The IFF Applied to Carbon Credits

By now, many of our readers are familiar with the Impact Factoring Fund (IFF). When we first introduced it, we knew it would solve a common problem for many startups in emerging markets. Since then, we have discovered that there is a range of applications for the IFF across a variety of sectors, including tablet sales, pay-as-you-go energy sales, and even carbon credits. The common thread is the working capital constraint that businesses face when trying to scale such solutions in emerging markets.

One of our most unique applications of the IFF will be in the carbon finance sector. The IFF can act as a financial intermediary for carbon credits generated from improved cookstoves. In 2008, the Gold Standard released transparent guidelines to measure the amount of greenhouse gas emissions that an improved cookstove offsets over its lifetime[1]. Since then, carbon asset managers (CAMs) have worked to certify, register, and sell the carbon credits generated. Because the market enables CAMs to earn back the cost of the goods sold (COGS) and profits by selling the carbon offsets, they are able to distribute the improved cookstove to end-users at a heavy discount. Although it can improve the quality of life for the 3 billion users who rely on open flames or inefficient cookstoves to cook, this target market cannot afford the upfront cost, so the discounts are necessary to open up the market. The flaw in the plan is the lag between the subsidy of the cookstove and the earned revenue from its carbon credits, thus creating the working capital constraint for the CAM.

Using our model of purchasing accounts receivable, the IFF provides the CAM with working capital based on the sales volume of improved cookstoves. For every one sold, the IFF pays the CAM at a discounted rate for part of the expected future value of carbon credits generated from the cookstoves the CAM sells. The CAM receives working capital and the ability to continue to scale. The IFF will then collect payments directly from the CAM as it sells its acquired carbon credits until the factored value has been repaid. The IFF does not factor the entire future value of a stove in order to keep the CAM incentivized to ensure that cookstoves produce credits throughout their lifetime. This approach both encourages and enables the CAM to scale and increase the availability of improved cookstoves available to end-users.

By providing financial intermediation for carbon asset managers, the IFF enables the scale of improved cookstoves, which ultimately creates a dual impact: reduced carbon emissions and improved quality of life for the end-user. You can read our in-depth explanation on the background, challenge, and approach on our Resources page.

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