By Amrita Kumar, Erb MBA/MS student, class of 2011
An original (longer) version of this post appears on the E+Co- Energy through Enterprise Blog site.
• Do carbon-offset projects actually make good on the environmental benefits that they promise to deliver and does the resulting carbon revenue actually benefit local economies?
• Does carbon finance have a role in the development sector; as the engine of growth for small and growing social businesses?
• How does one operate a social enterprise that delivers triple bottom line results in West Africa?
• Can energy efficient cook stoves slow deforestation and benefit the poor at the same time?
Tasked with the challenge of addressing ‘barriers to scale’ in the efficient cook stove sector in Western Africa, these were the questions that I found myself addressing during my summer internship with E+CO. (www.eandco.net) For three months I was happily entangled in a complex web that encompassed issues that converged around rural energy efficiency, business strategy and carbon finance. Here are some thought stirrers and questions to ponder over:
A new trend in carbon finance:
As the carbon finance sector has matured over the past couple of years, it is being recognized as a legitimate tool that has succeeded in attracting capital to large-scale emissions reduction projects in emerging markets. E+CO is one of the few organizations that has realized the potential for carbon finance to propel smaller scale, distributed energy efficiency projects via projects in the voluntary carbon market. It is signaling a trend that is forcing many philanthropy organizations to take a closer look at how carbon finance fits into their organization portfolios. It is also gathering much attention from bigger carbon project developers as they turn their attention to different types of carbon projects as revenues dry up from lower hanging fruits.
Carbon finance and the cook stove sector:
Energy efficient cook stoves are not new. For decades, Peace Corps volunteers and NGOs have been trying to get these stoves successfully adopted in villages that use biomass for cooking. The stoves are low technology, made of locally available materials and within the skill-set of the average blacksmith in Africa. They reduce the amount of charcoal consumed by the consumer thus providing tangible value and health benefits but also environmental value from reduced emissions. Environmental value that is only now, being monetized via carbon finance.
The success of carbon finance projects in yielding tangible emission reductions via efficient cook stove projects is largely unproven with only a handful of carbon projects being registered and validated in 2008-09. This is set to change very soon and I will follow the developments with much interest, as the emission reductions from the E+CO carbon projects in Mali and Ghana are verified over the coming year. If successful, these projects promise revenues of the order never seen by local African businesses and local NGOs!
Can efficient cook stoves reduce carbon emissions?
Interviews with government officials and research institutes in both countries have yielded some other interesting questions – for instance, as more and more households adopt efficient stoves will the benefits of reduced charcoal usage actually encourage households to cook more, thus negating the overall benefits of using efficient cook stoves? (This is termed ‘leakage’ in carbon parlance and is therefore monitored as part of the carbon project.) Will households actually turn in old inefficient stoves in the favor of newer efficient ones or will they continue to use old stoves along side with newer ones? Stove buyback programs may provide incentives but anecdotal evidence from Mali suggests that cultural nuances may prevent the obsolescence of old stoves as many joint family households simply tend to hold on their older stoves. Additionally, as income levels in emerging markets improve, households will probably cook more and we can only hope that they will cook with more efficient stoves and move to cleaner fuels like gas in the medium to long term. Unless efficient cook stoves saturate the market quickly resulting in the total amount of charcoal consumption offset per household being greater than the rate of increased charcoal consumption, efficient stoves are not likely to yield net carbon reductions on a national scale.
Changing the rules of the game:
Carbon finance has completely changed this dynamic. With a large influx of capital, stove manufacturers with the right connections will now be able to finance large-scale production of stoves. Carbon finance can also be used to subsidize the price of the stove making it cheaper than its inefficient counterpart for households, another factor which will increase adoption. It could increase the income capacity of the large informal sector that makes up the stove industry – from metal workers, ceramic artisans, sales agents and retailers. Not to mention the health benefits it will immediately yield for women and children as indoor air pollution is reduced. From this perspective carbon finance has been a boon to the efficient cook stove sector. It has directed private sector capital to an industry that was largely a recipient of NGO charity dollars. This has enabled private stove businesses to become financially sustainable and as I have seen in Mali and Ghana – cook stove entrepreneurs are gaining respect in the eyes of local bankers and financiers and an informal sector is gaining legitimacy by leaps and bounds.
It is not all a rosy picture however and there are several questions marks that underlie these new developments. As carbon finance makes its way into the development sector, several key issues need to be addressed: How should carbon revenues be apportioned to ensure that all parties are fairly compensated? Who controls this distribution– the project developer? The NGO? The banks that finance the project? The stove manufacturer? The end customer who actually generates the credits? All of the above?
Also in most developing countries, the ability of the local government to govern these arrangements are lacking and carbon finance is often not well understood by blue-collar workers in the stove sector or even by government officials themselves. Who will then protect the interests of the poor? For example, the availability of carbon finance will enable local stove manufacturers to import metal components or entire stoves itself and this may come at the cost of local employment. While this choice may be the most efficient use of capital – how does one ensure fair and equitable treatment of local artisans who are reliant on metal working of stoves for their livelihoods?
Secondly, carbon finance yields streams of revenue that are of a magnitude that probably have never been seen before by players in the sector. Do they have the capacity to absorb these large sums of money and manage it efficiently and in a manner that will enable their own long term financial sustainability? E+CO’s approach of empowering the entrepreneur with capital and technical assistance has proven results, but not all stove project developers have the same philosophy and many do not have the expertise and/or capacity required to develop local businesses and support entrepreneurs. Instead they could choose to ‘run’ the carbon project like a badly managed aid project, without developing the capacity of local partners to manage a business or attain self-sufficiency.
Where do we go from here?
As carbon finance finds its way into the poorer communities via conservation/reforestation projects, distributed off-grid renewable energy projects and programmatic agricultural soil carbon projects – it will play a big role not only in environmental protection but also poverty alleviation and social enterprise development. It becomes imperative then, for charitable organizations, social venture funds, and the entire development sector to consider the implications of carbon finance for their organizations and their intervention approaches. Standard setting organizations like the Gold Standard need to set contracting standards that provide guidance on choice of local counterparts as well as guidance on the equity of carbon revenue sharing agreements. On the other hand maybe the NGO sector shouldn’t rely on regulating bodies to set these standards and set the bar high via internal coordination. Collaborations like ANDE (http://www.aspeninstitute.org/policy-work/aspen-network-development-entrepreneurs) and Next Billion (http://www.nextbillion.net/) could support such initiatives. In the absence of this, we have to rely upon competition and efficient markets to do their job. They will eventually do so but a few dozen efficient stove manufacturers in Africa and other continents may get a raw deal in the process.