Carbon Funding for Cookstoves

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Carbon Funding

In order to support market introduction of improved cookstoves, adequate funding over a fairly long term is needed. Projects often face difficulties in getting enough money for their activities. In December 2007, stove projects were accepted under the Clean Development Mechanism (CDM) of the Kyoto Protocol, opening new funding possibilities. Financial payments for reducing the emissions from stoves can be a source of funding for stove projects. However, the carbon funding is complex and the requirements for applying are substantial in terms of time and investment. Even though stove projects still account for a negligible share of the global carbon fund markets, the number of improved stove projects has been growing rapidly ever since. New stakeholders and project approaches have entered the stove business.


Carbon finance can be accessed by implementing a stove project under the requirements of either:

  • the Clean Development Mechanism (CDM) of the Kyoto Protocol or
  • the Voluntary Carbon Market (VCM)


This chapter focuses on the possibilities and challenges of successful carbon finance for stove projects. For more detailed information please refer to HERA's Guidebook Carbon Markets for Improved Cooking Stoves - A GTZ Guide for Project Operators.




The Clean Development Mechanism (CDM)

Carbon credits for certified emission reductions of greenhouse gases (GHGs) can be generated in developing countries through the CDM. The generated funds must be used to enable emission reductions, which would otherwise not be possible (additionality).

The CDM is one of the three flexible mechanisms to reduce GHG under the Kyoto Protocol; the others being Emissions Trading and Joint Implementation. Emissions reduction credits that have been achieved through the CDM in a project in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Protocol (Annex I Countries).

The CDM has two primary goals:

  1. to assist Annex I countries in achieving their reduction targets
  2. to contribute to sustainable development in the host countries


The CDM encompasses renewable energy, energy efficiency, and avoidance of GHG sources projects. Relevant GHGs are Carbon dioxide (C02), which also serves as reference value, Methane (CH4), Nitrous oxide (N20), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF6). Certified Emissions Reductions (CERs) of a project are measured in tCO2 euqivalents compared to emissions of the baseline scenario.

All countries that wish to participate in the CDM must:

  1. have ratified the Kyoto Protocol and
  2. designate a national CDM authority (the Designated National Authority (DNA)) which evaluates and approves the projects and serves as a point of contact.


As each DNA can establish its own working procedures, the project developer should be well informed about the requirements of the national DNA.

In December 2007, stove projects were accepted under the Clean Development Mechanism (CDM) of the Kyoto Protocol. In February 2008, two small-scale methodologies for reduced use and displacement of non-renewable biomass were accepted by the CDM Executive Board (EB): "Switch from Non-Renewable Biomass for Thermal Applications by the User" (AMS-I.E) and "Energy Efficiency for Thermal Appliances by the user" (AMS-II.G). AMS I.E only applies to projects introducing 100% renewable energy and zero emission technologies such as solar or biogas cookers and therefore cannot be used by stove projects disseminating efficient biomass cooking stoves. It is AMS-II.G, “Energy Efficiency for Thermal Appliances by the user” that provides the opportunity for conducting efficient biomass stove projects under the CDM.


The CDM Project Cycle

The Project Design Document (PDD) is the central document in a CDM project. The PDD describes the technology used in the project activity, the relevant project participants and project location(s). It defines the methodology used to calculate emission reductions, including the baseline, project boundary´, leakages and monitoring plan. The life time of the CDM-project can be a fixed crediting period of ten years or a flexible crediting period of seven years which can, if desired, be renewed twice. It has to be validated by an independent operational entity (Designated Operational Entity (DOE)) and is then submitted to the CDM-Executive Board for registration. The PDD is the key document that the host country, investors, stakeholders and DOEs will use to evaluate the project’s potential, and to judge its achievements - it's preparation follows UNFCCC requirements .

The process from project idea until registration as CDM project and final issuance of credits takes 6 month at a minimum; in fact the procedures normally take much longer, possibly up to two years. The CDM project cycle (see Table below) is complex, regulations are strict and developers are always at risk that their project activity will not create any credits at the end. The development of a CDM project documentation and the involvement of different institutions throughout the project cycle generate substantial costs.


Project Cycle
 Description
 Estimated Costs

Planning a CDM project activity

Preparing the PDD

Project participants employ a consultant for PDD writing, communication with DNA, EB, etc.

The standard format for the PDD must be used.

Consultant: 30-40 person days, plus travel costs
Getting DNA-approval from each party involved The written approval of the host country must include the confirmation that the project activity assists in achieving sustainable development
 Depends on DNA regulation
Validation Validation by the DOE is the independent evaluation of a project activity against the requirement of the CDM on basis of the PDD. 20.000 - 45.000 €
Registration (to be deducted from the share of proceedes)

The registration by the CDM EB is the formal acceptance of the validated project as a CDM project activity.


The registration fee is an advance payment of the share of proceeds due for the issuance of certified emission reductions likely to be achieved during the first year.

< 15.000 tCO2= no fee

= 15.000 tCO2= $0.10/CER

> 15.000 tCO2 = $0.20/CER (max. 350.000)

(No registration fee to be paid for proposed project activities hosted in least developed countries)

Monitoring a CDM project activity Project participants collect all relevant data necessary for calculating emission reductions by the CDM project activity. 10.000 -20.000 € (excluding equipment)
Verification and certification Verification is a periodic independent review and ex post determination of the monitored emission reductions and results in the certification of the emission reductions. It is carried out by a second DOE that is different from the one having validated the project. 15.000 - 45.000 €
Issuance of CERs The EB will issue certified emission reductions equal to the verfied amount.

2% of the CERs issued must be paid as adaptation fee. Least developed countries are exempted.

Depending on national regulation other fees may accrue.

Distribution of CERs

A consultant works out agreements of CER distribution among project participants.

Broker markets the CERs

5.000 - 10.000 €


To be negotiated


There are two options concerning the size of project:

  • Small Scale Projects and
  • Programme of Activities.


Small Scale CDM Projects are projects comprising the following characteristics:

  • Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent)
  • Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 60 gigawatt hours per year; and
  • Other project activities limited to those that result in emission reduction of less than or equal to 60 kilotonnes of CO2 equivalent per year


Small-scale projects contribute clearly to the sustainable development aspect of the CDM; small-scale projects can use simplified baseline and monitoring methodologies. Transaction costs associated with developing small-scale projects are still high relative to the emissions benefits that may be available. Transaction costs are particularly problematic when the volume of CERs being offered is relatively low. As a rule of thumb, it can be stated that an individual project activity should generate at least 10,000 CERs to cover the costs for CDM preparation safely. Due to the combination of perceived risk factors and lack of economies of scale, small-scale projects are challenging to transact in the market.


Programme of Activities

As emission reductions of small-scale projects such as projects disseminating efficient cookstove are often too small to justify the efforts of implementing a stand-alone CDM project, several small-scale projects can become CDM programme activities (CPA) under a Programme of Activities (PoA) in order to reduce the high transaction costs.

With the PoA approach the project approval process for many individual activities that are distributed over space and time are brought together.

The program is coordinated or managed by a coordinating entity, which can be private or public, and does not necessarily achieve the reductions but promotes others to do so. The coordinating entity is responsible for the CERs distribution and communication with the EB.


Multiplicity of activities to reduce GHG distributed in time and space Numerous activities are participating in the program and resulting in GHG emission reduction in multiple sites over lifetime of the program. The sites could be located in one or more countries.
Lower transaction costs Registration and verification processes for CPAs are greatly streamlined.
Reduced risk of non-registration Since the time to registration and associated uncertainties are greatly reduced for CPAs compared with standard CDM projects it will become possible to provide pre-payments or other forms of securitization for future CDM revenues.
Duration (PoA and CPA) The length of the PoA is up to 28 years (60 for afforestation/reforestation projects (A/R)). The crediting period of a CPA is either a maximum of seven years (20 for A/R project acitivities) which may be renewed at most two times, or a maximum of ten years (30 for A/R) with no option for renewal.
Size / Scalability For Small-scale (SSC) programmatic CDM only the individual CPAs have to be under the SSC threshold, while the overall program can go beyond. This reduces transaction costs and generates economies of scale.
Monitoring and Verification A combination of several methodologies may be applied within a PoA.
No registration of CPAs After the registration of the PoA, individual CPAs are not required to request registration. Instead the DOE includes the CPA after a check that the CPA follows the rules for inclusion in the PoA.




The Small-scale Methodology for Efficient Biomass Cookstove Projects: AMS-II.G

Consider the case of an improved cooking stove that saves fuel and therewith CO2 emissions compared to the existing baseline technology. The methodology assumes that in the absence of the project activity, a fossil fuel (kerosene, liquefied petroleum gas, etc.) would be used to satisfy local demand for cooking energy. Hence baseline emissions are calculated on the basis of the CO2 emission factors of the fossil fuel that is most likely to be used to replace non-renewable biomass for cooking purposes in the project area. According to this formula the fraction of the total annual biomass savings originating from non-renewable resources is determined and multiplied by the net calorific value of the biomass actually used and the emission factor of the fossil fuel that would most likely be used in the project area in the absence of the project activity. The projected emission reductions will therefore be based on a fossil fuel scenario. Annual biomass savings in tonnes are calculated by multiplying annual biomass consumption in the baseline by the efficiency improvement of the new technology in comparison to the old stove (or three-stone fire).

Higher efficiencies as well as higher fractions of non-renewable biomass (NRB) earn higher emission reductions. An increase in the number of stoves will reduced emissions linearly.

For the determination of the emission reductions that are relevant for the carbon market, please refer to the calculation method for “Emission reduction (ERy)” in Carbon Markets for Improved Cooking Stoves - A GTZ Guide for Project Operators.



Additionality

The most challenging aspects of the PDD are dealing with establishing the baseline and assessing the project’s ‘additionality’. A project activity is ‘additional’ if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. This is the central point of the CDM. It means that a CDM project activity is additional if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. A CDM project must not be a project that would have been implemented under the business as usual scenario. The fulfilment of the additionality criteria is vital for the successful registration of a CDM project.


Leakage

The project activity’s impact outside the project boundary must also be assessed. If the savings of non-renewable biomass within the project area result in an increase in non-renewable biomass consumption in neighbouring regions outside the project area, its value must be adjusted to account for this leakage.
Leakage assessment poses a general problem. AMS II.G requires ex-post surveys of users and biomass collection areas to gather data on leakage emissions. Illegal harvesting of wood fuel is difficult to detect. If people from outside the project boundary use non-renewable biomass that is claimed to be saved due to the project activity, exact values for leakage are difficult to define.


Monitoring

Monitoring is an important step in the CDM-project cycle to ensure that constant savings of non-renewable biomass are achieved. The parameters that have to be monitored are given in the methodology and the monitoring plan laid down in the PDD: annual checks on the efficiency of all appliances, or a representative sample, data on the amount of biomass saved under the project that is used by non-project households/users.


The Voluntary Market

The compliance market regulated by the Kyoto Protocol is not the only option to financially benefit from emission reductions. Voluntary Carbon Markets (VCMs) are developing rapidly. They function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis.

Companies and individuals are increasingly concerned about their environmental impact. Some will neutralise activities they cannot avoid by “offsetting” their own emissions. Individuals may seek to offset their travel emissions and companies claim they are ‘carbon neutral’ by buying large quantities of carbon offsets to ‘neutralize’ their own carbon footprint or that of their products.

They see voluntary offsetting as part of their corporate responsibility and/or as part of their image strategy. Emission offsets in this category are usually verified by independent agents and are commonly referred to as Verified Emission Reductions (VERs).

The voluntary market comprises more different project types than the compliance market. Because the voluntary market is not subject to the same level of scrutiny, management, and regulation as the compliance market, project developers are more flexible to implement projects that might otherwise not be viable (e.g. projects that are too small or too disaggregated). This provides opportunities for innovation and experiment.

Although VER projects are not necessarily required to go through the project cycle, they should be developed and documented according to CDM rules and procedures, for example, by using the PDD format to develop the project.

To provide evidence of its effectiveness, it is recommended that the project is validated, particularly as the voluntary offset market has been criticised for its lack of transparency, quality assurance and third-party standards. To address these shortcomings, several Standards have been developed on the Voluntary Carbon Market to ensure reliable emission reductions. Each standard has a slightly different focus, and none has so far managed to establish itself as the industry standard.

-> A good overview of the Standards has been published by WWF in March 2008


The Gold Standard (GS) Foundation offers a quality label to CDM/JI and voluntary offset projects, fetching premium prices. Only renewable energy and energy efficiency projects with sustainable development benefits are eligible. Under www.cdmgoldstandard.org the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found. The GS has accepted a ‘Methodology for improved Cook-stoves and Kitchen Regimes’. The methodology differs from the CDM-requirements as it allows the use of multiple fuels, includes methane reductions in the calculation of emission reductions, and is eligible for large scale projects. Despite its complexity, the GS methodology leaves room for new and innovative project outlines and for mixing fuels and technologies within one project. However, mixing stove and fuel types leads to extremely complex monitoring procedures. Prior to implementation, a project planner must care-fully assess whether mixing fuel and stove types is a feasible option. The advantage of using the GS methodology for a project’s emission reduction calculations lies in its all-inclusive approach. It not only accounts for CO2 emission reductions during the cooking process, but also takes into account other GHG emission reductions, i.e. methane (CH4) and nitrous oxide (N2O), as well as emissions produced during fuel production. Although combustion of wood and charcoal does not give rise to high emissions of methane and nitrous oxide, even small amounts of these emissions constitute considerable CO2 equivalents due to their strong global warming potentials (GWP)


Advantages, Disadvantages and Risks for the Cooking Energy Sector

Advantages of Carbon Finance for the Cooking Energy Sector

  • So far, mostly public sector funds were used to introduce improved cookstoves to the market and to change user behavior. But public sector funds for cookstoves were not flowing easily. Now Carbon Finance offers a separate source of funding. These funds could allow for a massive increase in stove promotion.
  • The more efficient and clean the stove the more carbon credits can be generated. Thus, there is an observable effort to increase efficiency and improve combustion of stoves. As a result, more researches and developers are working on stoves.
  • Experience has shown, that in order to achieve sustainability in use of improved stoves, long term awareness creation and consumer follow-up for at least 5 years is needed. Carbon funded projects can run at least 7, even up to 28 years. This offers an enormous opportunity for achieving sustainability in use of efficient and clean burning cookstoves.
  • Selling emission reductions requires intensive monitoring, This allows and forces project staff to better understand stove users’ needs and stove market specifics and to adopt strategies accordingly.


Disadvantages and Risks of Carbon Finance

  • Planning a carbon funding project is very cumbersome and time consuming. And it takes at least two years before revenues are earned.
  • Bringing stoves to the market supported with Carbon finance needs high up-front costs for project development and for introducing the stoves. Not many investors are ready for this up-front payment.
  • Many project developers and implementers don’t have experience in the cookstove market. Only with time will they realize how difficult it is to change consumer habits and cooking behavior, There is the risk that these projects will stop on the way and leave a high number of stoves unused. This again might lead to the impression that stoves don’t work.
  • There is evidence that some carbon funded projects give away (or distribute) stoves for free or with high subsidies. If this happens in countries with an established stove market where stoves are sold without or with low direct subsidies, these projects will disturb the existing market and commercial stove producers will lose their jobs. Once the subsidies stop, the stove market and the reputation of stove projects is down to zero.


Further Information

Improved Cook Stoves and the Carbon Market




General Information on Carbon Markets



References

This article was originally published by GIZ HERA. It is basically based on experiences, lessons learned and information gathered by GIZ cook stove projects. You can find more information about the authors and experts of the original “Cooking Energy Compendium” in the Imprint.



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