Carbon credits as a means of financing development projects
As a kid, I would sit in front of the TV every Saturday morning to watch my favorite show, Justice League. I would watch Superman, Batman and their colleagues fight off evil, not with the ambition to obtain power, money or glory, but with the ambition to bring justice to the world. Being a participant of Unleash Lab 2017 I now have the opportunity together with 999 other young people to become a Batman. But what does it take to become a Batman in the real world? In my eyes, it takes idealism and realism.
Being a 26-year-old student of Quantitative Economics I am a realist, and it is obvious to me that we will not reach the Sustainable Development Goals by 2030 if we mainly rely on government subsidies and foreign aid as means of financing our solutions. The money is simply not enough. Therefore, it is crucial that we attract money from the private sector. This can be done in several ways. In this post, I will discuss using carbon credits also called certified emission reduction (CER) credits as a means of financing. The carbon credit market has been criticized a lot since it was introduced with the Kyoto Protocol, and deservedly. Companies and private investors have been able to take advantage of certain holes in the design of the protocol to make money without reducing GHG emissions. Some of these holes have been closed and hopefully the still remaining ones will also be eliminated. Despite these unfortunate holes in design the carbon credits can still be used exactly as intended — to finance certain types of green projects in developing countries (besides from the obvious goal of lowering GHG emissions). Let me explain.
As many of you probably know polluting companies must hold carbon credits in an amount equal to their emissions. If their emissions exceed the carbon credits they have been allocated from their government, they must buy additional carbon credits on the carbon market. This is where the transfer of private money to development projects comes into the picture. The UN’s clean development mechanism (CDM) allows emission-reduction projects in developing countries to earn one carbon credit for every tonne of CO2-reduction. These carbon credits can be traded and sold to polluting companies whose emissions exceed their allocation of credits. In effect, total emissions are unchanged but there has been a transfer of money from the private sector to a development project. So, you might think: “What the heck! Emissions are the same, so why celebrate”? Let me give an example.
Many African households depend on firewood for cooking. Several problems are associated with this. Firstly, firewood is a scarce resource in many places making the collection of firewood costly in terms of time and energy. Indian women spend approximately 374 hours collecting firewood every year according to one research paper. Furthermore, supply of firewood is non-existing, as the relatively low value of firewood does not permit long-distance transportation. Secondly, the use of firewood has severe health implications. Every year 95 000 women die in Nigeria from firewood smoke, and when collecting wood in harsh environments women are exposed to morbidity and assault. By providing a home-sized biogas system as an alternative to firewood it is possible to solve severe health problems of the women while freeing up time for them to be more productive. Furthermore, bio waste is used as an input in the production of gas and a rich fertilizer comes out as a byproduct.
So, the biogas system is a good idea. Now, the big question is; who is going to pay for the biogas systems? The answer is; the private sector. Supplying home-sized biogas systems to African households will prevent a lot of firewood from being burned and thereby prevent a lot of CO2-emissions. This will allow for carbon credits to be obtained and sold to the private sector. So even though total emissions are unchanged, the private sector will be financing a development project that improves health, removes bio waste, delivers a fertilizer for the fields and frees up time for African women.
My main message here is that somebody must pay for our solutions. The people who need our solutions do not have a lot of money and foreign aid and government subsidies is simply not enough. Therefore, if we want to reach the SDGs by 2030, we need to find ways to attract private money. Furthermore, I would like to express my concerns about the political instability surrounding the carbon credit market. I very much hope that politicians and experts in the EU and UN will succeed in creating certainty about the future of the carbon credit market and make the market more transparent, because right now it is a jungle to find out how it works. Lastly, if somebody is out there with knowledge of or interest in the carbon market, please reach out to me. I would love to exchange thoughts and ideas.
Thanks for reading and remember to love one another.
