Addressing Africa’s Affordability Challenge: Is Carbon Trading The Answer?

In early 2010 Shell Foundation and Envirofit, long-standing partners in the battle against IAP, decided the time was right to expand the geographical focus of their work to Africa.

What they found was a very different situation to the one they faced in India. People in Africa already knew about the benefits of improved cookstoves and, what’s more, they were keen to buy them. The problem, almost exclusively, was the issue of affordability.

Pradeep Pursnani heads Shell Foundation’s programme to tackle Indoor Air Pollution. In the last two years he has been working to overcome the main barriers to growth of the nascent cookstove market in India, living and breathing the IAP challenge.

Pradeep says:

"India poses a complex set of challenges, and high amongst these is the issue of demand. Indian consumers in rural areas still struggle with the idea that purchasing a better cookstove is a good use of their limited resources. The impacts of IAP need to be spelt out at all levels, and consumers need help to understand the efficiencies and savings that improved stoves can offer. On the other hand, for quite some time, Africans have been giving up on three-stone fireplaces in favour of metal stoves,largely because the depletion of forests and scrubland has forced them to purchase the wood and charcoal they use as kitchen fuel."

In fact locally built stoves such as the Joki, a metal stove with a combustion chamber made from mud, were introduced in Africa nearly 20 years ago. For Pradeep this meant that there was less need to spend time, effort and resources building awareness about the problem of IAP and the need to use improved stoves. As he scouted markets in Kenya and Tanzania it became clear that the economic benefits of a stove that consumed less fuel appealed greatly to consumers.

Pradeep explained:

“We soon realised that people in Africa were comfortable buying a stove as a household product. This meant that our biggest challenge was to deliver a value proposition that would displace the existing, less efficient but very cheap stoves. We needed to make efficient cookstoves available via a strong distribution system, but at a price that matched or bettered the existing alternatives.”

Pradeep discovered a continent awash with stove sellers. With the market highly elastic (price-sensitive) some of these businesses had started to sell carbon credits in order to reduce their prices. Herein lay tremendous potential to use carbon revenues to subsidise the price of improved clean cookstoves or to invest in technological development to lower costs.

“Carbon credits are a key enabler for clean cookstoves in the African market”,said Pradeep.

“They can help overcome the barriers of affordability by taking advantage of the fact that cleaner cookstoves offer environmental as well as health benefits.”

[Early research shows that improved stoves can save up to 3 tonnes of carbon per year from entering the atmosphere. Over the five year life span of a stove this figure can be substantial.]

Unfortunately taking advantage of these carbon savings proved far from simple; the main problem, it turned out, was one of timing.

“For a clean cookstove business to be competitive in the wider market place they must be selling stoves at around $10. If they can reach this price point they’ll have the edge on product quality. But at the moment this price is far lower than the cost to make the stoves. Trading the future carbon savings from each stove could subsidise much of this shortfall, but this revenue won’t be seen until two to three years later.”

Carbon savings need to be measured and validated in the field before credits are issued and trading can take place. Clean cookstove manufacturers simply lack the working capital to cover this gap.

Catalysing sustainable growth

“After a great deal of market analysis and research we came to the conclusion that although we could find the right partners to distribute stoves and maximise the value of carbon revenues, we needed to help them bridge to the point in time at which this system would be self-sufficient” continues Pradeep, his excitement clear in every word.

“We launched the Shell Foundation Envirofit Carbon Fund in at the end of 2010. The idea is to have a $1 million fund to support different kinds of high-quality clean stove businesses, regardless of the technology they use, and facilitate new distribution channels by making appropriately structured finance available to them on a temporary basis to help them become sustainable.”

Through the new fund the partners hope to subsidise the sale of over 100,000 stoves over the next 2 years in countries such as Kenya, Tanzania, Nigeria and India. The subsidy will be replaced with earnings from carbon revenues over time. The fund will also work with other organizations, such as women’s groups and MFIs, to make the sale and marketing of improved stoves more affordable.

The Carbon Fund has announced three deals to work with distributors in Kenya, Nigeria and Tanzania. The first, announced in the third quarter of 2010, is a partnership with Paradigm, a voluntary carbon network in Kenya. The plan is for Envirofit to sell improved stoves to Paradigm for $10 to $12 (approx $20 less than their usual retail price) with Shell Foundation providing a subsidy to Envirofit to make up the difference. Paradigm will sell these at cost to a range of distributors in the country and the stoves will eventually be sold to consumers for roughly $15. Over time Paradigm will trade the carbon credits it receives for each stove sold and use this income to subsidise further stove purchases.

By early 2011 similar deals had been struck with C-Quest, a US-based carbon financier, that aims to sell two million improved stoves in Nigeria within the next five years, and E+Co, the clean energy investor, in Tanzania.

Just one piece of the jigsaw

Whilst the new fund will provide a much-needed spur to help the clean cookstove industry realise the value of carbon revenues, Pradeep knows that further cost-efficiencies and technological developments are needed.

“Carbon credits will part-subsidise the price of the improved stoves but more savings are going to be necessary for these stoves to be competitive in the mature stove markets of Africa. The next step will be for Envirofit to start local assembly operations in Kenya where they will benefit from tax waivers. The cost of an imported Envirofit G3300 is roughly $30 but local assembly would bring down the cost to around $15. Once you factor in the income from trading carbon credits this makes a final retail price of $8 much more realistic. If they then start using local paint and parts such as handles, costs could be reduced even further. Then you have the boost to local employment that this would provide.”

This development would see Kenya become the hub of Envirofit’s East African operations and enable duty free export to Tanzania and Uganda. Generating carbon revenues from the sale of clean cookstoves is an important route to achieving this; a sustainable, scaleable win-win for stove manufacturers, distributors and the customers they serve.

Case Study: Cleaner Cooking Makes Business Sense in Ramnagar

Suresh is a self-employed tavern owner from Ramnagar, Karnataka – a small but rapidly growing town between Bangalore and Mysore made popular by the legendary Bollywood film Sholay.

For years Suresh relied upon a three-stone traditional chulha to prepare sambar (Indian lentils), rice, tea and coffee for his customers – a broad mix of local townsfolk and travellers on route to Mysore. Business was good but behind the scenes Suresh was paying a big price. Whilst his customers enjoyed the aroma of freshly brewed coffee, Suresh was inhaling dense toxic fumes from the chulha that left him with sore eyes and a sore throat. At the same time he was spending Rs100 a day for firewood to feed the stove.

Three months ago, an officer from Grameen Koota, a micro-finance organisation, saw Suresh cooking over his traditional chulha.  A short discussion between the two led to Suresh being introduced to a bright orange cookstove that consumed less firewood and emitted less smoke. Suresh saw the value immediately but although he liked the idea of having the stove – one of Envirofit’s G3300 models – he worried about getting the money together. The Grameen Koota officer stepped in with a loan for Suresh’s mother, Thayamma, to buy the stove.

Today, Suresh stirs his sambar without coughing or crying and his customers are happy to sit in a smoke-free space. The Envirofit stove has helped Suresh cut down the time he spends cooking. By using the stove for two to five hours a day (two to three hours every morning, one hour in the afternoon and another hour in the evening) he can cook rice and sambar on five-litre pots to feed his customers throughout the day. With his old traditional chulha the same amount of cooking used to take Suresh between eight and 10 hours.

Suresh requires less wood for his new improved cookstove and this saving has already allowed him to repay the loan from Grameen Koota.

“In less than a month, I’ve recovered the stove’s cost from the savings I make on fuel”, Suresh told us. “I’m now only spending between Rs 20 and 30 on wood each day – that’s a daily saving of Rs 70 to 80. I don’t have to breathe in dirty smoke and even the food tastes better.”

Envirofit stoves reduce harmful emissions up to 80% and require up to 60% less fuel compared to traditional cookstoves. They are manufactured to last longer than traditional chulha stoves whilst being easy to use, clean and maintain.

Various MFI financing schemes, like the one from Grameen Koota, help to make the stoves more affordable. Grameen Koota officers make the most of their familiarity in the villages and the understanding of the socio-economic conditions of their customers to raise awareness about the benefits of clean cookstoves.

Suresh’s new stove has made his life easier, more comfortable and saved him money. While his customers enjoy their piping hot coffee and sambar-rice, Suresh is now cooking safely in his smokeless kitchen.