IS-ACADEMY RENEW Can REDD+ contribute to private sector development in sustainable fuelwood and charcoal production in Rwanda? F.J. Brandts

October 2011

Foreword This research is carried out as part of the International Cooperation Academy (IS-Academy). Set up in 2005 as an initiative from the Dutch Ministry of Foreign Affairs, the IS-Academy aims to encourage policy makers and academics to work together on international cooperation issues. The IS-Academy project ‘RENEW’ is a partnership between Energy research Centre of the Netherlands (ECN), the Institute for Environmental Studies (IVM) at the Vrije Universiteit Amsterdam and the Directorate General for International Cooperation of the Dutch Government (DGIS). The program is comprised of three distinct research perspectives, targeting Rwanda, Mozambique, and Kenya. The research perspectives are classified into distinct themes as follows (Beukering, Bruggink, Brouwer, Berkhout, & Saidi, 2009): • • •

Entrepreneurial perspective - An exploration of opportunities for business model innovation, to increase the viability of renewable energy technology enterprises. Household perspective - An analysis of household decision-making processes under constrained circumstances regarding fuel choices and the uptake of renewable energy carriers. Institutional perspective - An analysis of renewable energy technology diffusion, its evolution and prospects in Eastern Africa from an innovation systems perspective.

This report describes research which contributes to Theme 1. The author would like to thank Raouf Saidi (ECN) and Rahul Barua (IVM/ECN) for their contributions, valuable comments and constructive criticism. The author would also like to thank the experts that availed themselves to participate in this study.

Abstract The expected increase in future demand of biomass feedstock in Rwanda cannot be met because of constraints at the supply side. This has a negative effect on the energy security for Rwandese in the future and the income generated for the Rwandan population involved in biomass feedstock production. There are, however, opportunities to stimulate the typically informal private sector in such a manner that the biomass energy production is made more sustainable. This report conducts research into the REDD+ mechanism (Reducing Emissions from Deforestation and Forest Degradation and the role of conservation, sustainable management of forests, and enhancement of forest carbon stocks (UN, 2011)) and the role it can play for the Rwandan biomass feedstock market. Next, an exploration is made of the current charcoal and fuelwood value chains to be able to better promote sustainable production of biomass. It is shown that existing, improved and economically viable techniques exist in Rwanda, which can be exploited to improve the sustainability of practices within the charcoal and fuelwood value chains; and leverage private investment. It is also shown that REDD+ can provide the financial argumentation for private smallholders to provide a tangible benefit of being in a cooperative, but that there is a lack of data available to prove it. Based on the research findings, the Government of Rwanda is recommended to build institutional capacities at different levels of Government in order to: (1) Align laws and policies applying in the different sectors involved in biomass energy production so that competition for land between energy agriculture and forestry is decreased; (2) Develop and implement laws and policies specifically addressing charcoal and fuelwood in Rwanda which can be monitored uniformly and are applied consistently across the various levels of Government; (3) Promote increased social, economical and ecological benefits of improved charcoal and fuelwood production cooperatives to reach more formal organization of the charcoal and fuelwood sector and more equally distributed income across the value chains;

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(4) Gain insight in what the economic characteristics of the charcoal and fuelwood markets in Rwanda are, so that intervention to create long-term economic sustainability is founded on better reasoning; (5) Operationalize additional value of their project-involved activities, so that sustainable benefits of practical intervention can be proven and continued funding for the longer term can more easily be derived. Based on the research findings, it is recommended to DGIS (the Directorate General for International Cooperation) to: (1) Reconsider their food security definition to include domestic cooking energy for developing countries which are densely populated and rely on traditional biomass. The current food security definition increases competition between wood production for domestic energy provision and agricultural food production - without the energy to cook there are no means to achieve food security; (2) Convince the international developing aid community that a reconsideration of the food security definition is needed; (3) Provide aid to the Government of Rwanda through bilateral agreements for: a. Capacity building activities (e.g. institutional or business); b. Gaining an insight in the economic characteristics of the charcoal and fuelwood markets in Rwanda; (4) Develop guidelines for the REDD+ mechanism on which data can be collected in what way to be able to prove additional value of certain projects. Currently these guidelines do not exist. Hence, sustainable benefits of practical intervention are short term. This is because involved parties lack the time and resources to consider long-term sustainability – potentially through carbon finance - since short-term results are needed; (5) Follow up on the previous recommendation so that current and future funding of projects requires not just a focus on practical intervention, but focuses on proven long-term additionality of practices as well; (6) Research opportunities to develop a mechanism by which such supply-side interventions in woody, traditional biomass value chains can be funded. Although these interventions are beneficial in terms of sustainable development, the old-fashioned image of woodfuels and the complexities with terrestrial carbon – including forest carbon – calculations hamper the possibilities for funding of wood energy interventions at the supply side.

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Table of Contents Foreword ................................................................................................................................................. 2 Abstract ................................................................................................................................................... 2 List of figures ........................................................................................................................................... 4 1.

2.

3.

4.

5.

6.

Introduction ..................................................................................................................................... 5 1.1.

Background .............................................................................................................................. 5

1.2.

Problem statement.................................................................................................................. 5

Forest carbon finance ...................................................................................................................... 7 2.1.

Carbon markets and wood energy .......................................................................................... 7

2.2.

REDD+ potential ...................................................................................................................... 8

2.3.

Conclusions about forest carbon finance in Rwanda .............................................................. 8

The biomass feedstock market in Rwanda...................................................................................... 9 3.1.

The value chains ...................................................................................................................... 9

3.2.

The stakeholders ..................................................................................................................... 9

3.3.

Barriers to sustainable production of biomass energy ......................................................... 10

3.4.

Conclusions about the Rwandan biomass feedstock market ............................................... 10

Business models design ................................................................................................................. 10 4.1.

Business opportunities .......................................................................................................... 10

4.2.

Findings from business model design. .................................................................................. 12

4.3.

Conclusions about business models design .......................................................................... 12

Strategic development .................................................................................................................. 13 5.1.

Government of Rwanda ........................................................................................................ 13

5.2.

DGIS ....................................................................................................................................... 14

5.3.

Conclusions strategic development ...................................................................................... 15

Conclusions and recommendations .............................................................................................. 16

Literature ............................................................................................................................................... 18

List of figures Figure 1: Annual Supply versus Demand of Wood for fuelwood and charcoal. Adapted from FAO (2011). ..................................................................................................................................................... 5 Figure 2: The biomass feedstock value chain. Adapted from Blodgett (2011) ....................................... 9 Figure 3: Simplified stakeholder visualization ........................................... Error! Bookmark not defined. Figure 4: Traditional earth mount kiln (Falzon, 2010) and improved carbonization with a basic chimney. ................................................................................................................................................ 11

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1. Introduction This chapter first describes the background of Rwanda and its energy situation. Then the problem statement provides an insight in what the current challenges and opportunities are for the Rwandan Government. Following this discussion, a research objective and a research question are elaborated.

1.1.

Background

Rwanda is a landlocked country in East Africa with a population of approximately 10 million people. It is one of the most densely populated countries in Africa, with a large rural population. Rwanda is a developing country undergoing economic growth. Since 2002, the GDP growth rate ranged from 3%3% 11% per annum, and inflation ranged between 2%-9%. 2% 9%. Rwanda depends on significant foreign imports (over 900 million United States Dollars (USD) per year), and significant foreign aid. This, and the persistent lack off economic diversification beyond the production of tea, coffee, and minerals keeps the country vulnerable to market fluctuations and subject to an unhealthy economy (U.S. Department of State, 2011). Biomass continues to play an important important role in the energy mix of Rwanda today - approximately 85% of primary energy comes from biomass. The largest part of this energy is produced typically in the form of wood that is either used directly as a fuel (57%) or converted into charcoal first (23%) (23% (GTZ & MARGE, 2009).. The remaining part of this biomass energy (5%) consists of any other type of woody biomass, for instance agricultural waste that is used as a fuel. fu

Wood in Rwanda [Million tonnes / year]

A recent study conducted by the UN Food and Agriculture department (FAO) (2011 2011) (See Figure 1), shows that there currently is a deficit between available wood and wood needed as fuelwood and for charcoal production. Furthermore, even in the best case future scenario, a deficit of 0,77 Mt remains reality (See Figure 1). 3 2,9

2,47

2 1,7

Demand of Wood for Fuelwood and Charcoal

1,1 1 Current situation

Supply of Wood for Fuelwood and Charcoal

Future Best Case Scenario

Figure 1:: Annual Supply versus Demand of Wood for fuelwood and charcoal. Adapted from FAO F (2011).

Rwandan energy strategy documents therefore target a reduction in usage as a proportion of primary energy demand to 65% by 2020. To reach this target, the Rwandan Ministry of Infrastructure (MININFRA) specifically identifies identifie the need for the private sector to play a greater role across all energy sectors (MININFRA, MININFRA, 2009). 2009

1.2.

Problem statement

The Rwandan dependency on biomass energy intensifies the pressure on natural forest resources. According to MININFRA (2009),, however, biomass remains vital for cooking and other household uses because it provides an accessible and affordable source of energy for the population. Access to such forms of energy is important because energy plays a critical role in achieving achieving the Millennium Development Goals (MDG) to reduce poverty (EAC, 2007).. Moreover, activities within the t biomass feedstock market provide an important source of income for the Rwandese population. About 300.000 Rwandans depend on the production and sale of wood-based wood based fuels for their livelihoods. It is estimated that the annual value of production is around 122 million USD or 66 billion Rwandan Francs (RWF).. This is over three times the value of coffee production which is one of Rwanda’s main export products (Blodgett, 2011;; MININFRA, 2009). 5

This provides the Rwandan Government with a dilemma when regarding traditional biomass energy. Private sector development, income creation and access to an affordable source of energy are deemed important, but intensified pressure on the natural forest resources provides negative environmental implications. The private sector must be stimulated to produce biomass energy in a sustainable manner. What is meant by sustainable is that it is financially, socially and ecologically responsible and therefore can be sustained over time (Brundtland, 1987). However, intervention for sustainability requires increased investment and can lead to higher enduser prices in a low income market. Furthermore, Rwanda is a developing country where limited resources are available for such sustainability intervention. The Dutch Directorate General for International Cooperation of the Dutch Government (DGIS) can potentially provide such resources as they aim to improve the understanding of the role renewable energy technologies can have for sustainable energy access in developing countries (Beukering et al., 2009). When considering the Rwandan dilemma from a broader, global perspective, we see that there is a lot of international attention for such challenges. Forests have the potential to play an important role in climate change mitigation. Land-use changes, including deforestation, account for 15% to 20% of carbon dioxide (CO2) emissions. These emissions are mainly taking place in tropical, developing countries (IPCC, 2007). However, because it is hard to relate an amount of non-released carbon to one specific piece of land, forestry transactions were soon sidelined in emerging global greenhouse gas (GHG) regulations (Waage et al., 2011). Attempts are still made, however, to make forest carbon offsets work. United Nations’ (UN) REDD+ is the latest international mechanism under negotiation within the UN climate conferences and other international forums. It will provide compensation to Governments, communities, companies or individuals in developing countries for actions taken to Reduce Emissions from Deforestation and forest Degradation (REDD) below an established reference level. The additional plus represents (2011): (1) Conservation of forest carbon stocks; (2) Sustainable management of forest; and (3) Enhancement of forest carbon stocks. In essence, REDD+ aims to incentivize forest protection over forest destruction. It is expected to be an integral part of future climate agreements and includes a system for monitoring activities and ensuring results. The design and implementation of the mechanism provide to be challenging; and consequently, the mechanism for long-term financing of REDD+ and disbursal of funds has not yet been determined. It is expected to entail a combination of donor finance through public funds and private finance raised through the carbon markets (Global Witness, 2010). The eventual design of REDD+ provides an opportunity for the Rwandan production of biomass energy from fuelwood and charcoal. This is because biomass energy intensifies the pressure on natural forest resources, which can increase GHG emissions. Given the above challenges and opportunities, the objective of this research is to develop a set of recommendations to the Rwandan Government and DGIS on how to increase the sustainability of the charcoal and fuelwood value chains. This leads to the following research question formulated: Which measures can the Rwandan Government and DGIS take to allow the private sector in Rwanda to potentially profit from REDD+, and simultaneously enjoy the benefits of increasing the sustainable production of charcoal and fuelwood for the household energy sector? To answer this question, the next chapter first describes the potential REDD+ can have for the biomass feedstock market in Rwanda. Following this discussion, a characterization of the biomass feedstock market is provided in chapter 4. In chapter 5, business models are discussed which tackle the barriers to a sustainable biomass feedstock market in Rwanda. Then, in chapter 5 a strategy for 6

the Rwandan Government and DGIS is proposed based on the findings of the research. Finally, chapter 7 discusses the conclusions and recommendations of the research.

2. Forest carbon finance This chapter discusses forest carbon finance and the support it can provide the private sector active in the charcoal and fuelwood value chain. First, carbon markets are introduced in relation to wood energy. Then, the potential of REDD+ is discussed.

2.1.

Carbon markets and wood energy

The European Union emissions trading system (EU ETS) - the largest market for emissions trading in the world today - issues about two-thirds of the total volume of carbon credits worldwide and, in terms of the value of credits traded, the EU ETS accounts for almost 80% of carbon credit markets (Klepper, 2011). However, the EU ETS has excluded all terrestrial carbon – including forest carbon – because of complexities involved with terrestrial carbon calculations (REMA, 2009; Waage et al., 2011). This limits the regulated market for forestry carbon. To illustrate, in 2009 a volume of 17,9 Mt CO2 (million tonnes of carbon dioxide) of forest carbon was transacted in the Voluntary Carbon Market (VCM) historically. This is over six times the volume of 2,9 Mt CO2 of forest carbon that was transacted in the regulated carbon markets. The largest potential demand for forest carbon therefore lies within the voluntary market. Hence, the majority of demand for forestry credits has come from voluntary buyers who purchase credits to offset their own emissions and retire their credits immediately upon purchase. Over time, 40% of the total volume of forest carbon offsets was supplied by private sector developers. There are a range of possibilities in the voluntary market. Simply put, a final buyer purchases credits and retires them from a project developer that has designed, and implemented the project and has put the credits up for sale. A more complicated possibility is that an offset credit will pass in a brokered deal between a project developer and an aggregator, and will then be sold to a retailer who sells it to the final buyer (Waage et al., 2011). The easiest way to apply for carbon credits would be for a project to obtain validation or verification from a third party or an internal standard. Historically, 70% of credits transacted on the voluntary market have been sold from validated projects or verified to a third-party standard, 15% have been verified to internal standards, and only 14% did not specify use of a standard (Hamilton, Chokkalingam, & Bendana, 2009). In Rwanda, the Rwanda Environment Management Authority (REMA) is the third party which can supply such verification or validation (REMA, 2009): "REMA is currently working on VCM Project Approval Procedures to ensure that all VCM projects in Rwanda contribute to sustainable development and apply an established VCM standard which requires the use of an independent third-party auditor to certify emission reductions.” Hence, carbon finance is already present in Rwanda. There is even a draft national carbon policy document. REMA also believes there is a potential for forestry projects in Rwanda. Their current focus and expertise, however, lies with CDM. If we look at the possibilities for energy production from wood, then the voluntary market seems the option with the largest potential to apply for land use, land change and forestry (LULUCF) related carbon market projects (Blodgett, 2011). When compared to the CDM, the VCM has more flexibility in LULUCF project types and monitoring methods allowed. Within Rwanda, there are limited possibilities for REDD, because there are hardly any trees left and the ones that are left are well protected by the Government (Blodgett, personal communication, May 4, 2011). REDD+, however, provides an opportunity. Although the UNFCCC has not yet finalized the rules for this mechanism, negotiations are moving forward; certain VCM standards, such as the VCS, are currently even allowing REDD+ projects. Furthermore, the VCM Project Approval Procedures on which REMA is currently working include REDD+ projects (REMA, 2009). 7

2.2.

REDD+ potential

Frequently used standards for REDD+ voluntary certification all ensure (some of) the following criteria (Merger, Dutschke, & Verchot, 2011): (1) (2) (3) (4)

Net GHG Benefit; Poverty Alleviation; Sustainable Management of Forests (SMF); and Biodiversity Conservation.

Different standard schemes adopt different certification procedures which result in different costs of certification. In general, the cost of certification can range between 15,000 and 50,000 USD, depending on the three major certification cost determinants (Merger et al., 2011): (1) the complexity and the certification modalities of the standard; (2) the quality of project documentation; and (3) the project type, size and regional dispersion. Hence, even in the best-case scenario, an amount of 15.000 USD is needed to get a potential wood energy project certified. Apart from the fact that the REDD+ mechanism has not been fully developed, this costly procedure is the biggest barrier for involving REDD+ in wood energy production in Rwanda. Besides financial resources, other attributes are needed for successful REDD+ implementation as well. Harvey, Zerbock et al (2010) provide preliminary insights into what will be needed to make REDD+ work on the ground (Harvey et al., 2010): (1) (2) (3) (4) (5)

The creation of effective on the ground partnerships and capacity; To ensure that forest carbon initiatives are backed by rigorous technical and scientific analyses; To attract the needed financial resources for development; To successfully engage stakeholders in project design and implementation; and To ensure active Government support of field activities.

It is to be seen if these aspects to successfully implement REDD+ activities are present in Rwanda. From the next chapter which explores the biomass feedstock market in Rwanda it will appear whether these aspects are currently available and if not, what is needed to improve the current situation.

2.3.

Conclusions about forest carbon finance in Rwanda

Besides the uncertainties involving REDD+ and the costs of certification, it remains to be seen if the five attributes of Harvey, Zerbock et al. (2010) are present in Rwanda. Pastakia and Oza (2011) have found that before one can develop an intervention plan or intervention in value-adding markets, one must first analyze: (1) Present value-adding chains; and (2) Ruling constraints within these value chains. More insights into these knowledge gaps can then serve as a basis for developing value chain interventions or a plan of interventions. Hence, to be able to develop an intervention or a plan of intervention which can potentially benefit from REDD+ carbon finance in the voluntary market, we combine the attributes of Harvey, Zerbock et al. (2010) with the need for analysis described by Pastakia and Oza (2011): (1) The analysis of the present value-adding chains needs to entail an overview of the stakeholders involved in the charcoal and fuelwood value chains; and

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(2) The analysis of the ruling constraints within these value chains can provide an insight in the present enabling and hampering capacity, economics, institutions and general Rwanda specific characteristics. The next chapter follows these findings.

3. The biomass feedstock market in Rwanda This chapter first discusses the current activities of the private sector related to biomass feedstock in Rwanda. Taking these activities as leading, a further characterization of the biomass feedstock market is given in terms of the involved stakeholders. Then the barriers for sustainable production of biomass feedstock in Rwanda are discussed.

3.1.

The value chains

The charcoal value chain consists out of five main activities as illustrated in Figure 2. Production of wood

Carbonization

Transport

Retailing and Distribution

Consumption

Figure 2: The biomass feedstock value chain. Adapted from Blodgett (2011)

Since fuelwood is burned directly for energy purposes, the carbonization step can be left out for the fuelwood value chain. Other than that, the value chain is the same, except for the fact that charcoal is mostly consumed in urban areas, whereas fuelwood is more consumed in rural areas. Very little to no information is available about the fuelwood value chain (Kayitare, personal communication, May 3, 2011). The linear sum-up of the activities within the value chains does not imply that actors involved limit themselves to one of the activities. There are possibilities for vertical, as well as horizontal integration. An example of horizontal integration is that some entrepreneurs are involved in producing charcoal as well as selling fuelwood. An example of vertical integration is that some entrepreneurs produce charcoal as well as the cook stoves to cook with the charcoal.

3.2.

The stakeholders

A simplified visualization of the stakeholders is shown in Figure 3. The many private smallholders involved in all activities within the value chains are interested to raise as much profits as possible from their actions. They do so by selling a product or service to the next smallholder in the value chain. This conflicts with the interest of the consumer whose interest is to find available household energy services for the lowest possible price. These interests impose a pressure on the sustainability of the biomass feedstock. The public parties involved attempt to improve the long-term sustainability of the feedstock by enforcing laws and regulations that apply throughout the value chains. These laws and regulations should reduce the pressure on biomass feedstock; by doing so public parties gain income from taxes.

Figure 3: Simplified stakeholder visualization

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Finally the project-involved parties, for example Non-Governmental Organizations (NGOs), influence the value chain activities in numerous ways, depending on the project. They are involved in the value chains through projects that aim to reduce the gap between biomass energy supply and demand. In doing so, they attempt to bring the interest of the private smallholder and consumer closer to the interest of public parties and vice versa.

3.3.

Barriers to sustainable production of biomass energy

Currently, the supply of wood cannot meet the demand, while in the near future demand for charcoal will remain high due to the wants and needs of the Rwandese population and their limited economic power to enable a fuel switch. The current practices of the private smallholders involved in the value chains can be considered to increase the problems as described, resulting in a negative effect on the energy security for Rwandese in the future and the income generated for the Rwandan population involved in biomass feedstock production. The sustainability of the biomass feedstock is further limited by barriers such as: (1) (2) (3) (4) (5) (6)

A lack of financial resources of the involved stakeholders; Irregular bureaucratic Government procedures or processes; A lack of standardization; The old fashioned image of charcoal and fuelwood at some Rwandan Government institutions; The dense population of Rwanda; and The hilly topographies of Rwanda.

3.4.

Conclusions about the Rwandan biomass feedstock market

If we reconsider the five necessary attributes of Harvey, Zerbock et al (2010) for potentially successful implementation of REDD+ activities on the ground; and these barriers to sustainability of the biomass feedstock, then we conclude that great challenges lie ahead for the private smallholder in the fuelwood and charcoal value chains before they are eligible for REDD+ financing. For individuals with limited financial means, the potential benefits from carbon finance seem to be out of reach because of the huge startup resources needed. For larger, more organized private sector involvement within more formalized value chains, REDD+ financing can be a more viable option. Most of the project-involved interventions show quite promising results, but the challenge is for these improvements to sustain once the project-involved parties have gone. Building upon these project-involved activities and the fact that an organized private sector structure is needed, potential business models can be tailored to stimulate the private sector to employ more sustainable production practices. These business models can then serve as a shared language to increase efficiencies in the value chains, both from a private as well as a public sector perspective. These increased efficiencies can then aid in reducing the annual gap between supply and demand for wood. Such business models are further described in the next chapter.

4. Business models design This chapter discusses business model design to stimulate the private involved in biomass energy production to employ more sustainable practices. First, a choice between several potential business opportunities is elaborated. Then, findings from the business model design will be discussed.

4.1.

Business opportunities

According to Ashley and Mitchell (2008), improvement of existing production can be a pro-poor intervention in value chains. Hence, opportunities were sought that can increase the sustainability of practices within the activities of wood production and carbonization. Improvement of existing production entails that producers increase their profits or reduce their risks via improved quality and productivity of production. According to Lusby and Panlibuton (2007), there is a general recognition in the development community that traditional approaches to enterprise development have been 10

lacking in impact and sustainability. The promotion of more sustainable "market-based” or “commercially viable” solutions has therefore been promoted. This can result in greater competitiveness of the targeted sectors as a whole. From the analysis of the charcoal and fuelwood value chains, it became apparent that two improved and profitable production techniques exist in Rwanda. First, improved planting, protection and follow-up management of trees can increase wood production threefold (IFDC, 2011). Through activities like choosing the correct tree species and/or crops for available land, soil improvements and clearing area around planted trees during the first years, an increase by 50-75 cubic meters per hectare (m3/ha) in 5 years, on an annual increment of 10 to 15 m3 can be reached. Fertilizers and Integrated Soil Fertility Management (ISFM), multiply this effect even more. However, because data and experiences from intensified tree production lack for the region; the potential beneficial economic impacts are unknown. Second, improved carbonization techniques by means of adding a basic chimney to the production process can increase average efficiency from about 11% to 20-30% (Schaeffer, 2011). According to estimations of Murererehe (Personal communication, 17 July, 2011), for the same amount of wood, the improved kilns produce three times as much charcoal in one third of the carbonisation time needed by traditional kilns. Moreover, because the calorific value of the charcoal is higher, it allows longer cooking time and therefore less charcoal is need. A higher price is paid for the improved charcoal because consumers tend to measure the quality of charcoal by manually weighing it and visually inspecting the size. The heavier a piece of charcoal is, the higher its’ energy density. The larger the pieces of charcoal are, the fuller carbonization has taken place during the production process. These market-based techniques can not only reduce the wood deficit in Rwanda, they are also profitable from an economic perspective.

Figure 4: Traditional earth mount kiln (Falzon, 2010) and improved carbonization with a basic chimney.

As was concluded from the previous chapter, great challenges lie ahead for the private smallholder in the fuelwood and charcoal value chains before they are eligible for REDD+ financing. Larger more organized private sector involvement within more formalized value chains is needed so that REDD+ financing can become viable. There is a need to both increase the financial power of the smallholders as well as to organize their activities within the value chains more efficiently. A way for the private smallholders to do so is to self-organize into cooperatives. According to the U.S. Overseas Cooperative Council (OCDC) (2010), cooperatives have proven potential to bring economic opportunities to low-income developing country individuals. The cooperative business model can therefore allow entrepreneurs to overcome many of the market barriers that exist in developing countries because it allows the entrepreneurs to: (1) Generate economies of scale that reduce transaction costs and/or increase incomes through volume sales; (2) Increase efficiencies along the value chain through greater access to information and networks;

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(3) Improve the quality and value-added of products, by allowing members to learn new skills and leverage technologies among and between themselves; (4) Increase access to capital through joint-pooling of resources into cooperative financial arrangements; and (5) Gain substantial bargaining power through collective action. Following these discussions it was decided to further work out business models combining the available market-based improvements of production with the potential provided by cooperatives.

4.2.

Findings from business model design.

Consequently, the following two business models which further increase the sustainability of practices in the charcoal and fuelwood supply chains in Rwanda were developed by Brandts (2011): (1) A charcoal cooperative, which exploits improved carbonization techniques as well as cooperative benefits; (2) A fuelwood production cooperative, which exploits improved fuelwood production techniques as well as cooperative benefits. When compared to the status quo, the improved techniques in the business models provide: (1) Environmental benefits because of efficiency gains in the production process; (2) Natural economic incentive for entrepreneurs to incorporate these techniques into their businesses. When the business models are compared to each other, it appears that: (1) The business models show many similarities; (2) The improved fuelwood production requires high initial investment costs. This increases the need for a cooperative organization structure because then financial resources can be pooled; (3) The improved charcoal production requires lower initial investment. Therefore more tangible financial incentives are needed to ensure charcoal entrepreneurs see the benefits of joining a cooperative; (4) Both techniques can be widely incorporated in and further promoted by project-involved activities; but (5) At the same time such technique promotion can increase the dependency of the smallholder on the resources provided by these project-involved parties. In the future, carbon finance through the REDD+ mechanisms can potentially play a role to provide the financial incentives for entrepreneurs to join cooperatives, potentially resulting in wider benefits of more formalized value chains; and provide improvements which remain for the longer term. There is, however, a severe lack of data available from these project-involved parties to show that their activities are additional.

4.3.

Conclusions about business models design

Following these findings, it can be concluded that the promotion of the improved production techniques by the project-involved parties can be continued. It must, however, also be noted that this traditional form of development aid - mostly based on bilateral or multilateral funding – struggles to reach permanent results. According to Vastbinder, Kroesen, Blom, and Ortt (2011) this is because such traditional development aid focuses on social and/or ecological responsibility, but lacks the financial incentives to last over time. If carbon finance through REDD+ or any other type of funding is to play a role to provide such financial responsibility in the future, it is vital that incentives for the private sector to engage in the production of sustainable biomass feedstock production are provided. This way, the opportunities provided by the business models can potentially be more easily grasped by the private smallholders currently involved in biomass energy production in Rwanda. As was shown by means of the analysis 12

of the biomass feedstock market in Rwanda, currently it provides to be challenging to grasp these opportunities. The government of Rwanda and DGIS can potentially provide such incentives by adapting their policy strategies. Possibilities for such strategic development by both parties are therefore discussed in the next chapter.

5. Strategic development This chapter discusses the possibilities for the Rwandan Government and DGIS on how they can improve their policy strategies in order to create private incentives for sustainable biomass feedstock production.

5.1.

Government of Rwanda

From the analysis of the biomass feedstock market in Rwanda it became clear that laws and policies specifically addressing charcoal and fuelwood in Rwanda are in place. Across the various levels of Government, however, these are inconsistent. Moreover, the policies applied in the different sectors involved in biomass energy production are not aligned. Another barrier to sustainable production is that there is a lack of institutional capacity to properly monitor and implement and monitor laws and policies. The highest institutional capacity is present at the highest level of Government while the capacities at the more regional and operational levels are often low. These findings are illustrated for example by (re)forestation programs of the Government of Rwanda. These involve both the planting and management of trees. These trees, however, may not be used for energy purposes. Since there is such land scarcity in Rwanda, there is a competition for soil between agricultural practices and biomass energy practices. Currently, the policies of the forestry, agriculture and energy sector further facilitate this competition Since the value chains described are of such an informal nature, the local people benefit from charcoal and fuelwood production. The local people are provided the opportunity of incomecreation, but social equity is not ensured. This is due to the fact development is most limited at the more rural supply-side of the value chains, even though capacity and financial resources are most needed here. Currently these rural stakeholders are exploited and receive the least marginal value for their products/services throughout the value chain. Producing charcoal and fuelwood can be economically sustainable in the short term. It is, however, unknown why such activities are profitable. For this reason it becomes very challenging to maximize the economic sustainability because it is unknown where the largest profit margins are made, and how other profit margins can be increased. Because the direct economic benefits are of such a platonic nature, it becomes even more challenging to predict the indirect economic benefits of charcoal and fuelwood producing activities. It is information like this that is needed to provide an incentive for private investments in sustainable biomass feedstock production. This is because such information can be used to realistically calculate foreseen profits in specific areas. Furthermore, such information can be used to address bottlenecks within charcoal and fuelwood production which hamper economic sustainability. As we have seen, continuing the current practices can increase the negative effect on the energy security for Rwandese in the future; and the income generated for the Rwandan population involved in biomass feedstock production. For the longer term the economic sustainability is therefore jeopardized as well. In addition, currently private smallholders within the value chains are able to obtain the benefits of project-involved interventions, only as long as project-involved parties like the Government of Rwanda are present. Finally, the sources of wood in Rwanda remain unsure. The Government does, however, intervene to increase the sustainability of the charcoal and fuelwood value chains. Since the Government of Rwanda is heavily dependent on multilateral and bilateral funding, it can be imperative to operationalize additional value of their activities, instead of focusing on practical intervention. This 13

way, continued funding for the longer term in whatever form can be more easily derived; and more long term improvements can be made in terms of sustainability.

5.2.

DGIS

Dutch developing aid has recently undergone fundamental revisions. This entails that the Cabinet has chosen to focus on four priority areas where they believe the Netherlands has a special value. A focus on fewer partner countries was also decided, Rwanda is still on the shortlist of these countries. The four priority areas that are the current focus of Dutch bilateral aid are (Knapen, 2011): (1) (2) (3) (4)

Security and rule of Law; Water; Food security; and Sexual and reproductive health and rights.

If we look more specifically at the third priority for Dutch bilateral aid, then food security entails (Knapen, 2011): “Food and nutrition security exists when all people, at all times, have physical, social and economic access to sufficient food which meets their dietary needs and food preferences for an active and healthy life” As was shown, in densely populated developing countries like Rwanda that depend heavily on traditional biomass for household energy use, there is a competition for land between food and energy. Therefore, the definition of food security on which the new Dutch developing aid is built, is shortsighted for four reasons: (1) Without the energy to cook there are no means to achieve food security. This is because fuelwood and charcoal are vital to the nutrition of poor rural and urban households in developing countries; and in addition to being used for domestic cooking and heating, they are often essential in food processing industries like baking, brewing, smoking, curing and the production of electricity (FAO, 2010). (2) This definition of food security increases the competition between food and energy for land because it has a direct negative effect for wood production for energy purposes. If food production is maximized on the scarcely available land, then wood production is hampered. As was shown by the previous point, this cannot be a desirable effect. (3) If the food production is maximized, there is a negative effect for the productivity of land as well. In absence of wood agricultural waste retrieved from farmers’ lands is burned to provide the energy to cook. This agricultural waste then cannot be used anymore to naturally fertilize the agricultural lands. This results in land degradation because the fertility of soils cannot be improved. Hence, a paradox exists between maximizing food production and the volumes of food that can be produced in the long term. (4) Finally, if food production is maximized, this can result in a scarcity of wood, which would lead to increased retail prices of wood to better reflect its market value. Such rising wood prices can further increase the use of less appropriate cooking fuels for domestic cooking as well as industrial food processing. Consequently, the quality of the food can be in jeopardy by maximizing its production. These discussions show that the definition of food security of DGIS lacks the inclusion of domestic cooking energy for developing countries which are overpopulated and rely on traditional biomass. Furthermore, woodfuel, recognized internationally as an important source of domestic cooking energy in developing countries, is only considered sustainable if it does not negatively impact food security in a negative manner (FAO, 2010). Yet, the internationally recognized definition of food security as applied by DGIS is considered sustainable regardless of the negative impact it might have on the sustainability of woodfuels. Besides these considerations, the effectiveness of DGIS aid programs is influenced by the policies, laws and institutional frameworks that are in place. Therefore aid programs that build institutional 14

capacity within Rwanda are needed to ensure that implemented policies, laws and institutional frameworks become clear and are consistent across the various levels of Government and the institutions within the biomass energy-related sectors. As was shown, the international REDD+ mechanism can potentially play a role in increasing the sustainability of the Rwandan biomass feedstock through the voluntary carbon market. Problematic herein is that REDD+ mechanism is not yet existent, let alone clear or consistent. It is therefore vital that data can be collected to be able to prove additional value of certain projects. Such guidelines can lower the barrier for project-involved parties to certify the additional value of their projects; and eventually increase sustainability of practices in the long term. Besides providing this argumentation, DGIS can provide content-related input throughout the development of the guidelines. In addition, an increased amount of voluntary REDD+ projects can be the result of such guidelines. Lessons learned from these projects can also feed back into the developing of the final REDD+ mechanism. Project-involved interventions often proof to be of great value for the sustainability of practices in Rwanda, but the increase in economic sustainability is not necessarily long term. It is therefore important that current and future DGIS funding of projects require not just a focus on practical intervention, but focus on proven long-term additionality of practices as well. To be able to prove such long-term economic sustainability, an insight in the current characteristics of the charcoal and fuelwood markets in Rwanda is needed. DGIS can therefore aid the Government of Rwanda in obtaining such an insight. To add to this insight DGIS can attempt to increase the business skills throughout the value chains to mitigate the lack of business skills as well. As an added bonus such private capacity building activity of DGIS makes it easier for the Government of Rwanda to gather information about the current characteristics of the charcoal and fuelwood markets in Rwanda. It became clear from the business model design that the current focus of intervention in the charcoal and fuelwood value chains is more at the demand side while the largest pressure on sustainability results from practices at the supply side of the value chain. There is a severe lack of data available to undeniably prove that such activities can be additional and eligible for carbon finance. Nevertheless, DGIS can start to think to develop a mechanism in which such activities can be funded. An example hereof can be that DGIS finds a way to express the benefits of the improved charcoal and fuelwood business models in such a way that it is eligible for carbon finance. If this proves to be impossible, DGIS can perhaps develop a new mechanism in which bilateral funding is distributed through developing parties to reach this goal.

5.3.

Conclusions strategic development

In order to create private incentives for sustainable biomass feedstock production, the Government of Rwanda is recommended to: (1) Make sure that Institutional capacities at different levels of Government are increased; so that (2) Laws and policies applying in the different sectors involved in biomass energy production can be aligned; in order to make sure that (3) Laws and policies specifically addressing charcoal and fuelwood in Rwanda can be adequately implemented and monitored consistently and uniformly. (4) Promote increased social benefits of improved charcoal and fuelwood production cooperatives to reach more formal organization of the charcoal and fuelwood sector and more equally distributed income across the value chains; (5) Gain insight in what the economic characteristic of the charcoal and fuelwood markets in Rwanda are, so that intervention to create long-term economic sustainability is founded on better reasoning.

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(6) Operationalize additional value of their activities, so that sustainable benefits of practical intervention can be proven and continued funding for the longer term in whatever form can be more easily derived. Given the barriers to sustainable practices within the charcoal and fuelwood value chains, this will prove to be a challenging task, especially since the Government of Rwanda is heavily dependent on multilateral and bilateral funding. To ensure these goals are met, aid from parties like DGIS is therefore needed. In order develop support which provides private incentives to increase sustainable production of biomass energy, it is therefore recommended to DGIS to: (1) Revise their food security definition to include the domestic cooking energy for developing countries which are overpopulated and rely on traditional biomass; and (2) Convince the international developing aid community that a revision of the food security definition is needed; (3) Take a stand that guidelines need to be developed for the REDD+ mechanism on which data can be collected in what way to be able to prove additional value of certain projects; so that (4) Current and future DGIS funding of projects require not just a focus on practical intervention, but focus on proven long-term additionality of practices as well; and (5) To be able to prove such long-term economic sustainability, aid the Government of Rwanda in gaining an insight in the economic characteristics of the charcoal and fuelwood markets in Rwanda; (6) Build private capacity to ensure easier information gathering; and (7) Even though there is a severe lack of data available to undeniably prove that the business models described are additional and eligible for carbon finance, DGIS can start to think to develop a mechanism in which such supply-side activities are funded as well. As shown by Vastbinder et al (2011), the traditional approach to development aid cannot be considered sustainable. Given the barriers to sustainable practices within the charcoal and fuelwood value chains, a top-down effort of the Rwandan Government and DGIS to improve practices is not enough. It can help, however, to create an enabling environment in which the private sector is provided the possibility to grasp opportunities of business models that can contribute to such sustainable practices. Ideally, these business models can be triggered in such a way that a bottom-up approach to improve practices is achieved at the same time.

6. Conclusions and recommendations The main research question formulated in the problem statement is: Which measures can the Rwandan Government and DGIS take so that the private sector in Rwanda can benefit from REDD+ to play a role in increasing the sustainable production of charcoal and fuelwood for household energy? From on an analysis of the application requirements for REDD+ in chapter 2, it can be concluded that forest carbon finance through REDD+ can play a role in Rwanda through the voluntary market. However, current activities of the private smallholders will result in increased negative effects for the energy security of the Rwandan population and their income generated from biomass feedstock production. As great challenges lie ahead for the private smallholder in the fuelwood and charcoal value chains before they are eligible for REDD+ financing, business models potentially benefiting from REDD+ in the future were developed that combine a more organized structure of the private sector with improved production techniques currently promoted by project-involved parties. There are possibilities for the Rwandan Government and DGIS to improve their policy strategies in order to create private incentives for sustainable biomass feedstock production. A top-down infliction of policy strategies may not be enough, but can perhaps create a more enabling environment in which the private sector is provided the possibility to grasp opportunities of the

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developed business models. Before one can inflict such top-down intervention in an appropriate manner, it is necessary that institutional capacities are built. Given the above conclusions from the research, the following measures can be taken to ensure that the private sector in Rwanda can benefit from REDD+ to play a role in increasing the sustainable production of charcoal and fuelwood for household energy. The Government of Rwanda is recommended to build institutional capacities at different levels of Government in order to: (1) Align laws and policies applying in the different sectors involved in biomass energy production so that competition for land between energy agriculture and forestry is decreased; (2) Develop and implement laws and policies specifically addressing charcoal and fuelwood in Rwanda which can be monitored uniformly and are applied consistently across the various levels of Government; (3) Promote increased social, economical and ecological benefits of improved charcoal and fuelwood production cooperatives to reach more formal organization of the charcoal and fuelwood sector and more equally distributed income across the value chains; (4) Gain insight in what the economic characteristics of the charcoal and fuelwood markets in Rwanda are, so that intervention to create long-term economic sustainability is founded on better reasoning; (5) Operationalize additional value of their project-involved activities, so that sustainable benefits of practical intervention can be proven and continued funding for the longer term can more easily be derived. It is recommended to DGIS to: (1) Reconsider their food security definition to include domestic cooking energy for developing countries which are densely populated and rely on traditional biomass. The current food security definition increases competition between wood production for domestic energy provision and agricultural food production - without the energy to cook there are no means to achieve food security; (2) Convince the international developing aid community that a reconsideration of the food security definition is needed; (3) Provide aid to the Government of Rwanda through bilateral agreements for: a. Capacity building activities (e.g. institutional or business); b. Gaining an insight in the economic characteristics of the charcoal and fuelwood markets in Rwanda; (4) Develop guidelines for the REDD+ mechanism on which data can be collected in what way to be able to prove additional value of certain projects. Currently these guidelines do not exist. Hence, sustainable benefits of practical intervention are short term. This is because involved parties lack the time and resources to consider long-term sustainability – potentially through carbon finance - since short-term results are needed; (5) Follow up on the previous recommendation so that current and future funding of projects requires not just a focus on practical intervention, but focuses on proven long-term additionality of practices as well; (6) Research opportunities to develop a mechanism by which such supply-side interventions in woody, traditional biomass value chains can be funded. Although these interventions are beneficial in terms of sustainable development, the old-fashioned image of woodfuels and the complexities with terrestrial carbon – including forest carbon – calculations hamper the possibilities for funding of wood energy interventions at the supply side.

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