Smart, efficient finance has huge potential to help public sector organisations cut their carbon footprint cost-effectively, so it’s surprising it’s so little used at a time when budgets are under pressure.

We’ve set out to help councils and other public bodies meet their carbon targets for less money, and today we publish Smarter finance: how to get more carbon savings for your cash. This report shows how smarter ways of raising and using finance – like revolving funds and services companies – can make money go further, saving both carbon and cash.

We’ve gathered rare examples of pioneering initiatives from as far afield as Lithuania – where groups of tenants club together to fund energy efficiency measures – and we now know what is special and worth repeating.

For instance, Kirklees’ Re-Charge scheme loans householders money to install low-carbon technologies in their property, such as solar panels to heat water. It is successful because there are no interest charges and the money does not have to be repaid until the property is sold. The council only has to subsidise the interest on the loans and this costs around three times less per home than using a grant scheme.

In parts of Milton Keynes developers pay a levy into a fund to offset the carbon emissions from the use of new properties. The money is spent on local schemes such as insulating older homes which are much less energy efficient. It works because it is cheaper to save carbon in older homes than make new homes carbon neutral and it raises capital from the developers.

Perhaps most famous of all is Woking Borough Council and its service company, Thameswey Energy Ltd. Thameswey installs combined heat and power plants which supply heating and electricity to households, businesses and council buildings in the centre of Woking. It used just £38,000 of council funds to borrow £1 million from private investors. The story has been widely celebrated, yet there are few other councils establishing service companies.

Rather than wondering why Thameswey isn’t being copied elsewhere, we wanted to identify the replicable ingredients which allowed Woking to take this bold step in the first place.  The answer is of value to all public sector organisations – it’s because the council leaders and executives actively supported innovation.

The most important lesson from Woking isn’t the technicalities of establishing a private CHP network, it’s that top-level leadership, which encourages staff to be inventive and take risks, can lead to exceptional, progressive solutions. Of course, thorough research, risk management and feasibility analysis are important too, but this release from the bureaucratic leash is a vital and, until now, overlooked success factor for smarter finance and cost-effective carbon savings.

We have used many more practical insights like these to develop ten success factors for getting smarter with finance, and a staged process for developing new initiatives which we'll use to work with public sector organisations as part of our Climate Finance project.

I’ve seen first-hand, whilst working in the European Commission, how creativity can be stifled by hierarchy and procedures. So when we launched Climate Finance at the Corporation of London earlier this year, I was delighted to see that UK public servants have such free-flowing enthusiasm, passion and creativity. After barely an hour of our ‘fantasy finance’ game we had developed new financial models to save carbon. These included a new service company which supplied water, heat and electricity to the NHS and invested in energy savings and generation across its estate, and a trading scheme for waste. The winner was a community-run social enterprise which generated energy locally and used the profits to provide insulation to households.

Many who joined us that day said that having a broad range of expertise in the groups was the catalyst to the success. This is why we are offering interested public sector organisations the opportunity to work with our advisory group to help them create schemes like this for real.

The public sector faces the prospect of a cash-starved decade, yet carbon reduction targets will stiffen. This recession is the opportunity to move from grant to pay-as-you-save schemes which generate returns. This sort of smarter finance is our solution and this report is a practical guide to making it happen.

In the future, public income will be as important as expenditure when it comes to funding carbon savings. “Cash out – cash in”, is the new way to save carbon.