Carbon Market Watch

For fair and effective climate protection.

Pro-poor carbon projects: challenges and perspectives (Newsletter #20)

12 Jul 2012

Guest article by Marion Verles and Marion Santini, with contributions from Nexus-Carbon for Development’s team

Worth 3.3 billion USD at the end of 2011,[1] the CDM – a long-term output-based financing mechanism – represents a much needed funding opportunity for the widespread dissemination of appropriate low-carbon technologies. However, projects targeting the poorest populations – also called ‘pro-poor projects’ – face methodological, financial and market-related challenges when trying to tap this funding source. This article describes these challenges and proposes solutions to increase the positive impact of the CDM on the poorest populations.

Development practitioners have a long history of experience in managing projects that disseminate clean technologies to the most deprived populations. Well-designed interventions can bring numerous economic, social and environmental benefits to populations. As they contribute to reducing GHG emissions, these ‘pro-poor’ projects should benefit from the CDM. This is currently not the case: CDM projects have a limited impact on the poorest communities (Crowe 2011, Haya 2007, Bumpus and Cole 2010).

Pro -poor projects are different from conventional CDM projects:

  • The number of emission sources is higher: projects distribute large numbers of units (e.g. improved cookstoves, water filters, domestic biogas)
  • Emissions reductions tend to be limited in the early years:  the number of units in use slowly grows over time
  • Projects are more complex: they strengthen an entire sector and require involvement from a variety of stakeholders, including government institutions.

Pro-poor projects face methodological, financial, and market-related challenges when accessing CDM:

Methodological challenges

Recent innovations (development of PoAs, standardised baselines) have simplified the registration process. However, pro-poor projects face additional challenges:

  • Monitoring systems are complex and costly. Done by sampling, they account for numerous  emissions sources thus incurring higher costs.
  • Ramping up to potentially hundreds of thousands of units takes time. Project developers are not allowed to transfer successful pilots into scaled up CDM projects without having registered the pilot first, because retroactive crediting is not allowed.[2]

Why  methodologies should integrate development best practices:

As demand is shifting towards Least Developed Countries, there is a ‘gold rush’ for improved cookstove interventions in Africa.[3] By focusing only on GHGs, the CDM creates a perverse incentive to disseminate products as fast as possible and does not reward longer term sectoral interventions.

The risk is of creating an increase in the number of projects that use the CDM to ”mass dump” units as quickly as possible to recover the high upfront costs and generate substantial financial returns. These interventions usually fail after a few years. In the worst case scenario, they flood local markets with inappropriate technologies and undermine years of efforts by development practitioners working on strengthening local supply chains.

Financial challenges

Because of their complexity, pro-poor projects usually suffer from longer lead-in times and higher upfront costs. The uncertainties related to the future of the CDM impact them more because they need significant upfront finance and premium prices to break even.

Because raising working capital remains extremely difficult, donor funding is needed to support the early stages of interventions, and pave the way for impact investors to come in at the scale-up phase.

A number of actors are actively promoting hybrid approaches coupling donor funding and carbon finance to value the environment as well as the development benefits of these projects. We warn that these new schemes should be carefully designed so as not to create additional perverse incentives or simply to reduce business risks at the expense of end-users’ satisfaction.

Market-related challenges

There is a strong appetite for pro-poor carbon credits but currently no regulatory support. There is no evidence that the poorest populations will benefit from the EU decision to direct CER purchase to LDCs: a project in a poor country is not necessarily pro-poor. On the contrary, this decision undermines the incentive to invest in community-based projects in high poverty zones of developing countries that are not LDCs.

In a highly competitive market, a common definition of ‘pro-poor’ would increase buyers’ willingness to pay a premium for these projects.

What  is a pro-poor carbon project?

In a workshop organized by Nexus in May 2012, and building on the work done by Tracey Crowe (2011), participants listed some criteria to assess if a project is pro-poor:

  • Target populations: If poverty is defined by geographical indicators, what should be taken into account? Special Underdeveloped Zones or LDCs?
  • Economic benefits: Job/income creation, access to energy, equitable revenue sharing.
  • Social benefits: Improved services, gender inclusiveness, improved equality, empowerment of communities.
  • Environment benefits: Improved air/soil/water quality, sustainable use of natural resources, improved environment.
  • Technology appropriateness: Adapted to local practices, aspirational, human-centred design.
  • Durability and stability: the benefits of the project are sustainable beyond the carbon finance timeframe.
  • Revenue sharing: What share of carbon finance remains with the community? Does the project developer benefit from a sound pre-finance scheme? Does the buyer pay a fair price?

Recommendations

In order to incentivise the development of pro-poor CDM projects, we make the following recommendations:

  • The expertise acquired by development practitioners should be taken into account to create a set of best practices for pro-poor projects.
  • Guidelines should be provided to help market players identify pro-poor projects (additional label, set of best practices, disclaimers).
  • Special attention should be given to monitoring aspects, as project developers are not encouraged to monitor social criteria because of additional costs.
  • Donor institutions should develop innovative financial models while establishing safeguards to ensure that their funding benefits the poorest populations.
  • The EU should consider accepting CERs coming from projects located in Special Underdeveloped Zones of developing countries, or from projects respecting a set of pro-poor criteria.
  • The civil society should raise buyers’ awareness on the co-benefits of projects. If ‘bad’ projects are now well-known, ‘good’ projects are still in the dark.

[1] Source: Point Carbon.

[2] However projects must be non-additional or prove that carbon finance was needed from the start.

[3] More than 35 improved cookstove PoAs are currently under registration in Africa.