Alliance Wins Grant to Explore New Financing and Capacity-Building Work in India

Can the carbon market fund energy efficiency projects? The Alliance will explore the issue in a feasibility study that identifies opportunities for funding energy efficiency measures in India's small and medium enterprise clusters through a carbon trading mechanism.

Just over 380 small and medium enterprise (SME) clusters account for up to 40 percent of India's energy use and emissions. Despite a recognized need to bolster energy efficiency in Indian SMEs, the topic is not widely considered due to a high equipment costs, limited subject knowledge and a lack of financing.

The Alliance is investigating an alternative to the status quo. With € 100,000 (about USD 130,000 ) in funding from the Renewable Energy and Energy Efficiency Partnership (REEEP) over 1 1/2 years, the Alliance's India office will test a new financing mechanism that leverages profits from the carbon market to fund energy efficiency measures in India's SMEs.

Why carbon markets? There is a great – and largely untapped – opportunity to involve energy efficiency in this area. At the moment, energy efficiency projects are typically underrepresented in the Clean Development Mechanism portfolio, accounting for only 10 percent of the emission reduction credits traded in the carbon market in 2007, despite the fact that energy efficiency is one of the quickest and most cost-effective ways of reducing greenhouse gases (GHG). By developing a system that bundles energy efficiency projects and GHG reductions in SME cluster industries, it is possible to bring certified emission reductions from this sector to the carbon market. SMEs would gain access to resources for energy efficiency projects and learn more about the carbon finance market, while donor countries would meet their quantified emission commitments according to the Kyoto Protocol.

In partnership with the financial institution IREDA, technical consultants (Conzerv) and the Cluster Development agency, the Alliance will explore the feasibility that tests the proposed model on a pilot SME cluster; then it will determine opportunities for replication across the country. Project staff will develop a handbook and training based on the results of the pilot and disseminate the model to other nearby SME clusters through workshops. By developing the knowledge and capacity of SMEs and innovative ways of financing, the project will build confidence in this sector to pursue this and other similar financing mechanisms, while also contributing to increased energy efficiency and productivity in SMEs. Should the project prove a success, it has the potential to catalyze similar energy efficiency project initiatives in other SME clusters across India.