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Study on the potential use of micro financing in support of CDM projects in LDC countries Title Final Report December 2009

Danida

Study on the potential use of micro financing in support of CDM projects in LDC countries

FINAL REPORT

December 2009

Danida

Study on the potential use of micro financing in support of CDM projects in LDC countries

FINAL REPORT

December 2009 Prepared by: Niels Bahnsen, Christiana Figueres, Morten Pedersen, Sine Skov, Hans Jürgen Stehr and, Jonas Valdimarsson

NIRAS A/S Sortemosevej 2 Telephone +45 4810 4200 DK-3450 Alleroed Fax +45 4810 4300 F.R.I, FIDIC Denmark E-mail [email protected]

6 Final Report 21-12-2009 JVa MOP NBa 5 Draft Final Report 21-11-2008 JVa MOP NBa 4 Draft Final Report 23-10-2008 JVa HJS/CF NBa 3 Draft 13-10-2008 JVa MOP NBa 2 Draft 17/05-08 JVa 1 Draft 25/3-08 JVa/HHJ HJS/CF 0 With comments from EB 18/2-08 NBa HHJ NBa No. Revision Date Prepared Checked Approved

Final Report Page i Potential use of Micro-Financing in Support of CDM Projects in LDC December 2009

NIRAS c:\documents and settings\ssk\desktop\study on mf in support of cdm projects in ldcs_final report 2009.12.doc

LIST OF CONTENTS

LIST OF CONTENTS........................................................................................... I

LIST OF ABBREVIATIONS ............................................................................ IV

1. EXECUTIVE SUMMARY .......................................................................... 1 1.1 Background ...................................................................................... 1 1.2 Objective .......................................................................................... 1 1.3 Synergies of micro-finance and pCDM............................................ 2 1.4 Conclusions and Recommendations................................................. 3

1.4.1 Conclusions ........................................................................ 4 1.4.2 Recommendations............................................................... 4

2. INTRODUCTION ........................................................................................ 6 2.1 Background ...................................................................................... 6 2.2 Objective .......................................................................................... 6 2.3 What are the “Least Developed Countries” ..................................... 7

3. CDM IN LDCS............................................................................................. 9 3.1 Introduction ...................................................................................... 9

3.1.1 The CDM project cycle ...................................................... 9 3.1.2 Eligibility criteria of CDM projects.................................. 13 3.1.3 Additionality and baseline methodologies........................ 14 3.1.4 Methodologies for Small-scale CDM projects ................. 15 3.1.5 Geographic distribution of CDM project activities .......... 16

3.2 Status of CDM in LDCs ................................................................. 18 3.3 Barriers to CDM in LDCs .............................................................. 19

3.3.1 Financial Barriers.............................................................. 19 3.3.2 CDM specific barriers in LDCs........................................ 20 3.3.3 Technological barriers ...................................................... 22

4. CDM PROGRAMME OF ACTIVITIES IN LDCS................................... 24 4.1 Concept of CDM Programme of Activities for LDCs ................... 24 4.2 Characteristics of a CDM programme of activities........................ 28

4.2.1 Types of CPAs.................................................................. 32

Final Report Page ii Potential use of Micro-Financing in Support of CDM Projects in LDC December 2009


4.3 Procedures for submitting a PoA.................................................... 34 4.4 De-bundling.................................................................................... 35 4.5 Cost reduction................................................................................. 36 4.6 Case Study 1: National Domestic Biogas Programme for Pakistan37

4.6.1 Background....................................................................... 37 4.6.2 “Real Life” MF Project organized as a pCDM................. 37

4.7 Status of pCDM.............................................................................. 40 4.7.1 Survey June 2008.............................................................. 40 4.7.2 Status of approval CDM-EB, November 2009................. 41

5. MICRO-FINANCING IN LDCS ............................................................... 42 5.1 Introduction .................................................................................... 42 5.2 Microfinance process and -flow..................................................... 43 5.3 Best practices.................................................................................. 45 5.4 Scope of microfinance.................................................................... 47 5.5 Trends in microfinance................................................................... 48 5.6 Microfinance Strategies in LDCs ................................................... 49 5.7 Microfinance and energy lending programs................................... 50

6. COMBINING MICRO-FINANCE AND CDM......................................... 55 6.1 Introduction .................................................................................... 55 6.2 Simplified organisational set-up of a pCDM/MF programme ....... 56 6.3 Fostering increase of CDM in LDCs through micro-finance......... 57

6.3.1 Overlaying microfinance with pCDM.............................. 57 6.3.2 Examples of MFIs involved in reducing climate change . 58

7. CONCLUSION AND RECOMMENDATIONS ....................................... 60 7.1 Conclusions .................................................................................... 60 7.2 Recommendations .......................................................................... 61

7.2.1 Stakeholders involvement................................................. 61 7.2.2 Project Organisation Aspects............................................ 62 7.2.3 Generic baselines .............................................................. 63 7.2.4 Risk assessment of combining MF with pCDM............... 63 7.2.5 Demonstration project ...................................................... 63 7.2.6 Project Preparation CDM fund for LDC countries........... 64 7.2.7 CDM portfolio standard contemplating a percentage of

CDM projects to origin from LDC countries ................... 64 7.2.8 Overcoming Structural and Institutional Barriers

specifically targeting pCDM and MF............................... 64

ANNEX A - CASE STUDY 2: FINANCIAL IMPACT OF CDM ON MF PROJECTS IN LDCS................................................................................. 66 B.1. Background and Objective.................................................................. 66

Final Report Page iii Potential use of Micro-Financing in Support of CDM Projects in LDC December 2009


B.2. Short description of reference projects ............................................... 67 B.3 Simple pay-back analysis on the financial impact of CDM on MF

projects ........................................................................................... 69 B.4. Conclusions and Recommendations ................................................... 75 B.5. Sensitivity Analysis of Potential pCDM/MF projects. ....................... 75

ANNEX B – ELIGIBLE SMALL SCALE METHODOLOGIES ..................... 77

ANNEX C – APPROVED SMALL SCALE CDM METHODOLOGIES - SECTORAL SCOPE .................................................................................. 80

Final Report Page iv Potential use of Micro-Financing in Support of CDM Projects in LDC December 2009


LIST OF ABBREVIATIONS

CER Certified Emission Reductions

CMP Conference of the Parties to the UNFCCC serving as the Meeting of the Parties to the Kyoto Protocol

COP Conference of the Parties to the UNFCCC

CPA CDM Programme Activity - a project activity under a programme of activities

DNA Designated National Authority

DOE Designated Operational Entity

EB CDM Executive Board

LDCs Least Developed Countries are countries which according to the United Nations exhibit the lowest indicators of socioeconomic de-velopment, with the lowest Human Development Index ratings of all countries in the world.

MFI Micro finance institution

MT Mega ton

pCDM Programmatic CDM

PDD Project Design Document

PIN Project Idea Note

PoA Programme of Activities

PP Project Proponent

UNFCCC United Nations Framework Convention on Climate Change

For further reference please refer to the latest guidance on CDM project activi-ties and CDM programme of activities available on: http://cdm.unfccc.int/index.html

http://cdm.unfccc.int/index.html

Final Report Page 1 Potential use of Micro-Financing in Support of CDM Projects in LDC December 2009


1. EXECUTIVE SUMMARY

1.1 Background The report is prepared as input to the Executive Board’s deliberations regarding CDM and microfinance, and in pursuance of the:

Nairobi Action Plan

Annex on regional distribution to the report of the Executive Board to the Bali CMP 3 (FCCC/KP/CMP/2007/3)

Response of the CMP, where it “welcomes initiatives that explore the po-tential contribution of microfinance mechanisms to the CDM”

Item 97 of the minutes of the 36th meeting of the Executive Board, where it “took note of the update from the Chair on the plans of the government of Denmark to initiate work, in cooperation with the Board, to identify the po-tential and scope for synergy and co-operation between CDM and micro-finance mechanisms.”

A final draft report was presented and discussed at a seminar hosted by the CDM-EB and the Danish Ministry of Foreign Affairs in Copenhagen 28 Sep-tember 2009. The present Final Report has been updated with comments and conclusions from the seminar. Moreover, the report has been updated with deci-sions from the UNFCCC in relation to Programme of Activities (PoA) which in the report will also be referred to as programmatic CDM (pCDM).

1.2 Objective The purpose of this study is to identify possible synergies between the CDM, especially CDM Programme of Activities, and Microfinance mechanisms.

The objective is to enhance CDM activity in Least Developed Countries (LDCs) by exploring ways to improve the financial feasibility of mitigation projects that are pertinent to LDC countries.

The target groups for this report are donors, NGOs, Microfinance institutions, Energy Companies (dealers/suppliers of appropriate energy technologies for



LDCs), CMP, as well as the Executive Board, in pursuance of the above men-tioned decisions and statements.

1.3 Synergies of micro-finance and pCDM The present study assumes that the synergies between micro-finance (MF) and CDM will apply to projects that can be characterised as CDM Programme of Activities (PoA), also referred to as programmatic CDM (pCDM). This is due to the similarities in concept as both micro-finance and PoA in LDCs deal with dispersed and large volumes of small units. With respect to possible pCDM pro-ject activities, the report focuses mainly on the use of energy devices or units, although other pCDM activities such as afforestation/reforestation projects are possible.

Strengths of MF related to programmatic CDM (pCDM)

There are several factors that make MFIs suited for channelling pCDM funds to LDCs:

a) The MFIs are embedded in the communities, especially rural off-the-grid communities that need decentralized energy solutions.

b) MFI staff meets with millions of households every week; and as such are a channel to market for financial services, and financed energy services are a natural expansion.

c) MFIs possess administration methods suited for widely dispersed applica-tions.

Strengths of pCDM related to MF

The main strengths of pCDM regarding micro financed projects are:

a) Its attractive investments in fixed assets,

b) Credit enhancement and

c) Reliable returns.

d) Potential provision of up-front capital is possible by using the future revenue of CERs as a guarantee for some of the loans that are required to cover the initial expenditures of a project or a programme.

Common ground between Micro-finance and pCDM

One of the most obvious synergies of MF and CDM are:



a) Integration of pCDM monitoring procedures in microfinance loan monitor-ing.

b) Professional management and highly dispersed applications are prerequisites for both MF and pCDM.

c) Overlap in reporting procedures

d) Shared infrastructure.

Fostering increase of pCDM in LDC's through micro-finance

Issues to be considered in overlaying micro-finance with pCDM:

a) Choice of the coordinating entity for PoA. The coordinating entity of the PoA can, but does not have to be, the institution providing the microfinance (MFI)

b) Distribution of certified emission reductions (CERs). Coordinating entities have the freedom to negotiate arrange-ments as they see fit. Aggregation of CERs is the only sensible option.

c) Financial impact of CERs. All CDM projects or programs create new assets (CERs) which have market value. This can make a project more feasible from the banking perspective of a MFI.

1.4 Conclusions and Recommendations It should be stressed that some of the conclusions and recommendations ad-dressed in the present report should be dealt with at CMP level, if the potential is to be exploited.

Furthermore, it is vital that potential projects that combine CDM with MF in LDCs, not only focus on the energy sector, but contemplate all potential green-house gas emission sources, eligible under the Kyoto Protocol, e.g. afforestation.

A seminar was held in Copenhagen 28 September 2009 to discuss the conclu-sions and recommendations of the Final Draft Report of the study. In order to increase the synergies between CDM, especially Programme of Activities (PoA) and micro-finance, as an instrument for increasing CDM activities in Least De-veloped Countries, the participants recommended to focus and increase the ac-tivities in the following four areas : 1) Demonstration projects, 2) Simplified administration, 3) Establishment of a CDM fund, and 4) Priority to CDM projects from LDC countries.



The recommendations from the seminar were forwarded to the CDM-EB before the 50th CDM-EB meeting in October 2009. Hence, the CDM-EB has had the opportunity to incorporate the recommendation from the seminar in the docu-ment: “CDM-EB meeting 50, Annex 50, Recommendation on Regional Distri-bution of Clean Development Mechanism Project activities”

1.4.1 Conclusions The following summarises the conclusions of the study:

1. The combination of pCDM with MF can resolve some of the prevailing barriers for channelling CDM funds into LDCs

2. pCDM can provide credit enhancement and up-front capital to MFI.

3. Constraints that need to be addressed:

lack of coordination between the energy and microfinance sectors.

lack of knowledge of these two parties of the opportunities pCDM of-fers

need for simplifying the number of parties involved

4. CDM Transaction costs are relatively high but pCDM can reduce this sig-nificantly

5. Need for demonstrating how transaction costs can be decreased with the present pCDM set-up and in combination with MF

6. Need for further investigation on how pCDM can be streamlined for LDCs

7. Additional funds for preparing and developing demonstration projects are a precondition for increased interest amongst MFIs and the Energy Sector

1.4.2 Recommendations The following summarises the recommendations of the study:

1. Commitment by MFIs, Energy Sector, Host Governments and Donors is crucial

2. Partnership between MFI and supplier/dealer of energy devices

3. Generic Baselines / Standard CERs for LDCs

4. Risk assessment of combining MF with pCDM (e.g. over-loading of MFIs)

5. Demonstrate how the number of parties involved in CDM transactions can be reduced



6. Set-up of demonstration projects to stimulate and test different combina-tions of MF and pCDM

7. Demonstration projects start with targeted capacity building efforts with (M)FIs that already consider CERs as a potential source of financing.

8. Project Preparation CDM fund for LDC countries

9. CDM portfolio standard for Annex 1 countries - i.e. a percentage of CDM projects to origin from LDC countries

10. Priority by CDM-EB to CDM projects from LDCs.



2. INTRODUCTION

2.1 Background The report is prepared as input to the Executive Board’s deliberations regarding CDM and microfinance, and in pursuance of:

Nairobi Action Plan

Annex on regional distribution to the report of the Executive Board to the Bali CMP 3 (FCCC/KP/CMP/2007/3)

Response of the CMP, where it “welcomes initiatives that explore the po-tential contribution of microfinance mechanisms to the CDM”

Item 97 of the minutes of the 36th meeting of the Executive Board, where it “took note of the update from the Chair on the plans of the government of Denmark to initiate work, in cooperation with the Board, to identify the po-tential and scope for synergy and co-operation between CDM and micro-finance mechanisms.”

A Final Draft Report was prepared on the basis of a draft outline document that has been discussed 29 January 2008 with the Executive Board of the CDM, in connection with its 37th meeting in Bonn.

The final draft report was presented and discussed at a seminar hosted by the CDM-EB and the Danish Ministry of Foreign Affairs in Copenhagen 28 Sep-tember 2009. The present Final Report has been updated with comments and conclusions from the seminar. Moreover, the report has been updated with deci-sions from the UNFCCC in relation to Programme of Activities (PoA) which in the report will also be referred to as programmatic CDM (pCDM).

2.2 Objective The purpose of this study is to identify possible synergies between the CDM, especially CDM Programme of Activities, and Micro-finance mechanisms. The objective is to enhance CDM activity in Least Developed Countries (LDCs) by



exploring ways to improve the financial feasibility of mitigation projects that are pertinent to LDC countries.

The target groups for this report are donors, NGOs, Microfinance institutions, Energy Companies (dealers/suppliers of appropriate energy technologies for LDCs), CMP, as well as the Executive Board, in pursuance of the above men-tioned decisions and statements.

2.3 What are the “Least Developed Countries” Least Developed Countries (LDCs or Fourth World countries) are countries which according to the United Nations exhibit the lowest indicators of socioeco-nomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteria:

a low-income criterion, based on a three-year average estimate of the gross national income (GNI) per capita (under $750 for inclusion, above $900 for graduation);

a human resource weakness criterion, involving a composite Human Assets Index (HAI) based on indicators of: (a) nutrition; (b) health; (c) education; and (d) adult literacy; and

an economic vulnerability criterion, involving a composite Economic Vul-nerability Index (EVI) based on indicators of: (a) the instability of agricul-tural production; (b) the instability of exports of goods and services; (c) the economic importance of non-traditional activities (share of manufacturing and modern services in GDP); (d) merchandise export concentration; and (e) the handicap of economic smallness (as measured through the popula-tion in logarithm); and (f) the percentage of population displaced by natural disasters. (E/2004/33)

A country must satisfy all three criteria to be added to the list. 1

The current list of LDCs is presented overleaf:

1 http://www.un.org/special-rep/ohrlls/ldc/ldc%20criteria.htm



Africa (33 countries) Asia (10 countries) Angola Afghanistan Benin Bangladesh Burkina Faso Bhutan Burundi Cambodia Central African Republic East Timor Chad Lao People’s Democratic Republic Comoros Maldives Democratic Republic of the Congo Burma Djibouti Nepal Equatorial Guinea Yemen Eritrea Ethiopia Oceania (5 countries) Gambia Kiribati Guinea Samoa Guinea-Bissau Solomon Islands Lesotho Tuvalu Liberia Vanuatu Madagascar Malawi Americas (1 country) Mali Haiti Mauritania Mozambique Niger Graduated LDCs Rwanda Botswana (in 1994) Sao Tome and Principe Cape Verde (in 2007) Senegal Sierra Leone Somalia Sudan Tanzania Togo Uganda Zambia

Table 1: List of Least Developed Countries (LDCs)2

2 http://www.un.org/special-rep/ohrlls/ldc/list.htm and http://en.wikipedia.org/wiki/Least_Developed_Countries



3. CDM IN LDCS

3.1 Introduction This section will describe the CDM and assess the status of the CDM in LDCs. It will include an overview of technologies applied in relevant types of CDM projects. Finally, barriers to application of CDM in LDCs will be analysed.

The UNFCCC recognizes the fact that emissions of greenhouse gases are a global concern and hence the Kyoto Protocol contains provisions allowing in-dustrialized countries with emission targets to use three flexibility mechanisms enabling reductions to be made where costs are lowest. The Clean Development Mechanism (CDM) as defined in Article 12 is the only market mechanism through which developing countries can enter the international market of emis-sion mitigating activities within the UNFCCC regime. The objective of the CDM is twofold

Assist non-Annex 1 countries achieve sustainable development and con-tribute to the overall objective of the UNFCCC

Assist Annex 1 countries in achieving their emission reduction commit-ments cost-effectively

3.1.1 The CDM project cycle Projects aiming at being developed and registered as CDM projects must un-dergo a series of steps known as the CDM project cycle illustrated below:



Figure 1: CDM Project Cycle

The five primary participants in the CDM project cycle include:

1. A private or public project proponent (PP) initiating the CDM project activity;

2. An entity purchasing the CERs. The project proponent can, however, develop the project unilaterally if the host country allows it and sell the emission reductions after they have been verified and certified;

3. Host Party which is the government authority of the country in which the activity is implemented (Designated National Authority – DNA);

4. Designated Operational Entity (DOE) accredited by the CDM Executive Board (EB) and responsible for validation of CDM project activities and verification and certification of CERs; and

5. The CDM Executive Board which i) supervises the CDM, ii) develops rules, iii) approves methodologies, iv) accredits DOEs, v) registers pro-jects and vi) issues CERs.



The CDM project cycle can be divided into two phases i.e. the project design phase and the project operation phase as illustrated in Figure 2 and Figure 3 in the following sections. The first comprises the steps up to and including registra-tion of the project by the CDM Executive Board and the latter consists of moni-toring, verification, certification and issuance of Certified Emission Reductions (CERs).

3.1.1.1 Project Design Phase Documents included in the process of developing a CDM project comprise the unofficial Project Idea Note (PIN), and the official Project Design Document (PDD), national approval and validation report.

Step 1 : CDM project idea, and project definition.

Step 1a : Prepration of Project Idea Note

(PIN)

Project Design Phase

Project Proponent Operational Entity (OE)

Investor Party and/or Buyer

Executive Board (EB)Host Party

Step 1b : Pre-screening and

opinion PIN

Step 2: Preparation of the Project Design Document, including- Project Description - Baseline Methodology- Duration project activity- Monitoring Methodology / plan- Calculation GHG emissions - Analysis Environm impacts - Stakeholder Comments

Step 9 : Registration of

the Project with the EB

Step 4-6 : Make submitted PDD and

other documents publicly available

Step 7: Validation of PDD and submits the

validation report to the EB

Step 8 : Possible

Review by EB

Approval of Project in

written form

Negative

Positive

Step 1b : Pre-screening and opinion on PIN

Figure 2: Project Design Phase - CDM Project Cycle

The elaboration of a PIN by the project proponent is optional (illustrated by a dotted line in Figure 2 above) but may be required by the host or Investor Party. Upon evaluation of the project proposal the respective Designated National Au-thority (DNA) will provide an opinion on the project eligibility.

A mandatory PDD format provided by the EB must be filled in by the project proponent containing information on the project design, baseline and monitoring methodology, justification of additionality (the project is additional to what would otherwise occur), duration, monitoring plan, calculation of emission re-



ductions, environmental and social impacts of the project and stakeholder com-ments. The PDD is submitted to the host country DNA in order to attain a statement indicating that the government of the host country participates volun-tarily in the proposed project and that the project activity contributes to the achievement of sustainable development objectives in the host country.

Once the DNA Approval Letter is attained, a DOE is contracted to ensure that the information in the PDD is accurate and in accordance with the requirements for CDM projects as set out in the Protocol and subsequently by the Parties to the Protocol (Modalities & Procedures) in the Marrakesh Accords. The DOE prepares a validation report which is made publicly available on the UNFCCC website for comments for a period of 30 days. Following this period the docu-ments are forwarded to the CDM Executive Board for registration of the project. In principle, the project proponent begins to execute the project hereafter.

3.1.1.2 Project Operation Phase During the execution of the project, monitoring of the greenhouse gas emission reductions from the CDM project activity is performed according to the moni-toring plan described in the validated PDD. The project proponent prepares a monitoring report including a quantification of CERs generated which is submit-ted for verification by a DOE. In the case of large scale projects (see below), the DoE’s different than the one which carried out the validation of the project.

The verification ensures that the CERs have been generated according to the terms agreed upon in the validation report. A verification report is prepared and the DOE certifies the amount of CERs generated by the CDM project activity. The certification report constitutes the written confirmation by the DOE that the project achieved real, measurable and additional reductions and is furthermore a request to the CDM Executive Board for issuance of CERs. Unless a review of the project is requested, the CDM Executive Board will after a period of 15 days instruct the CDM registry to issue the CERs. (See Figure 3)

Three Executive Board members or a project participant can request a review of the registration of a project or of issuance of CERs in which case specific proce-dures apply before registration or issuance can take place.



Step 1-2 : Monitoring of the project performance and submission of Monitoring results and report to OE

Project Operation

Step 3 : Verification by

Operational Entity (OE)

Submission of Certification report to EB

Step 5 :Issue CERs

Registration of the CERs in the

Register

Project Proponent

Operational Entity (OE)

Investor Party and/or Buyer

Executive Board (EB)

Host Party

Registration of the CER in Buyers national account

Step 4 : Possible

Review by

Figure 3: Project Operation Phase - CDM Project Cycle

3.1.2 Eligibility criteria of CDM projects CDM projects must comply with the requirements of the Kyoto Protocol and Marrakech Accords, decisions made by the CMP (Conference of Kyoto Parties) and the CDM Executive Board as well as criteria set by the host country and the investor country.

A list of criteria is provided below:

The project must involve an emission reduction of one or more of the green-house gases eligible under the Kyoto Protocol i.e. Carbon Dioxide (CO2), Methane (CH4), Nitrous Oxide (N2O), Hydrofluorocarbons (HFCs), Per-fluorocarbons (PFCs) and Sulphur Hexafluoride (SF6)

The project activity must assist the non-Annex 1 country in achieving sus-tainable development. The project should not result in unacceptable impacts on the environment. If it is expected by the project proponent or host gov-ernment that the unintended environmental impacts of the project are sig-nificant, then an Environmental Impact Assessment in accordance with the procedures as required by the host country should be carried out



The emission reductions must be additional to any that would have occurred in the absence of the project

The emission reductions must be real and measurable and need to be vali-dated and verified by a Designated Operational Entity

The PDD must conform to the format provided by the UNFCCC

The project type must be eligible under the Kyoto Protocol. Nuclear energy projects and Land Use and Land Use Change and Forestry (LULUCF) pro-jects other than afforestation and reforestation are not eligible during the first commitment period, 2008-2012

If the project is financed by sources of public funding this must not result in a diversion of Official Development Assistance, and the sources of public funding must be separate and not be counted towards the financial obliga-tions of the Annex 1 countries

The host country must be a party to the Kyoto Protocol

The host country must provide a national approval of the project (approval of voluntary participation) and at the same time confirm that it meets the sustainable development objectives of the country

The project must be acceptable to the host country and conform to its CDM requirements

If the CDM project activity is small-scale it must meet the eligibility criteria (see section 3.1.4) and conform to one of the project categories defined for small-scale CDM project activities

3.1.3 Additionality and baseline methodologies Article 12 of the Kyoto Protocol stipulates that emission reductions generated from CDM projects must be additional to any that would have occurred in ab-sence of the project. A reference baseline scenario representing the anthropo-genic emission of greenhouse gases occurring in the absence of the CDM pro-ject must be established. The emission reduction credits generated from the CDM project activity corresponds to the difference between the baseline sce-nario and the actual monitored emissions from the implemented project.

CDM-EB has approved a tool for demonstration and assessment of additionality. Moreover, at the CDM-EB Meeting 50, guidance was issued for the objective demonstration and assessment of barriers. The guidance includes special guide-



lines for LDCs, e.g. that it is sufficient to describe the relevant barriers and less stringency is needed with regard to data availability in the actual demonstration of barriers.

All CDM projects/programs must apply an approved CDM methodology for determining the baseline (the business as usual scenario) and quantifying the emission reductions with respect to that scenario, and for monitoring the achievement of the emission reductions. These methodologies must be approved be the CDM Executive Board. Upon approval, the methodologies are made pub-licly available to be used by subsequent CDM projects with comparable charac-teristics thereby reducing the costs of these.

The CDM has two types of methodologies, one for large scale activities and one for small scale activities.

In the next chapter, focus will be on Small Scale CDM methodologies and pro-jects

3.1.4 Methodologies for Small-scale CDM projects At COP 8 the Parties adopted the Simplified Modalities and Procedures for Small-Scale CDM Project Activities in order to reduce the proportionally higher transaction costs associated with the development and implementation of small-scale CDM project activities. The modalities include a simplified PDD, baseline methodologies by project category, the possibility of bundling small scale pro-ject activities, a shortened period of time for registration and the same DOE is allowed to undertake validation, verification and certification.

There are currently at least 49 small scale CDM methodologies3 which fall into three types of project activities:

Type I - for renewable energy project activities that have a maximum output capacity of 15 MW (or an appropriate equivalent). Examples would be micro hydro, small wind turbines and all solar equipment.

Type II – for project activities which reduce energy consumption, on the supply and/or demand side, limited to a maximum output of 60 GWh per year (or an appropriate equivalent). Examples would be improved cook-ing stoves or higher efficiency boilers in small enterprises.

Type III – for other project activities, limited to those that result in emis-sion reductions of less than or equal to 60 kt CO2 equivalent annually.

3 All approved small scale (SSC) methodologies can be found on http://cdm.unfccc.int/methodologies/SSCmethodologies/approved.html



Examples are the installation of biogas digesters in households or small farms

In addition, there are at least 6 small scale CDM methodologies that concern afforestation/reforestation project activities.

Annex B and C list the eligible small-scale project methodologies. If a proposed small-scale project activity does not fall into one of the listed methodologies, the project proponent can submit a new methodology to the CDM Executive Board for approval. Debundling of large scale CDM project activities to obtain com-pliance with the definitions for small-scale project activities is not allowed.

3.1.5 Geographic distribution of CDM project activities The intrinsic nature of the CDM as a market based mechanism causes the mechanism to favour a) large scale projects with high volume of CERs and low cost mitigation opportunities, b) large markets, c) higher project replicability and d) economically and politically stable countries with certain degree of in-vestment security. These factors are usually more prevalent in more developed countries than in LDCs.

This can partially be illustrated by Figure 4, Figure 5 and Figure 6 below. The figures indicate the geographical distribution of CDM project activities in terms of number of registered projects by region, geography and amount of emission reduction credits expected to be generated annually.

Region Number of pro-jects

NAI-Africa 36

NAI-Asia and the Pacific

1463

NAI-Other 11

NAI-Latin America and the Caribbean

450

Figure 4: Registered CDM projects by region. Total 1960, of which only 36 in Africa. (Ref. UNFCCC webpage CDM statistics, 17 December, 2009)4 4 http://cdm.unfccc.int/Statistics/Registration/RegisteredProjByRegionPieChart.html



Figure 5: Geographical distribution of CDM project activities in terms of number of regis-tered projects. (Ref. UNFCCC webpage CDM statistics, 17 December, 2009)5

Figure 6: Geographical distribution of CDM project activities in terms of amount of emis-sion reduction credits expected to be generated annually. (Ref. UNFCCC web-page CDM statistics, 17 December 2009)6

5 http://cdm.unfccc.int/Statistics/Registration/NumOfRegisteredProjByHostPartiesPieChart.html 6 http://cdm.unfccc.int/Statistics/Registration/AmountOfReductRegisteredProjPieChart.html



The figures above illustrate the dominance by especially China and to a lesser degree India within the CDM regime. These two countries account for about 60% of all registered CDM projects and 70% of the expected average annual amount of CERs.

3.2 Status of CDM in LDCs By comparison, the LDCs as a group account for only about 0,7% of all regis-tered projects and less than 0,4% of the expected average annual amount of CERs.

Table 2 shows the distribution of the registered CDM projects in LDCs. It should be noted that out of the seven countries only Uganda and U.R. of Tanza-nia are African.

Country Number of registered CDM projects

Expected average annual CERs

Bangladesh 2 169,259 Bhutan 1 524 Cambodia 4 124,356 Lao PDR 1 3,338 Nepal 2 93,883 Uganda 2 41,774 U.R. of Tanzania 1 202,271

Table 2: Distribution of Registered CDM Projects in LDCs

While it is true that the uneven geographical distribution is partly due to the countries’ variation in size, emissions of greenhouse gases and reduction poten-tial, it is a fact that of all the CDM projects approx. half of all projects are under the small scale cap.



Figure 7: Approx. half of all CDM projects are under the small scale cap 7

Therefore size and potential emission reduction volume is not the only factor affecting the uneven distribution of CDM projects. Issues like investment cli-mate, risk and policy towards the CDM also play a vital role.

3.3 Barriers to CDM in LDCs Barriers to the development of CDM projects can arise at different stages in the CDM project cycle, both at international and/or national level. In the following, some of the most common barriers are briefly touched upon and categorised as: financial-, CDM specific- and technological barriers.

3.3.1 Financial Barriers The various steps that are required to ensure the integrity of the CDM make the CDM project cycle a costly process. This includes the use of external experts like DOEs and payment of registration fees to the CDM Executive Board and DNA (if required by the host country) as well as monitoring of emissions from the project activity. The fact that the DOEs are generally large international con-sultancy firms, whose rates are expensive for the potential project proponent in a LDC, reinforces the challenge. Furthermore, in case of large scale projects the requirement of a site visit by the DOE adds to the financial burden of develop-ing a CDM project8.

The transaction costs depend on the project type and its complexity, whether an approved baseline can be utilised or a new methodology has to be developed, submitted and approved. It furthermore depends on the quality of the PDD and subsequent validation issues, the efficiency of the host country approval process and whether a project review is required during the registration process. The transactions costs imply that a CDM project activity must be of a certain size in terms of CERs to be deemed financially viable and is thus one of the key barri-ers especially for small-scale CDM project development in LDCs.

The transactions costs described above combined with the high initial invest-ment costs often required to develop a CDM project and the fact that CDM revenues are only generated once the project has been implemented and CERs issued comprise a financial barrier to CDM project development faced by many

7 http://cdm.unfccc.int/Statistics/Registration/RegisteredProjByScalePieChart.html 8 Cosbey, Aaron; Murphy, Deborah; Drexhage, John and Balint, John: “Making Development Work in the CDM. Phase II of the Development Dividend” (pre-publication version), Interna-tional Institute for Sustainable Development (IISD). October 2006. http://www.iisd.org/pdf/2007/making_dev_work_cdm.pdf



potential project proponents. It is especially a problem in LDCs suffering from poor credit ratings and high sovereignty risks thus limiting the possibility for securing overseas financing. This causes local financial intermediaries to poten-tially play a vital role in the development of CDM projects. However, knowl-edge of the CDM among these institutions is often low or non existing.

Even in the case that the local banking sector is aware of the CDM, they may be reluctant to finance projects due to their potentially high credit risks, the rela-tively small size of the investment, and lack of financing history and expertise on the part of project developers.

3.3.2 CDM specific barriers in LDCs Specific barriers to the development of CDM project activities in LDCs are the lack of institutional capacity and awareness among key stakeholders i.e. policy-makers, CDM institutions and potential project developers. The present chapter deals with these barriers in the following sub-sections: 1) Structural and institu-tional barriers and 2) Project level barriers.

3.3.2.1 Structural and institutional barriers Lack of knowledge of the CDM among policymakers can result in the imple-mentation of regulations which hinder development of CDM projects and dis-courage foreign investments or failure to remove existing barriers. This includes for example import tariffs affecting the technology transfer required to complete certain types of CDM projects, restrictions on participation for foreigners limit-ing outside investment in potential CDM project activities (or e.g. regulations constraining the generation of electricity for the grid by independent power pro-ducers).

Though most sub-Saharan African LDCs are registered as Parties to the Kyoto Protocol 9 several DNAs have been established only on paper and do not have the regulatory framework through which they can operate. Further, a number of DNAs in the sub-Saharan African LDCs do not possess the necessary office equipment to enable it to function e.g. communicate with the outside world or even print a Letter of Approval. These DNAs are also unable to establish a na-tional web-based platform presenting practical information on national proce-

9 A list of countries listed as parties to the Kyoto Protocol can be found at the UNFCCC web-page, www.unfccc.int. The following African LDCs are not listed as parties to the Kyoto Proto-col: Chad, Comoros and Somalia.



dures and requirements and promoting the country as an eligible and attractive CDM location10.

Given the basic development challenges facing the LDCs e.g. eradication of poverty, health issues, education, infrastructure etc. it is not surprising that these countries have not prioritised investing resources in establishing the required institutional structures to evaluate and approve CDM projects.

3.3.2.2 Project level barriers Lack of knowledge of the CDM among potential project proponents also im-pedes the CDM development in LDCs as it for example can result in non-compliance with national and international eligibility requirements or insuffi-cient PDDs being submitted to the DOE thereby delaying the validation of the project and increasing the costs. It may, however, be difficult for the project proponent to obtain knowledge of the complicated CDM market especially in sub-urban and rural areas of LDCs.

Finally, even in the best of cases where project proponents are familiar with both the CDM procedures and requirements as well as having access to the nec-essary financial resources, they may be reluctant to enter into CDM project ac-tivities due to the risks associated with the development and implementation of the project and the delivery of CERs. These comprise:

i. Regulatory risks relating to whether the CDM Executive Board will register the project activity as a CDM project accepting the project as additional and acknowledging the applied baseline methodology.

ii. Host country risks including a delay in or failure to obtain a Letter of Ap-proval from the DNA; and

iii. Risks associated with the delivery of CERs i.e. if the project will perform as expected and deliver the contracted amount of credits.

As described previously numerous sub-Saharan LDCs have not established a functional CDM framework and DNA meaning that especially bullet point (ii) above is of major importance in these countries.

10 Jane Ellis (OECD) and Sami Kamel (UNEP Risø Centre): “Overcoming barriers to Clean Development Mechanism projects”, Organisation for Economic Co-operation and Development (OECD), International Energy Agency. May 2007. http://www.oecd.org/dataoecd/51/14/38684304.pdf.



It should also be noticed that what may seem as the most efficient way of e.g. channelling energy services to users in LDCs is not necessarily eligible for CDM. For example, dealers/suppliers of small energy devices such as solar lan-terns or improved stoves may not have the capacity to monitor the use of the sold devices, as they may be spread to a considerable large geographical area. As documented emission reduction is a prerequisite for acquiring CER, this may not be feasible even though the additional revenue of CER may contribute to the cost of monitoring. Furthermore, as CERs can basically only be handed over to the owner of the device, it in many cases requires the dealers to maintain owner-ship by either leasing or renting out the devices with a considerable risk for re-payment of the involved investment. Thus, changing the project set-up to meet CDM eligibility criteria may lead to decreased net revenues, in spite of the addi-tional funds CDM may contribute with. However, it should be mentioned that there are modalities within programmatic CDM (pCDM) that can simplify both the issue of monitoring and ownership of CERs. This will be dealt with in the following chapters of the report.

3.3.3 Technological barriers Many LDCs have limited human and technical resources and thus do not pos-sess sufficient knowledge and technological capacity, which often manifests itself in:

i. the inability to deploy modern and new technologies and practices in the marketplace,

ii. insufficient capacity to build and operate and

iii. presence is often limited to only larger cities and densely populated ar-eas/regions thus in many cases excluding the population living in rural ar-eas.

Technological asymmetry is also more prevalent in LDCs. For example, SMEs generally have less access to efficient technologies than their publicly-owned counterparts and large private or multinational companies.

Project investment- and installation costs of new- and renewable energy tech-nologies may often require additional funding compared to conventional energy technologies. Even though savings during the life time of the equipment would cover these additional costs, the users may fail to use the new- and renewable energy option. This may be due to the following factors:

a) Lack of information on the relative efficiency of products and services;

b) Lack of information on the cost effectiveness of these new- and renewable energy choices;



c) Constraints in initial funding; and

d) Split, or insufficient, incentives to make pertinent decisions.

Finally, it must be stressed that one of the most well-known and crucial con-straints for expanding energy services in LDCs is the low population density and low ability to pay for these services. This has the consequence that it is rela-tively expensive to reach potential energy consumers, maintain equipment and billing for energy services. Furthermore, even though access to energy services may in the long run increase the income of population by productive use of en-ergy, the energy consumption will remain relatively low for many years to come.

To summarise, the immediate potential for CDM projects is low, unless as a minimum, they can contribute with sufficient funds or mechanisms to make provision of energy services economically sustainable. In practice, this requires the minimisation of costs for setting-up, implementing and monitoring projects by for example using existing organisational structures such as NGOs or MFIs together with more flexible CDM concepts such as the so-called programmatic CDM (pCDM). This is indeed the subject of the succeeding sections of the re-port.



4. CDM PROGRAMME OF ACTIVITIES IN LDCS

4.1 Concept of CDM Programme of Activities for LDCs The previous chapter has discussed the difficulties of implementing CDM pro-jects in LDCs. Some of those challenges are inherent to general economic de-velopment challenges in those countries. But some of the intrinsic difficulties are exacerbated by the modalities of the CDM, which as a market-based mecha-nism, searches for high volume/low cost mitigation opportunities, which are usually more accessible in more developed countries than in the LDCs.

While it must be recognized that the CDM cannot solve the development need of LDCs, it is also evident that LDCs are severely underrepresented in the CDM portfolio. The CDM has been implemented mostly on the basis of single mitiga-tion sites that offer a relatively high volume of emission reductions, contrasting with LDCs where the mitigation potential is not only lower on the whole, but is also typically highly dispersed.

In the effort to e.g. increase access to energy in LDCs, there are evidently some opportunities to build centralized renewable energy plants for supplying electric-ity to the national grid, and these could be pursued though traditional CDM. However, one of the most urgent and challenging needs in LDCs are rural en-ergy applications that occur in a decentralized, dispersed, manner. Access to energy, needs to be made available for low-income households, rural communi-ties, and micro entrepreneurs. If properly structured and financed, the benefits of the CDM could reach millions of people who are currently unserved or under-served by modern energy. E&Co, one of the leading institutions in micro-finance and energy solutions, estimates that a scale-up of these activities could result in 80-100 million people being served with modern energy by 202011.

This chapter examines the new option of registering a large number of small dispersed mitigation actions coordinated under a CDM Programme of Activi-ties12 as a possible source of additional funding for the dissemination of clean

11 www.eandco.net 12 As defined in Annex 38 of EB 32, a Programme of Activities is a “voluntary coordinated action by a private or public entity which implements any voluntary or mandatory pol-



energy services in LDCs. The chapter focuses on the structural/organizational aspects of CDM projects that are conceived as CDM programmes. The financial impact of the sale of CERs on the feasibility of CDM projects is the topic of Case study 2 presented in Annex A.

The challenge of dealing with a large number of small financial transactions is the heart and soul of microfinance, thus the concept of the “long tail”13 is fre-quently used in microfinance. In a recent RISOE publication on energy effi-ciency and pCDM, Hinostroza, et al (2007) uses the concept of the “long tail” to explain the lack of energy efficiency measures in the CDM. The same argument can be made for the absence of CDM projects in LDCs.

The Long Tail of GHG reductions

Red

uctio

ns/u

nit

Number of units

Long tail: large numberof small end-use units

owned by many owners

Programs of activitiesTraditional CDM

Few

larg

e un

its

Traditional CDM

Few

larg

e un

its

Figure 8: The Long Tail of GHG Reductions Emission reduction activities can be plotted on an x,y axis according to the number of units achieving the reductions (x) and the volume of reductions achieved per unit (y). The green “big head” to the left is made up of a few large units each of which have a sizable reduction potential. This constitutes the miti-gation potential being tapped by traditional CDM in the larger developing coun-

icy/measure or stated goal (i.e. incentive schemes and voluntary programmes), which leads to GHG emission reductions…” 13 The phrase The Long Tail (as a proper noun with capitalized letters) was first coined by Chris Anderson in 2004 to describe the business model of companies such as Amazon.com or Netflix which focus on selling small volumes of hard-to-find items to many customers, instead of only selling large volumes of a reduced number of popular items. The Long Tail concept has found a broad ground for application and is now a common term in the on-line business, mass media, and micro-finance.



tries. By contrast, the yellow “long tail” to the right is made up of myriads of small units that are geographically dispersed and typically implemented over a period of time. The long tail constitutes most of the mitigation opportunities in LDCs. These much dispersed but potentially high volume emission reduction opportunities are difficult to implement under traditional CDM because they have to be appropriately aggregated in order to reach a volume significant enough to access the market.

Until recently the only possibility to aggregate mitigation activities under the CDM was the option of “bundling” them. Bundling allows project developers to aggregate several mitigation activities and register them as one CDM project. However, the exact number of activities in the bundle has to be clearly defined before registration, and the composition of the bundle cannot change over time. There is no possibility to add new activities as they develop without submitting a new CDM project with all its requirements. This restriction is not appropriate for micro activities that are financed by micro finance, since in those situations typically an entity promotes a particular technology to households or small en-terprises, and it is not usually known at the outset what the uptake of the tech-nology is going to be. Promotion may in fact be done village by village, without knowing ahead of time which households will adopt the technology nor exactly when they will do so.

Furthermore, a bundle that applies a simplified small scale CDM methodology must respect the small scale threshold (discussed in the previous chapter) for the sum of all activities under the bundle. If the sum of activities exceeds the threshold, the bundle must apply a large scale methodology. This requirement is completely impractical in microfinance situations where the sum total of emis-sion reductions can actually be of a significant volume, but where each mitiga-tion activity is in fact a micro activity and does not warrant the costs or the complexities of a large scale CDM methodology.

Table 3: below summarizes the key differences between a bundled and a pCDM project.

Bundled CDM pCDM

Composition Each project must be identified and qualified before registration

Does not change over time.

The concept will be registered and only one CPA needs to be identified and qualified before registration.

Grows over time. Final volume may not be known at the outset.



Bundled CDM pCDM

Crediting period and life time

Bundled CDM projects can be 10 years or up to 21 years (3 x 7 years).

All projects have same start date, same crediting length.

A PoA can be up to 28 years.

The crediting period can be up to 10 years or up to 21 years (3 x 7 years).The crediting period should be finalised before the end of the lifetime of the PoA.

(CPAs) can have different start dates and different crediting lengths.

Table 3: Key differences between a bundled CDM and a pCDM project

PoA can have a lifetime of 60 years for afforestation/reforestation project activi-ties. Furthermore the crediting period can be upto 30 years for afforestation/ reforestation project activities.

The concept of “programmatic CDM” (pCDM) incorporates into the CDM those dispersed multi-actor activities that occur over a period of time, thereby promot-ing a broader regional distribution of CDM projects. Programmatic CDM speaks to the needs of LDCs by:

Allowing the aggregation of a large number of small mitigation activities (scale-up) achieved over a period of time. Once a CDM programme has been registered as the organizing framework, any number of mitigation activities can be added to that programme, as long as they are all identical

Reducing the transaction costs of CDM. The traditional costs of stakeholder consultations, validation, and registration are reduced as these can be under-taken once at the program level and do not need to be repeated for each indi-vidual mitigation activity.

Reducing the regulatory risk of CDM project activities. Once the program has been validated and registered as a valid overall CDM activity, each (compliant) individual mitigation effort achieved under that framework is recognized as pertaining to the program, and does not incur the risk of re-questing certification for every activity.

In conjunction with appropriate micro-finance, improving the quality of life for rural and peri-urban poor families in LDCs (e.g. improved cooking stoves, solar water heaters, solar lighting, etc).



In combination with appropriate microfinance, catalyzing energy access for income generating activities and small businesses (e.g. micro hydro power, wind, biogas or LPG) contributing directly to sustainable development in LDCs.

Programmatic CDM was introduced into the regulatory framework of the CDM by the first meeting of the Kyoto Parties (CMP 1) in November 2005. The guid-ance on pCDM was finalized by the Executive Board of the CDM in July 200714, and the pertinent forms for the submission of PoAs were published in August 200715. Further, in May 2009 important procedures and guidelines for pCDM was published.16 All regulatory documents for CDM Programmes of Activities can now be found on the United Nations Framework Convention on Climate Change home page for the CDM (http://cdm.unfccc.int/index.html).

4.2 Characteristics of a CDM programme of activities A programme of activities (PoA) operates on two levels: the program level and the program activity level. At the program level, the purpose of a PoA is to pro-vide the enabling environment for others to implement a policy/ measure or stated goal. Some examples could be an incentive scheme to replace inefficient cooking stoves, a credit line to purchase and install solar water heaters, or a pro-gram to promote biodigesters, all of which reduce emissions with respect to the business as usual scenario. The program provides the organizational, financial and methodological framework for the emission reductions to occur, but the program does not actually achieve the emission reductions. The emission reduc-tions are attained at the level of the “CDM program activities” (CPAs), by those that participate in the program. A CPA could be a single household replacing its inefficient wood stove, or it could be a group of households all of which install the same efficient cooker. In another program the CPA could be a single biodi-gester or a group of them (see discussion below on types of CPAs). But in either case it is at this operational level that the emission reductions are actually achieved.

14 Annexes 38 and 39 of EB 32 15 Annexes 41, 42, 43, and 44 of EB 33 16 Annexes 29, 30, 31 and 32 of EB 47

http://cdm.unfccc.int/index.html



PoAProvides the financial,

administrative structure

CPA

CPA

CPA

CPA

CPAAchieve

GHG reductionsor removals by sinks

Figure 9: The two levels of a PoA: Program level and Program activity level. 1- Coordinating entity. The PoA must be submitted to the Executive Board of the CDM by one coordinating or managing entity, which can be private or pub-lic. This entity does not necessarily implement the GHG reductions but rather provides the framework and incentives for others to do so. The coordinating entity could be the micro-finance institution (MFI) itself, or a clean energy pro-vider, an NGO active in the field, etc. The coordinating entity has the obligation to ensure that double counting does not occur by verifying that emission reduc-tion activities in each CPA are not registered as a separate CDM project activity, nor are they part of another registered CDM program. It is not the various im-plementers of mitigation activities that communicate with the Executive Board of the CDM but rather the coordinating entity which takes on this responsibility, including on matters such as the distribution of certified emission reductions (CERs). (See discussion below)

2- Boundary. In principle, the physical boundary of a PoA can extend beyond the boundary of a single developing country, provided each participating coun-try provides a letter of approval from the respective CDM Designated National Authority (DNA). Thus CDM programs can be national within the boundary of one host country, or regional, including various countries. However, from the perspective of micro finance it is likely that PoAs will be limited to one country or even to one region within a country, as the complexities of managing scores of small financial transactions make inter-country micro finance schemes unlikely. In any event, the physical boundary of both the PoA and each CPA must be clearly defined in order to prevent double counting.

3- Definition of the CPA. The decision of what constitutes the CPA is one of the most important decisions in the design of a PoA. Once the CPA has been defined, all further CPAs must apply the same baseline and monitoring method-



ology in the same type of facility/installation/land, and must meet the eligibility criteria established for CPAs under that program. Once this “typical CPA” has been established, every CPA in the program is simply a “repetition” of that typi-cal CPA. The coordinating entity must define whether the CPA is a single loca-tion or many locations within a certain area, depending on the type of program. As mentioned, a CPA can be added to the PoA as often as once a month; how-ever, every request for inclusion of a CPA incurs the administrative cost charged by the DOE. Therefore, in deciding how to define the CPA the coordinating entity must consider that each emission reduction site could be a separate CPA with its own crediting period but incurring its inclusion costs. On the other hand, the CPA could be defined as an area that contains a number of emission reduc-tion sites. This minimizes inclusion costs, but if the various emission reduction sites start over a long period of time, there will be a loss in crediting. The fol-lowing examples highlight the trade-offs:

Example 1: In the case of an investment program targeting the construc-tion of six mini hydro plants over a period of time, the project proponent may decide that each plant is a separate CPA, as there may be a signifi-cant time lag between each construction which warrants defining each plant as a separate CPA and having its crediting period be independent of other plants. Furthermore, the CERs from each plant are sufficient to cover the transaction costs of individual CPAs. The option of requesting CPA inclusion for each individual site is appropriate for programs with a few large activities.

Example 2: In the case of small farm biodigesters, the project proponent may choose to define a CPA as the annual tranche of installed biogas plants. The time lag between one installation and the next is probably not long enough to warrant separate CPAs, on the other hand the lifetime of the measures is long enough to not be disproportionately affected by av-eraging the CERs over the duration of the tranche. Since a once yearly request for inclusion of a CPA has reasonable transaction costs, this op-tion seems appropriate for a program that lasts several years and has a manageable number of medium size activities.

Example 3: In the case of a 3-year inefficient light bulb replacement program targeting 100,000 bulbs each year, the project proponent could decide that all targeted bulbs are a single CPA (one CPA including 300,000 bulbs). This CPA could be included in the PoA when the PoA is registered. The crediting period for the CPA would then start with the date of PoA registration. In each monitoring and verification period (e.g. once a year) the number of bulbs coming up within the CPA and the as-sociated emission reductions will be established and the corresponding



CERs can be issued. This option may be more appropriate for programs that have a short duration and a large number of micro emission reduc-tions. The all-encompassing definition of a CPA also works best for short programs targeting equipment with a short lifetime. Even if the new bulbs last only 2 years the lifetime of the bulbs installed at the end of the 3-years program lifetime will be completely covered by the CPA crediting period.

4- Methodologies for quantification of emission reductions. A PoA can apply more than one approved baseline and monitoring methodology16 to its CPAs17.

In case a more than one baseline and monitoring methodology is used a request must be forwarded to the Secretariat. This request will be evaluated by a Panel or working group under CDM-EB. In the end the request for using several base-line and monitoring methodologies need to be approved by the CDM-EB.

As indicated earlier, the CDM has two types of methodologies, one for large scale activities and one for small scale activities. In a PoA the baseline and monitoring methodology is applied to each CPA individually, not to the PoA as a whole. Therefore, it is most unlikely that any microfinance activity would ever have to use a complex large scale CDM methodology, as the limits of microfi-nance lending are most probably below the limits imposed on small scale meth-odologies.

As the thresholds for small scale methodologies (ref. chapter 3.1.4) apply to each CPA independently of how many times the CPA is “repeated” in a pro-gram, a PoA which uses microfinance for the CPAs could in theory and over time exceed the small scale limits, as long as each individual CPA does not ex-ceed the threshold and is identical to every other CPA in the program.

5- Additionality. All CDM projects must prove that they are “additional”. A CDM project is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity18. In a program, additionality must be demon-strated at both the program and the CPA levels. At the program level, the PoA is additional if it is shown that in the absence of the CDM (i) the proposed volun-tary measure (e.g. replacement of kerosene lanterns with solar powered battery) would not be implemented; or (ii) in the case of a mandatory policy/regulation 16 A list and description of all approved CDM methodologies is available from the UNFCCC’s website: http://cdm.unfccc.int/methodologies/index.html 17 CDM Executive Board, EB 47, Report, Annex 31, ”Procedures for Approval of the Applica-tion of Multiple Methodologies to a Programme of Activities” 18 UNFCCC decision 17/CP.7



would not be enforced as envisaged but rather depends on the CDM to enforce it; or (iii) that the PoA will lead to a greater level of enforcement of the existing mandatory policy/regulation. Most microfinance activities will fall into the first category of voluntary measures.

The coordinating entity will also have to provide a sound and credible argument for the additionality of the CPAs by proving that either the CDM helps over-come a specific (market, institutional or financial) barrier, or it is the additional income from the CDM which makes the CPAs viable. However, once the argu-ment for additionality has been accepted in the registration of the PoA, all sub-sequent CPAs can use the same argument for additionality and no need to rein-vent the wheel.

6- Duration. The duration of an energy related PoA can be as long as 28 years, and that of a forestry based PoA can be as long as 60 years. The exact duration must be defined by the coordinating entity at the time of registration.

7- Crediting period. As with all CDM projects, a CPA can have a crediting period (period during which the CPA can claim CERs) of either ten years, or a seven year period renewable two times. In either case no CPA can exceed the duration of the PoA as a whole.

The crediting period for afforestation/reforestation projects may be 30 years.

8- Stakeholder consultation. All CDM projects must perform a stakeholder consultation before they can be registered by the Executive Board. In a pro-gramme, the stakeholder consultation can be done either at the program level for all future CPAs, or at the individual CPA level.

4.2.1 Types of CPAs There are four main prototypes of CPAs, based on whether the CPA applies a single measure or several, at a single location or several:

1. Single measure, single location. These are activities that apply a single measure to a single facility, such as a biodigester in a single household. In this example, each biodigester is a CPA. In the graph, a circle represents a single measure, in this case, applied to single locations or households, each of which is a CPA.



PoA

CPA=Single technology

Single location

CPA

CPA

CPA

CPACPA

Figure 10: PoA - Single measure, single location 2. Several measures, single location. These are activities that apply a set of measures to a single facility, such as a set of energy efficiency measures applied to multiple boilers in a small or medium enterprise. Each boiler is a CPA apply-ing a set of efficiency measures to one industrial facility – as long as the set of EE measures is covered by one approved CDM methodology. In the graph, a triangle represents several interrelated measures. In this case the set of measures are applied to single locations (the small industrial facility), each of which is a CPA.

Figure 11: PoA - Several measures, single location 3. Single measure, many locations. These are activities that apply one measure, such as replacement of inefficient wood cooking stoves, to many locations within a single CPA defined as an area. The CPA could be the replacement of all/number x of cooking stoves in a village or area of a country, as long as the boundary of the CPA is clearly defined and does not cross the boundary of an-other CPA. In the graph, the single measure is applied to several locations (households) within the single CPA (village).



Figure 12: PoA - Single measure, many locations 4. Several measures, many locations. These are activities that apply a set of interrelated measures, such as various energy efficiency measures in homes, to many locations within a single CPA defined as an area. The CPA could be a city, or a section of the city, in which a group of efficiency measures (such as im-proved air conditioners, fans) are applied to many homes within the area, as long as they all apply the same CDM methodology. In the graph, a set of interrelated measures is applied as a group of measures to many homes within each individ-ual CPA.

Figure 13: PoA - Several measures, many locations

4.3 Procedures for submitting a PoA When submitting a CDM program for registration, the coordinating entity must submit the following three documents to the Executive Board of the CDM (via a DOE that is explained in chapter 3.1.1):

A Programme of Activities Design Document (PoADD) which contains all the information at the PoA level: the location and boundaries, the or-ganization, the operational information, the methodology chosen, the eli-gibility criteria for all CPAs, etc. This is the structure for the entire pro-gram.



A generic (or template) Programme Activities Design Document (CPADD) which contains all the information that is common to all CPAs in the program.

A specified Programme Activities Design Document (CPADD) which contains the information that is specific to the first CPA. This document uses the CPADD template as a base, but gathers the information which is unique to the first CPA.

These documents are examined by the Board for consistency with all CDM mo-dalities, and if found to be compliant, the program is registered. A CPA can be added to the program at any point during the duration of the program19. All CPAs added after registration do not need to request registration on their own. Rather, subsequent CPADDs are checked only by the corresponding DOE and if successfully validated, they are automatically uploaded onto the UNFCCC web-site under the original registration of the program. This feature of pCDM re-duces transaction costs and the regulatory risk for activities that otherwise would have to have been submitted as individual projects, or as several bundles of pro-jects.

If however at some point during the duration of the PoA a CPA is found to have been erroneously included in the program, the validating DOE will have to ac-quire and deposit into a cancellation account the number of CERs equivalent to the erroneous CPA, and the PoA will be “frozen” (no further CPAs can be added) until it is reviewed.

4.4 De-bundling Under the CDM, debundling is the fragmentation of a large project activity into smaller parts. A debundled CPA is not eligible to use the simplified modalities and procedures20.

According to EB 47, annex 32, if each of the independent subsystems measures (e.g. biogas digester, solar home system) included in the CPA of a PoA is no greater than 1% of the small scale thresholds defined by the baseline and moni-toring methodology applied, the CPA of the PoA is exempted from performing de-bundling check. As such the CPA is not considered to be a de-bundled com-ponent of a large scale activity.

For example, installation of an Improved Cooking Stove in a household may generate an annual emission reduction of around 4 t CO2e/ year. This is well 19 Not more frequently than once a month 20 Appendix C of the Simplified Modalities and Procedures for Small-Scale CDM project activi-ties (contained in annex II to decision 21/CP.8, see document FCCC/CP/2002/7/Add.3).



below 1 % of the small-scale threshold of 600 t CO2e/ year. Hence, the PoA will be exempted from performing the de-bundling test.

If the individual measures included in a CPA exceed the 1% threshold (i.e. 15 kW installed capacity or 0.6 GWh annual energy savings or 600 t CO2e annual emission reductions) the CPAs must pass the de-bundling test as indicated in Figure 14 below:

Figure 14: Guidance for Determining the Occurrence of De-bundling under a Programme of Activities (PoA)21

As discussed in the present report, most microfinance activities will likely be eligible to use small scale CDM methodologies as the CPAs will not exceed the established 1% of the small scale thresholds for CPAs. However, it is extremely important that the coordinating entity designs the PoA to avoid the appearance of debundling.

4.5 Cost reduction There are costs associated with every step of the CDM project cycle: design of the project, validation on the part of a Designated Operational Entity (DOE), registration on the part of the Executive Board, monitoring during the execution 21 CDM Executive Board, EB 47, Report, Annex 32, ”Guidelines on assessment of de-bundling for SSC project activities”, page 5.



of the project, and finally verification for purposes of obtaining the Certified Emission Reductions that can be sold. It is obvious that a certain volume of CERs is necessary to cover these transaction costs. It only makes sense to over-lay a MF project with CDM if the potential volume of CERs (at a foreseeable price) is high enough to not just defray costs, but in addition to have a positive financial impact on the project.

On the other hand, there is no doubt that pCDM reduces transaction costs with respect to traditional CDM. Validation is performed only at the program level and is charged only once. Subsequent CPAs are not validated but rather just included22 in the PoA. The registration fee that is paid to the CDM Executive Board is based only on the first CPA which is submitted with the PoA for regis-tration. All subsequent CPAs do not pay a registration fee. Since verification can be done by sampling, DOEs need not charge the full cost of individual verifica-tions.

The application of pCDM to an emission reduction effort in a LDC is best un-derstood in light of a specific project elaborated in case study 1, below.

4.6 Case Study 1: National Domestic Biogas Programme for Pakistan

4.6.1 Background Winrock International and SNV, the Netherlands Development Organization, are currently exploring arrangements for implementing a national programme for large scale dissemination of domestic biogas plants in Pakistan 23. In this case the term “programme” does not refer to pCDM, but rather to the fact that the intent is to promote the dissemination of the new technology on a national scale. The project counts on CER income flows to increase the financial feasi-bility, but the project has not yet designed the CDM component.

The present case study suggests ways in which the project could be designed as a CDM programme of activities and the analysis focuses on the organizational aspects of pCDM.

4.6.2 “Real Life” MF Project organized as a pCDM The project seeks to establish a commercially viable biogas industry in Pakistan over a period of 10 years. In the first 4 years the project aims to construct 30,000 domestic biogas installations in farming households that have at least 2 buffa-loes or cattle. Under a traditional CDM scheme the project proponent would have to either submit each biogas installation as a separate CDM project, or at

22 DOEs are still assessing how much they will charge for the step of including CPAs into a PoA 23 This case study is based on project material provided by Winrock International



best, aggregate several of them in a CDM bundle, for which the project propo-nent would have to know at the outset exactly which biogas installations would be included in the bundle. This requirement is obviously very cumbersome in the case of a dissemination program where the incentives will be put in place but the project proponent cannot know exactly which households will take advan-tage of the incentives to construct their biogas plant, and when they will do so. Programmatic CDM allows the project proponent the flexibility of designing a program to which participants can be added over a period of time.

If this Project were to be designed as a programme of activities it would likely have the following characteristics:

1. Coordinating entity

The Pakistan Biogas Development Entity (PBDE) would be the obvious coordi-nating entity of the PoA. It is already envisioned as the single entity coordinat-ing, regulating and facilitating functions, providing monitoring, quality man-agement, training and business support services. The PBDE will also channel the resources from the sale of the CERs. In the context of a PoA the PBDE would assume the responsibility of setting up the PoA, preparing all necessary documentation for the validation request, hiring the DOE for validation and verification of the CPAs, and would communicate with the Executive Board of the CDM on behalf of all participants in the Project.

2. Boundary

The boundary of the PoA could be the national boundaries of Pakistan, if it is decided that all 30,000 plants will be submitted under one PoA. The other option is to submit one PoA per province, if that makes the logistical arrangements and financial tracking easier to handle.

3. Methodology

All CPAs in the PoA must apply at least one or a combination of approved CDM baseline and monitoring methodologies. In case multiple methodologies are applied, this has to be previously approved by the EB. However, as this can delay the overall approval process of the PoA, effort should be made to base the PoA on a single methodology. Thus, in the case of the biogas plants there are two possibilities: AMS III.R if the methane recovery systems achieve an annual emission reduction of less than or equal to 5 tonnes of CO2e per system, or AMS III.D if the systems achieve an annual emission reduction higher than 5 tonnes of CO2e. The existence of two methodologies that differ on the volume of emission reductions demands a decision on the part of the coordinating entity because including more than one methodology implies a formal approval by the EB. The project documentation states that biogas plants are expected to reduce



4-5 tons of CO2e. If this is relatively certain, the coordinating entity could choose methodology AMS III.R in the understanding that any reductions above the 5 ton level will not be credited.

4. CPAs

The CPAs would be implemented by the various Biogas Construction Enter-prises (BCEs), typically capable of constructing 100 to 500 biogas installations per year. Since each plant achieves an annual reduction of up to 5 tons, there is no danger that a CPA will surpass the small scale limit of 60,000 ton/year. Fur-thermore, this is well below 1 % of the small-scale threshold of 600 t CO2e/ year that exempts the PoA from performing the de-bundling test. Thus the PBDE can be flexible in the definition of CPAs. PBDE could decide that a CPA will con-sist of up to 120 biogas plants or all the biogas plants built by one BCE in one particular area during a certain period of time. New CPAs can be added to the PoA at any time during the lifetime of the PoA, but not more frequently than once a month. It is important however to remember that debundling must be avoided by either keeping the size of the CPAs well below 600 t CO2e/ year or assigning CPAs that are within 1 km of each other to different BCEs or in other ways adhere to the debundling test indicated in Figure 14.

5. Additionality

At the program level, the PoA can be determined to be additional by showing that in the absence of the CDM the proposed biogas dissemination program would not be implemented. At the level of the CPAs the coordinating entity will have to prove how the CDM helps overcome a specific (market, institutional or financial) barrier. Which barrier is chosen for purposes of the additionality ar-gument depends on how the PoA is designed, and how the flows of income from the sale of CERs are channelled within the program.

6. Crediting period and duration

The project itself is meant to span a 10 year period. However the duration of the PoA can be longer than that. The coordinating entity may be interested in having the option of claiming credits for up to three seven-year crediting periods. If the coordinating entity has the staying power, it may consider a PoA duration of 28 years, with crediting periods of up to 21 years. It is possible that in 21 years time the baseline will have moved to the point where no reasonable amount of CERs can be claimed anymore.

7. Stakeholder consultation

Stakeholder consultation can be performed at the PoA level at the outset with national agencies and with the stakeholders of the first CPA that is submitted



with the PoA. Once the stakeholder consultation is accepted as part of the regis-tered PoA it does not need to be repeated (but can be if the coordinating entity so wishes) for every CPA.

As can be seen from the above case study, pCDM fits the organization model of micro finance. In contrast to traditional CDM, pCDM:

Allows for the aggregation of demand over time;

Helps to organize low-income consumers and communities to manage com-plex initiatives;

Reduces CDM regulatory risk; and

Reduces CDM transaction costs.

These characteristics make pCDM not only particularly pertinent to LDCs, but also allow it to be used as a complementary income flow in micro finance activi-ties in LDCs, in those cases in which micro finance is destined to emission re-duction activities. The next chapter explains the concept of micro finance and examines its applicability to mitigation activities in LDCs.

4.7 Status of pCDM 4.7.1 Survey June 2008

In order to get an indication of the progress of PoAs worldwide, a request was sent out, end June 2008, via Climate L, which is news and announcement list service that focuses on climate change policy and issues.

Responses were received from 15 different organisations that were in the proc-ess of preparing CPAs, as further indicated by the table below:

No. Country Sector 1 Madagascar Agro-forestry 2 Peru Energy efficiency and fuel switch in burners 3 Mexico Replacement of 25 million inefficient light bulbs 4 Chile Replacement of inefficient light bulbs in homes and buildings 5 Nicaragua Efficient wood stoves 6 El Salvador Substitution of inefficient motors for energy efficient electric

motors 7 El Salvador Installation of energy efficient industrial lighting devices 8 Uganda Small scale forestry activities 9 India CFL distribution to grid connected households

10 China CFL 11 Brazil DSM refrigerator 12 Mexico Distribution of CFL light bulbs 13 South Africa Solar water heating programme 14 Tunisia Solar water heating programme



No. Country Sector 15 Kenya Micro hydro

Table 4: Response to Climate L request regarding preparations for pCDM. Summer 2008 Apart from the above organisations, the study team had knowledge of an organi-sation that was putting together a PoA for PV solar home systems, where the entire Tanzania is just one CPA. The CPA will involve targeted measures by the organisation and two enterprises in Tanzania that are in the organisation's in-vestment portfolio. These measures will boost dissemination of PV solar home systems that mainly will be used for home lighting, TV, cell phone charging. The systems are small in size, with PV modules ranging from about 10Wp to 200Wp, of which the majority will likely be 50Wp or less. The CPA in Tanzania was at the time of the survey projected to lead to 10's of thousands of new instal-lations, from new PV sales over seven years. This will bring substantial quality of life benefits, but the aggregated capacity from all the new PV installations would only amount to about 1.9 MW, way below the 15 MW limit.

In the context of the present study, it is interesting to notice that out of the 16 projects, only three, namely Madagascar, Tanzania and Uganda are registered as LDC countries.

4.7.2 Status of approval CDM-EB, November 2009 Two Programmes of Activities have been registered by the CDM-EB by No-vember 2009, i.e.: 1. Smart use of energy in Mexico which involves distribution and installation

of energy efficient light bulbs all across Mexico and

2. Methane capture and combustion of biogas at pig farms in five states in Brazil.

Furthermore, 16 other pCDM projects have reached the stage of validation. These projects are to be hosted by the following LDCs: Uganda, Senegal, Bang-ladesh as well as non-LDCs: China, Egypt, Honduras, India, South Africa, South Korea, Tunisia and Vietnam.



5. MICRO-FINANCING IN LDCS

5.1 Introduction This chapter describes the status of micro-financing in LDCs in terms of financ-ing models and applications, major players and lessons learned. Furthermore, barriers to implementation of micro-financing schemes related to CDM in LDCs will be discussed. The section will include basic information on the workings of micro-financing, as it is assumed that such information is useful for project pro-ponents not previously involved in micro finance activities.

Microfinance has evolved as an economic development tool intended to benefit low- income men and women. The term refers to the provision of financial ser-vices to low income clients, including the self employed. Financial services in-clude savings and credit with some microfinance organizations providing insur-ance and payment services as well. In addition to financial intermediation, many microfinance institutions (MFIs) provide social intermediation services such as group formation, development of self confidence, and training in financial liter-acy and management capacity among members of the group. Thus the definition of microfinance often includes both financial and social intermediation. Broadly stated, microfinance is not simply banking, it is a development tool.

Microfinance activities are typified by the following characteristics:

1. Small loans, typically for working capital

o Purchase of inventory, equipment, etc.

2. Informal appraisal of borrowers and investments

o Very little credit or business analysis

o Loans are “character based”

3. Collateral substitutes, such as group guarantees

o Peer pressure and communal support are usual



4. Access to repeat and larger loans based on repayment performance

5. Streamlined loan disbursement and monitoring

o Transaction costs are high due to small size of loan

6. Secure savings products

o Secure implying regulated

o A growing trend, but many NGO MFIs do not offer regulated savings products

MFIs can be nongovernmental organizations (NGOs), savings and loan coopera-tives, credit unions, government banks, commercial banks, or non bank financial institutions. Microfinance clients are typically self-employed, low income, en-trepreneurs in both urban and rural settings. Although they are poor, they are not generally considered to be the “poorest of the poor”. MFIs are most likely to flourish in areas with little employment opportunity for the working poor caus-ing them to gravitate to small businesses that provide income generated through self employment and the usually unpaid labour of close family members.

5.2 Microfinance process and -flow Microfinance loans are usually granted to new clients in small amounts for short periods of time and with monthly repayment requirements. The loan may be granted to a group where all of the members are liable but there is a growing trend towards individual loans. Borrower performance on past loans generally determines the amounts and duration of future accommodations.

Loan applications are appraised by a loan officer with loan approval usually granted by a committee. Collateral may be taken and there may be a perfunctory discussion of repayment capacity from cash flow, but loans are approved based on knowledge of the borrower’s character, honesty, and past performance with the MFI. The process works as evidenced by the very high repayment rate found in the MFI industry.

Successful MFIs can be characterized as having:

1. Good governance

a) A strong board of directors with

No tolerance for corruption



Dedication to serving the community in which the MFI operates

An understanding of a board’s roll as policy makers, not managers

2. Strong management

a) Sound knowledge of MFI operations

b) A commitment to excellent credit quality

Close monitoring of loan performance

Rapid and aggressive collection efforts in event of default

3. Profitable operations

a) Microfinance lending is expensive because of high transaction cost

b) The MFI must be operated as a business in order to be effective

The actual process or flow of a microfinance transaction for an individual would be:

Identifes need

Flow of microfinance transaction for an individual

IfYes

Applicant /Borrower

Loan Committee

Loan Officer Assistance

Assists borrower with

application

Approaches Loan Officer

May advice to size and

tenure of loan

Appraisal /Recommenda

tion

Loan Officer Appraisal

AmountPurposeTerms

Applicant history with

MFI

Reputation in community &

business knowledge

Decision

Contact to Applicant

Respons from Loan

Committee

Loan Fund

Disbursment of funds

Figure 15: process of a microfinance transaction for an individual



Group based lending involves the formation of groups of people who have a common wish to access financial services. Groups would follow the same ap-proach as outlined above, but each member of the group is liable for the other’s loans. In some instances small groups of 5-10 people are formed and individual loans are made to group members. In other instances groups of 30-50 are formed and a loan is made to the group as a whole. The peer pressure and communal support offered by group lending are believed to have contributed greatly to its success.

5.3 Best practices The Consultative Group to Assist the Poor (CGAP) is a consortium of 33 public and private funding organizations - bilateral and multilateral development agen-cies, private foundations, and international financial institutions - working to-gether to expand poor people's access to financial services. CGAP serves as a global resource centre for microfinance, providing advisory services and infor-mation to a wide range of stakeholders and is generally recognized by microfi-nance professionals as the definitive resource for guidance concerning provision of financial services to the poor. CGAP has laid out the following as an outline for best practices for microfinance institutions:

1. Poor people need a variety of financial services, not just loans. Like eve-ryone else, the poor need a range of financial services that are convenient, flexi-ble, and affordable. Depending on circumstances, they want not only loans, but also savings, insurance, and cash transfer services.

2. Microfinance is a powerful tool to fight poverty. When poor people have access to financial services, they can earn more, build their assets, and cushion themselves against external shocks. Poor households use microfinance to move from everyday survival to planning for the future: they invest in better nutrition, housing, health, and education.

3. Microfinance means building financial systems that serve the poor. In most developing countries, poor people are the majority of the population, yet they are the least likely to be served by banks. Microfinance is often seen as a marginal sector—a “development” activity that donors, governments, or social investors might care about, but not as part of the country’s mainstream financial system. However, microfinance will reach the maximum number of poor clients only when it is integrated into the financial sector.

4. Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people. Most poor people cannot get good financial services that meet their needs because there are not enough strong institutions that pro-vide such services. Strong institutions need to charge enough to cover their



costs. Cost recovery is not an end in itself. Rather, it is the only way to reach scale and impact beyond the limited levels that donors can fund. A financially sustainable institution can continue and expand its services over the long term. Achieving sustainability means lowering transaction costs, offering services and financial instruments that are more useful to the clients, and finding new ways to reach more of the unbanked poor.

5. Microfinance is about building permanent local financial institutions. Finance for the poor requires sound domestic financial institutions that provide services on a permanent basis. These institutions need to attract domestic sav-ings, recycle those savings into loans, and provide other services. As local insti-tutions and capital markets mature, there will be less dependence on funding from donors and governments, including government development banks.

6. Microcredit is not always the answer. Microcredit is not the best tool for everyone or every situation. Destitute and hungry people with no income or means of repayment need other kinds of support before they can make good use of loans. In many cases, other tools will alleviate poverty better—for instance, small grants, employment and training programs, or infrastructure improve-ments. Where possible, such services should be coupled with building savings.

7. Interest rate ceilings hurt poor people by making it harder for them to get credit. It costs much more to make many small loans than a few large loans. Unless microlenders can charge interest rates that are well above average bank loan rates, they cannot cover their costs. Their growth will be limited by the scarce and uncertain supply of soft money from donors or governments. When governments regulate interest rates, they usually set them at levels so low that microcredit cannot cover its costs, so such regulation should be avoided. At the same time, a microlender should not use high interest rates to make borrowers cover the cost of its own inefficiency.

8. The role of government is to enable financial services, not to provide them directly. National governments should set policies that stimulate financial services for poor people at the same time as protecting deposits. Governments need to maintain macroeconomic stability, avoid interest rate caps, and refrain from distorting markets with subsidized, high-default loan programs that cannot be sustained. They should also clamp down on corruption and improve the envi-ronment for micro-businesses, including access to markets and infrastructure. In special cases where other funds are unavailable, government funding may be warranted for sound and independent microfinance institutions.

9. Donor funds should complement private capital, not compete with it. Do-nors provide grants, loans, and equity for microfinance. Such support should be



temporary. It should be used to build the capacity of microfinance providers; to develop supporting infrastructure like rating agencies, credit bureaus, and audit capacity; and to support experimentation. In some cases, serving sparse or diffi-cult-to-reach populations can require longer-term donor support. Donors should try to integrate microfinance with the rest of the financial system. They should use experts with a track record of success when designing and implementing projects. They should set clear performance targets that must be met before funding is continued. Every project should have a realistic plan for reaching a point where the donor’s support is no longer needed.

10. The key bottleneck is the shortage of strong institutions and managers. Microfinance is a specialized field that combines banking with social goals. Skills and systems need to be built at all levels: managers and information sys-tems of microfinance institutions, central banks that regulate microfinance, other government agencies, and donors. Public and private investments in microfi-nance should focus on building this capacity, not just moving money.

11. Microfinance works best when it measures—and discloses—its per-formance. Accurate, standardized performance information is imperative, both financial information (e.g., interest rates, loan repayment, and cost recovery) and social information (e.g., number of clients reached and their poverty level). Do-nors, investors, banking supervisors, and customers need this information to judge their cost, risk, and return.

5.4 Scope of microfinance The microfinance industry, like other industries, is concentrated. Just 9 percent of the world’s MFIs are thought to account for 75 percent of all borrowers24. There are thousands – estimates range up to 10,000 - of small, unprofitable MFIs that do not report to international databases. Fairly reliable data can be found for around 1,000 MFIs which provides a basis for determining the status of the industry as well as changes and trends in the type of operations that are prevalent. Of particular note are estimates that only ten percent of the micro-credit demand is being met25.

24 The State of Microfinance – Outreach, Profitability, and Poverty, Findings from a database of 2600 microfinance institutions, Adrian Gonzalez (MIX/CGAP),Richard Rosenberg (CGAP) ref.: http://info.worldbank.org/etools/library/latestversion.asp?232702 25 Microfinance: An Emerging Investment Opportunity, Deutsche Bank Research, December 19, 2007.



5.5 Trends in microfinance26 What began as a collection of individual non-governmental organizations funded by development donors has become a professional business offering not just credit, but a full range of banking services to poor people.

Hundreds of microfinance institutions have matured and become profitable. Lo-cal commercial banks are beginning to see opportunities at the low end of their retail market. Even mobile-telephone operators are innovating with cell phone-based banking services.

The industry has attracted a flood of new money from investors and big com-mercial banks. In the year 2008, there were at least 80 investment funds that specialized in microfinance, 30 of which were established during the previous three years. These funds are still small and highly concentrated in the leading institutions in Latin America and Eastern Europe, but their pool of capital avail-able is growing fast. Big banks are also getting in the game: Citigroup, Deutsche Bank, TIAA-CREF, Morgan Stanley, ABN AMRO and Societé Generale are deploying their structuring and fund-management skills to offer investment products that appeal to a broad range of investor-risk profiles and social motiva-tions.27

Commercialization of microfinance has placed an emphasis on professionalism and profitability and has seen a trend away from group lending in favour of in-dividual loans. Not only have established commercial lenders such as banks “reached down”, long established MFIs are moving up into the small and me-dium enterprise (SME) market. New entrants to the microfinance field include the very wealthy such as Pierre Omidyar, the founder of eBay and Bill and Melinda Gates through their foundation. These people are very much business oriented and are strongly influencing the future direction of the microfinance industry. Omidyar has granted $100 million to Tufts University with the stipula-tion that the principal be dedicated to a fund to invest in microfinance - specifi-cally, in investments that would promote microfinance commercialization.28 Google established a philanthropic entity called Google.org, with seed money of about a billion dollars, to fight disease, global warming, and poverty; microfi-nance is expected to be a key component of its poverty portfolio. And in April,

26 It should be noted that due to the world-wide financial crisis, the information given in the present section and other sections of the chapter may have changed, as the majority of the text in the chapter was written prior to issuing the final draft report of the study in November 2008. It is clear that the flux of investment funds to LDCs, targeting MF institutions is significantly lower than during previous years. Anyhow, as the duration and the full effect of the financial crisis is impossible to predict it was still found relevant to highlight MF trends during the last years. 27 www.forbes.com/2007/12/20/elizabeth-littlefield-microfinance-biz-cz_el_1220littlefield.html 28 http://www.tufts.edu/alumni/magazine/winter2006/departments/upfront.html



2006, the Bill and Melinda Gates Foundation announced that it would devote an undisclosed amount of money to expanding financial services for the poor in developing countries.29

Commercial financial institutions expanding their activities include Citigroup, the largest banking network in the world, who launched a microfinance unit in April 2005. Citigroup determined that the market potential of reaching the “un-banked” is so vast that there is room for every approach: profitable, sustainable, and subsidized. The Omidyar-Tufts fund has invested in a Frankfurt-based bank-ing network called ProCredit Holding that operates in developing countries in Eastern Europe and Africa.

Along with this change in delivery of services has been a change in the makeup of the traditional MFI customer base. While MFIs have traditionally focused on women borrowers, recent studies have shown that men can be diligent savers and are therefore attractive as customers for the many MFIs now offering a full array of financial services. It is thought the customer base is becoming more educated, has increasingly wide access to technology, and has the skills needed to use it. The challenge of efficient delivery of services to the rural communities is more and more being met with advances in technology, primarily cell phones. And, while it is not yet accurate to define many developing countries as becom-ing urbanized, there is rapid growth in most of the major cities in the developing world even though employment opportunities do not necessarily keep pace.

In recent years then, younger and nimbler players have been taking microfi-nance toward the idea of building a fully commercial, profit-making sector. This conflict, between the traditional pure do-gooders and profit-minded do-gooders, has come to define the current debate in the microfinance world.

When all the above is said, it is clear that the present world-wide financial crisis is taking its toll by significantly reducing the flow of capital also to MFIs in LDCs. However, as the full effect and duration of this crisis is impossible to predict, it was still found relevant to mention the positive trends in microfinance during the last years.

5.6 Microfinance Strategies in LDCs Microfinance is regarded as one of the priorities of national development in an ever growing number of countries. More than 20 LDC countries, of which the

29 http://www.newyorker.com/archive/2006/10/30/061030fa_fact1?currentPage=3



majority are African, have developed a national microfinance strategy as indi-cated in the table below30:

AFRICA (18 countries)

ASIA (4 countries)

Benin Cambodia Burkina Faso Lao PDR DRC Congo Nepal

Ethiopia Yemen Gambia Liberia

Madagascar Mali

Malawi Mauritania

Mozambique Niger

Rwanda Sierra Leone

Senegal Tanzania

Togo Uganda

Table 5: LDC countries with national microfinance strategies

5.7 Microfinance and energy lending programs Access to small-scale finance, like micro credits that are suited for low-income businesses, households and individuals, is generally regarded very important for expanding access to modern energy services. Nevertheless, the poor have typi-cally very limited choices for financing the purchase of energy devices/units. Generally, poor people are not viewed as viable markets by energy supplying companies. Hence the suppliers don’t offer loan or credits in order for these people to be able to pay for the energy services.

Therefore, microfinance is assessed as an important input to poor people in or-der to receive energy services. MFIs can through partnering with local energy suppliers extend the amount of inhabitants who will be provided access to en-ergy, as MFIs are more willing to provide financial support for services in poor and/or rural areas where they are used to handling the financial risk.31

30 http://www.cgap.org/gm/document-1.9.4349/Briefs_NatMicroStrat-Update.pdf 31 Using Microfinance to Expand Access to Energy Services: Summary of findings, SEEP Net-work, November 2007



Regardless of how a MFI is defined, traditional NGO or a new commercial model, it must operate profitably if it is to be sustainable; i.e. free of donor sup-port. The MFI must have a performing loan portfolio and a minimum of collec-tion problems. To accomplish this MFI borrowers must be able to repay their loans primarily from cash flow generated from the small businesses they typi-cally operate. Characteristics of microfinance borrowers are:

Small entrepreneurs

o Lack of employment opportunities force people into small business for livelihood

o Most would prefer a decent job

o Nascent business skills

Little discretionary income

o Hand to mouth existence

o No money for conveniences and luxuries

Most MFI loans are for less than 6 months with a very few up to one year. Hardly any MFIs have the capacity to lend beyond one year if they adhere to the practice of matching their assets – loans – to their liabilities, or deposits. This is becoming increasingly important given the rapid growth in full service MFIs.

Lending for energy then could tend to focus on programs that reduce a bor-rower’s cost of living or doing business to the same extent as the cost of repay-ing the loan. There could, of course, be an increase in profitability in a business by the introduction of energy driven increases in productivity. In any event, it does seem that the energy lending program would ultimately be driven by pure business principles for both the MFI and the borrower.

In reviewing recent discussions regarding MFIs and energy lending, some com-mon threads do emerge. Firstly, MFIs do seem to recognize energy lending as a good business opportunity and there is an increasing focus on such programs by commercial lenders as well as the donor community. While the MFIs may look at improvement in the environment as a collateral benefit to an expanded loan portfolio, and the energy suppliers at expanded business opportunities as well, it is probably safe to assume that there will be continued support – if not pressure - from those primarily interested in the reduction of man’s detrimental impact on the environment. It does seem to becoming evident that the most effective way



to impact the decisions of the MFIs is to first, if not always, keep in mind the financial interest of the MFI and its borrowers.

Recent work by Accion in Uganda and a report completed by the SEEP network are consistent in concluding that MFIs are serious about expanding their energy loan portfolio and are best served by forging strategic alliances with principals in the relevant energy industry sub-sectors. A symbiotic relationship can emerge that eventually benefits all concerned, especially the end user of the energy/loan product. The following is an excerpt from a January 2008 SEEP paper32:

“One of the major bottlenecks to expanding access to energy services for the poor through microfinance is the lack of coordination between the energy and microfinance sectors. For example, in many cases it is com-mon for a microfinance institution (MFI) and its clients to lack informa-tion about the benefits of modern energy. Successful energy-lending programs begin with the formation of strategic partnerships between one or more groups of stakeholders, including MFIs, self-help groups, energy companies and rural energy enterprises, government agencies, donors, commercial banks, NGOs, and more. The role played by each stake-holder in energy lending – and, more importantly, their understanding of each other’s responsibilities – are crucial determinants for the success of an energy-lending program.

Some of the more recent examples of successful energy-lending pro-grams involve a strong partnership between the MFI and energy com-pany. The strength of this partnership largely depends on the internal ca-pacity and core competency of each partner, as well as a clear and mu-tual understanding of roles and responsibilities. It is important to note upfront that there is no “one size fits all” model for developing these partnerships. The demarcation of roles and responsibilities will likely vary and are dependent on a wide range of factors, including country contexts, institutional visions, and organizational structures. For exam-ple, in some cases, the MFI develops and markets the energy loan prod-uct to its clients. In other cases, the energy company will actually market the MFI and its energy loan product to a customer who expresses interest in purchasing an energy service product but is unable to pay upfront, lump-sum costs.”

32 Sparking Strong Partnerships: Field Tips from MFIs and Energy Companies on partnering to Expand Access to Energy Services, A joint publication of the SEEP network and Sustainable Energy Solutions, January 2008. Ref: http://www.seepnetwork.org/files/5874_file_Sparking_Strong_Partnerships_FINAL.pdf



The relatively new United States of America based NGO named Arc is an ex-ample of an NGO that focuses on increasing access to financing for clean energy by building linkages between the energy and microfinance sectors. Their main pipeline of work for this year concentrates on:

1) Brokering new partnerships between energy enterprises and microfinance institutions,

2) Scaling up existing energy-lending programs of MFIs and FIs,

3) Setting up wholesaling mechanisms for energy onlending to savings and credit associations and smaller village banks, and

4) Experimenting with new business models for financing small scale energy.

Arc is working together with the organisation E+Co that for the last 15 years has invested in clean energy technologies in the developing countries. Arc’s mission is to “empower local small and medium enterprises that supply clean, modern and affordable energy to households, businesses and communities in developing countries”. 33

Although the number of MFI that is interested in the energy lending portfolio is increasing, very few of them have looked at the carbon market as a potential source of income for marketing clean energy products. This is, in most cases, because of the apparent overwhelming overhead costs for setting-up and admin-istrating such activities. However, there are a few energy enterprises doing some innovative work in the voluntary market using carbon credits to buy down the interest rates offered by banks and MFIs enabling their products to be sold to the large, often untapped credit market.

Examples of energy products offered by MFIs are:

Asia MFI Energy Product

SEWA Bank

Solar Home System, Solar battery charging, Solar lanterns, So-lar headlamps, Sarai Cookers, Improved Cookstoves

SEED Solar Home System, Grid connection, Village micro hydro NUBL Biogas Loan Amret Open to client’s choice of energy system through traditional

business loans. Africa

KUSCCO LPG stoves and cylinders and solar systems (Is introducing bio-gas products)

Faulu, Kenya

LPG stoves and cylinders and solar systems (Is introducing bio-gas products)

Latin America and Caribbean Various Mainly solar products, although some offer loans for grid con-

33 http://eandco.net/newsletter/newsletter_su08_Microfinance.php



nection Table 6: Energy products offered by MFIs 34

A recently completed study of UNDP provides a sound overview and analysis of seven real cases from Burkina Faso, Kenya, Nepal and Tanzania, where small-scale finance has been applied to improve access to energy services for the poor35. These cases provide lessons on especially the role of government in re-moving barriers and bridging the gaps of resources and knowledge that often constrain the poor from accessing small-scale finance essential for the purchase of energy. As a result of this UNDP study, a set of four concrete recommenda-tions for policy makers emerged, to support the expansion of small loans for modern energy services:

Analyse the current situation on small-scale finance for modern energy ser-vices.

Create enabling conditions for linking small-scale finance options with na-tional rural energy programmes and policies.

Facilitate partnerships to strengthen financial institutions and energy enter-prises serving the poor.

Support and strengthen monitoring, evaluation and disclosure of energy lending portfolio performance, impact, and growth.

In regard to the last bullet point, the UNDP study stresses that MFIs through the years have developed very effective ways of tracking the various loans that are being issued, the number of clients, the quality of the portfolio, and the overall impact the loans are creating with respect to economic and social development. These types of standards and disclosure requirements are usually absent regard-ing most energy loans. Therefore, there is a great need and good opportunity to start building monitoring and disclosure standards that are modelled according to the microfinance sector.

34 Using Microfinance to Expand Access to Energy Services: Summary of findings, SEEP Net-work, November 2007 35 Ellen Morris and Gathu Kirubi, ”Bringing Small-Scale Finance to the Poor for Modern En-ergy Services: What is the role of government?, Experiences from Burkina Faso, Kenya, Nepal and Tanzania”, UNDP, August 2009.



6. COMBINING MICRO-FINANCE AND CDM

6.1 Introduction It is assumed at this stage that the synergies between micro-finance and CDM will apply to Programme of Activities type CDM projects. This is due to the similarities in concept: both micro-finance and PoA in LDCs deal with dispersed and large volumes of small units.

This section analyses the complementarities of micro-finance and pCDM, and seeks to identify possible synergies between the two, specifically how the barri-ers in each system can be overcome by the other.

Strengths of microfinancing related to pCDM: There are several factors that make MFIs suited for channelling pCDM funds to LDCs. The MFIs are embedded in the communities, especially rural off-the-grid communities that need decentralized energy solutions. MFI staff meets with millions of households every week; and as such are a channel to market for financial services, and financed energy services are a natural expansion. In addition, MFIs possess administration methods suited for widely dispersed applica-tions.

Strengths of pCDM related to microfinancing: Some main strengths of CDM on micro financed energy projects is its attractive investments in fixed assets, credit enhancement and reliable returns. Potential provision of up-front capital is possible by using the future revenue of CERs as a guaran-tee for some of the loans that are required to cover the initial expenditures of a project or a programme.

Common ground between micro-finance and pCDM: One of the most obvi-ous synergies of MF and CDM is the integration of CDM monitoring pro-cedures in microfinance loan monitoring. A prerequisite for both MF and CDM is professional management and highly dispersed applications.

Other possible synergies: Overlap in reporting procedures and shared infra-structure.



6.2 Simplified organisational set-up of a pCDM/MF programme The immediate organisational set-up of a pCDM/MF programme, indicated in the figure below, involves a considerable number of stakeholders and thus trans-action costs are rather heavy.

Figure 16: Traditional set-up. Involves many stakeholders and thus considerable transac-

tion costs Therefore it makes sense to attempt to minimise the number of parties involved by e.g. combining the role of the MFI and the dealer of technology in one unit (or a symbiotic relationship), as indicated in the figure below:

Figure 17: Alternative set-up. Involves fewer stakeholders and thus reduced transaction costs. Here the MFI and dealer/supplier of energy technology are considered as one unit. The inclusion of pCDM could be considered under the same umbrella.



Nevertheless, it is important to keep in mind that representatives of deal-ers/suppliers of the energy technology should in one way or another be present in the vicinity of the users, also in order to ensure access to spare parts and maintenance. In some cases, like the Solar Home Systems programme currently running in Bangladesh, under the auspices of Grameen Shakti, the maintenance and installation of spare parts is taken care of by trained groups of women that at the same time create job-opportunities for them. Many MFIs are used to working in rural areas and structuring loan schedules but not all of them do have the interest and the technological expertise required to act as dealer of the energy technology or managing a CDM programme.

On the other hand the dealers may have experience with consumer credits and leasing arrangements for their energy products but it is questionable how many of them have the interest and capacity to manage a fairly complex system like pCDM.

6.3 Fostering increase of CDM in LDCs through micro-finance 6.3.1 Overlaying microfinance with pCDM

There are several issues to be considered in overlaying microfinance with pCDM:

1. Choice of the coordinating entity for PoA: The coordinating entity of the PoA can, but does not have to be, the institution providing the microfinance (MFI). It is important however that the chosen coordinating entity have the managerial capacity and the staying power to supervise the implementation of all the CPAs, monitor their performance and provide the necessary reports throughout the duration of the PoA. Unless the chosen methodology allows for monitoring by sampling, the current requirement of the CDM is that each CPA be individually monitored, which requires a decisive level of cost and man-power. This requirement may change in the future, but for the time being high quality monitoring is the only avenue to certified emission reductions.

2. Distribution of certified emission reductions (CERs): There is no interna-tional guidance on the distribution of certified emission reductions, allowing coordinating entities the freedom to negotiate arrangements as they see fit. In the case of micro activities, it is clear that individual ownership/marketing of CERs does not make sense. Individual households that upgrade to an improved cook-ing stove have no use for a CER, and can in any case not access the international market individually. Aggregation of CERs is the only sensible option, and this can be done either at the level of the MFI, or at the level of the coordinating entity, if it is different from the MFI. In any event it is the responsibility of the



coordinating entity to inform the Board with regard to the agreed distribution of CERs.

3. Financial impact of CERs: All CDM projects or programs create a new as-set (certified emission reductions or CERs) which have market value. When sold, CERs are converted into an income flow, which is additional to the main income flow in the case of projects that have a principal product which is sold, such as renewable energy projects that sell electricity. In other cases where there is no principal product, the CERs are the only source of income, as in the case of anaerobic digesters in swine farms. The same distinction can be made in the case of microfinance. Some MF projects, such as financing for micro hydro power plants, benefit from a rate of return on the investment. In these cases the income from CERs improves the IRR of the project, and can make it more fea-sible from the banking perspective. In other cases, such as the substitution of kerosene lanterns with solar powered light, the investment is not made for finan-cial reasons but rather for social and development purposes. In these cases, the CER income flow can serve as a credit enhancer or can be front loaded in order to defray some of the initial start up costs.

In a CDM program the income flow from the CERs can be used in various ways, depending on the structure of the program:

1. Payment on delivery- if the individual activities are large enough to gener-ate a reasonable level of CERs, the income could go directly to those who achieve the emission reductions once they have been certified.

2. Advance payment- in the case of those programs with high upfront costs the income flow can be front loaded and used to buy down at least a portion of those costs.

3. Soften the loan- in those loan programs in which the borrowers are high risk, the CER income can be used to soften the loan or enhance the credit.

4. Reduce the price- in the case of a supplier selling a new technology to users, the CER flow could be used to reduce the price thus broadening the market.

6.3.2 Examples of MFIs involved in reducing climate change A number of respected MFIs and networks – including ACCION, BASIX in India and Equity Bank in Kenya – are exploring products to respond to climate change36

36 Microfinance: Climate change connections. Development Outreach, Katharine McKee http://www1.worldbank.org/devoutreach/article.asp?id=476



A smaller organisation that promotes access to energy through microfinance is the for-profit social enterprise MicroEnergy Credits Corporation (MEC). It was recently launched and hopes to revolutionize financing of reliable and sustain-able “clean”/renewable energy sources at the base of the pyramid (BoP). Their target group is people in the developing countries that cannot afford to pay the high up-front costs of clean energy technologies and therefore adopt traditional energy sources. MEC intends to bridge this financing gap, making it affordable for the poorest and most remote clients to utilise clean energy sources.

MEC provides financing through Microfinance Institutions (MFIs) and utilises the recent developments in the carbon credit markets on the supply side to facili-tate the adoption of clean energy for their target group.

In order to reduce the transaction costs of carbon financing, "MEC provides MFIs carbon revenues on a per unit basis for each system they finance. This gives them near term access to finance for the seed costs of starting an energy program. As their program scales up, they can pass on the subsidy to end users which enable them to achieve greater volume by reaching poorer clients."

The MFIs receive revenue by lending for energy systems that create verified carbon emissions reductions, such as solar PV systems, improved cook stoves and biogas digesters.37

37 MicroEnergy Credits Corporation: Greening the Base of the Pyramid, 23 April 2008, World Changing. Change your thinking. Ref: http://www.worldchanging.com/archives/007982.html



7. CONCLUSION AND RECOMMENDATIONS

It should be stressed that some of the conclusions and recommendations ad-dressed in the present report should be dealt with at CMP level, if the potential is to be exploited.

Furthermore, it is vital that potential projects that combine CDM with MF in LDCs, not only focus on the energy sector, but contemplate all potential green-house gas emission sources, eligible under the Kyoto Protocol, e.g. afforestation.

The CDM-EB and the Danish Ministry of Foreign Affairs hosted a seminar in Copenhagen 28 September 2009 to discuss the conclusions and recommenda-tions of the Final Draft Report of the study. The participants recommended fo-cusing on and increasing the activities in the following four areas to increase the synergies between CDM, especially Programme of Activities (PoA) and micro-finance, as an instrument for increasing CDM activities in Least Developed Countries: 1. Demonstration projects, 2. Simplified administration, 3. Establishment of a CDM Fund, and 4. Priority to CDM projects from LDC countries. The recommendations from the seminar were forwarded to the CDM-EB before the 50th CDM-EB meeting in October 2009. Hence, CDM-EB has had the op-portunity to incorporate the recommendation from the seminar in the document CDM-EB Meeting 50, Annex 50 “Recommendation on Regional Distribution of Clean Development Mechanism Project activities”

7.1 Conclusions The combination of CDM with MF can resolve some of the prevailing barriers for channelling CDM funds into LDCs and at the same time introduce benefits for the respective populations.

One of the main effects of CDM on micro financed energy projects, or other projects having an impact on reducing the emission of green house gasses to the



atmosphere, is credit enhancement and the potential provision of up-front capi-tal. This is enabled by e.g. using the future revenue of CERs as a guarantee for some of the loans that are needed to launch the projects.

However, there are a number of constraints that need to be addressed, to accel-erate and facilitate this provision of CDM funds in combination with MF in LDCs.

A major constraint to expanding access to energy services for the poor through microfinance is the lack of coordination between the energy and microfinance sectors. Improving this coordination should be regarded as a prerequisite for combining CDM funds with MF.

Another constraint is lack of knowledge of these two parties of the opportunities CDM offers, e.g. the newly established pCDM.

In addition, there is a need for simplifying the number of parties involved in the implementation of CDM projects in LDCs to amongst others reducing the trans-action costs.

In principle, there are vast numbers of project types in LDCs that could candi-date for CDM funds. However, the expected contribution of CDM funds, nor-mally does not seem to exceed 5 – 10 % of the project investment costs, and as such does not immediately meet the increased CDM transaction costs. As a re-sult, there is a need to investigate further and demonstrate, for a selection of project types, how CDM funds in combination with MF can improve the eco-nomic viability of a project. Access to additional funds for preparing- and/or developing demonstration CDM projects in LDC countries can be regarded as a precondition for increased interest amongst MFIs and the different deal-ers/suppliers of appropriate energy technologies.

7.2 Recommendations The following sections summarise the recommendations of the study.

7.2.1 Stakeholders involvement Apart from the stakeholder involvement needed (of which here can be men-tioned the CDM Executive Board, relevant organs of UN involved in developing aid and CMP) for the materialisation of the below mentioned recommendations, the role of the following stakeholders can be crucial to ensure a successful im-plementation of CDM projects at the end of the cycle:

MFI and dealers/suppliers of energy devices



MFI and dealers/suppliers of energy devices need to cooperate and utilise each others strengths in order to seek the opportunity of channelling carbon credits into LDCs.

Government and Donors

The challenge of introducing energy lending supported by CDM funds can be addressed by Governments and donors by e.g. offering technical assistance and credit enhancement schemes. For example, they can assist MFIs to ally with energy companies, by the provision of funds for pilot projects and enable MFI staff to observe successful lessons-learnt in other countries.

Furthermore, it is important that host country governments both promote the opportunities CDM funding provides to project developers and delivers correct and updated information on CER pricing, changing rules and modalities, local sustainability requirements etc. and makes it accessible for the project develop-ers.

NGOs

NGOs can play a vital role in ensuring a sustainability of a project, especially in what concerns the anchorage of technical skills in the local population, thus re-moving the technical barriers that often inhibit proper installation and operation of renewable energy devices/units. There are some successful examples of this, such as the Solar Home Systems programme currently running in Bangladesh, under the auspices of Grameen Shakti, where maintenance and installation of spare parts is taken care of by trained groups of women, thus simultaneously creating new job-opportunities.

7.2.2 Project Organisation Aspects There is a need to reduce the number of parties involved in the CDM transac-tions.

Each programme should assess the added value of involving of a third part, e.g. is the MFI or other parties beneficial for the project or merely adds to the degree of complexity? To minimise the number of transactions and the number of par-ties involved in the CDM transaction, it should be considered that one entity took charge of both delivering the technology and delivering the loan. The ques-tion is which of the two (or if possible other organisations such as NGOs) would be more suited to take on this unified role? Are the MFIs interested in mastering the skills of supplying energy technologies or are the suppliers willing to build-ing microfinance into their business strategy. Some of the suppliers are already providing consumer credits or leasing of equipment with a financial backup from their international provider of equipment e.g. Siemens, Shell, OSRAM.



Alternatively, the MFI and the energy technology supplier may enter a partner-ship or a symbiotic relationship to provide CDM financed energy projects in LDCs.

Nevertheless, it should be stressed that in order to improving the sustainability of projects, it is essential that some kind of a service provider for the different energy technologies is present in the vicinity of the users. This is to ensure maintenance and supply of spare parts (after sales services). This could be an extended arm of the supplier in the form of a local- business man, shop owner, project developer or an NGO.

7.2.3 Generic baselines As the CDM mechanism is fairly complex for LDCs (even considering pCDM), it may be suggested to simplify the approach by e.g. developing Generic Base-lines and Standard CER for individual energy devices in LDC countries. This could be updated on a regular basis and be valid within countries, regions or globally.

It is clear that this is however at sensitive issue that can easily be interpreted as an issue of sovereignty and can involve a great amount of politics, amongst other a discussion of who will set these levels – an international third party or a national authority.

On the other hand and in theory, this could actually be done on the basis of pCDM by the development of a Programme of Activity (PoA) for individual energy technologies, where each LDC country can be regarded as a CPA.

7.2.4 Risk assessment of combining MF with pCDM Risks associated with combining MF and pCDM should be investigated further. Here can be mentioned the risks of overloading the MFIs and the adverse effects on the loan portfolio of small MFIs (cluster risk issue). The risk assessment should include a sensitivity analysis of the different parameters influencing the economic viability of the projects, as briefly touched upon in Case Study 2 of the report, see Annex A.

7.2.5 Demonstration project In the light of the above and the lack of concrete projects that combine MFI and carbon credits in LDCs, it is suggested to explore the possibilities to stimulate and test different combinations of MF and CDM. This can be done by setting-up demonstration projects in cooperation with some of the MFIs and Energy Com-panies that are present in at least one of the LDCs and preferably already have plans of entering the market of CDM.



In relation to conducting demonstration projects it is suggested to start with a targeted capacity building effort with some (M)FIs that have both carbon desks and MF arms (e.g. Bill & Melinda Gates or the Google Foundation).

Examples of project concepts can be many, of which the most promising should be addressed, e.g. biodigesters, Improved Cooking Stoves, solar lanterns, small solar home systems (LED), solar water pumping and micro hydro.

7.2.6 Project Preparation CDM fund for LDC countries Actually there is a 2 percent levy on CDM projects that is channelled into UN’s Adaptation Fund (AF). In the same manner, it should be considered to utilise a certain percentage of the created CER revenues for a revolving fund that fi-nances project preparation of CDM projects in LDC countries. After a success-ful implementation of individual projects, they should repay the provided fund to the revolving fund. Thus, some of the risk of developing CDM projects in LDC is shouldered by more lucrative CDM markets. It should be explored fur-ther whether donor grants can be part of such a fund.

7.2.7 CDM portfolio standard contemplating a percentage of CDM projects to origin from LDC countries It is proposed that the Annex 1 countries agree on a CDM portfolio standard that contemplates a certain percentage or a minimum quota of CDM projects to ori-gin from LDC countries. For comparison, a similar Renewable Energy Portfolio Standard exists in the EU, obliging member countries to base a certain percent-age of the countries’ energy supplies on renewable energy resources.

7.2.8 Overcoming Structural and Institutional Barriers specifically targeting pCDM and MF Below is a general recommendation for CDM development in LDCs that is not directly related to the synergies between pCDM and MF. Nevertheless, it is in-cluded as a response to the general barriers that have been highlighted in Chap-ter 3.3, and as such has a positive impact on overcoming specific barriers for the combination of pCDM and MF in LDCs.

Priority to CDM projects in LDCs

The experience of CDM projects in LDCs is very limited. It should be encour-aged to support a smooth approval process by CDM-EB. Therefore it should be considered to give the CDM-EB the mandate to prioritise LDCs in the daily work.



Host Governments can encourage foreign investments CDM host country Governments can encourage foreign investments by estab-lishing a simple and transparent policy and legislative framework including en-suring that relevant laws are stable and enforced and providing an appropriate tax and incentive framework for investments. Likewise it is important that a clear policy towards CDM projects is implemented as the CDM cuts across various sectors and stakeholders. This requires good communication between the various government departments and agencies involved in approving CDM projects and setting the context in which the project proponents operate38.

Functional CDM framework and DNA As described previously numerous LDCs have not established a functional CDM framework and DNA. This means that in these countries there is a major focus on especially host country risks including a delay in or failure to obtain a Letter of Approval from the DNA. Thus to become effective players in the CDM market the LDCs are in much need for capacity building funded by the Annex 1 countries. So far the amount of capacity building has primarily been directed at the middle-income countries that are better positioned to capitalize on carbon funding due to their more attractive investment climate and higher reduction potentials39. Host Countries’ options to reduce costs of CDM activities Due to the expensive nature of developing CDM projects as described previ-ously, host countries should consider options to reduce costs of CDM activities within their stage of the project cycle. The primary role of the DNA is to estab-lish a CDM project approval process with transparent procedures for screening, evaluating and approving project proposals. Host country DNAs need to estab-lish a reputation of consistency in approving CDM projects, efficiency in re-sponding to inquiries from foreign investors and potential emission reduction credits buyers as well as lead promotional activities to encourage investors and potential project developers.

38 Jane Ellis (OECD) and Sami Kamel (UNEP Risø Centre): “Overcoming barriers to Clean Development Mechanism projects”, Organisation for Economic Co-operation and Development (OECD), International Energy Agency. May 2007. http://www.oecd.org/dataoecd/51/14/38684304.pdf. 39 Cosbey, Aaron; Murphy, Deborah; Drexhage, John and Balint, John: “Making Development Work in the CDM. Phase II of the Development Dividend” (pre-publication version), Interna-tional Institute for Sustainable Development (IISD). October 2006. http://www.iisd.org/pdf/2007/making_dev_work_cdm.pdf



ANNEX A - CASE STUDY 2: FINANCIAL IMPACT OF CDM ON MF PROJECTS IN LDCS

The present case study contemplates a simplified analysis of the financial impact of CDM on potential project candidates for micro-finance in LDCs. The case study should merely be regarded as an indication of the expected contribution from CERs and as an inspiration for a thorough sensitivity analysis in a separate study.

B.1. Background and Objective The often high up-front investment costs of new- and renewable energy tech-nologies acts as a barrier to the poor rural population in LDC. Hence, additional financial support is required to promote these technologies. The present case study roughly estimates the financial impact of CER revenues on a selection of energy projects whose funds may be channelled through micro-finance. The study consists of simple pay-back calculations to illustrate possible synergies between CDM and MF, and should be regarded as a supplement to the discussions in the main text of the report. Furthermore, the issue of transaction costs for pCDM will be addressed. The potential for microfinance institutions (MFIs) to offer profitable loans to purchase energy services, and thereby promoting modern and efficient energy use, has not yet been realized in LDCs. This is due to different factors, such as lack of experience by both the energy and microfinance sectors and the lack of documented successes. Thus, only a few MFIs are involved in financing the purchase of energy services in LDCs and hardly any are channelling CDM funds into their portfolio of loans. The overall objective of this brief case study is to attempt to estimate the poten-tial CDM contribution to improving the economy of micro-financed purchase of energy services in LDCs, thus clarifying their attractiveness for both MFIs and potential CER generators in LDCs.



B.2. Short description of reference projects A micro-finance project, as the name implies and as further described in the main report, usually deals with small loans. Bearing this in mind and the struc-tural synergies between pCDM approach and MF, it was found appropriate to select the following project candidates:

1. Solar Lanterns and Solar Home Systems (SHS).

2. Biodigesters (with reference to case study 1 in chapter Error! Reference source not found.)

3. Pico-Hydro (or micro Hydro)

4. Household installations in connection with Grid Connected Rural Electrifi-cation (Ready boards, prepayment meters, etc.)

5. Water pumping by PV solar energy that replaces diesel driven pumps.

All of the project candidates replace the need for petroleum/kerosene lamps for lighting purposes and thereby, apart from the increased quality of life, result in considerable household savings that as a minimum should pay back the initial investment of the respective energy producing devices. It is assumed that the use of the different energy producing devices displaces all kerosene lighting of the user, thus the so called baseline scenario corresponds to the continued use of kerosene lighting in the respective households.

Furthermore, some of the candidates have the potential to producing sufficient electricity for productive uses, thus creating additional income for the house-hold.

Apart from this, the Biodigesters replace fuel wood for cooking purposes, upon which 70 - 90% of the rural households in LDCs rely. What makes the biodi-gester especially interesting in the case of CER generation is the fact that it burns a part of the methane that otherwise would be released to the atmosphere. As the global warning potential of methane is much higher than CO2 it’s respec-tive generation of CERs has a greater impact on the return of the investment than any of the other renewable energy devices, included in the case study.

B.2.1. Solar lanterns and Solar Home Systems (SHS) Solar lanterns and other SHS contribute to the reduction of greenhouse gases through the displacement of kerosene lamps conventionally used for lighting.

The CDM project activity (CPA) proposed comprises the marketing of appro-priate Solar Lanterns (with or without a socket) or Solar Home Systems (SHS) in a number of households in rural off-grid areas in LDCs. The capacities of the



SHSs typically range from 30 Wp to 120 Wp and cost around 250 – 1000 USD.40

B.2.2. Biodigesters (with reference to case study 1 in chapter Error! Reference source not found.) Biodigester projects typically contribute in three ways to reducing the green house gas emissions to the atmosphere:

1. Feeding a biogas installation with animal manure changes the traditional ma-nure handling modality. Instead of manure being allowed to be stored in (semi-) anaerobic conditions in the environment, disposal of the dung in the biogas in-stallation captures the emitted greenhouse gasses.

2. Biogas burns “carbon neutral” as the source of the feeding material, animal fodder, is a renewable product. As a result, as far as biogas substitutes fossil fuels and/or non-renewable biomass, installations reduce GHG emissions.

3. Bio-slurry, the fermented feeding material, is a potent organic fertilizer. To the extent to which bio-slurry substitutes chemical fertilizer, it reduces GHG emissions linked to the production and application of the latter41.

A project of this type could have the goal of establishing a commercially viable biogas industry in a specific country or region over a certain period of years. In the first years the project could aim at constructing a number of domestic biogas installations in farming households that have at least 2 buffaloes or cattle.

For further reference and inspiration, please refer to case study 1 in section 4.6.

B.2.3. Pico-Hydro (or micro Hydro) Pico- or micro- Hydro are small water-turbine systems that convert the energy of a stream into electricity. The system can either be used in connection with small dams of water or directly utilising the flow of the river, depending on the flow and gradient of the stream and the size of the turbine.

Especially, the pico hydro systems are relatively easily to install. The type in the example has the capacity of 100Watts and should suffice for the supply of elec-tricity for 5 households.

40 Grameen Bank, PDD Bangladesh, 2007 and FUNAE, Mozambique, 2008. 41 Note: In practice, chemical fertilizer substitution proofs to be difficult to monitor and verify. For that reason, this option has not been included in this preliminary analysis



B.2.4. Household installations/Grid Connected Rural Electrification A conventional household installation requires a distribution board with a meter and fuses and electrical wiring of the house, including sockets and installation of lamps. As this can be quite costly, and as such not affordable for the majority of households in rural areas of LDCs, a simple alternative exists in the form of a ‘Ready-Board’, with which the basic benefits of electrification can be provided. The 'Ready Board' is a simplified distribution board into which lights and appli-ances can be plugged directly. The boards are operated by means of a meter or simply a load limiter and pre-payment of the electricity costs is often preferred. More advanced forms of Ready-Boards are operated via magnetic cards with which the household repurchases electricity at a central pay-point in the village.

Auxiliary equipment, like extension lines, electrical lanterns and other energy devices could be included as an option in the micro-loan for the households.42

B.2.5. Water pumping by PV solar systems, replacing diesel driven pumps. A solar PV (photovoltaic) water pumping system is a stand-alone system, where solar panels produce electricity that runs a submersible pump. The water is usu-ally pumped from the ground or stream into a storage tank that provides a grav-ity feed. Thus, no batteries are needed and that makes both operation and main-tenance of the system much simpler and durable.

In addition, due to the laws of physics, this system enables pumping of water to depths greater than the conventional diesel pumps that are placed on the surface and suck the water from the bottom of the whole. The solar PV pumps can be used for irrigation and drinking water purposes.

B.3 Simple pay-back analysis on the financial impact of CDM on MF pro-jects A simple pay-back analysis has been carried out to assessing the financial im-pact of CDM on MF for the projects described above.

The cash outflow and internal rate of return analysis of a consistent and more thorough model is not comprised in the present study but should as a minimum comprise the following parameters: fixed assets investments working capital operation and maintenance taxes income taxes MF loan payments

42 FUNAE, Mozambique, www.funae.co.mz



pCDM transaction costs

B.3.1. Assumptions and preconditions In what concerns kerosene replacement, the potential emission reductions have been calculated based on the IPCC43 emission factor for kerosene i.e. 2.41 tCO2e/kilolitres. Price of CER The price of the Certified Emission Reductions (CERs) fluctuates significantly and future predictions are very uncertain. Therefore, the cash inflow has been calculated for three different CER price scenarios. Scenario A: 10 USD/tCO2e Scenario B: 15 USD/tCO2e Scenario C: 20 USD/tCO2e These three scenarios are compared to the reference case of “no CER revenue” to assess the influence of funds originating from the CDM. It is probable that the reader of the report has a different opinion on the appro-priate level of CER prices and it may be argued that it is unlikely that end-buyer prices will be channelled 100% to the CER producer unless a south based trans-action platform emerges (e.g. SSN is trying to build one for Southern Africa). Further, PoAs will likely need to enter frontloaded ERPAs which would have an impact on the price. 44 On the other hand, the mere intention of the study is to provide a reference base enabling a relative analysis of the influence of the CER price on the overall economic viability of a micro-financing case. Transaction Costs for preparing a CDM project In what concerns the estimated costs of the individual phases of developing a conventional CDM project, the below table has been elaborated: "Physical" - Track Feasibility Study Permits Adoptation 2% of CER

UN-Track PDDDue

Diligence ValidationLoALoA Registration Monitoring Verification

14.500 € >12.000€ 8-14.000 € 2.000 € <15.000 ~ 0,15 USD/t ~+10.000€ ~7-10.000€UN GlobalCompact >15.000 ~ 0,20 USD/t

Note: EA: Energy Agreement DNA

PIN + EA

5000 - 100.000 €

Operation

Table 7: Estimated cost of the individual phases of developing a CDM project

43 IPCC: Intergovernmental Panel on Climate Change. .See http://www.ipcc-nggip.iges.or.jp/public/2006gl/index.html and http://www.ipcc-nggip.iges.or.jp/EFDB/main.php 44 Michael Schlup, CDM Gold Standard, member of the Advisory Group of the study.



As previously mentioned in the main text of the report, the transaction costs for pCDM are significantly reduced as compared to conventional CDM project ac-tivities. At this point the transaction costs are difficult to estimate since to date very few pCDM have been presented to the UNFCCC. An amount of 30-85.000 USD is estimated for the programme level activities comprising the ‘UN-track’: pre-development including stakeholder consultations (PIN and EA) development of the PoADD and generic CPADD Due diligence (if required) validation of PoA by DOE DNA approval The registration of PoA by CDM EB is depending on the level of CER gener-ated by the PoA and ranges between 15 and 20 cent USD per CER. For each subsequent CPA the activities are estimated to amount to 11-25.000 USD. These activities include: check of CPADD by DOE verification and monitoring of emission reductions Especially the latter is subject to great uncertainty due to the nature of pCDM where activities can be geographically dispersed to a great extent. For comparison Eco Securities did in 2001 estimates on the minimum transac-tion costs associated with the CDM cycle, as presented in the table below:



Table 8: Minimum transaction costs associated with the CDM cycle 45

Much has changes since, and awareness has arisen of the necessity of simplify-ing the procedures and the related transaction costs for small scale projects. The UNFCCC’s adaptation of simplified procedures for small scale CDM method-ologies (for reference see Annex B and C) and pCDM are one of the most vivid examples of this. The pCDM projects that are in the pipeline will provide con-crete experience on the sufficiency of these measures and the necessity for fur-ther simplification of the CDM procedures. B.3.2. Results of the analysis The table on the following page gives an indication of the expected value of CER as compared to fuel cost savings. It is a simplified analysis where, transac-tion costs of pCDM are not included and at this stage only simple pay-back pe-riods calculated. The contents of the table are evidently subject to price fluctua-tions due e.g. development in technologies and differences between countries and regions.

45http://www.ecosecurities.com/Assets/3158/Pubs_Clean%20Development%20Mechanism%20(CDM)%20Simplified%20modalities%20and%20procedures%20for%20small%20-%20scale%20projects.pdf



Investment cost per unit

Type of energy

displaced

Amount of fuel

displaced per year

Value of displaced fuel

7)

Approx. CER

generation per year per

Value of CER@

Simple pay-back of

investment 6)

Simple pay-back of invest

incl. CER


incl. CER


incl. CER[USD] [CER/year] 15 USD/tCO2 Excl. CER 10 USD/tCO2e 15

USD/tCO2e20 USD/tCO2e

[USD/year] [tCO2e/year] [USD/year] [years] [years] [years] [years]

1. Solar PV Lanterns 30Wp 255 Kerosene[litre]

156 117 0,38 5,64 2,18 2,11 2,08 2,05

2. Photovoltaic SHS2)

50Wp 650 Kerosene[litre]

260 195 0,63 9,40 3,33 3,23 3,18 3,13

3. Biodigesters 3) 6 m3 475 Non Rev. FuelWood

[kg]

2190 87,6 5,8 86,95 5,42 3,26 2,72 2,33

4. Pico-Hydro 100W 500 Kerosene&Diesel

274 205,3 0,66 9,90 2,44 2,36 2,32 2,29

5. Household installations/RE5)

25 kWh/month

150 Kerosene&Diesel

48 36 0,12 1,74 4,17 4,04 3,98 3,92

6. Solar PV Water pumping

160Wp 3000 Diesel 680 510 1,64 24,58 5,88 5,70 5,61 5,53

Type of project/technology

Capacity

Table 9: A simplified estimate of the expected value of CER as compared to fuel cost savings. Note Transaction costs of pCDM are not included Note: All figures are indicative and for guidance only and based on one unit of the respective energy device and as such do not indi-cate the actual benefits of bundling the devices into groups to increase the cost efficiency of a project. Note: Transaction costs are not included and Leakage is not considered in the approximate calculation of CERs. Note 1-2: Approx. 5.2 litre kerosene/Wp/year (average consumption estimate) and 2.41 tCO2eqv/kiloliter (kl) Note 1-2: SHS: Solar Home System. Key figures from Grameen Bank, PDD, Bangladesh 2007 Note 3: Displaces fuel wood for cooking. Here in the ratio 50/50 for guidance only. Largest contribution from the displacement of methane. With a feeding of 40 kg/day it may be expected to produce approx. 1.5 m3 gas/day. As it will not be used every day, here production is set at 1.2 m3gas/day. This replaces approx. 6 kg/day of firewood @ 4cUSD/kg. Note 4: This type of a pico-turbine should suffice for 5 households - Approx. 0.15 litre kerosene per household per night Note 5: In connection with grid connection rural electrification projects. Investment in Household connection, "Ready-board" (i.e. a simplified distribution board containing a meter/load limiter, light bulb and a socket) and a 5 m cable with a lamp.



Note 6: The periodic payment includes principal and interest but no taxes, reserve payments, or fees that may be associated with the loans. Note 7: Prerequisite: The capacity of the local households to pay for at given energy appliance or -service is set as the value of the displaced fuel Note 8: MFI interest rate is not included in the present calculation. Typical annual interest rate would be around 20 - 40 %.



B.4. Conclusions and Recommendations In the light of this simplified pay-back analysis, the immediate conclusion indi-cates that by merely substituting diesel or kerosene, the expected contribution of CDM funds, does not seem to exceed approx. 5 % of the project investment costs. Unless recovery of methane is included (e.g. biogas digesters), the contri-bution of CDM funds, does not immediately meet the overall CDM transaction costs.

However, there are various factors that may alter the picture. Here can be men-tioned the gradually decreasing costs of renewable energy technologies and lo-cally produced energy units like improved stoves that minimise the required up-front investment. Furthermore, a well designed PoA provides opportunities to significantly reducing transaction costs, including the cost of monitoring.

Another result of the present analysis indicates that the pay-back period required for the different renewable energy devices lies in the range of 2 – 6 year. This surpasses the capacity of most MFIs that typically provide loans for less than 6 months with a very few up to one year. Hardly any “normal” MFIs have the capacity to lend beyond one year if they adhere to the practice of matching their assets – loans – to their liabilities, or deposits. Although a few examples are given in the microfinance chapter of the report, regarding access to microfinance for energy, this constraint should be fully addressed. It is becoming increasingly important given the rapid growth in full service MFIs.

As a result, there is a need to investigate further and demonstrate, for a selection of project types, how pCDM funds in combination with MF can improve the economic viability of a project and be regarded as a realistic option to improve access to energy in rural communities, at the same time as reducing the emission of green house gases to the atmosphere.

B.5. Sensitivity Analysis of Potential pCDM/MF projects. Due to the uncertainties of the assumptions made in this case study, it is impor-tant that prior to launching a pCDM/MF demonstration project, a sensitivity analysis should be carried out, evaluating the influence of prevalent parameters. This is outside the scope of the present study, but should be encouraged to en-able a sound assessment of the project in mind. It is suggested that the sensitivity analysis may be expanded to include as a minimum the following parameters:



CER price (USD/tCO2e)

Energy use per household (kWh/day)

Investment need for new- and renewable technologies

Fossil fuel price (USD/litre)

Interest rate of MF loans (annual %)

Repayment period of loans (years)



ANNEX B – ELIGIBLE SMALL SCALE METHODOLOGIES

Project type Methodologies I. Renewable en-ergy <15 MW

A. Electricity generation by the user B. Mechanical energy for the user with or without electri-cal energy C. Thermal energy for the user with or without electricity D. Grid connected renewable electricity generation E. Switch from non-renewable biomass for thermal appli-cations by the user

II. Energy Effi-ciency <60 GWh savings

A. Supply side energy efficiency improvements – trans-mission and distribution B. Supply side energy efficiency improvements - genera-tion C. Demand side energy efficiency activities for specific technologies D. Energy efficiency and fuel switching measures for in-dustrial facilities E. Energy efficiency and fuel switching measures for buildings F. Energy efficiency and fuel switching measures for agri-cultural facilities and activities G. Energy efficiency measures in thermal applications of non-renewable biomass H. Energy efficiency measures through centralization of utility provisions of an industrial facility I. Efficient utilisation of waste energy in industrial facili-ties J. Demand side activities for efficient lighting technolo-gies

III. Other activities <60 ktCO2 reduc-tion

A. Urea offset by inoculant application in soybean-corn rotations on acidic soils on existing cropland B. Switching fossil fuels C. Emission reductions by low greenhouse gas emitting vehicles D. Methane recovery in animal manure management sys-



Project type Methodologies tems E. Avoidance of methane production from decay of bio-mass through controlled combustion, gasification or me-chanical/thermal treatment F. Avoidance of methane production from decay of bio-mass through composting G. Landfill methane recovery H. Methane recovery in wastewater treatment I. Avoidance of methane production in wastewater treat-ment through replacement of anaerobic lagoons by aerobic systems J. Avoidance of fossil fuel combustion for carbon dioxide production to be used as raw material for industrial proc-esses K. Avoidance of methane release from charcoal produc-tion by shifting from pit method to mechanized charcoal-ing process L. Avoidance of methane production from biomass decay through controlled pyrolysis M. Reduction in consumption of electricity by recovering soda from paper manufacturing process N. Avoidance of HFC emissions in rigid Poly Urethane Foam (PUF) manufacturing O. Hydrogen production using methane extracted from biogas P. Recovery and utilization of waste gas in refinery facili-ties Q. Waste Energy Recovery (gas/heat/pressure) Projects R. Methane recovery in agricultural activities at house-holds/small farm level S. Introduction of low emission vehicles to commercial vehicle fleets T. Plant oil production and use for transport applications U. Cable Cars for Mass Rapid Transit System (MRTS) V. Decrease of coke consumption in blast furnace by in-stalling dust/sludge recycling system in steel works W. Methane capture and destruction in non-hydrocarbon mining activities X. Energy efficiency and HFC-134a recovery in residen-tial refrigerators Y. Methane avoidance through separation of solids from



Project type Methodologies wastewater or manure treatment systems Z. Fuel switch, process improvement and energy effi-ciency in brick manufacture AA. Transportation Energy Efficiency Activities using Retrofit Technologies AB. Avoidance of HFC emissions in Standalone Com-mercial Refrigeration Cabinets AC. Electricity and/or heat generation using fuel cell AD. Emission reductions in hydraulic lime production AE. Energy efficiency and renewable energy measures in new residential buildings AF. Avoidance of methane emissions through excavating and composting of partially decayed municipal solid waste (MSW) AG. Switching from high carbon intensive grid electricity to low carbon intensive fossil fuel AH. Shift from high carbon intensive fuel mix ratio to low carbon intensive fuel mix ratio

Small-scale Affor-esta-tion/reforestation CDM project activ-ity categories

AR-AMS1. Afforestation and reforestation project activi-ties under the clean development mechanism implemented on grasslands or croplands AR-AMS2. Afforestation and reforestation project activi-ties under the CDM implemented on settlements AR-AMS3. Afforestation and reforestation project activi-ties implemented on wetlands AR-AMS4. Agroforestry - afforestation and reforestation on crop lands AR-AMS5. Afforestation and reforestation project activi-ties under the clean development mechanism on lands having low inherent potential to support living biomass AR-AMS6. Silvopastoral afforestation and reforestation activities

Table 10: Eligible Small Scale Methodologies, 17 December 2009



ANNEX C – APPROVED SMALL SCALE CDM METHOD-OLOGIES - SECTORAL SCOPE

Approved Small Scale Methodologies as of 17 December 2009

Methodology Number

Sectoral Scope 1

Energy Industries (Renewable and non-renewable sources)

AMS-I.A. Electricity generation by the user

AMS-I.B. Mechanical energy for the user with or without electrical energy

AMS-I.C. Thermal energy for the user with or without electricity

AMS-I.D. Grid connected renewable electricity generation

AMS-I.E. Switch from Non-Renewable Biomass for Thermal Applications by the User

AMS-II.B. Supply side energy efficiency improvements – generation

AMS-III.AG. Energy Efficiency and HFC-134a Recovery in Residential Refrigerators

AMS-III.AH. Shift from high carbon intensive fuel mix ratio to low carbon intensive fuel mix ratio

AMS-III.B. Switching fossil fuels

Methodology Number

Sectoral Scope 2

Energy Distribution

AMS-II.A. Supply side energy efficiency improvements – transmission and distribution

Methodology Number

Sectoral Scope 3

Energy Demand

http://cdm.unfccc.int/DOE/scopes.html#1

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_VECB8EZJV6NSM13KPOVCDLO9PBR4OY

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_MPT5X3QC5NESZQMY2ELP0MNEU340LJ

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_Q5LOZVUT3BZ8WIP7NR9KGQ76BAZIE1

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_PHPV5WESACMBTJ2YY54GAJYSIEI3HD

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSP4VBBO5G54RXDE9KQ6FJWMGHZLHFA5

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_JB7CGXF4MNOMHZ92JMQF1XL1HHHKU2

http://cdm.unfccc.int/methodologies/view?ref=AMS-III.AG.

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSSCSSCXE8WJQOGZ1BVG4TTK6F0BOQO3

http://cdm.unfccc.int/methodologies/view?ref=AMS-III.AH.

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS8C4CYZRXU8HWN5MQ1XQ83USWSP4GDZ

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_UW3T7OSMNKZY7EY43QKEO14O77L255


http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_OQDF3KGXMM8S4GYXCXCH4QA6FXXO98





AMS-II.C. Demand-side energy efficiency activities for specific technologies

AMS-II.E. Energy efficiency and fuel switching measures for buildings

AMS-II.F. Energy efficiency and fuel switching measures for agricultural facilities and activities

AMS-II.G. Energy Efficiency Measures in Thermal Applications of Non-Renewable Biomass

AMS-II.J. Demand-side activities for efficient lighting technologies

AMS-III.AE. Energy efficiency and renewable energy measures in new residential buildings

AMS-III.X. Energy Efficiency and HFC-134a Recovery in Residential Refrigerators

Methodology Number

Sectoral Scope 4

Manufacturing Industries

AMS-II.D. Energy efficiency and fuel switching measures for industrial facilities

AMS-II.H. Energy efficiency measures through centralization of utility provisions of an industrial facility

AMS-II.I. Efficient utilization of waste energy in industrial facilities

AMS-III.K. Avoidance of methane release from charcoal production by shifting from pit method to mecha-nized charcoaling process

AMS-III.N. Avoidance of HFC emissions in rigid Poly Urethane Foam (PUF) manufacturing

AMS-III.P Recovery and utilization of waste gas in refinery facilities

AMS-III.Q Waste Energy Recovery (gas/heat/pressure) Projects

AMS-III.V Decrease of coke consumption in blast furnace by installing dust/sludge recycling system in steel works

AMS-III.Z. Fuel Switch, process improvement and energy efficiency in brick manufacture

Methodology Number

Sectoral Scope 5

Chemical Industries

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_NUYR4LTAJWFFEKSTJRJDZ8YDRKJB3T

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_LAVBAV8STPGYPWVKGQJLBCNEC8APNP

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_HM02VSHFBNGLKTWQ2F39QI52MOXRLO

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSUT12SPEL6M69U60GBKV3OOYZERRHLK

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSDF1ZDFY4GCRR9BAVBLHFD8BIMIP3G8

http://cdm.unfccc.int/methodologies/view?ref=AMS-III.AE.

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS02DI2P0YCXF0W6W3D6HV1KX6NWQ8O0

http://cdm.unfccc.int/methodologies/view?ref=AMS-III.X.



http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_61544KRBY1HQWG0JGK85N4K640WSVP

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSY08I9HG1Q6YI4ZD140UG6XLIBQ7OXC

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSLHSXOF7SE455HN292SH1GEB5JZBNID

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_LNYKLW9VNJKP8UBKJKRNY4SVJGOG0B

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_LNYKLW9VNJKP8UBKJKRNY4SVJGOG0B

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_R39SRUMM04KKQV6OQR2ORFHBNOCZ4B

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS961P14XE3R66TTPEJS2USDISPJRCE0

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_NQ9VVLJBIZ7TRNM2AFAAYXUGCSPDUD

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSUYGCTCKWY4CJ6RGCHUDIEY1IELXDFY

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSUYGCTCKWY4CJ6RGCHUDIEY1IELXDFY

http://cdm.unfccc.int/methodologies/view?ref=AMS-III.Z.

http://cdm.unfccc.int/UserManagement/FileStorage/SH8WDP35LFV4G61K0MZBNX7YIATRE2





AMS-III.AC. Electricity and/or heat generation using fuel cell

AMS-III.J. Avoidance of fossil fuel combustion for carbon dioxide production to be used as raw material for industrial processes

AMS-III.M. Reduction in consumption of electricity by recovering soda from paper manufacturing process

AMS-III.O. Hydrogen production using methane extracted from biogas

Methodology Number

Sectoral Scope 7

Transport

AMS-III.AA. Transportation Energy Efficiency Activities using Retrofit Technologies

AMS-III.C. Emission reductions by low-greenhouse gas emitting vehicles

AMS-III.S. Introduction of low-emission vehicles to commercial vehicle fleets

AMS-III.T. Plant oil production and use for transport applications

AMS-III.U Cable Cars for Mass Rapid Transit System (MRTS)

Methodology Number

Sectoral Scope 10

Fugitive emissions from fuels (solid, oil and gas)

AMS-III.W Methane capture and destruction in non-hydrocarbon mining activities

Methodology Number

Sectoral Scope 11

Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride

AMS-III.AB. Avoidance of HFC emissions in Standalone Commercial Refrigeration Cabinets

AMS-III.X. Energy Efficiency and HFC-134a Recovery in Residential Refrigerators

Methodology Number

Sectoral Scope 13

Waste handling and disposal

AMS-III.E. Avoidance of methane production from decay of biomass through controlled combustion, gasifi-cation or mechanical/thermal treatment

http://cdm.unfccc.int/methodologies/view?ref=AMS-III.AC.

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS0L9EBZNC47R91ML2MVGA0KYX8PB1QO

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_QCFPV07PTADN9NSDBQ5WDFK9QSU60X

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_QCFPV07PTADN9NSDBQ5WDFK9QSU60X

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_CHWJWOMUPQAW12CG8LQI7DAUOU3MXF

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSW050DMNAAJAQZVK9ELW2IIPVVMXDQL


http://cdm.unfccc.int/methodologies/view?ref=AMS-III.AA.

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSU2QAQVXZJC16X3NDRXXP6OYUSK0PCG

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_LN3RQSIZJ4EL987WI68NW0SZFOI4PM

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSF01BV5SB5QCEMPNM5K5QV1C5B2TUL4

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS3R6PD32XS27WJ432NM7YJW42C24ZY2

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSMHM8MN5R2ROSSUV2OR8J52JSMHXARB


http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSRIERAH177E7WDCN65LK2G03MQVC6US


http://cdm.unfccc.int/methodologies/view?ref=AMS-III.AB.

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSO0NWE4AYM02CXBESTZNGIPAPBJP8CR

http://cdm.unfccc.int/methodologies/view?ref=AMS-III.X.



http://cdm.unfccc.int/UserManagement/FileStorage/IAKEF9AVE8STMFB3OQ880Z25V0L25Q

http://cdm.unfccc.int/UserManagement/FileStorage/IAKEF9AVE8STMFB3OQ880Z25V0L25Q




AMS-III.F. Avoidance of methane production from decay of biomass through composting

AMS-III.G. Landfill methane recovery

AMS-III.H. Methane recovery in wastewater treatment

AMS-III.I. Avoidance of methane production in wastewater treatment through replacement of anaerobic lagoons by aerobic systems

AMS-III.L. Avoidance of methane production from biomass decay through controlled pyrolysis

Methodology Number

Sectoral Scope 14

Afforestation and reforestation

AR-AMS0001 Simplified baseline and monitoring methodologies for small-scale afforestation and reforestation project activities under the clean development mechanism implemented on grasslands or croplands

AR-AMS0002 Simplified baseline and monitoring methodologies for small-scale afforestation and reforestation project activities under the CDM implemented on settlements

AR-AMS0003 Simplified baseline and monitoring methodology for small scale CDM afforestation and reforesta-tion project activities implemented on wetlands

AR-AMS0004 Simplified baseline and monitoring methodology for small-scale agroforestry - afforestation and reforestation project activities under the clean development mechanism

AR-AMS0005 Simplified baseline and monitoring methodology for small-scale afforestation and reforestation

project activities under the clean development mechanism implemented on lands having low inher-ent potential to support living biomass

AR-AMS0006 Simplified baseline and monitoring methodology for small-scale silvopastoral - afforestation and reforestation project activities under the clean development mechanism

Methodology Number

Sectoral Scope 15

Agriculture

AMS-III.A Urea offset by inoculant application in soybean-corn rotations on acidic soils on existing cropland

AMS-III.D. Methane recovery in agricultural and agro industrial activities

AMS-III.R. Methane recovery in agricultural activities at household/small farm level

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_6NOS8D6BN7GD231AN3DVLG1EPPYXUK

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_9EB44N8MGZPCFZNZVV23UA491TOL6E

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_ZKGIVDGAIF68U4ECHYS2K4PJ1X4LVW

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_L9TP5YZD5W7YJPDC0LE0PNN94TFJT3

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_L9TP5YZD5W7YJPDC0LE0PNN94TFJT3

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_C7UWTIEMRJ05M3D02XWDW80JN989IP


http://cdm.unfccc.int/UserManagement/FileStorage/IRG4EK84S3V1AJWF6X2AEJWS8HKGJ4

http://cdm.unfccc.int/UserManagement/FileStorage/IRG4EK84S3V1AJWF6X2AEJWS8HKGJ4

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSAUTYOB8ENMXQJKTFGFO3881CJ7A8JQ

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSAUTYOB8ENMXQJKTFGFO3881CJ7A8JQ

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS265RZ2UYRKLUMD8PHM3BZL7QMDL790

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS265RZ2UYRKLUMD8PHM3BZL7QMDL790

http://cdm.unfccc.int/methodologies/view?ref=AR-AMS0004

http://cdm.unfccc.int/UserManagement/FileStorage/LXB75FO38Z9NW1IEGH6V0TSUKD4JYM

http://cdm.unfccc.int/UserManagement/FileStorage/LXB75FO38Z9NW1IEGH6V0TSUKD4JYM


http://cdm.unfccc.int/UserManagement/FileStorage/JD1TI6A2XEYSUN97G85ZOMW04KFVCB




http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSN7QQ0QUDOX8XOHZH8V5RSMGPFJ4HAG

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSN7QQ0QUDOX8XOHZH8V5RSMGPFJ4HAG


http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMSZWWIVT3A9ZK5RZHA0CDUBOER0LP1H1

http://cdm.unfccc.int/UserManagement/FileStorage/CDMWF_AM_P414J8AC94YJAYHZAFUKHCKTIHKHXN

http://cdm.unfccc.int/UserManagement/FileStorage/CDM_AMS6TO7KR3EIBF6Y1PYA7NPY84I2V76QB

Study on the potential use of micro financing in support ... · Potential use of Micro-Financing in...

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