Making Carbon 76924 Finance Work for the Poor Integrating Social Co-benefits into Carbon Finance Operations: Lessons from the Community Development Carbon Fund (CDCF) Experience Carbon finance is an important tool for mitigating climate change. A key challenge however is to ensure that carbon finance operations combine development dividends with emission reductions. This note focuses on the role of carbon finance in contributing to pro-poor development. It explores how social co-benefits can be effectively integrated into carbon finance operations, and highlights lessons from the World Bank’s’ Community Development Carbon Fund (CDCF) experience. The note summarizes key findings from a recent assessment of the Fund’s performance on social co-benefits and sustainable development with a view to documenting outcomes, good practice examples and lessons learned. Introduction projects in a manner that not only reduce greenhouse gas (GHG) emissions, but also provide tangible development Over the past decade carbon finance has emerged as an benefits to poor communities and poor countries. important tool for supporting climate change mitigation. The Community Development Carbon Fund (CDCF) Market-based mechanisms established under the Kyoto was created in March 2003 to extend the benefits of car- Protocol, such as the Clean Development Mechanism bon finance to the poorest countries and poor communi- (CDM), allow industrialized countries with emission- ties in all developing countries, which would otherwise reduction commitments to implement emission-reduction find it difficult to attract carbon finance. The CDCF sup- projects in developing countries. CDM was intended ports small scale projects that measurably benefit poor to provide developing countries with additional finan- communities and their local environment, and gener- cial resources for investment in clean technologies while ate Kyoto-compliant emission reductions under CDM. contributing to their sustainable development priorities. CDCF projects are unique because they are an opportu- However, a general concern about CDM is that it focuses nity for small communities in poorer countries to obtain primarily on emission reductions, and many CDM proj- clean water, improve health conditions, and create jobs as ects fail to deliver on development benefits.1 Furthermore, much as they are an investment in clean technologies that there is an uneven geographic distribution of projects, help reduce GHG emissions. The CDCF also emphasizes with China, Brazil and India dominating the CDM mar- community dialogue and participation in project design ket. Poor countries, especially in Africa, have found it dif- and implementation processes. ficult to attract CDM investment dollars due to the high The Fund is a public/private initiative designed in transaction costs and financial risks.2 Thus a key challenge cooperation with the International Emissions Trading in carbon finance operations is designing programs and Association and the United Nations Framework Conven- THE The Community Development Carbon Fund is one of several carbon funds administered WORLD by the World Bank’s Carbon Finance Unit. BANK tion on Climate Change (UNFCCC). The first tranche of sewage facilities, potable water connections, construc- of the CDCF is capitalized at $128.6 million with 9 gov- tion and rehabilitation of local roads, renovations to local ernments and 16 corporations participating in it. The schools and health clinics, construction of parks, commu- two key eligibility criteria for CDCF projects are: (i) The nity centers etc. These benefits are typically provided as CDCF will give preference to small scale projects that part of an additional CBP. are compatible with the definition of “small-scale CDM project activities� in accordance with a UNFCCC deci- Improving access to clean energy for heating and cooking – sion3; (ii) Each project must lead to improvements in the 3 projects in the CDCF portfolio focus on the provision material welfare of the community or communities in- of cleaner energy for cooking and heating. These proj- volved in it. As of October 2009, the CDCF had signed ects not only contribute to providing poor rural house- 31 Emission Reduction Purchase Agreements (ERPAs) holds with cleaner and more affordable energy solutions, with a corresponding Emission Reduction (ER) volume they also contribute to decreasing the negative impact on of 8,939,535 ERs. health of using firewood or inefficient heating systems. Improving livelihood and employment opportunities – Integrating Social Co-benefits: Key Assessment 6 projects in the CDCF portfolio focus on employment Findings creation and livelihood security as the primary commu- nity benefits. In most cases, the emphasis of the CBP ac- The CDCF supports projects that integrate social co- tivities is on improving the quality of working conditions benefits with emission reductions to create “development for the informal laborers who typically work in these in- plus carbon� credits. Co-benefits describe parallel or an- dustries, such as brick workers and waste pickers. In some cillary benefits (non-climate change benefits) of climate cases, the CDCF project seeks to directly benefit the la- mitigation policy. All projects supported by the Fund ben- bor force employed in the industry by enhancing sector efit local communities either directly or indirectly. Ben- productivity and thus increasing incomes. In addition, efits are typically meant to arise from the project itself: almost all CDCF projects have some tangential impact on village electrification, improved air quality or increased employment creation at the local level as the construction employment and income. In some cases, where there and operation and maintenance of CDCF projects often are limited benefits or no identifiable benefits integral entails the hiring of community residents. to the project, an additional benefits package (indirect benefits) may be put together. Examples of the types of Improving access to electricity and energy efficient lighting goods and services which may be provided as addition- 12 projects in the CDCF portfolio focus on the provi- al benefits include equipment for schools, health clin- sion of electricity or energy efficient lighting as one of ics, training workshops etc. Such packages are financed the primary community benefits. This includes renew- by a price premium to cover the cost of the additional able energy projects such as micro-hydro and solar, and community benefits and a separate Community Benefits energy efficient lighting programs that focus on installa- Plan (CPB) is prepared which is included in the ERPA. tion of compact fluorescent lamps (CFLs). The CDCF portfolio currently has 19 projects with in- direct benefits, 10 projects with direct benefits, and 2 Welfare impacts on local communities projects which provide both direct and indirect benefits.4 Evidence suggests that CDCF projects can contribute to pro-poor development outcomes by providing a range Main categories of community benefits of important co-benefits. These co-benefits include im- While the community benefits provided by CDCF proj- proved health and environmental outcomes; economic ects often include a range of activities, the key community co-benefits such as reduced fuel costs and increased in- benefit activities in CDCF projects can be categorized as come generating opportunities, and developmental ben- follows: efits such as improved rural infrastructure. For example, installing new energy efficient boilers in Moldova resulted Improving local infrastructure – There are a total of 15 in a significant reduction in respiratory diseases due to a projects in the CDCF portfolio that provide commu- decrease in local air pollution. In Nepal, installation of nity benefits geared towards improving local infrastruc- micro hydro plants has reduced kerosene consumption ture This includes a range of activities such as construction and costs. And with more reliable supply of energy, small Project Examples Nepal Biogas Program – The project aims to provide rural households with a clean and energy efficient option for cooking by installing 162,000 small-sized biogas plants across the country. The CDM project is part of an ongoing nationwide program—the Biogas Support Program that is funded by international donors and coordinated by the Alternative Energy Promotion Center (AEPC). Key impacts include reduced indoor pollution, enhanced agricultural productivity, reduced consumption and therefore expenditure on firewood, improved sanitation, and time saving for women. One of its most significant impacts has been on improving the health conditions of both women and children in the households by reducing respiratory illnesses and other diseases associated with using traditional cook stoves that operate with fuel wood. Moldova Biomass Heating and Energy Conservation Project – In Moldova, the quality of community infrastructure had deteriorated severely in the last ten years and most public buildings such as schools and hospitals were supplied with heat from inefficient boilers. Through this project, 153 new boilers and heating systems have been installed in a number of public buildings across 116 rural communities. This project is implemented within the framework of the Moldova Social Investment Fund (SIF) project, which empowers rural communities to plan, implement, operate and maintain the heating systems. Installation of energy efficient boilers has resulted in increasing the heating period in buildings and enhancing thermal comfort. Greater comfort has improved attendance in schools. The installation of energy efficient boilers also reduced respiratory diseases and improved local air quality due to a reduction in noxious fumes from inefficient boilers. The new boilers have also decreased consumption and expenditure on fossil fuels such as coal and gas. Senegal Rural Area Energy Efficient Lighting Program – The project is a component of a rural electrification plan that will provide affordable access to power for Senegal’s rural communities. The Energy Efficient Lighting Program will provide energy efficient lighting in newly electrified households and buildings. The project is being implemented by Agence Senegalaise d’Electrification Rurale (ASER) who will install about 1,500,000 Compact Fluorescent Light bulbs (CFLs) within five years. These light bulbs can work up to five times longer than a conventional light bulb and result in cost savings for households as they decrease electricity use. They also help optimize the demand for energy at a time when generation capacity is limited. businesses such as milling units, tailoring shops, and bak- ernment entities. The level of community dialogue and eries have expanded. In Argentina, the CDCF project re- participation in projects with direct benefits tends to be sulted in the provision of potable water connections to high when they are embedded in ongoing programs that rural households. are based on principles of community empowerment. In Many CDCF projects that focus on developing re- the Pakistan Micro Hydro Project, the program builds on newable energy and energy efficiency can be particularly the previous successes achieved by the Aga Khan Rural appropriate for addressing energy poverty in developing Support Program (AKRSP) in micro-hydro development. countries. Nearly 1.6 billion people across the developing Individual project development is done through a three- world remain without electricity. A significant portion of part dialogue process with the local communities. Once this population resides in small or dispersed communities the micro-hydro plant is constructed, the community is or far from the national grid where transmission and dis- in charge of the operation and maintenance of the sys- tribution of energy generated from fossil fuels can be dif- tems including collection of user fees. In projects which ficult and expensive. Producing renewable energy locally are required to prepare an additional Community Benefits can thus offer a viable alternative. Plan (CBP), the participatory process tends to be stron- ger when the consultation process involves a range of key Community participation and dialogue stakeholders including local government administrations While the specific requirements for community participa- and is linked to broader local development priorities. tion and consultation depends on the type of community benefit, all CDCF projects involve the communities in Poverty Targeting identifying the benefits and establishing partnerships with As compared to other CDM projects, most CDCF proj- representative community organizations or local gov- ects are targeted towards communities with high levels of poverty. Currently 50% of the projects are targeted to- ensure smooth flow of funds. Even though small scale ward CDCF priority countries, and of this almost half the projects are supposed to benefit from simplified CDM projects are located in Africa.5 Furthermore, most of the procedures, in practice this is often not the case. The projects are targeted towards communities that either lack delays in project registration and implementation essential services such as roads and health care, or have a cause resentment in the communities as their expecta- very poor quality of service delivery. tions are unduly raised during the initial consultations. Furthermore, in many projects, sponsors receive CBP resources as and when they generate verified ERs. The Challenges and Lessons Learned sporadic flow of funds creates a bottleneck for imple- menting CBP activities in a timely manner. On the The CDCF experience demonstrates the viability of a co- regulatory front, programmatic approaches to CDM benefits approach to carbon finance by linking climate can open the door for scaling up dispersed small scale change mitigation tangibly to the poverty reduction and activities in areas such as energy efficiency, renewable development agenda. However, it also highlights some energies for rural households etc. Inclusion of sup- of the challenges in this approach. The key lessons that pressed demand for energy services in CDM baselines emerge from the CDCF experience are: could also better enable less developed countries to benefit from CDM. ◗◗ Greater emphasis needs to be placed on identifying ◗◗ There is a need to strengthen attention to monitoring projects that have intrinsic benefits i.e. where there and evaluation of community benefits and incorporate is a strong synergy between local development goals indicators for social benefits into the project design itself. and achieving emission reductions. Currently there Most projects reviewed did not have robust monitoring is a large unmet need for carbon finance projects that systems for CBPs as the monitoring typically focuses address core development priorities in poor countries. on the emission reduction component of the projects. However, low emission factors and high administrative In order to make real and measurable contributions to costs in many poor countries, especially in Africa, pre- sustainable development, carbon finance projects need clude them from taking advantage of carbon finance to emphasize not just emission reductions, but proac- opportunities. tively incorporate social co-benefits into project design, ◗◗ There is a need to design projects in a manner that implementation and monitoring processes. maximizes scale and sustainability, and minimizes transaction costs. This entails leveraging additional —Aditi Sen, author partnerships, integrating carbon finance projects Carbon Finance Unit, 2009 within a larger local development framework, and sup- For more information: porting capacity building initiatives for participatory Haddy Jatou Sey, Task Team Leader community development. The transaction costs of im- hsey@worldbank.org plementing additional CBPs in CDCF projects can be www.carbonfinance.org www.worldbank.org fairly high if they are designed in an ad-hoc and isolated fashion. Furthermore, the resources available through carbon revenues alone are often not enough to address critical community development needs. Projects that work on the grass-roots level also require continuous 1 Jessica Ayres, Maryanne Grieg-Gran, Lizzie Harris and Saleemul Huq. support, capacity building and follow-up. However, 2006. Expanding the development benefits from carbon offsets. Lon- don. IIED. in many carbon finance operations, project sponsors 2 Gouvello, C., Dayo, F and Thioye, M. (2008, Low-carbon Energy Proj- typically have limited experience with participatory ects for Development in Sub-Saharan Africa: Unveiling the Potential, planning. Thus, embedding CBPs within a support- Addressing the Barriers. Washington: World Bank . 3 See http://unfccc.int/cdm/ssc.htm ing policy and institutional framework is important 4 Many CDCF projects are still in early stages of implementation Cur- to ensuring scale and sustainability in the delivery of rently only 11 projects have begun implementation of community ben- community benefits. efits. ◗◗ It is important to address procedural and regulatory 5 These are defined as (i) International Development Association (IDA) list of countries; (ii) “IDA blend� with a population of less than 75 mil- constraints in the CDM. There is an urgent need to lion; or (iii) countries designated as Least Developed Countries (LDCs) streamline procedures in the CDM project cycle and by the United Nations.