Micro, Small and Medium Scale Enterprises (MSMEs) in India play a pivotal role in the country’s economy, contributing approximately 30% to its gross domestic product while providing employment opportunities to around 120 million people. However, according to a 2018 report by the Centre for Study of Science, Technology & Policy (CSTEP), MSMEs generate nearly 110 million tonnes of CO2 equivalent, making them a significant contributor to climate change.
India’s Commitment and Way Forward
In light of this, during the 26th Conference of Parties (CoP26) to the United Nations Framework Convention on Climate Change in Glasgow, Scotland in 2021, India vowed to attain net-zero carbon emissions by 2070. This commitment hinges on multiple strategies – phasing out coal use, increasing investments in renewable energy, ceasing deforestation, and accelerating the transition to electric vehicles.
The Role of MSMEs in Reducing Carbon Emmissions
The CSTEP report also highlighted that the MSME sector consumes significant proportions of coal, petroleum products, and natural gas supplied in India. Given this, the sector needs to adopt innovative technologies to reduce its carbon footprints and enhance resilience against climate change risks. However, traditional funding mechanisms are insufficient for effectuating the necessary decarbonization.
Climate Finance: An Effective Solution
Enter Climate Finance – monetary aid provided by developed nations, chiefly responsible for historical emissions, to developing countries. This aids in financing emission reduction measures and fostering adaptation. By facilitating the transfer of technology and knowledge from developed to developing nations, climate finance can potentially catalyze the required transformation in the MSME sector.
Why MSMEs Need Climate Finance
The MSME sector in India faces a considerable credit gap – the difference between the total credit supplied from formal channels and the addressable demand. The International Finance Corporation reports a drastic surge in this credit gap, rising from $37 billion in 2010 to $330 billion in 2017. Despite an overall debt demand of $882.42 billion, the MSME sector only receives 16% of its needs from formal sectors, with the remaining catered to by informal sectors.
Challenges Faced by MSMEs
Several factors exacerbate this problem. First, a lack of awareness around climate finance policies and structures, coupled with limited financial literacy, constrains MSMEs’ ability to leverage climate finance for profit. Second, the formalistic nature of climate finance frameworks, characterized by strict guidelines, creates accessibility barriers for the MSME sector. Finally, comprehensive procedures required to avail international climate funds, including detailed project proposals and audit reports, are inaccessible for many small and micro-businesses lacking resources or capabilities.
Action Plan for the Government
Given these challenges, the government’s role in proposing strategies and financing avenues for MSMEs gains paramount importance. Connecting the sector to a formalized credit system will facilitate access to climate finance and help bridge the overwhelming credit gap. Additionally, promoting decarbonization measures like cleaner fuel, common combustion facilities, and energy-efficient technologies can significantly reduce the sector’s carbon footprint.
Understanding ‘Social Cost of Carbon’
The ‘Social Cost of Carbon’ (SCC) is a monetary measure of the long-term damage caused by a tonne of CO2 emissions in a given year. It aids policymakers in understanding the economic impacts of decisions affecting emissions. India’s country-level SCC was estimated as the highest at $86 per tonne of CO2, implying that the Indian economy stands to lose $86 for each additional tonne of CO2 emitted. This loss underscores the urgency and importance of implementing comprehensive climate change mitigation measures, particularly in high emission sectors like MSMEs.