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Carbon Revenue and MFIs: Making it Work
Marco van der Linden
Ramesh K. Gautam
Role of greenhouse gases
Emission trading
• Under Kyoto Protocol, industrialized countries
have taken a commitment to reduce greenhouse
gas emissions.
• Based on domestic actions, but also introduces
principle of trading of emission-reductions.
• Intentions:
Flexibility and lower cost for industrialized countries;
Clean and low carbon development for host
countries.
Carbon markets
• Two types of markets:
Compliance market under the Kyoto Protocol;
Voluntary markets.
• Under Kyoto Protocol, industrialized countries can
purchase emission-reductions from activities in
developing countries through the Clean Development
Mechanism (CDM).
• Voluntary markets individuals or companies voluntary
compensate their carbon emissions by paying someone
else to reduce GHG emissions elsewhere.
In the voluntary market, a number of competing standards
and schemes exist.
Volumes of credits transacted
Source: Worldbank, 2009. State and Trends of the Carbon Market 2009.
Basis for determining emission reductions
• Emissions reductions are not tangible.
• Often difficult to directly measure emissions.
• Mostly calculated based on activity data, for
example:
Fuel consumption;
Product produced.
• Calculation of emission reductions against a
baseline which represents a business-as-usual
scenario.
Basis for establishing the emission
reductionsFirst step is to determine the emissions under a baseline scenario, representing what would have happened without the project
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Time
GH
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Establishing the emission reductions (cont’)
Actual emissions with the project activity are determined
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GH
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Establishing the emission reductions (cont’)
Emission reduction credits are awarded for the difference between baseline and actual emissions
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Time
GH
G e
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Amount of credits
Emission reduction potential of RET
• Renewable energy technologies (RET) have the potential
to reduce emissions
Technology Country Estimated emissions
reductions in tonnes
per year per
installation
Biogas Nepal 1.96
Micro hydro Bhutan 524 for a 70 kW plant
Photovoltaic Lamps India 0.117
Solar cooker China 2.1 for a 773.5 W cooker
Experience with CDM in Nepal
• Currently there are 2 registered CDM projects from
Nepal and one project in the voluntary market, all
using biogas.
• The buyer is the World Bank, providing up to US $
600,000 as net income annually.
• Several other possible CDM and voluntary projects
are currently being developed.
Challenges in accessing the carbon market
• Carbon price volatility.
• Timelines.
• Risk of non-delivery.
• CDM process and associated transaction costs.
Carbon price volatility
• Differs over time, between markets and depending
on what is offered (existing CER vs. future CER).
• Current price around 1250 NPR but price varies
Timelines
• Taking a CDM project through the project cycle can
take up to a year (or longer)
• Long period between investments and potential
carbon revenues
• Can be addressed through innovative ways of
financing and cooperation between MFIs and
carbon investors, allowing to bring part of the
payments forward to support the first investments
and overcome the time gap.
Steps in the CDM project cycle
Risk of non-delivery
• Carbon revenue is performance based.
• Risks that might affect the delivery and issuance
of CERs:
Regulatory risk arising from the CDM process itself
and possible changes that might occur in this process
over time;
Risk that technologies do not deliver the CERs
expected because of maintenance and performance
problems.
CDM process and associated transaction
costs• Developing a carbon project is a complicated
process which requires specialized knowledge.
• The transaction costs might vary from 25,000 USD
to more than 100,000 USD, depending on the size
of the project and the project type.
• This means that in general 15,000 – 20,000 CERs
per year is considered as a minimum to make a
project feasible.
• Bundling of portfolios through a so called
“Programme of Activities” can drastically reduce
the costs.
Carbon finance and MFIs
• Can be attractive for microfinance banks and
selected FI-NGOs.
• Micro finance lending can increase RET installation
significantly if:
MFI is committed;
Supply and demand for technologies is matched.
• Estimated that carbon might create minimum 2-3
percent income margin.
• Can be used by the MFIs to mitigate risks
associated to RET lending by covering its loan loss
provision cost.
Conclusions
• Carbon revenue has the potential to address some
of the traditional risks associated with RET
lending.
• Also has potential to bring in extra capital.
• However, also brings new challenges and risks
that require:
Specialized expertise;
increased cooperation between MFIs;
creation of innovative financing and risk sharing
mechanisms;
increased capacity to access foreign capital markets.
SNV involvement
• SNV is currently exploring ways to link MFIs in
Nepal to the global carbon market and increase
RET lending in Nepal by:
matching demand and supply of technologies;
increase cooperation between MFIs;
create innovative financing and risk sharing
mechanisms between different market actors based
on carbon revenues.
Thank you!
Marco van der Linden
Carbon Finance Advisor
SNV Nepal
Email: [email protected]
Ramesh K. Gautam
Micro Finance Advisor
SNV Nepal
Email: [email protected]
