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www.developeconomies.com

E+Co, a mission-driven clean energy investor in developing countries, is working to implement strategies that enable Wall Street investors to put capital to work in developing countries through the carbon markets.  Unlike more traditional carbon finance developers, however, E+Co strives to ensure that dollars flowing from carbon credits make it to the bottom of the pyramid.

I asked him a series of questions about some challenges facing organizations trying to break into this space.  Be warned that it contains more technical jargon than I usually have in the Journal.  I have included the answers to all of his questions here. 

Josh Weinstein (JW): At what scale does carbon financing make sense for the types of products distributed by MFIs (cook stoves, solar lanterns)?  How do you mitigate the transaction costs?

Erik Wurster (EW): This depends on the technology.  For stoves, greater than about 15k stoves per year is required, 20k/yr and growing would be better, but 15k/yr is the bare minimum, with a product that lasts at least 2 years, preferably 3-5. Solar lanterns are a totally different story – I am not sure of the exact figures, but scale is more on the order of 100k/yr units per year.  In the model, assume that it costs about $200k to get a project up and running and about $70k to keep it running.  Then just see how much carbon revenues you get back (after subsidizing the technology or doing what you want with the carbon revenues to promote the project) and there’s your answer.

There are many sub-standard ways to mitigate transaction cost, but none of them work particularly well.  The most obvious is streamlined approval approaches for small scale projects in CDM and micro scale for Gold Standard voluntary, but the former isn’t particularly streamlined, and the latter is so small you can’t make any money from it in spite of it being more streamlined.

JW: What role do microfinance institutions play in this process?  Is their role strictly distribution, or are they involved in monitoring, auditing, evaluation, etc.?

EW: In our projects they are not playing a formal role. Microfinance is used as a way to increase distribution of products in some cases.  But our program is being implemented by stove companies that use our working capital to enable the lending and payment plans.

JW: How are subsidies from carbon offsets factored into the cost of the product?   How long is it before you can actually start generating offsets for sale?

EW: Yes, offsets reduce the price at point of sale to the end user.  Product manufacturers and distributors can borrow against future carbon revenues to make up the difference.  Realizing cash in the bank from offset sales takes about 3 years from the time when one first begins developing the carbon project, and then only arrives every year thereafter, so credit is needed to fill the time gap and smooth cash flows for local manufacturers and distributors.

JW: In your opinion, what class of products have the most potential for carbon financing?  What about the least potential?

EW: The products with the most potential are cookstoves.  The ones with the least are more expensive household solar PV systems, not lanterns, they have more potential.

JW: What are the greatest challenges faced by organizations looking to use carbon financing to subsidize the cost of energy/cookstove products?

EW: Actually realizing the revenues. The system is complex, slow and expensive. My guess is that 9/10 local orgs/MFIs who attempt this won’t make it.

JW: What are some examples of innovative technologies or methodologies for using carbon financing today?  What about innovative organizations?

EW: Innovative technologies include crediting water filtration systems with carbon finance using not boiling water as the baseline. This approach was recently approved by the Gold Standard and the CDM.  See our project in Tanzania as an example of projects that are engaging in this approach:

http://eandco.net/approach/carbon-finance/carbon-finance-tanzania-pdd/

We have also piloted an SMS-based system that allows tracking of end user data to facilitate carbon finance auditing, see: http://mobileactive.org/cleaner-safer-way-cook-tracked-mobile-tech This system was developed based on strong understanding of what is actually needed to navigate the carbon approval process, which I’m not convinced other similar systems share. This system also has the ability to track microfinance payments of the same technology, though that is not a centerpiece of the functionality.

Natural resource wealth, in addition to increasing a country’s propensity for civil war, also creates its own trap. In Collier’s view, natural resources can be a curse, because of “Dutch Disease”, which makes a country’s other export activities uncompetitive, and causes commodity price volatility. Countries of the bottom billion are often too poor to harness the wealth they gain from natural resources, such that other sectors of the economy remain stagnant, prohibiting future economic development.

So the money gained from natural resources is not properly invested in improving other industries, such as manufacturing and agriculture, causing them to atrophy.   Once the natural resources dry up, these industries – the real economy – are unable to sustain the false productivity levels during the natural resource boom, to the detriment of the economy as a whole.  This is called the “Dutch Disease”:

In economics, the Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The theory is that an increase in revenues from natural resources (or inflows of foreign aid) will deindustrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive and public services entangled with business interests

Another negative consequence of natural resources is that it keeps the corrupt governments that control them in power.  Governments are responsible for providing services to the people.  In fact, that is the sole purpose of government – there is no other function.  For Ron Paul fans, that means building roads, paying police and firefighters, and not much else.  For most others, it includes healthcare, education, safety and security, energy, and the economy.  Though, even when the government is severely deficient, totalitarian regimes in Burma, North Korea, and Zimbabwe use violence and political repression to crush dissent and maintain power.

That is why Israel was initially overjoyed when the people of Gaza elected Hamas to run the government.  Israel thought that Hamas would destroy itself from within by failing to provide basic services for the people of Gaza, thereby discrediting itself as a movement and losing the support of the people.  When that didn’t happen, Israel created the blockade that has been at the center of this flotilla hullabaloo.  By starving the Gaza Strip from basic resources – allow enough for survival, but not much else – they would show that continued support for Hamas would come at the expense of the Palestinian people.

To provide these basic services, a government needs to raise funds in the form of taxes.  When the economy is in shambles, tax revenues fall and the government becomes less able to perform its duties.  That is, unless it can raise money in other ways.  That money can come from a lot of different sources, not least of which is foreign aid.  In fact, the main argument against government-to-government aid is that it props up corrupt and repressive regimes in developing nations, creating a culture of dependency and maintaining the status quo when the status quo should be changed. Another source of revenue comes from selling natural resources.  This is what is happening in Zimbabwe right now, with the discovery of a massive deposit of diamonds in the country.

In the article “Diamond Find Could Aid Zimbabwe, and Mugabe,” the New York Times explains the issue:

New mining in Zimbabwe has quickly yielded millions of carats of diamonds and could help catapult the nation into the ranks of the world’s top diamond producers, according to the head of a group of experts for the United Nations-backed effort to stop the trade in conflict diamonds.

But the new wealth has provoked fears that the riches will be used to subvert attempts to bring democracy to a country that has long suffered under authoritarian rule, and also to finance conflicts.

Other experts agree it is an important find, while awaiting more data to gauge its full magnitude. But the steady accumulation of stones has already emboldened President Robert Mugabe, 86, to consolidate control over the Marange fields to prolong his 30-year grip on power, members of his inner circle said.

Though Mr. Mugabe now officially governs under a tenuous power-sharing agreement with his longstanding rivals, the diamond fields are overseen by a ministry run by his party, ZANU-PF, and guarded by an army that reports to him and gives him and his allies lopsided control over a desperately needed economic boon.

Mr. Van Bockstael, a geologist, says he is waiting for Zimbabwe’s promised geological report on the fields. But from interviews with officials and other data, he says they could yield $1 billion to $1.7 billion a year, earnings that would put Zimbabwe in the world’s top half-dozen diamond producers.

Those are huge sums for a country whose gross domestic product was only $4.4 billion in 2009, according to the International Monetary Fund. Zimbabwe sorely needs new money to combat hunger, disease and poverty.

These are conflict diamonds used to fund armed conflict and extracted through slave labor.  Despite efforts to stop their export, the diamonds are smuggled to Mozambique where they can make their way onto the world markets.  One could argue that these diamonds will provide much-needed relief to a country in desperate need of money, regardless of the fact that it will prop up the regime that is largely responsible for its current condition.   But, in the long run, I would guess that very little of that money will ever find its way down to the masses.  Instead, it will keep an old tyrant in power a little bit longer by fattening the pockets of his cronies and the country of Zimbabwe in a continued state of paralysis.   The article closes with a discussion of this “predatory virus”:

Analysts and civic leaders fear that rather than bringing hope for Zimbabwe’s long-suffering people, this new wealth will reinforce authoritarian rule. They say it could finance more of the patronage and repression that have kept Mr. Mugabe in power, and possibly infect the Movement for Democratic Change, the junior partner in the power-sharing government, with what Eldred Masunungure, a political scientist at the University of Zimbabwe, called “the predatory virus.”

“The gravy train is not likely to be one that leads to a democratic destination,” Professor Masunungure said.

Indeed.

With 606 oilfields, the Niger delta supplies 40% of all the crude the United States imports and is the world capital of oil pollution. Life expectancy in its rural communities, half of which have no access to clean water, has fallen to little more than 40 years over the past two generations. Locals blame the oil that pollutes their land and can scarcely believe the contrast with the steps taken by BP and the US government to try to stop the Gulf oil leak and to protect the Louisiana shoreline from pollution.

“If this Gulf accident had happened in Nigeria, neither the government nor the company would have paid much attention,” said the writer Ben Ikari, a member of the Ogoni people. “This kind of spill happens all the time in the delta.”

The real cost of the Gulf oil spill

This is the norm for oil-rich nations in Africa.  At the risk of sounding like a bleeding heart liberal, oil companies exploit the resources of poor African nations with little regard for the local population or the environmental impacts.  It is hardly covered, only getting media attention when a comparatively smaller spill occurs off the coast of the U.S.   Compare these two examples.  First, from Pensacola, Florida:

Hundreds of thousands of tourists flock here every year to surf, swim and sunbathe. But this season, the coastline is less pristine than the locals would like.

Globules of thick brown tar have started washing up on shore. Some are as small as a coin, others are as big as a doormat.

“We live off these four or five months in the summer that’s how I make a living, but it’s gone,” says Dave Bohanan, who owns a burger restaurant on Pensacola Beach.

“My sales are down at least 10% already. And it will get worse.”

And this one from Nigeria:

Small children swim in the polluted estuary here, fishermen take their skiffs out ever farther — “There’s nothing we can catch here,” said Pius Doron, perched anxiously over his boat — and market women trudge through oily streams. “There is Shell oil on my body,” said Hannah Baage, emerging from Gio Creek with a machete to cut the cassava stalks balanced on her head.

I am not trying to draw comparisons about which is worse (I have never been to Florida, though maybe this is their comeuppance for the hanging chads controversy that would’ve sent Al Gore, an environmental warrior, to the White House).  But this oil spill just seems like the reality of offshore oil drilling.  It is a tradeoff, something we have to deal with if we are going to pursue it.  And what has happened in Nigeria for the last 50 years shows that it isn’t anything new.  Nigeria produces 10% of the oil consumed in the United States, with hardly any acknowledgement of the costs.

The situation in Nigeria is actually far far worse, since the oil revenues generated from leasing the land Shell and other oil companies keeps the corrupt and ineffective government in power.  In the book The Bottom Billion, economist Paul Collier describes four poverty traps that keep the poorest countries in the world from making any forward progress.  In researching why these “bottom billion” countries where the only countries in the world with a shrinking GDP, he came to a conclusion:

His findings are the result of over three decades of research, solid statistical analysis, and time spent in Africa. His investigation led him to discover a series of traps that extremely poor countries tend to fall into, which, left unchecked, will define their future. He discusses each at length. Briefly, they are conflicts; dependence on natural resources, such as diamonds and oil; land-locked geography, which makes these countries dependent on their neighbor’s transportation system; and bad governance.

The trap of being resource-rich seems counterintuitive, since resource extraction provides a major source of revenue for the country.  But it also relieves the government of the responsibility of having to invest in the infrastructure that generates real growth independent of resources.  Governments are responsible for providing services to the people, usually by generating taxes from economic productivity.  But when the well runs dry, disaster strikes, according to Collier:

What we found was that in the short term everything is hunky-dory. Things go up. They really go up. You have booms. Income goes up; output goes up; everything goes up. That is happening at the moment. It’s the predominant reason why Africa is now growing faster. So the short term just looks great.

How about the long term? It depends. But if we take the typical country, the long term is not hunky-dory; it’s Humpty Dumpty. That is to say, you fall off a cliff. If we track the typical resource exporter in Africa and we run it through this global pattern—I will just run you through GDP, national income. This is in terms of real output relative to counterfactual. We started at 100 now. By 2010, it’s 110. So it’s up 10 percent relative to counterfactual. By 2025, it’s at 75. It’s down 25 percent as a result of the commodity booms relative to counterfactual—a massive loss. So instead of these huge revenues being harnessed for sustained growth, they actually become a disaster.

The situation in Nigeria is the BP spill magnified a thousand times, in terms of environmental cost.  And in terms of economic development, it is certainly a contributing factor to why the country remains so poor.  And, on top of it all, they started off dominating Greece in their World Cup match last night, only to play with a man down after a red card.  They eventually lost the game 2-1 against a country populated by lazy tax-evaders that has almost destroyed the European economy, damaged the U.S. economy, resulting in further declines in the amount of international aid we send to countries like Nigeria.  It probably deserves more attention, just like most of the injustices in this world that I don’t know about.

“He should be in school,” said Awil’s commander, Abdisalam Abdillahi. “But there is no school.”

This is a topic I admittedly do not know too much about, so any discussion about it will be academic and speculative.  But I have been reading recently about the problem of child soldiers in the U.S.-backed government military in Somalia, where kids as young as 12 have picked up arms to fight.  A few months ago I took a 10-day jaunt through Myanmar, which has the most child soldiers in the world (though you would never know it, since most of the country is off-limits to foreigners).  There are an estimated 300,000 children fighting in wars throughout the world, and a wide range of circumstances make this possible.

For one thing, countries using child conscripts are usually embroiled in intractable civil wars that never seem to end.  Many of these wars began as ideological ethnic or religious conflicts and, over time, morphed into gangs of criminals fighting over control of land and resources.  The chief correspondent for East Africa, Jeffrey Gettleman, explains the nature of these conflicts:

There is a very simple reason why some of Africa’s bloodiest, most brutal wars never seem to end: They are not really wars. Not in the traditional sense, at least. The combatants don’t have much of an ideology; they don’t have clear goals. They couldn’t care less about taking over capitals or major cities — in fact, they prefer the deep bush, where it is far easier to commit crimes. Today’s rebels seem especially uninterested in winning converts, content instead to steal other people’s children, stick Kalashnikovs or axes in their hands, and make them do the killing. Look closely at some of the continent’s most intractable conflicts, from the rebel-laden creeks of the Niger Delta to the inferno in the Democratic Republic of the Congo, and this is what you will find.

So in parts of Africa at least, these armed conflicts are really just territory and resource battles between gangs, some of which are affiliated with the government.  It is certainly more complicated than this, but the premise that they are more about money and power than ideology is probably true in most cases.  In these cases, it is easy and cheap to abduct children and conscript them as soldiers.  They are easily manipulated and can be trained to kill without much effort.  The conflicts are self-perpetuating, where one side fights for control of resources, uses the money to purchase more arms and recruit more soldiers, and fights for more resources.  Children are a natural fit for this type of conflict.

The root of the issue has to do with economics.  In a lot of these countries, the population is heavily skewed toward children.  In Somalia, for example, where children fight for both Islamic fundamentalist groups like Al-Shabab and the Transitional Federal Government army, 45% of the population is below 15 years old.  There is an oversupply of young people, and a vast undersupply of opportunities for employment.  This combination makes children particularly susceptible to recruitment by militias, since it offers employment and the chance to part of a group that offers even a basic level of support and camaraderie.  Andrew Revkin describes this principle:

A surplus of young people can be an asset when there is a functioning economy and school systems able to train young workers; development economists call this the “demographic bonus.” But when there is no opportunity, this “bonus” can be exploited by whoever fills the opportunity gap — be it a warlord or extremist group.

Burma

A lack of opportunities creates desperation among young people, increasing their vulnerability for recruitment.  And probably the biggest reason that child soldiers exist is that vicious warlords and repressive governments perpetrate these conflicts.  And when they need soldiers, they take them from the most accessible pool.  A grown man is more likely to resist, but a child can be easily molded into something.  The military junta in Myanmar, which has been engaged in armed conflict with ethnic groups in the northern part of the country, simply recruits by force.  Here is one story from a 15 year-old Burmese recruit:

‘I was recruited by force, against my will. One evening while we were watching a video show in my village three army sergeants came. They checked whether we had identification cards and asked if we wanted to join the army. We explained that we were under age and hadn’t got identification cards. But one of my friends said he wanted to join. I said no and came back home that evening but an army recruitment unit arrived next morning at my village and demanded two new recruits. Those who could not pay 3000 kyats ($3 USD) had to join the army, they said. I (my parent) could not pay, so altogether 19 of us were recruited in that way and sent to Mingladon (an army training centre).’

Here in the Philippines, there is a problem with child soldiers as well.  In the Autonomous Region of Muslim Mindanao (ARMM), infamous for being the home of the Moro Islamic Liberation Front (MILF), a violent Islamic insurgent group, and Abu Sayyaf, the jihadist group with ties to Al Qaeda, children join the ranks at an early age:

The increasing number of children involved in armed conflict is due to a number of factors. They join the ranks because of: (1) psychological reasons (i.e., thrill and excitement); (2) social tension (i.e., peer pressure); propaganda; and (4) forced recruitment or abduction. Armed groups target the emotional, psychological, mental, or physical vulnerabilities of the children, as well as the situations in their families or communities.

Human Rights Watch further observes that children most likely to be recruited are: (1) poor; (2) separated from their families; (3) displaced from their homes; (4) living in a combat zone; and (5) with limited access to education. They also come from communities, which have inadequate social services.

Recruitment of children usually takes place in areas where there is less or no government presence at all. The adolescents are usual targets for recruitment as soldiers. They are trusting and innocent like a child, yet have the strength and stamina of adults.

The Philippines

It is a major problem with a wide network of causality.  Ending the recruitment of child soldiers would probably require overthrowing the governments that use them and providing more employment opportunities for young people, which means improving the education system, the roads, the health care system, access to energy, the supply of food, etc., through a combination of diplomacy, development and military force.  In other words, it is a deeply complex issue with human rights and national security implications.  Everything is connected in this world, and smart development policies need to be part of the solutions.

The pictures in this post come from the photo essay “Planet War” in Foreign Policy magazine

Homework by streetlight: the photo behind the theory

A while back, I discussed why China had been so successful at poverty alleviation during the 1980’s and 1990’s.  I surmised that it had something to do with China’s embrace of “state capitalism.”  In a recent article in the Atlantic Monthly, one economist suggests that, actually, it is Britain is ultimately responsible for bringing more than 100 million Chinese out of poverty over a ten-year period.  By exporting the laissez-faire, business-friendly city model of Hong Kong to urban centers throughout China, the British created the seed that has grown into the China that exists as an economic and political powerhouse today.  The author explains the rationale behind Romer’s theory of establishing “charter cities” leased and operated by foreign governments:

When Romer explains charter cities, he likes to invoke Hong Kong. For much of the 20th century, Hong Kong’s economy left mainland China’s in the dust, proving that enlightened rules can make a world of difference. By an accident of history, Hong Kong essentially had its own charter—a set of laws and institutions imposed by its British colonial overseers—and the charter served as a magnet for go-getters. At a time when much of East Asia was ruled by nationalist or Communist strongmen, Hong Kong’s colonial authorities put in place low taxes, minimal regulation, and legal protections for property rights and contracts; between 1913 and 1980, the city’s inflation-adjusted output per person jumped more than eightfold, making the average Hong Kong resident 10 times as rich as the average mainland Chinese, and about four-fifths as rich as the average Briton. Then, beginning around 1980, Hong Kong’s example inspired the mainland’s rulers to create copycat enclaves. Starting in Shenzhen City, adjacent to Hong Kong, and then curling west and north around the Pacific shore, China created a series of special economic zones that followed Hong Kong’s model. Pretty soon, one of history’s greatest export booms was under way, and between 1987 and 1998, an estimated 100 million Chinese rose above the $1-a-day income that defines abject poverty. The success of the special economic zones eventually drove China’s rulers to embrace the export-driven, pro-business model for the whole country. “In a sense, Britain inadvertently, through its actions in Hong Kong, did more to reduce world poverty than all the aid programs that we’ve undertaken in the last century,” Romer observes drily.

This is the theory.  And by applying this theory in a modern economic development context, Romer thinks we can revolutionize the way we think about aid and assistance.  What he is suggesting is basically neo-colonialism – leasing land to foreign government to create cities.  These cities will be effectively immune from the crippling corruption and bureaucracy that plagues some third world government and scares away potential investors.  If a first world country were running the show, companies outside of the oil and natural resources industry would be more comfortable investing and setting up shop.  Most developing nations have an abundance of labor and a lack of employers.  Setting up government that is friendly to business, in terms of its incentives and tax structure, could be the catalyst some of the nations need to build sustainable export industries.  Here is the vision:

But Romer is also urging us to reexamine assumptions about citizenship and democracy, and this is where he gets more radical. In the kind of charter city he imagines, the governor would be appointed by Canada or some other rich nation, but the people who work there would come from poor countries—the whole point, after all, is to bring the governance of the developed world to workers in undeveloped places. It follows that the workers in Romer’s charter city wouldn’t be citizens in the full sense. They would be offered whatever protections the founding charter might lay down, and they would have to take them or leave them. Rather than getting a vote at the ballot box, Romer is saying, the residents of a charter city would have to vote with their feet. Their leaders would be accountable—but only to the rich voters in the country that appointed them.

Chomsky: "Great idea! Sign me up!"

So the idea is completely smash the entrenched government controls that hold back major development in third world countries.  Instead of trying to get the bureaucrats to adopt and enforce economic policies that are in the best interest of the people (and usually inversely correlated to their own well-being), bypass the bureaucrats altogether.  The new cities will be bastions of growth and prosperity, attracting copycats and exporting their increased productivity to the rest of the country.

In this journal I talk a lot about working within the current system, since it is generally easier to leverage the existing infrastructure than it is to change the paradigm altogether.  But Romer is suggesting the opposite, in a way.  He is not saying developed nations should overthrow the government and take the reigns.  Rather, he is saying we should enter into a mutually beneficial business agreement with the government to operate legally within the country.  Whether or not this qualifies as textbook neo-colonialism depends on a number of variables, not least of which is the motivation.  But in a continent that owes many of its current economic and political woes to a lasting legacy of European colonialism (the original George W. Bush, as I remind my forgetful European acquaintances), I would guess that most politicians will be quick to remind their constituents of what happened the last time they white man came in.  For that reason, I am not sure an arrangement like this could ever really work.  After all, according to Romer, the biggest challenge is not finding cooperating governments in developing countries, but rather signing on a new imperialist from the first world.  Nobody wants to be the next Belgium in the Democratic Republic of Congo.

Advice to Americans backpacking through Asia: memorize this map. It will come in handy when you get into debates with Europeans

I like the idea, but there are a lot of influential parties (politicians, development entities) who stand to lose from Romer’s idea.  It seems to me like one of those ideas that is right in all its assumptions and would probably be effective in creating revolutionary changes.  If successful, it would be copied through the developing world.  The pessimist and skeptic in me says it won’t work – there are too many powerful forces with an interest in its failure – but it is a cool idea nonetheless.

In keeping with the theme of colonialism, I want to share a video that sums up my thoughts on the issue:

An Envirofit cookstove - designed in Colorado.

I am in the process of researching an article about the impossibly complex topic of using carbon credits to finance small-scale energy ventures in the developing world.  The experience reminds me of a religion course I took in college on the Old Testament.  I was confident that my five years of Hebrew school (I graduated when I was 12) would be sufficient to land me a high grade without much effort.  Unfortunately, I found out (too late) that there are, in fact, six five books of the Old Testament and I was familiar with a very small part of one those books (Genesis).  Likewise, trying to learn more about this topic has led me to everything from arcane parts of the Kyoto Protocol to how the global market for carbon has fluctuated in the downturn.  I wish I had chosen an easier topic, but the damage is done and now, hundreds of articles later, I know something about it.

Ratifiers of the Kyoto Protocol are highlighted in green. A subtle barb at us Americans.

Basically, there are two types of carbon markets, both of which were created as part of the Kyoto Protocol in 2005.  The first is a highly-regulated formal market that is controlled by the United Nations Framework Council on Climate Change (UNFCC).  Every country in the world, with the exception of the United States, Afghanistan, Mauritania, and Somalia (solidarity is key), signed the Kyoto Protocol, which stipulates that participating countries will agree to cap greenhouse gas emissions by limiting the amount of CO­­­₂ key industries can pump into the atmosphere.  If those companies don’t feel like scaling back their emissions, they can buy carbon credits via a “flexibility mechanism” defined by the Kyoto Protocol.  The Clean Development Mechanism (CDM) allows developed countries to buy carbon offsets from developing countries, which produce them by building wind farms, biogas facilities, geothermal plants, and other large-scale projects.  The value of a carbon credit is determined by the theoretical amount of carbon that would have been produced had the status-quo alternative been maintained.

This graph shows that Canada is the leading polluter.

Alternatively, there is a much smaller voluntary market for carbon credits, which consists of countries, companies, organizations, and individuals.  Purchasing credits on this market is exactly as it sounds – voluntary.  Last year I went to the Lollapalooza music festival in Chicago, where I decided to pay an extra $5 for a “BeGreen” wristband, which said that I could both rock out and remain carbon neutral for the weekend.  I didn’t know it then, but I was participating in the voluntary carbon market.  Any time you agree to offset your carbon footprint when you buy a plane ticket, you are doing the same thing.  It is from these two markets that most of the development projects utilizing carbon financing turn to for subsidies.

As far as I can gather, the CDM is incredibly complicated and bureaucratic, making it difficult for most organizations to access the financing.  It costs a minimum of $100-200K and more than a year to implement a carbon offset program in the developing world, requiring field visits to evaluate the carbon impact and constant monitoring to make sure the products are being used as directed.  You have to calculate (scientifically) exactly how much carbon is being neutralized by the project.  For example, environmental cookstoves reduce carbon emissions by consuming less wood fuel, which comes from cutting down forests, which contain trees, which sequester carbon from the atmosphere.  In addition, these stoves burn more efficiently than a traditional three-stone stove, which also reduces the amount of carbon that is released.  Using a clean-burning cook stove saves an estimated 0.8 tons of carbon every year.  Similarly, a solar lantern emits no carbon into the atmosphere, compared with one ton every seven years for the alternative, a kerosene lamp.  You can bolster your case by showing co-benefits for the people involved.  In the example of cookstoves, the people save money by using less fuel and are protected against indoor air pollution (IAP), which kills 1.6 million people per year.  On top of all this, you have to demonstrate that the program would not be financially viable without carbon financing, and monitor it periodically to ensure that the products are still functioning.

Once you do all of this, you can start aggregating carbon credits, which can then be sold to companies that will securitize them and sell them on the global carbon market. Most of these projects participate in the voluntary market, which has less stringent requirements and lower transaction costs to pay up-front.  On the voluntary market, the credits credits are sold to car companies, airlines, and other polluters who can talk of their good deeds in the “Letter From the Chairman” in their annual statement to shareholders.

Carbon financing is not without controversy, with many in the development world viewing it as “fool’s gold” that distracts from the important process of design, implementation, and marketing.  But there are a lot of examples of companies successfully implementing programs.  Most partner up and down the value chain, from the microfinance institution selling the cook stove to its clients all the way up to Goldman Sachs and JP Morgan, who agree to buy the carbon credits ahead of time at a fixed price and then trade them in the global marketplace.

My brain is full of useless knowledge about carbon markets in the developing world, so I have much more to write on this topic.  In my next post, I will talk about some organizations that are using carbon credits to subsidize the cost of their products and distribute them to the developing world.  It is Independence Day in the Philippines (from the Spanish, not the Americans) and time for a celebration, meaning I can’t think about this anymore.  In the meantime, here is a good overview of how one company, E+Co, has helped a manufacturer of clean-burning cook stoves scale up from a couple hundred units five years ago to over 70,000 today.

Correction:  There are five books in the Old Testament, not six

Portfolios of the Poor: How the World Lives on $2 a Day

Portfolios of the Poor: How the World’s Poor Live on $2 a Day (Princeton University Press, 2009) tackles the fundamental question of how the poor make ends meet. Over 250 families in Bangladesh, India, and South Africa participated in this unprecedented study of the financial practices of the world’s poor.

These households were interviewed every two weeks over the course of a year, reporting on their most minute financial transactions. This book shows that many poor people have surprisingly sophisticated financial lives, saving and borrowing with an eye to the future and creating complex “financial portfolios” of formal and informal tools.

Indispensable for those in development studies, economics, and microfinance, Portfolios of the Poor will appeal to anyone interested in knowing more about poverty and what can be done about it.

The reason research like this is so useful and even groundbreaking is that it blows the doors off the misconception that the poor live on $1-2 a day, everything. The reality is that they live on $5 on Monday, and $0 until Friday.  The implications for these findings are huge because it shows researchers and practitioners what poor people need.  In the past, much of aid and development has focused on what people think poor people need.  With the insights from books like Portfolios of the Poor, economic development strategies can be targeted to make the biggest difference.

If only it were that easy.

One of the unifying themes of this journal is that the most effective strategies for poverty alleviation understand the existing dynamics and work within the current structure.  The ones that fail are those that are ignorant to the realities on the ground and try to get people to adopt things they don’t actually need.  One of the big winners from this kind of researchers is savings accounts.  When income is volatile, which Portfolios of the Poor demonstrates, it is good to have somewhere to put the money when it flows so that you can access it later.  Otherwise, it goes under the mattress and is less likely to be there in case of emergency.  David Roodman of the Center for Global Development explains this dynamic in his review of the book:

[Portfolios of the Poor] emphasizes that being poor in a poor country means having an income that is not just low but variable and unpredictable. At least as much as a family’s average level of income (such as $2/person/day), the volatility around the average drives how the poor manage money. If you make $1 today, $4 tomorrow, and nothing the day after, but need to put food on the table every day, you will engage in complex patterns of borrowing and saving to smooth the mismatch between your income and outflows. Thus out of necessity poor people deploy more complex financial strategies than do the rich. The book tells stories of families who are constantly juggling small loans to and from friends and family; saving with local “moneyguards”; participating in savings and insurance clubs (such as burial clubs in South Africa); buying groceries from the local shopkeeper on credit; and otherwise patching together an extraordinary diversity of financial devices in order to get by.

Microfinance Podcasts conducts interviews with microfinance researchers and practitioners about various topics.  For the last few weeks, many of the preeminent voices have been discussing the book and its impact on their field.  William Easterly, a professor of economics at NYU and author of the blog Aid Watch talks about how this understanding of the volatility of income among the poor will impact how we view development.  It is worth a watch.  (Hat tip: Andrew Sullivan)