Introduction

I’m an undergraduate student at Berkeley working on a project with Solar4Africa to pilot test a poverty reduction credit scheme. The aim is to extend the concept of carbon credits to poverty reduction and create new financing that ties funding directly to the impact created by poverty-reduction projects. It is also hoped that this program would improve access to funding for smaller organizations that may not be able to finance randomized control trial studies (RCTs) to validate their impacts to high degrees of confidence from an academic perspective.

Many global health and welfare (GHW) interventions give socially useful products to people for free (such as medicines or bednets). Poverty-reduction or impact credit financing may be useful for administering a partial subsidy for items that are not distributed for free, but which are distributed at a discount price. The poverty-reduction credit can quantify the amount of subsidy that a product might deserve based on its social or health benefits.

Key Requirements for this program:

“Poverty credit” financing must be contractually committed before the associated impact is created.
Project impact is measured in standardized units for donor’s easy comparison between projects. (e.g. People-Percent-Years of impact)
Verification procedures are defined to ensure evidence of impact is properly defined and created, ideally without the use of expensive RCTs. Procedures are agreed to by the project implementer and project financier.

Poverty Reduction Credits:

The main idea behind a poverty-reduction credit is to create a market for impact that can more dynamically set a price that is transparent and open to a larger number of implementers and donors. Right now, a few organizations set an effective price for impact, but if donors and project implementers are not directly involved with those organizations, any transactions outside of those organizations are not being done based on a clear and transparent “impact price.”

While voluntary carbon credit markets have their imperfections and inefficiencies, one thing the market has been very successful with is getting a large diversity of impact buyers and project implementers involved in climate mitigation projects.

Another benefit of carbon credit markets is that it incentivized many actors to quantify their impact in terms of a clearly measurable unit, i.e. tons of CO2-equivalent impact. Similarly, a poverty reduction credit market may incentivize much more attention and effort at quantifying progress with respect to poverty reduction in similarly clear, quantifiable units: people-percent-years of standard of living/utility increase.

Quantifying poverty reduction

The quantity that we use for measuring poverty reduction is the “people-percent-year” which is defined as increasing the income of 1 person by 1% for 1 year.

According to Open Philanthropy, “we need to be … increasing income for 4 people by ~1% for a year for $1”¹.Open Philanthropy derives this value because they expect to have an impact per $1 that is “slightly over 2000x.” And they “use a logarithmic utility function anchored at $50K.” Essentially, they are assuming that an X-percent change in income has the same utility (or humanitarian value) no matter what the base income might be.

The “2000x” threshold used by Open Philanthropy means that they want a poverty-reducing dollar provided in a development project to have the same impact as $2000 donated to someone who has a per-capita income of $50K. Their effective impact of $2000 benefit for someone who might earn $50K/year is equivalent to a 4% income increase for one person for one year(i.e. four people-percent-years(PPY)).

Thus Open Philanthropy has a threshold of $0.25 per person-percent-year of poverty reduction.

Example application of PPY credits

Solar4africa distributes subsidized pumps which can generate more than $500/year of new income for families that are earning as little as $200 per person per year. The $500 per year increase in income is $100 per person per year, which is a 50% increase of income for five people. If these pumps last for 10 years and increase the income of 5 people by 50%, then this represents poverty reduction of 5 people x 50 percent x 10 years = 2500 PPY. And if 1 PPY is worth up to $0.25, then the maximum justifiable subsidy for the pump is 2500 x $0.25 = $625. Note that the PPY credits would be received in the years that the PPY impact is verified. So the pump in this case might earn $62.50/year worth of PPY credits for the project implementer over 10 years if the impact can be verified.

The cost of a portable solar pump system is between $200-300. So if a poverty reduction credit can be financed at Open Philanthropy’s “price” for funding poverty reduction, then projects like this could be efficiently financed for any implementer and the “earning” of PPY credits could be potentially profitable for any implementing business, charity or institution.

Note that the key to a solar pump earning a large number of PPY credits is to have the solar pumping system last a long time and be used well. This is exactly the type of incentive that a poverty-reducing development program might want to create, because long-lasting, well-utilized pumps will produce maximum economic benefits.

Next steps

The next steps in this project are to define in detail the use of PPY credits for a particular “use case” in a demonstration project where an initial “start-up” philanthropic donation helps finance income-generating investments by very-low-income households. Then additional philanthropic donations that are tied to measurement of impacts that generate “PPY credits” that are used for financing the expansion of the project over time through the purchase of additional income generation equipment in subsequent years. If the poverty-reduction that is created by the initial start-up philanthropic investment is large, then the PPY credits will generate enough surplus revenue for the project to expand rapidly over time. If the impact that can be verified and measured is not enough to pay off the initial investment, then the project will have to decrease the use of PPY credit revenues to sustain itself over time.

By tying the PPY credit revenues to a measured impact at an “efficient price” this creates a natural selection for high-performing projects which will grow rapidly because they generate enough poverty reduction to rapidly pay off the initial costs of the project and subsequently grow..

Other considerations and issues

Even after a demonstration project is defined and implemented, larger scale implementation of a PPY credit scheme would require addressing system issues that may arise such as:

‘Bad’ credits, cheating, and credit for actions that would have happened without the market
Tradability (e.g. Are they something that a corporate CSR program might buy into?)
How prices for credits may change over time
Balancing verification procedure cost versus accuracy
Assuring that income and impacts are measured accurately

As I work on this project I plan to post updates on progress. Any comments or suggestions or considerations that the EA forum community has on this project would be greatly appreciated.

Solar4Africa Project 6: Formulating a methodology for “Poverty Reduction Credits”