NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Reducing greenhouse gas emissions–and, therefore, global warming–will require a suite of solutions. The scope of traditional conservation efforts is limited, since most of the world is adopting developed-world lifestyles and consumption habits as their incomes rise. Experts and politicians cite technological advances as a primary source of long-term reductions, but they also realize that technology alone cannot solve the problem overnight.

In light of these challenges, much of the world has adopted market-based cap-and-trade systems to control greenhouse gas emissions. I have been thinking a lot about these systems, and have asked myself the following question: what can a cap-and-trade system, especially one that provides incentives for financing projects in the developing world, do to help the BoP, who are most vulnerable to climate change?

This may not be a new question, but it is one that deserves ongoing attention. One provision of the Kyoto Protocol has been established to clearly address the BoP–the Clean Development Mechanism (CDM). The CDM allows developed countries to offset their greenhouse gas emissions by paying poor nations to develop clean energy projects or to create carbon sinks that cut global emissions.

Emerging markets are seeing an influx of investment from these offset payments. According to Scientific American, the market for clean development mechanism credits accounts for about $4.4 billion annually. In theory, this investment should lead to job creation and opportunities for the BoP to develop clean wind, hydropower and biomass projects from India to Brazil.

Despite the influx of capital, a Reuters article posted on NextBillion in August 2007 highlights an unfortunate reality: CDM financing is not going where it is supposed to go:

“Evidence is emerging that while brokers stand to make enormous profits, least developed nations, especially in Africa, will get next to nothing — raising questions over whether Kyoto is fulfilling its social as well as environmental goals.”

The CDM is suffering from many of the criticisms launched at more traditional aid projects–large margins are taken by developed-world project managers and consultants while those in the developing world see little of the spoils.That said, many of the projects have been established to provide clean and distributed energy to those living at the BoP, which is considered one of the main barriers to sustainable economic development.

Reliable access to affordable energy is a salient problem in rural India, where kerosene and firewood are the primary cooking and fuel sources for the BoP income groups. In addition, 63% of the Indian BoP market for energy is concentrated in the rural populations. One CDM project in India attempts to tackle this problem by providing solar steam cook stoves constructed in rural villages. The company administering the project is a co-created German-Indian venture called Gadhia Solar.

The project’s description outlines the following:

“The technology creates new job opportunities in two ways: i) the solar system is entirely manufactured in India; it was introduced in India through German-Indian technical cooperation and is thus the result of a technology transfer process; ii) the operation and maintenance of the solar system is more labor intensive than in the baseline case, which generates new additional jobs, mostly in rural India.”

The project has also outlined its evaluation metrics across social, environmental, and economic indicators (See page 25 of the project design document).

Another CDM project that has addressed energy distribution is a small scale project in Morocco that uses photovoltaic (PV) kits to provide energy to rural households that otherwise would not have access to the electricity grid. The project is run through the Moroccan government and Temasol, a rural electric supply co-operative society with support from Total, EDF Energy, and Tenesol. The project seeks to equip 101,500 households with individual PV kits along with the basic installation for domestic electricity use (bulbs, plugs, etc.). The project, which was registered in 2006 with the CDM to provide carbon credits, is estimated to generate 300-400 full time jobs, the majority of which will be technicians in rural areas where employment is scarce.

Carbon markets present an opportunity for job creation and BoP energy access through renewable and clean sources, especially as technology links buyers and sellers through online marketplaces. One of these, the CDM Bazaar, was officially launched by the United Nations Framework Convention on Climate Change in September 2007.

Another hope is that the CDM could also provide indirect financing for these projects. The Inter-American Development Bank has pointed out that as the carbon market matures, future carbon credits could be used as guarantees or as collateral for obtaining microfinance loans for startup or expansion projects.

While this market has considerable potential, worries about the future of the Kyoto protocol and the cap-and-trade market for carbon throw a realistic element of risk into the mix. The jury is still out on whether the most effective means of combating greenhouse gas emissions is market-based or tax-based. Some environmentalists also see carbon offsets as a “sin tax,” giving the wealthiest polluters a way out by allowing them to simply write a check to cover their polluting habits.

Regardless, there is a good chance that the U.S., the world’s largest contributor to greenhouse gas emissions, will adopt a cap-and-trade system under the next administration. In that case, the market for CDM projects could expand quickly, bringing opportunities to those who need them the most–the BoP.