Carbon credits - Hydrologic (case study)

Hydrologic is a Cambodian social enterprise producing ceramic water filters and part of the Safe Water program phase II. Since its inception in 2001 Hydrologic has sold over 460,000 ceramic water filters to rural villagers in Cambodia. The enterprise is profitable since 2012 and generates income from filter sales as well as from selling carbon credits. Hydrologic claims that about 900,000 individuals (6% of Cambodia’s population) are making use of their filters, thereby saving time, money and reducing air pollution. Almost half of Hydrologic’s customers live on USD 1.25 – 2.50 per person per day and 18% on less than USD 1.25. (HYDROLOGIC, 2015).

About half of the Cambodian population boils its water using wood or charcoal, thereby producing carbon dioxide (CO2) (NATIONAL INSTITUTE OF STATISTICS, DIRECTORATE GENERAL FOR HEALTH, AND ICF INTERNATIONAL, 2015). If Cambodians start using water filters and stop boiling their water, CO2 emissions are being reduced. It is calculated that each Hydrologic water filter in use leads to a reduction of 1.03 tons of CO2 emissions per year. Hydrologic sells these carbon credits on the “voluntary” carbon market, as voluntary emission reductions (VERs). Companies, governments and citizens can buy them to voluntarily reduce their carbon footprint. Deutsche Post, DHL, Veolia and Coca-Cola are the main buyers of Hydrologic’s carbon credits (who by end of 2017 sold carbon credits for over 500,000 USD in total). By investing in local water filter producers like Hydrologic they create incentives to increase water quality in a less polluting way (i.e. with less CO2 emissions). But to sell carbon credits on the market, a project needs to be certified by an international certification body: Hydrologic is certified by the Gold Standard. This certification requires an extensive monitoring process in which Hydrologic proofs and quantifies how many tons of CO2 have been reduced by the sales of its ceramic filters. A broad range of aspects need to be taken into account: from the average amount of wood used in a Cambodian cook stove, to the wood used in the ovens to produce the filters, and the fuel used by the vehicle that delivers the filter. Water consumption, water quality, continuous use of the filter; everything needs to be monitored and cross-checked several times with auditors and stakeholders (check the public monitoring reports here). This is where the carbon credit “brokers” come in. Companies often hire brokers to conduct this application and monitoring process for them. Nexus, the non-profit "carbon consultant" hired by Hydrologic, usually invoices a one-time fee of about USD 80,000-100,000 for the Gold Standard application process plus USD 50,000-60,000 for the compulsory annual monitoring exercise. This means companies have to reduce a lot of CO2 before they can actually start benefiting from carbon credit sales; for Hydrologic more than 25,000 tons for instance. Even then it’s still a risky investment, as the carbon market is not very stable. Between 2012 and 2014 the price of carbon credits dropped by 46%.

After the application is approved by the Gold Standard, carbon credits can be sold via online market platforms such as Markit. This platform works as a match-making platform, on which investors need to be attracted actively. To do this, many companies again use the services of brokers. If companies don’t manage to sell their carbon credits, the investments in the application procedure do not pay off.

In 2012 Hydrologic was the first clean water carbon project in Asia, but nowadays Nexus also has projects in Laos, Indonesia and Vietnam. From the Safe Water Program Phase II also Spring Health (India) and Tinkisso (Guinea Conakry) entered the carbon market. A project overview can be found in Table below:

• Earning money from carbon credits only seems realistic for businesses that are able to reach scale: only then the expensive application process pays off and you are better able to cope with volatile carbon market prices.
• Generating carbon finance is a risky business and probably not a very feasible option for local projects that aren’t backed by international organisations or/and carbon brokers.
• If companies don’t manage to sell their carbon credits, the investments in the application procedure do not pay off.
• Are carbon credits sold, an interesting additional income stream can be developed to sustainably support activities and expansion of a safe water enterprise e.g. scale out activities to new regions or to invest in infrastructure (CapEx).
• Obtaining carbon credits asks for the commitment of an enterprise to comply with the necessary monitoring standards. In the case of Hydrologic a carbon credit manager works at 50% together with NEXUS and Believe Green in order to monitor and sell the carbon credits actively.

• Identify the right broker for getting your enterprise certified as well as to sell the carbon credits.
• Do not underestimate the time-consuming procedures and be aware that it will take time to receive the first revenues.
• Any safe water enterprise will probably need to hire an experienced M&E specialist to conduct monitoring for obtaining carbon credit certification, requiring the ability of an enterprise to cover this additional upfront cost.