Decarbonization of the Textile Manufacturing Sector

A Fund under NAMA Program Pakistan
Managed by WWF Pakistan

Background: The textile sector in Pakistan employs 40% of the industrial labor force, accounts for 8% of the total gross domestic product (GDP), and is the largest foreign exchange earner i.e., USD 19.33 billion. It is also the second most polluting industrial sector contributing 6% of the country’s greenhouse gas (GHG) emissions. These GHG emissions stem from two sources; 1) industrial stationary combustion contributing directly to GHG emissions, and 2) being the largest consumer of electricity, the energy sector is the biggest GHG emitter in the country.

Textile manufacturers linked to international supply chains are required to comply with environmental regulations, and textile manufacturers producing for the local market rarely comply. The main barriers to a sector-wide transformation towards a greener industry are (1) weak enforcement of environmental regulations on the local level, (2) lack of awareness of the benefits of resource and energy efficiency (RE & EE) measures, and (3) absence of liquidity in textile small and medium enterprises (SMEs) to invest in renewable energy (RE) and energy efficiency (EE) measures, paired with a lack of access to external capital.

Approach to Transformational Change: “Pakistan – Decarbonizing Textile Manufacturing” NAMA Support Project (NSP) provides access to financing and technical assistance. The Financial Component of the program will establish a fund to provide loans to manufacturers for adopting EE and RE technologies at reduced markup rates. This will be achieved by adopting existing concessional refinancing mechanisms and partnering with local banking institutions. The market approach will be used to develop financial products, loan disbursement mechanisms, and capture carbon credits. The value will be exchanged along the chain, and savings and sales premiums will augment the business case for investing in cleaner production. The project will catalyze the development of private-sector financing for textile SMEs beyond the NSP duration.

The Technical Component will support the adoption of regulations, and address enforcement and compliance issues through capacity development and policy interventions. The capacities of all relevant organizations including governments, banks, textile manufacturers, green technology equipment and service providers, and the banking sector will be built or strengthened.

Mitigation potential: It is expected that 354,000 tons of CO2e will be mitigated over the five years of the NSP. The capacity of local industrial machinery and equipment manufacturers will be built. This will help to meet the increase in demand for RE and EE technologies and will also reduce costs thereby reducing the need for additional capital investment.

Target Market & Opportunity: Export-oriented SME textile manufacturers. The decarbonization of SME textile manufacturing will help a larger vendor base in the textile sector, to meet the USA and the EU standards paving the way for the GSP Plus status renewal that is due to expire in December 2023. The GSP Plus status allowed Pakistani products to enter the EU markets duty-free, as a result, Pakistani Exports to the EU increased by 166% in the past eight years. It will also reduce the cost of production of large exporters as they have to invest less in vertically integrating the manufacturing and can rely on outsourcing and move towards an efficient production system.

Potential Interventions for De-Carbonization

  1. Caustic Recovery Unit
  2. Waste Heat Recovery Boiler
  3. Oxygen Trim Control at Boiler
  4. Low Liquor Dying Machines
  5. Energy-Efficient Motors
  6. Economizer
  7. Heat Exchange from Wastewater

Proposed Fund Structure:

  • The funds will be placed with a Bank and serve as the Cash refinanced.
  • This fund can attract profit from the bank at a pre-negotiated rate so that fund continues to grow.
  • On the back of such funds, WWF may consider reducing the mark-up rate (a spread up to 4%), for the amounts provided as loans to the Textiles SME manufacturers for the upgradation of equipment, plants, process, etc., leading to the reduction of the net carbon emissions.
  • The default risk of clients will be borne by the lending bank(s), as has been the case under the re-finance mechanism.
  • Banks will be allowed to charge market-responsive markup rates.
  • WWF will facilitate the industry visits and also share all the technical details for the education and understanding of the bank staff, helping them with the development of lending products, transaction structure, and procedures.
  • The customers of other banks may also avail of the facility where the Bank (managing fund) will act as the fund manager like SBP for the WWF fund and the spread may be shared between the managing bank and the other bank.
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