It’s time for SMEs to tap carbon finance

Market-based incentives for additional greenhouse gas emission reductions for project activities offer new opportunities in developing countries. The revenue from Clean Development Mechanism (CDM) projects can ensure financial viability of energy conservation and cost reduction measures in many industries. Carbon credits generation activity is growing at 80% in India. Though India has the highest number of registered CDM projects in the world, CDM has yet to become popular among small and medium enterprises (SMEs).
The number of Indian SMEs participating in CDM is small. It constitutes only around 5% of the total registered CDM projects in India. SMEs’ contribution is more than 50% of industrial production in India. Going by its value added figures in the manufacturing sector, it makes for one-third of total exports and employs the largest manpower next to agriculture.
With more than three million SMEs, this sector contributes 40% towards the GDP, provides employment to more than 22 million people and is growing at a rate of 20% annually. The wider role of SMEs in the economy and their potential to reduce GHG emissions through energy efficiency and other measures at a marginal cost make them ideal for CDM activities.
SMEs can immensely benefit from carbon cash flows. CDM can provide incentives to SMEs to adopt new and more efficient technologies, improve energy and environmental performance, and help them access finance at low costs.
Benefits from potential carbon revenue streams could be significant in raising the equity component of financing their modernisation. Energy efficiency, which enables flow of carbon revenue in the segment, will not only enhance their environmental quality but will also make the working environment better. Increasing the SME participation in CDM is very critical to achieve desired modernisation and cost competitiveness in the segment. A strategic approach needs to be formulated to leverage carbon finance to strengthen SMEs and their future potential in contributing to the Indian economy and making the economic growth more inclusive.
Since the SME participation to date is not very encouraging, a little effort to create a CDM-enabling environment in this sector could lead to harnessing its latent potential. The units in food processing and agri-industries—sugar, distilleries, meat/fish processing, diaries, poultries, starch, jute and steel rolling mills, ferro alloys, sponge iron and foundries—have excellent opportunities to generate additional revenue flows to enable modernisation and cost efficiency. The participation of SMEs in harnessing this mechanism is slack due to the lack of awareness, affordability of transaction costs and uncertainties in the CDM process and consequent risks.
At present, the sugar industries are active and are developing several CDM projects. At least 15 sugar mills have got successfully registered and a few among them have received carbon revenue flows. Their number can increase manifold with effective intervention by public and private bodies—especially financial institutions, the government and project development entities/consultants.
There are several cost effective indigenous technologies that reduce fuel consumption in boilers and thereby the carbon emission. For example, there are indigenously developed multifunctional fuel additives for petroleum fuels and solid fuels like coal, lignite, bagasse and biomass. Usage of such technologies can result in reduction in fuel consumption by 2-6% and in case of brick kilns, the reduction in coal consumption can be 10-15%. Such additive and emulsifier suppliers can make their business proposition more attractive to customers by using carbon revenue stream or generating upfront debt or equity finance.
In India, the brick industry is still a highly energy-intensive process. The annual estimated coal consumption in the brick industry is nearly 24 million tonne, which forms about 8% of the total coal consumption in India. The share of fuel in the total production cost of bricks is in the range of 35-50%. There are significant opportunities for improving the energy efficiency of the brick production sector. A balance use of energy with some improvements in existing technologies can reduce the sector’s energy usage by 5-15%.
The share of India’s textile industry in its GDP is nearly 5%, and the export earning from the sector is around 25% of the total value of exports from India. There are about 2,000 cotton and man-made fibre textile units in the country. Energy accounts for 12-15 % of the total cost of production in the sector. Up to 75% of energy is utilised in wet processing with temperatures ranging from 40°-140°C. Any initiative that would lead to a reduction is the use of fossil fuel by replacing it with alternative renewable energy sources would earn carbon credits.
The major reason behind the low participation of SMEs is lack of awareness about CDM and carbon abatement opportunities. Further, the kind of costs involved in structuring a green initiative as a CDM project make one look at it as a challenge and the volume of operations in SMEs makes the CDM structuring process apparently unviable.
A new approach introduced by UNFCCC, called programmatic CDM, provides an enabling environment for energy service companies to emerge and aid SMEs to participate in implementing CDM projects. Programmatic CDM can be seen as an attempt to lower transaction costs of the CDM process to bring in the emission reduction opportunities in small and tiny sectors into the carbon market.
This new initiative by the UN body enables emergence of new entities (called energy service companies) to finance and undertake initiatives particularly for renewable energy and energy efficiency projects in small and tiny sectors, which are marginalised in a CDM market dominated by high-yield, low-cost projects.
A clear road map needs to be prepared by the government and trade organisations to create a strong awareness of CDM and its benefits among SMEs. An appropriate policy for promotion of energy service companies (CDM project bundlers and CDM programme implementers), articulation of carbon credit ownership issues and some fiscal incentives will definitely make significant difference in achieving the higher participation of SMEs in India.



Source: Financial Express