Author: Jason Lopez, Deputy Direct, The Millennium Water Alliance
Link to Full Carbon Financing learning paper and executive summary (we are also testing a chatbot)
Water security and Water Resource Management (WRM) are crucial for public health, sustainable development, and environmental conservation. In low-income regions like Ethiopia, the long-term maintenance, repair, and operations (MRO) of water systems face funding shortages, often resulting in system failures and reduced access to clean water. Results-Based Financing through Carbon Credits (RBF-CC) offers an innovative solution to address these challenges by generating revenue from verified reductions in greenhouse gas (GHG) emissions.
This feasibility study, conducted by the Millennium Water Alliance (MWA) with support from the Conrad N. Hilton Foundation, assesses how RBF-CC can help sustain water security projects and expand into WRM initiatives. By using RBF-CC, emissions reductions from water systems and environmental conservation projects can be monetized, ensuring a sustainable source of funding for long-term operations and ecosystem restoration.
How Carbon Credits Work in Water Security
Water security projects often involve providing safe drinking water systems that reduce the need for households to boil water for purification. Boiling water using non-renewable fuels such as firewood and charcoal contributes to both deforestation and GHG emissions. When these safe water systems eliminate the need for boiling, the emissions avoided can be quantified and certified as carbon credits.
In regions like Ethiopia, where not all households regularly boil water due to resource constraints, the concept of suppressed demand is applied. Suppressed demand allows carbon credits to be issued based on the assumption that households would boil water if they had the necessary resources. This provides an important pathway for projects to claim credits for emissions reductions that reflect what would occur under improved conditions.
Water Resource Management (WRM) and Carbon Credits
Water Resource Management (WRM) projects also have the potential to generate carbon credits through nature-based solutions.
Objectives
This study sought to determine whether RBF-CC can be used to support long-term financing for both water security and WRM projects in Ethiopia. The objectives of the study were to:
- Estimate the financial viability of using carbon credits to sustain water and WRM projects.
- Evaluate institutional capacity for managing certification, monitoring, and verification processes.
- Identify opportunities and challenges to scaling carbon-financed projects in water security and WRM.
- Explore how WRM projects can generate carbon credits while supporting water availability and environmental conservation.
Methods
The study employed a mixed-methods approach, incorporating the following:
- Household Surveys: Surveys were conducted in target communities to assess water treatment practices, including the use of boiling for purification. Data on fuel use, water consumption, and existing access to safe water systems were used to estimate emissions reductions.
- Emission Reduction Calculations: Using the Gold Standard and Verified Carbon Standard (VCS) methodologies, the study calculated the potential GHG emissions avoided by reducing water boiling. These calculations helped estimate the carbon credits that could be generated from each water intervention.
- Economic Modeling: Financial models projected the costs associated with carbon credit certification, monitoring, and verification. These models also assessed revenue generation from carbon credit sales under various price scenarios, examining the break-even points for different project sizes.
- Stakeholder Consultations: Local stakeholders, including water service providers, government officials, and carbon project developers, were interviewed to assess institutional capacity and the practical challenges of managing carbon certification processes.
- Regulatory Review: An analysis of Ethiopia’s regulatory frameworks examined how conducive the environment is for scaling RBF-CC. The review focused on the alignment of national policies with international carbon certification standards and how these policies can be improved to support carbon finance.
Key Findings from the Study
- Financial Viability: Projects serving 50,000+ households can cover the high upfront costs of certification, monitoring, and verification through carbon credit revenues. Smaller projects face challenges unless bundled together to share the costs. WRM projects, such as reforestation, also show potential for generating carbon credits, especially when implemented at scale.
- Institutional Capacity Gaps: Local institutions showed interest in RBF-CC but identified capacity gaps in understanding and managing the technical aspects of carbon certification. Training programs and capacity-building initiatives are essential for scaling these projects.
- Challenges to Scaling: High certification costs, complex monitoring requirements, and fluctuating carbon prices are major barriers to scaling RBF-CC projects. Project bundling and simplifying certification processes can help overcome these challenges.
- WRM Potential: Reforestation, wetland restoration, and sustainable land management projects offer significant opportunities to generate carbon credits, sequester carbon, and support water security. These projects can contribute to both climate resilience and ecosystem services that benefit communities.
Costs Associated with Carbon Credits and Feasibility Factors
These factors affect the financial viability of projects. Larger projects are generally more viable, but bundling smaller projects can spread costs and increase financial feasibility.
Go-No-Go Decision Framework
A full decision tree is available within the RBF-CC feasibility and learning study.
Carbon Credit Process: Steps to Certification
Implications and Next Steps
- Sustainable Financing: Carbon credits provide a reliable revenue stream for both water security and WRM projects, ensuring long-term operations and maintenance. By turning emission reductions into financial resources, projects can cover ongoing costs without relying on traditional donor funding.
- Capacity Building: Scaling RBF-CC requires investing in local capacity to manage carbon certification, monitoring, and compliance. Training programs for local institutions are essential to ensure successful project implementation and management.
- Scaling Through Bundling: For smaller projects, bundling interventions into a single carbon credit portfolio can help reduce certification costs and increase overall financial viability. This approach can make RBF-CC more accessible to smaller communities and water projects.
- Expanding to WRM: Extending RBF-CC to WRM projects, such as reforestation and wetland restoration, presents an opportunity to enhance ecosystem services, sequester carbon, and improve water security. WRM projects can generate additional carbon credits while supporting broader environmental goals.
- Policy Advocacy: Governments and policymakers should simplify carbon certification processes and provide regulatory support for scaling carbon finance. Advocacy is needed to create an enabling environment for both water security and WRM projects to access carbon markets.
Next Steps: Moving Forward with RBF-CC
- Pilot Projects: Implement pilot projects to test and refine methodologies, validate financial models, and demonstrate the long-term viability of carbon financing for water security and WRM.
- Capacity Building: Develop targeted capacity-building initiatives to equip local stakeholders with the skills and knowledge needed to manage carbon credit projects and navigate international carbon markets.
- Policy Engagement: Work with national policymakers to streamline certification processes and develop supportive regulatory frameworks that encourage the adoption of RBF-CC in both water security and WRM sectors.
Learn More: Full Reports and Resources
For a comprehensive analysis, including financial models, case studies, and stakeholder insights, access the full reports here: Link to Full Carbon Financing learning paper and executive summary (we are also testing a chatbot)
Please see below for a digital download of the full poster:
Please contact Jason Lopez (jason.lopez@mwawater.org) for any questions.
Partners:
Lars Osterwalder (osterwalder@ircwash.org)
Funding:
