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, 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 reductions

Establishing the emission reductions (cont’)

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 BiogasNepal1.96 Micro hydroBhutan524 for a 70 kW plant Photovoltaic LampsIndia0.117 Solar cookerChina2.1 for a 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 Ramesh K. Gautam Micro Finance Advisor SNV Nepal