Despite the valid criticisms that have surfaced about the voluntary carbon market, carbon finance is playing a critical role in catalyzing a just and equitable transition to a green global economy. Social enterprises, though they receive little attention in the popular discourse around carbon markets, are essential to generating high-quality, impactful carbon credits.
Effective social enterprises offer market-based solutions that address problems for people living in poverty. Their viability depends on selling a product or service that people will actually pay for; meaning, they are uniquely positioned to respond to customer demands that ensure product success, which in turn drives social and environmental impact, including mitigating emissions.
Increased scrutiny on carbon credits has led to concerns about the lack of transparency and accountability in the market and the increased demand for what some researchers consider cheap, low-quality carbon credits – all of which amount to what many call corporate greenwashing. But when used responsibly, carbon finance is one way that wealthier nations, companies, and individuals, who bear the brunt of responsibility for climate change, can fund access to climate-friendly goods and services that people in poverty could not otherwise afford.
Acumen invests in off-grid and clean cooking companies, because the transition to clean energy must include people in poverty – and current financing approaches for clean energy risk leaving those people behind. Across the world, 2.4 billion people in poverty cook using mostly wood and charcoal. This creates significant health, economic, and environmental consequences, resulting in over three million deaths a year and exacerbating the climate crisis through increased deforestation. Those people deserve access to clean, safe, affordable energy – which is good for them, and good for the planet.
Carbon finance can have a multiplier effect – by not only reducing carbon emissions, but also by providing products and services to low-income people who need them most. Some companies have demonstrated incredible creativity in leveraging carbon credits to increase affordability or access to goods and services.
As of the end of 2022, the five clean cookstove companies that Acumen has invested in have sold a collective 3.8 million stoves, which saved customers hundreds of millions of dollars in fuel and health costs, and mitigated 18 million tons of carbon dioxide. Several companies, like BURN and BioLite, are using part of their mitigation impact to generate carbon credits, which subsidize the cost of their cookstoves to low-income customers, bringing a customer’s up-front cost down by 30-80%.
What’s more, modern energy cookstoves can supercharge carbon finance through metering and reliability. Electric and gas stoves enable more accurate tracking of use through metering or fuel sales. Buyers of carbon credits from modern energy cooking companies will be able to monitor impact in near-real-time, giving them greater security that their investments are making critical climate solutions more affordable.
Another example is off-grid solar, where companies like d.light and Easy Solar receive carbon credits for selling solar home systems to low-income people, some of whom are accessing electricity for the first time. These companies are driven by a mission to provide clean, renewable, affordable energy to people who otherwise would rely on kerosene or candles. The cost of doing so – especially in last-mile areas – is sometimes higher than what low-income households can afford to pay.
This puts pressure on prices and financial sustainability, but the social and environmental impacts are enormous: the number of people without access to electricity has roughly halved in the last decade, and 190 million metric tons of carbon dioxide have been avoided by replacing kerosene lamps with solar lighting. For some of these off-grid solar companies, carbon finance can help make their unit economics more sustainable, which means they can continue to provide clean energy to people in poverty.
In these examples, carbon finance enables a virtuous cycle: it creates affordability by reducing prices to end users, and financial sustainability by allowing companies to cover their costs and grow. This same virtuous cycle leads to increased uptake in products that reduce carbon emissions, thereby meeting the all-important additionality criteria that some argue the most popular carbon offset projects simply don’t meet. And while more transparency and increased scrutiny and rigor are needed in the voluntary carbon market, carbon finance also clearly holds immense potential to achieve both environmental and social good.
If more carbon finance can be directed to social enterprises, the environmental and social impacts could be even greater. There is promise in areas like productive use of energy and climate resilient agriculture, where microenterprises are replacing their costly diesel generators with cleaner forms of electricity and smallholder farmers are being connected to products and services that reduce their carbon footprint while also ensuring they can boost their incomes.
The cost of creating a cleaner and more equitable future cannot be borne by people in poverty who have suffered from historical injustices. And for carbon markets to be sustainable and meaningful, those people and communities – who are generating the actual impact – need to share in the benefits.
Dan Waldron is head of insights at Acumen.