Is carbon neutral green economy a myth?

Green Growth-1In an interesting paper of Environmental Justice, it was questioned that the vision or philosophy of carbon neutral economy or green economy is a myth.  The author of the discussion paper, Kevin Smith narrated that carbon offsets are the modern day indulgences, sold to an increasingly carbon conscious public to absolve their climate sins. The author further stated that if we dig out more, a disturbing picture emerges, where creative accountancy and elaborate shell games cover up the impossibility of verifying genuine climate change benefits, and where communities in the South often have little choice as offset projects are inflicted on them. This discussion paper argues that offsets place disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change. Promoting more effective and empowering approaches involves moving away from the marketing gimmicks, celebrity endorsements, technological quick fixes, and the North/South exploitation that the carbon offsets industry embodies[1].

But in reality the picture of carbon neutrality and green economy is not bad, rather encouraging; thanks to the leadership of market leaders like Global Green Growth Institute (GGGI) , which has been relentlessly working with the belief that economic growth and environmental sustainability shall go hand in hand and its integration is essential for the future of humankind. This fundamental vision of GGGI continues to inform and inspire its enduring commitment to the future – a resilient world where one can envisage growth to be strong, inclusive, and sustainable.

A few instances to demonstrate that carbon neutrality and green economic growth is a reality; one may like to go through the well-developed report on ‘Green Growth in Practice: Lessons from Country Experiences’. The report has convincingly described with evidences and rationale that carbon neutrality can be a part of the vision of a nation’s economic planning as well as it can be accelerate the economic growth engine of a nation with timely, cost effective and sustainable investment planning (resources and activities), delivery (implementation) and strong adherence to accountability (post-delivery ownership). Indeed, these principles are reflected in the Ethiopia’s Climate Resilient Green Economy (CRGE) Strategy.

The strategy considers synergies between economic development, poverty reduction, climate change mitigation and resilience across all sectors of the economy, considering agriculture, energy and water as key sectors. In agriculture benefits include increased productivity, enhanced food security, jobs and stability of export income (through crop diversification). In energy and water compelling benefits come from expanding energy access and security and reducing economic and social vulnerability. At the same time, Ethiopia has to manage trade-offs in making policy decisions to improve the lives of the rural poor such as between forest conservation and increasing land for agricultural production. Possible solutions for managing these trade-offs are increasing the productivity of agriculture and providing economic incentives for forest preservation.  Ethiopia’s main framework for green growth focuses on how climate change resilience and greenhouse gas mitigation is crucial to achieving its economic and social goals of becoming a middle-income country by 2025.

The progress in Ethiopia on green economy development is impressive; for instance, the investment framework is in practice, investment and delivery plans for agriculture and climate resilience are developed and put in practices; and an effective results and knowledge development pathways for measuring results and impacts are also in the process of development. Hence, it will be naive to jump into a conclusion that carbon neutral green economy is a myth, rather we may conclude that it is complex, multi-dimensional and multi-sectorial, which needs critical, systemic thought process and a robust system to translate the systemic, contextualized delivery plans into real actions. And, this is the unique value proposition of market leaders like GGGI, who drives and commits itself in this mission!

Keshav C Das

Addis Ababa, May 17, 2015

[1] Red the full paper here: http://www.tni.org/sites/www.tni.org/archives/reports/ctw/carbon_neutral_myth.pdf

Financing Innovatively: What can we do in Renewable Energy Sector?

There is widespread recognition that renewable finance needs to be scaled up from its current levels. However, there is no clear view on how developing countries like Nepal can efficiently and effectively mobilise further finance to meet the needs of its increasing energy economics from new and innovative sources of financing. Jan.

While the demand for renewable energy technologies keeps growing, the cost of such devices remains an important barrier for a majority of households and small businesses, slowing down their potential dissemination in developing countries.

The International Energy Agency (IEA) has reported in its recent Global Energy Demand Report that the world requires $48 trillion investment till 2035 in order to meet the growing need for energy. To meet this increasing energy demand, countries need to diversify sources of energy production and means of energy distribution and countries must invest $40 trillion in energy supplies over the next 21 years, according to the same report of IEA. Economic growth and rising living standards have been fuelling the global energy demand, forcing governments to find ways and money to increase supplies. The world has invested $1.6 trillion in 2013 for energy supply, more than double the amount in 2000. Until 2035, the annual investment figure is expected to reach $2 trillion, report says.

In the recently published Global Status Report on Renewable 2014 it is stated that that total investment in renewable power and fuels (excluding large hydro-electric projects) fell for the second year running in 2013, reaching $214 billion worldwide, some 14% lower than in 2012 and 23% below the 2011 record. That means, there is a significant gap between financing need and the existing financing, which is more than $50 billion investment gap (23% of the $214 billion).

In this context, the key question is- where from such a big investment can be generated to meet the growing needs of financing, while the global economy is affected with financial crisis? Indeed, this difficult situation has stimulated increased interest in innovative financing to help deliver more and better aid.

Seeking to overcome this barrier, we need further works and demonstrations on innovative finance for designing a range of innovative financing mechanisms for the renewable energy sector with a particular focus on the domestic cooking and lighting markets.  Key activities under this work could be conducting field based assessments to understand renewable energy users’ perceptions and preparedness for new financing methods, and evaluating the applicability and readiness of various result based finance instruments in the domestic cooking and lighting markets.  On this front, I will welcome inputs and partnership for this important works!

Keshav C Das

New Delhi, January 03, 2015

Access to Clean Energy: An Innovative Financing Modality

Energy poverty is one of the most important but least discussed issues. It is condemning billions of people to darkness and to missed opportunities for education and prosperity. One in five people lacks access to electricity and 3 billion rely on wood[1], coal or charcoal for cooking. Energy poverty is not just about the lack of energy, it cuts across – and undermines – all aspects of development. 

To turn on the lights in households around the world, successful examples of clean energy and energy efficient technology must be scaled up. This will require innovation that can spread through the developing world, where energy demand is burgeoning. With innovation come opportunities for development – and for business.

Energy poverty is a problem of technology, of infrastructure, of economics, of culture, and of politics – and it impacts over a billion people in the Asia-Pacific region alone.

Solving this problem requires solutions from the top-down and the bottom-up – everything from global finance to village-level technologies.

In the last few years, technological innovation has significantly reduced the cost of renewable energy technologies like solar panels, cooking energy solutions and other technologies, but renewable energy still needs serious financial supports to compete with conventional energy.

As of now, there are only limited options of financial mechanisms, which have been practicing widely by different actors. These mechanisms are primarily focused on grant, ODA funding, micro-credits, loans, which are merely considered as conventional funding windows. Indeed, based on the contemporary situation of providing access to energy at the bottom of the pyramid, it is realized that the conventional financial mechanisms alone may not be sufficient to fulfill the demands of energy. Perhaps, we need to think ‘out of the box’ and explore innovative financing streams or mechanism which could add impetus to the cause of providing access to energy for ALL.

An innovation on this front could be the carbon bundling mechanism. The key concept of the Carbon Bundling is that revenues from renewable energy carbon offsets can serve a risk-mitigating function for new renewable energy (RE) lending by microfinance institutions (MFIs). In this scheme, a financial institution would provide capital for a revolving fund set-up with a commercial bank or wholesale lending institution. This funding would be used to stimulate MFI lending for renewable energy technologies that are eligible for carbon trading.

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Income from these carbon trades triggers three things: (1) provides much needed upfront capital (2) motivates MFIs to provide loans for RE by covering their default risk and (3) brings revolving liquidity into the system. Furthermore, income from carbon trades can support extended after-sales service and funding of more RE projects.

The value to MFIs and the attraction of their participation is available capital and increased client volume from low-risk loans. The benefit to participating financial institutions would be a share of carbon income plus the added client base of participating MFIs. Finally, the possibility for carbon trading firms to access the renewable energy market would bring additional private sector weight to the initiative.

Since this is a revolving fund, once the loan is paid back to the financial institution, its initial investment can go directly to start-up the same type of carbon bundling programme in other countries.

How It Works [Figure/1].

The carbon bundling business model can work on a system of lending spreads that are backstopped by carbon revenue.

  1. The financial institution provides a soft loan of €1.5 million a year for a period of 3 years (total €4.5 million) —through a commercial bank — which funds MFIs to finance 5,000 RETs a year (each entity’s lending rate is shown below). The loans are paid back over a 3-year period. This means that €300 is available as loan per RET which in most case would require government subsidy as well (also refer to footnote 2).  
  2. Carbon revenue would begin to be available at end of Year 2, through a carbon project developer which makes their money in the trade. It is assumed that the market price of carbon is 10 Euro per ton of which 5 Euro goes back in the project and 5 Euro is for the carbon project developer (to be negotiated).
  3. Conservatively assuming every RET generates 1 tonnes carbon credits per year, this would generate €25,000 at the end of Year 2, increasing to €75,000 (post-project at end of Year 4) when all the units are operational
  4. With MFIs facing a potential default rate among RET purchasers (borrowers) of 2%, a portion of carbon revenue is set aside as MFI insurance = €30,000 per year or, potentially, as incentive
  5. A portion of the carbon revenue will go to RET purchasers as an incentive to participate or be developed as after-sales servicing (e.g.,  €3 per purchaser per year)
  6. Any remaining carbon revenue will be channelled back into the programme
  7. Regulation is provided by the Government of Nepal’s Alternative Energy Promotion Centre (which maintains a renewable energy credit facility)
  8. Rural Microfinance Development Centre, a wholesale lending institution in microfinance, or a commercial bank, which focuses on energy financing, could be responsible for fund channeling.

Role of SNV

SNV would identify and align commercial partners (MFIs, commercial bank, carbon trading firm), develop and run trainings and workshops for MFIs and directly manage activities related to Microfinance, Renewable Energy and Carbon—especially with respect to valuations, assets and technical trends.

Note: Grateful to my esteemed colleague Tom Krader, who supported to give shape to this concept.

Keshav C Das
Senior Advisor, Climate Finance, SNV Netherlands Development Organisation


[1] World Economy Forum 2011.