In mid-March 2019, the World Bank signed an Emissions Reduction Purchase Agreement with Kenya’s Tea Development Agency Power Company Ltd. This is part of its expansion of support to African farmers in adapting to the impacts of climate change. It will directly help 350,000 smallholder tea farmers and 39 factories by providing power from new hydropower plants. The key innovation is that the plants will generate revenue credits—payments for the certified reduction in emissions of carbon dioxide that they create in servicing the energy needs of communities and farms. These credits make the capital investment required more “bankable” and reduce debt service costs. In other bank projects built on this blueprint, they will subsidize farmers’ and families’ purchase of energy-efficient biogas stoves. The ERPA credits are internationally marketable as a carbon tax offset.
The main features of the innovation blueprint are:
- Exploit the scale of the World Bank and its access to global financial markets to provide a pool of initial capital plus guarantees for other parties.
- Target energy in fighting the impacts of climate change and reducing the poverty increasingly related to it: Africa has an abundance of hydro potential. (Hydro power has been controversial for its environmental damage and disruption of communities. These seem to be less of a problem given new technology, collaborations and project management.)
- Create financial incentives for emission reduction: emission credits add a new dimension to the We lend, or grant/You spend and repay development model. In this case, the farmer earns something.
- Expand collaborations beyond direct financing: Large-scale development projects demand many parties; involvement, from funding through to building to operating. The lead times are 5-20 years.
The World Bank is underwriting the initial loans to KDTA, a private sector partner with the bank’s private International Finance Company. IFC leverages investment from wealthy individuals, development agencies and businesses. The UK Department of Energy and Energy is contributing technical resources and expertise. The French government is funding KDTA to improve tea factory access to alternative energy sources. In addition to the hydropower project, IFC is investing in development of a Mombasa warehouse and supporting KDTA initiatives in wood sourcing, soil testing and financial literacy education for farmers.
The World Bank is also the trustee for the Carbon Initiative for Development (Ci-Dev), which was was set up in 2016 to improve living conditions and energy supply through “result-based financing.” It is in effect a trust fund.
Ci-Dev illustrates the most complex and original feature of the KDTA agreement. Without Ci-Dev, this is a large traditional loan and grant package. Ci-Dev pays the borrower for reductions in carbon emission. Its first project in East Africa was with SimGas, a private Dutch maker of low-cost plastic-molded biodigesters that it installed in a state-of-the-art facility in Tanzania to provide energy to rural households in Kenya and neighboring countries.
The biodigesters convert manure into cooking oil and a rich bio flurry that can be used as a fertilizer. It eliminates dependence on wood fuel, frees up the time of the women and children who must locate and collect the wood and lowers carbon emissions. The financial value of that reduction is converted into a “results-based” payment to SimGas.
The logic of the bank-KDTA association is the same: catalyze the generation of benefits through incentives that are derived from implementation, operation, diffusion and productivity.
The initiative is one of many that the World Bank is spearheading. Less than a decade ago, its total budget for loans to remediate climate change was $2.4 billion (2011). It nearly doubled in 2012 to $4.6 billion. The latest doubling in a year was announced at the end of 2018: to $200 billion globally for 2021-2025.
The Kenya tea project was part of the announcement of the Bank’s scaling up its support for climate adaptation and mitigation to $22.5 billion a year for 2021-2025, another doubling over the previous five years.
SOURCES: World Bank, KTDA, Clean Technico, Carbon Tax Center, Vigor News, Good News Network, Hydro Review, Smithsonian Magazine, Bloomberg, India NDTV, Ci-Dev
Kenya press: The Exchange, Nation