Financing Cities in a Changing Climate

“The battle for sustainability will be won and lost in cities.”

—Ban Ki-Moon

Cities have a large and increasingly important role to play in the fight against global climate change. Currently, cities produce more than 60 percent of all carbon emissions globally. The world’s urban population has grown by more than 2.8 billion since 1960, and greenhouse gas emissions from urban areas have grown in tandem. Urban populations, often located near coastlines and other major water bodies, can be disproportionately vulnerable to climate impacts.

According to an expert panel hosted by the German Federal Ministry for the Environment at the United Nations climate talks (COP21) in Paris this week, a successful climate change mitigation strategy must emphasize emission reductions and climate resiliency in urban areas.

The panelists—including representatives from the German Federal Ministry for Economic Cooperation and Development, Swiss Re, l’Agence Francaise de Developpement (AFD), KfW Development Bank, and the mayor of Catbalogan, a coastal city in the Philippines—highlighted the importance of reliable financing for climate projects in urban areas.

Philippe Orliange of AFD noted that demand for investments in low-carbon and climate-resilient infrastructure may total US$4.5–5 trillion annually by 2030, and that 70 percent of this demand may come from cities. He argued that international donors and financiers should scale up financial support for climate projects in urban areas, noting that investment decisions made in cities today will determine their ability to achieve emission reductions and to reduce climate risk exposure in the long term.

Orliange described four ways in which local governments can seek to finance city-level climate projects:

  1. Secure sovereign loans or grants;
  2. Encourage the development of financial intermediation—whereby banks intermediate between lenders and borrowers—and green credit lines to incentivize the engagement of national or regional financial institutions;
  3. Blend finance solutions by mobilizing resources from the European Union Facilities or from the Green Climate Fund to finance urban climate infrastructure; and
  4. Secure direct loans from financial institutions, with or without state guarantees, to fund city-level climate investment projects.

National and subnational coordination on climate policy is critical, as international financial institutions are unlikely to support city initiatives that conflict with national policies.

The panel participants noted that cities often struggle to secure funding for climate projects because regional development banks and private financial institutions will only invest in projects that meet certain criteria.

First, cities must be creditworthy. The World Bank estimates that only 4 percent of the 500 largest cities in developing countries are deemed creditworthy in international financial markets. Second, cities must have clear and detailed climate investment plans that not only increase climate resilience and reduce risk, but also generate short-term economic returns. Financial institutions are unlikely to invest in low-carbon development or climate resilience projects if the investment would not generate short-term economic growth. Third, cities must have the institutional capacity to implement their proposed climate plans. And fourth, city-level climate initiatives must complement national policies.

Implicit in these investment criteria is the assumption that continuous economic growth is desirable. But some argue that unrestrained economic growth is not desirable and is a root cause of climate change. We may see debate on this issue post-COP21.

Ultimately, the panelists called on the climate delegates in Paris to produce an agreement that encourages partnerships between financial institutions and city governments. Such partnerships could play a crucial role in the effort to achieve Intended Nationally Determined Contribution (INDC) targets moving forward.

Sophie Wenzlau is a Senior Fellow at the Worldwatch Institute and a  student at the UC Davis School of Law. Her research focuses on the role of sub-national governments in climate change mitigation and adaptation.

One thought on “Financing Cities in a Changing Climate”

  1. There’s much to be optimistic about with how our cities will adjust to climate change. Financing should not be an issue moving forward. Wind and solar power now represent very good investment opportunities. All types of lending institutions will want to offer renewables due to their considerable return on investment potential.

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