The planned pilot would see adverts for commercial firms permanently attached to 300 of the city's street lights.
The fabric banners would be erected high up on lampposts in the style of the temporary "I Love Leith" adverts on Leith Walk or Edinburgh Sparkles banners on Princes Street.
If the pilot is a success, it could then be extended across the city, potentially raising millions of pounds of revenue every year for the cash-strapped local authority.
If rolled out across the city, it is hoped that the income could help cover the annual 3.5 million street lights electricity bill.
The proposals have been cautiously welcomed by motoring groups, although they say the signs need to be carefully designed so that they do not distract drivers.
Philip Gomm, a spokesman for the RAC Foundation, said: "In an ideal world it would be nice to think we didn't need adverts on every available bit of space, but we are living in tough times so Edinburgh is right to consider this if it raises a meaningful amount of revenue and is not too distracting to drivers.
"We would hope the cash raised was spent maintaining roads, pavements and street lights, which are areas of expenditure always hit first during a financial squeeze."
Council chiefs are currently looking at possible locations for the pilot scheme, with city centre streets and thoroughfares leading up to major shopping centres likely to prove most popular with potential advertisers.
However, discussions will have to take place with city planners, as advertising on street lights is not currently permitted. Any change to the guidance would have to be approved by the city's planning committee.
Council officials will also need to ensure that the proposals do not break a 15-year bus shelter contract agreement with Adshel that gives it the exclusive right to on-street advertising.
It is the latest attempt by a council to cut the cost of its street lights, with some English authorities already leaving some streets in the dark overnight to save money.
Walsall Council introduced advertising on street lights in 2003 and hoped it would raise 7m over 25 years. But it has only raised 8138 in the six years since being introduced.
Renfrewshire Council also had proposals to sell advertising space but the idea never got moving amid fears about the impact on road safety.
The pilot scheme is part of the council's services for communities department's proposals to overcome budget difficulties.
Councillor Phil Wheeler, the city's finance leader, said: "For the package three budget proposals we asked officers to focus on, amongst other things, maximising the council's income. Clearly, if we are to balance the books, we must be innovative in our approach and remain open to new ideas."