can lead
applications, wind electric systems, biomass use,  to future reductions in the cost of follow-on manufac-
afforestation programs, fuel cells, and some    turing. These future cost reductions, capturing econ-
advanced efficiency-improving technologies      oies of scale in manufacturing that are the result of
(Anderson 1992).                                "learning by doing," represent an important global
26


benefit that will remain hard to quantify for many  country to implement even without an international
years (Anderson 1992).                          subsidy, or only those measuresin which the gover-
ment vests sufficient importance to allocate some of its
Calculating incremental costs: the problem      chronically scarce investment funds.
of the baseline
To calculate the incremental costs of a proposed  The importance of better information
project, it is necessary to have something to compare  Investment decisions made by the GEF will unavoid-
it to. When two alternatives are mutually exclusive,  ably be made inthe face ofcontinuing uncertainty. The
the situation is relatively less complex; for example,  uncertainties persist through every level of the analy-
when a decision is required to replace a proposed coal  sis. There are fundamental scientific uncertainties
plant for electricity with a geothermal or natural gas  about the workings of the climate system and the
system.                                         relationship of the greenhouse problem to other atmo-
spheric problems, including stratospheric ozone de-
When, however, the alternatives offer advantages in  pletion and acid deposition. There are technological
different but related areas, the pros and cons can  uncertainties aboutthe characteristics, costs, andavail-
acquire a daunting complexity. A possible situation  ability of a variety of response options. There are
could involve a choice between replacing an old oil  economic uncertainties concerning the rates of growth
plant with a new, advanced combustion turbine that  of national economies and of national energy demand
burns natural gas, or investing in a program of energy-  as well as price levels, elasticities, and population
efficient lighting.                             distributions among income groups. Finally, there are
uncertainties about the policies that will be imple-
In both cases, the comparison is very sensitive to a  mented by governments-both with respectto climate
series of input assumptions. The most important of  change and to national priorities.
these constitute the baseline against which the pro-
posed investment will be compared. King and Munas-  In the face of these uncertainties, perhaps the most
inghe (1992) observe that the selection of the baseline  valuable thing that the GEF can do is to invest in
may alter the estimated value and costs of the pro-  better information. In terms of the evaluation of all
posed programs or measures. If the baseline is built on  Type 11 projects, but especially in the case of solar,
current trends, it may ignore simple, cost-effective  wind, and biomass systems, better information about
reforms which are not due to global warming. If, on  the resource base is urgently needed. Very few devel-
the other hand, the baseline assumes that "best prac-  oping countries have up-to-date and accurate data on
tice"technology is employed, only theoretically "true"  solar availability, wind regimes, soil characteristics,
incremental costs will be calculated and the resulting  land-use patterns, or precipitation trends. Resource
picture will be wholly divorced from reality. King and  surveys conducted by local institutions are an inex-
Munasinghe conclude that the baseline chosen will  pensive solution which could dramatically improve
reflect a number of operational considerations, and no  the ability of domestic experts to evaluate future
uniform homogeneous rule can apply.             project alternatives.
The calculation of the baseline scenario for any coun-  Innovative and systematic programs for project momi-
try is necessarily problematic because it involves a  toring and evaluation are essential to the long-term
counterfactual analysis. It is difficult to ascertain the  success of the GEF. Such programs should include an
policies and projects that would be implemented  emphasis on costs and emissions but also highlightthe
absent the GEF subsidy. Indeed, the availability of the  lifetime and performance of projects. The ability of
GEF subsidy may induce countries to politicize the  projects or new systems to fit in smoothly with local
characterization of their baseline scenarios in order to  institutions will also be important to evaluate. By
maximize the expected subsidy. Even without such  developing well-documented data on the performance
concerns, serious questions arise over whether the  of different designs under alternative conditions, GEF
baseline should include all negative-cost measures  task managers will get a better idea of what works,
that would be economically advantageous for the  what doesn't, and how costs can be reduced in the
27


future. Training local institutions, including universi-
ties, independent research institutes, and non-govern-
mental organizations to perform these monitoring and
evaluation tasks could increase local levels of compe-
tence and build a broad base of local support for the
GEF.
Investment criteria and project selection
The principal goal of GEF projects should be to work
toward the overall stabilization objective of the Con-
vention. Although emphasis must therefore be placed
on investment in innovative technologies that can
have a large impact on future emissions, substantial
investments should also be made to increase the local
capacity to develop, manage, and evaluate these inno-
vations. In some cases it will make sense to invest in
Type I projects that offer the potential for inexpensive
early emissions reductions or sink enhancements.
Such projects will be especially interesting if they
offer new information about how to overcome market
failures, increase the efficiency of existing institu-
tions, or facilitate the adoption of innovations by
indigenous communities.
The GEF could also underwrite some experiments in
the financial bundling or packaging of small projects
in order to minimize transaction costs and spread the
opportunities for participation in the overall process.
One of the obvious keys to reducing future costs of
Type II projects will be through technology demon-
strations which graphically illustrate the potential of
the chosen technology. In doing so, it is not necessary
to employ the most advanced or radical design. It may
even be more valuable to employ well-tested designs
in systems that involve innovative institutional rela-
tionships, advanced training programs, sophisticated
monitoring systems, and challenging approaches to
integrating such innovations into local communities.
In this way, it may be possible to maximize learning
by doing while minimizing the chances of outright
failure.
28


Proposed Work
7        Program
The principal elements of the GEF work agenda  points for the regional development of key technolo-
related to the issues discussed in the foregoing chap-  gies, such as renewable and energy-efficient technol-
ters will be carried out through the Program for  ogies. Such institutes could also serve as repositories
Measuring Incremental Costs for the Environment  of data for monitoring and evaluation activities. By
(PRINCE). The GEF Administrator, working closely  principally employing citizens of the host region,
with the Chairman and members of the Scientific and  these institutes could make a major contribution to its
Technical Advisory Panel (STAP) of the GEF, will  human capital, and also increase public awareness
undertake a series of special studies covering key  about the climate problem. These institutes could also
methodological, strategic, and institutional issues raised  be used to encourage and facilitate the emergence of
by the development of an operational definition of  new partnerships between private enterprises in de-
agreed incremental costs. Specifically, the PRINCE  veloping and developed countries.
program will include:
By encouraging local enterprises to participate in
* Conceptual and methodological studies regarding  these partnerships, the GEF could increase their
pragmatic options for defining full incremental  learing experience, help them to capture econo-
costs                                       mies of scale in the production of advanced technol-
* Studies outlining procedural and institutional op-  ogies, and improve their economic competitiveness
tions for reaching agreement on incremental costs,  on a global scale. These new partnerships would
and means by which conflicts could be resolved  have the added benefit of building closer trade ties
* Recommendations on specific approaches for in-  between developing and developed economies. If
volving the private sector                   such partnerships are successful, the shared eco-
* Recommendations on new and innovative ap-    nomic rentfrom these innovative technologies could
proaches to financing agreed incremental costs  help to offset the net capital outflow that now
* GHG-abatement strategy studies developed on a  proceeds from South to North.
country basis
* Seminars, workshops, andothermodes of training.  Strengthening the Convention process
By distributing investments among the Bank's re-
In terms of building local capacity, the GEF could  gions and among countries with different historical
consider facilitating the formation of a network like  experience, the GEF could illustrate the varied re-
the Consultative Group for International Agricultural  sponses to the global problem of climate change. By
Research (CGIAR) to build on the expertise already  offering participation in innovative investments to a
available in certain regions. The competence of exist-  broad cross-section of countries, the GEF could help
ing institutes could be enhanced to serve as focal  many countries to "buy in"ato the Conventionprocess.
29


If the GEF succeeds in developing a carefully bal-
anced selection of project technologies, much new
information will be gained about resources, emissions
characteristics, and the costs of various response
strategies. This information could point the way to-
ward smooth transition strategies by minimizing
avoidable mistakes, and spreading the economic re-
wards of innovation over many sectors. This would
help individual countries recognize new opportunities
and keep their options open while contributing to
global efforts to reduce the risks of rapid climate
change.
Through its support of the indirect costs of national
response strategies, the GEF could help its members
to identify, test, and evaluate innovative strategies for
regulatory and institutional reform. Many of these
response strategies could create benefits for the local
economies which adopt them, benefits that go far
beyond their effects on GHG emissions or reabsorp-
tion by natural sinks.
30


Conclusions
8        and Recommendations
The risks of rapid climate change are principally asso-  differencebetweenthefullcostofthosemeasures, and
ciated with the accumulation of carbon dioxide and  the sum of the cost of the least expensive way to
other GHGs in the atmosphere. The timing and extent  deliver an equivalent economic service to the local
of future regional impacts are presently unknown and  economy, plus the direct, short-term economic bene-
will remain uncertain for decades to come. Feedbacks  fits to the local economy that would result from the
and other complex interactions between the climate  proposed measures.
system, the ocean, and the biota may accelerate the
pace of climate change, and trigger a non-linear re-  The incremental costs of measures covered by the
sponse to even small future increases in concentration.  GEF should include both the direct costs of
hardware, software, and training, as well as the
All countries contribute to the emissions of GHGs.  indirect costs associated with overcoming market
Economically important activities in all major sectors  failures, institutional obstacles, and other barriers to
of the economy release such emissions. In the last two  market penetration. These indirect costs are identi-
centuries, emissions of these gases, especially due to  fied in the Convention as including measures to
activities in developed countries, have transformed the  promote technology development and transfer; re-
natural background greenhouse effect into the green-  source assessment and data collection; training and
house problem. As a result of this historical accumula-  scientific exchange; and enhanced public aware-
tion, national economies and natural ecosystems are  ness of the climate problem. Where such indirect
threatened by the risks of rapid climate change.  costs clearly generate both local and global bene-
fits, the GEF should pay up to one-half of the
The GEF, designated as the interim financial mecha-  incremental costs.
nism of the Climate Change Convention, has an instru-
mental role to play in mobilizing the international  The GEF should encourage and underwrite
response to global warming. The GEF is charged with  projects which generate valuable new information
financing the full cost of reporting requirements under  on:
the Convention and the agreed full incremental costs of
measures taken by developing countries to achieve the  - Advanced technologies and their deployment
overall objective of the Convention. The relevant  * Innovative adaptive responses
measures are outlined in Article 4, paragraph 1, of the  - Institutional reform
FCCC.                                         d    Successful technology transfer.
The incremental costs of measures taken to achieve the  The GEF should also support the development of
objectives of the Convention should be defined as the  local capacity, and the creation of new partnerships
31


between governments and enterprises in developing
and developed countries. An especially valuable ap-
proach to achieving this goal would be for the GEF to
support the formation of a CGIAR-type network of
institutions of high repute to provide expertise on the
deployment and application of renewable energy and
energy-efficient technologies.
32


References
Anderson, D. 1992. "Cost-Effectiveness and the Investments of the Global Environment Facility." Background
Paper for the Scientific and Technical Advisory Panel of the Global Environment Facility. World
Bank, Industry and Energy Department, Washington, D.C.
Gleick, P.H. 1992. "Impacts of Climate Change on Internationally Shared Fresh-Water Resources." In I.
Mintzer, ed. Confronting Climate Change: Risks, Implications, and Responses. Stockholm Environ-
ment Institute and Cambridge University Press, Cambridge, U.K.
Houghton, J.T., G.J. Jenkins, and J.J. Ephraums, eds. 1990. Climate Change: The IPCC Scientific Assessment.
Intergovernmental Panel on Climate Change, Report by Working Group 1. Cambridge, U.K.: Press
Syndicate of the University of Cambridge.
Howarth, R. and P. Monahan. 1992. "Economics, Ethics, and Climate Policy." Working Paper. Lawrence
Berkeley Laboratory, Berkeley, Calif.
Jhirad, D. and I. Mintzer. 1992. "Electricity: Technological Challenges and Management Challenges to
Achieving a Low-Emissions Future." In I. Mintzer, ed. Confronting Climate Change: Risks,
Implications, and Responses. Stockholm Environment Institute and Cambridge University Press,
Cambridge, U.K.
King, K. 1992. "Sharing the Costs of Projects that Have Both Global and Domestic Environmental Benefits."
Draft Report. World Bank, Environment Department, Washington, D.C.
King, K. and M. Munasinghe. 1992a. "Cost-Effective Measures to Limit the Emissions of Greenhouse Gases
in Developing Countries." Divisional Working Paper 1992-30. World Bank, Environment Depart-
ment, Washington, D.C.
King, K. and M. Munasinghe. 1992b. "Global Warming: Key Issues for the Bank." Divisional Working Paper
1992-36. World Bank, Environment Department, Washington, D.C.
Mintzer, 1. 1990. "Living in a Warming World: Effects of Global Warming on Weather-Related Disasters."Draft
Paper. World Bank, Environment Department, Washington, D.C.
Norgaard, R. and R. Howarth. 1992. Sustainability and Discounting the Future. University of California,
Berkeley, Calif.
Pearce, D. 1992. "Cost-Effectiveness Criteria for the Protection of Biodiversity in the Context of the Global
Environment Facility." Discussion paper for the Scientific and Technical Advisory Panel of the
Global Environment Facility. Second Draft. World Bank, Environment Department, Washington,
D.C.
United Nations. 1992. Framework Convention on Climate Change. New York.
Warrick, R. and A.A. Rahman. 1992. "Environmental and Socio-political Aspects of Sea-Level Rise." In I.
Mintzer, ed. Confronting Climate Change: Risks, Implications, andResponses. Stockholm Environ-
ment Institute and Cambridge University Press, Cambridge, U.K.
33



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UNDP Field Offices*
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Kabul A~anisan         La Paz, Bolba         the Congo                Station                 Iakamt   10310,
New York,   .Y.        Indonda
Detshmte 4             P.C. Box 54             Apartado  Postl        10163-1608
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Villa No. 35            Bouswana                San  oul, Coda         P.0. Bsx 446            15875-4557
Tinna, Albania                                  Riot                    B-0090Tallaa            Tehran, ilande
Caixa PotaI 0255                               Ecnia RöptblOo of Ia
Bota posal. 23        70359.970 raSIlla,      01 Boi   postals
Alger alm,              D                       1147                    P. 0. Box 5580          P.o. Dx   248
Algiers  16000,         SMzia                   Abidjaa     01,         Addia   Ababa,          (AIwiy4
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P.O.BOx                d'Ivoin
CaLIa PoIl 910         1184 sofa                                       Pivate Maul ag          p. 0. am 210
LUanda, Psopt s          ulgada                 UNDP Cuba               suva,                   KM ^0ngt, Jakala
Ropublig of Agola                               1 Unitd Nado a
Bo1te postl~  1490     Plaza                  Bit potal 2183          P,0. ox 51359
Cailla ds Coo           B uj u m b a ta,        New York,   .Y.        LibravMa, 0abo          ju   , 91513
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Djibouti                loitö poual 22          P. 0. ex 2993
Uaitad   Nalinas         7.0. BOx 2077                                  Conaky, Republh         3at
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Daku 1, Aårhadan                               DominicanRepubith       C. P. 179
CaixaPoha 62                                    P.O. Bzx   1011        9 TäataSut
P.0. Bx 26314          Prata. Republia de     P.0. Bx 27              Blui  Codx           Socad flor
Manama, Bahmin           Cabo Verd              Pyoayng,               Republic of             Riga
D e m oo r a iGinealau                          Latvia
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*GEF Working Papers are available at UNDP Field ffices and through World Ban Distibutors.


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Catila de Corrw                                                          *0    Vi &ana
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Apartado   Poeta[       Domest G Alipost        Laml Reladans         PIstannya
105-39                  Pox   Ofas Lwit        Mam Pleun                StrRur                  P. 0. Bx 31966
11581   Mexico,         Box                     P.0.Box656               Kuiv   262010,          utnaRpubiugad
D.P., Maxico            Pasy City, Me«o         Victoria, Mahd          Ukraia                 Zambia
Mani&                  Seyahelles
Room    222/224,         hiippima                               '       P. 0. Bx 2490           ?.0. Box 4775
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P, 0. Box 7184
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Box 3233                inte rnaio mal         CaiUa da Corro
p. 0. Box 4595          Doha,   State  of        Conf~rne.              1207
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Ronma                  CH-1211  G~neva         1889  p   Street,
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