SPECIAL REPORT: The Merger of Microfinance and Carbon Finance – A Mechanism for Small-Scale Technology Transfer

As world leaders haggle over emissions cuts and financial obligations to promote technology transfer to developing nations, a vanguard of microfinance institutions (MFIs) have silently financed purchases of clean energy technologies such as solar panels, biogas digesters, micro hydro dams and clean energy cook stoves in some of the poorest regions of the world. The prevalence of small-scale clean technologies could contribute to the displacement of rapidly expanding coal powered electricity grids to rural areas. Furthermore, it could replace dirty fuels – firewood, animal dung and charcoal – which have significant consequences for human health.

MFIs’ extensive network of connections and local knowledge, position them well to broker and finance small-scale technologies. It is estimated that hundreds of millions of the world’s poor are reached by microfinance services. Since the initial investment costs of technology are often the main barriers to low-income households, microcredit can allow the costs to be borne by end-users in small installments over a prolonged period.

Numerous MFIs already have programs geared to financing clean technology. SELCO-India (Solar Electric Light Company), a technology provider, has partnered with MFIs that extend loans to its customers. Since 1995, SELCO has installed over 95,000 solar lighting systems. Start-up online microfinance platform, 51Give, facilitates microloans from individuals around the world to low-income people in China to purchase clean energy technology. And Grameen Shakti (‘Village Energy’), profiled by MicroCapital in January 2009, has financed and installed over 200,000 solar panels that electrify the homes of an estimated 2 million people in rural Bangladesh. It also installed 6,000 biogas plants, which convert chicken dung into gas for cooking and lighting, and 20,000 energy efficient stoves.

Access to carbon finance could allow MFIs to expand such clean energy programmes. Carbon finance could subsidize the price of clean technology and thereby increase demand. Alternatively, it could be used to build support networks of suppliers and technicians. Most of the global mechanisms for generating carbon credits in developing countries explicitly require the consideration of poverty alleviation and sustainable development goals, including the Clean Development Mechanism (CDM) under the Kyoto Protocol and the Biocarbon Fund under the World Bank. Until recently, however, MFIs have been unable to tap into the carbon markets due to the high transaction costs associated with monitoring, registration and verification of small-scale projects.

Three recent developments have made some modest progress in linking microfinance with carbon finance. First, a reformed CDM offers greater opportunity to small-scale projects. The CDM Executive Board introduced the Programmatic Approach (pCDM), which offers a flexible method for small-scale projects to sell their credits in aggregate to overcome high transaction costs. The pCDM could open the door for MFIs to enter the CDM. However, due its relative complexity, transaction costs remain a barrier. As of February 2010, only two projects (not MFIs) had been registered through the pCDM.

The second development, the founding of MicroEnergy Credits (MEC) in 2008, has focused instead on trading voluntary emission reductions (VERs). VERs are not allowed to be traded in mandatory markets within the Kyoto Protocol but are instead sold to organizations and individuals that wish to voluntarily offset their emissions. MEC acts as a middleman by purchasing and selling the carbon reductions produced by MFI clients. As reported by MicroCapital in November and December 2009, MEC has signed deals to purchase of carbon credits from XacBank, a Mongolian MFI that provides microloans for purchases of efficient cooking stoves and heating technologies, and Spandana, an Indian MFI that aims to develop a carbon financed solar powered lighting program. MEC has an agreement to sell its credits to carbon trading giant, EcoSecurities, which in turn sells them as VERs through private placements to large corporations. MEC also sells VERs to individuals.

The third development was the establishment of the Microcarbon Foundation (MCF) in 2009. The MCF aims to create a recognized standard within carbon markets, similar to the Gold Standard applied to both mandatory and voluntary markets, but specifically geared to the verification of carbon credits from small-scale clean energy programs financed by MFIs. Putting in place a proper methodology to monitor and verify widely dispersed small-scale emission reduction projects will be an important step for MFIs to access voluntary markets on a wider-scale – and eventually to access the CDM.

Whilst details remain to be ironed out, bringing together microfinance and carbon finance clearly creates an untapped source of emission reduction projects, and a scalable mechanism for technology transfer and poverty alleviation to the world’s poor.

By Ryan Hogarth, London School of Economics

Additional Resources:

51Give: Home

Clean Development Mechanism: Home

GFA Envest, UNEP, August 2009: PoA CDM Manual Mini Biogas Plants for Households

Grameen Shakti: Home

MicroCapital press release, November 4, 2009: Energy Reduction Microfinance Loans Earn XacBank Carbon Credits from Micro Energy Credits (MEC)

MicroCapital story, January 29, 2009: Grameen Shakti Managing Director, Dipal Barua, Wins $1.5m Energy Prize for Implementing 200 Thousand Solar Panels in Bangladesh with Microfinance Scheme

MicroCapital story, December 16, 2009: HSBC India, MicroEnergy Credits, Microfinance Institution Spandana Team Up to Offer Solar-powered Lighting

Microcarbon Foundation: Home

MicroEnergy Credits: Home

SELCO-India: Home

Spandana: Home

XacBank: Home

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