Carbon credits

Overview
This type of financing involves enterprises funding themselves or their projects through the sale of carbon offsets. When a project has the effect of reducing the amount of greenhouse gas beneficiaries are releasing into the atmosphere, (for example, by causing a community to shift from wood stoves to high efficiemcy gas ones, or by processing the methane from their cow manure into burnable cooking fuel), the reduction can be calculated and potentially sold to polluters seeking to offset their own carbon footprint. There are two broad types of carbon offsets which can be sold:

• Official credits validated through the Clean Development Mechanism (CDM) of the Kyoto Protocol, which can be sold either after they are generated or as futures contracts, in which money is given in advance for the rights to credits which buyers will later sell at a higher price.
• Voluntary credits, which are sometimes sold for projects reducing carbon but not certified by the CDM.  Sometimes voluntary credits are rigorously calculated, and sometimes they are the equivalent of donations, but a company cannot use them to officially reduce its footprint.

Enterprises reported pricing offsets at approximately US$14/ton. New CDM regulations released in 2012, favored projects that promote sustainable development in poorer countries.

Pros
The sale of offsets for a project allows enterprises to monetize part of the value that the project is creating that would otherwise go uncaptured. Enterprises cannot always get donors to fund this benefit, and there is no way to get customers to pay for it, so the ability to sell this value to companies who are willing to pay for it is a positive thing. Some enterprises able to sell carbon credits can get higher amounts per ton than the official market price by donors who combine an offset purchase with a donation.

Cons
Sale of formal carbon offsets through the official Clean Development Mechanism requires a certification process which can take 2 years and cost over $100,000, which makes the transaction costs too high for enterprises not operating on a large scale, meaning that many enterprises generating offsets don’t have access to this market. Some markets are much more developed than others.  It is much easier to prove the benefit of methane biogas digesters than solar lights, since the amount of carbon that would have been released from the methane processed can be much more easily calculated.

Case Studies
SKG Sangha designs and implements large-scale household level biogas digester projects providing entire rural villages with digesters for cooking fuel and vermicompost fertilizer.
SKG has certified its digesters to each offset 5.9 metric tons of carbon per year. Since 2007, SKG has been obtaining financing by selling 10 year fixed term carbon credits on the futures market. SKG’s social mission and benefits allow the enterprise to convince its buyers to pay a much higher price than the market value.
This can actually be a profitable investment, because SKG’s digesters have an expected lifetime of 25 years, which means that buyers can convert the 10 year fixed credit into a 7 year renewable credit that can be renewed 3 times, providing them with 21 years worth of offsets for the price of 10. Document preparation for carbon credits is very expensive, especially because SKG does not always have the in house capacity. It estimates it would pay 1/4 the cost of preparation if it could do so in-house.