4 ways to finance climate-friendly urban development

By Bill Hinchberger 15 December 2015

An aerial view of Manaus, the capital city of Amazonas state in Brazil. Cities have a big role to play in climate-friendly development, with over half of the world's population living in urban areas. Photo by: Neil Palmer / CIAT / CIFOR / CC BY-NC-ND

If climate-friendly development is possible, cities must play a big role. They account for over half of the world’s population and more than two-thirds of economic activity, energy use and energy-related greenhouse gas emissions. Urbanization shows no signs of abating.

Yet local officials often lack the capacity, tools, or even the legal authority to attract funding for climate-friendly projects.

A report by the Cities Climate Finance Leadership Alliance, released during the Paris climate change conference outlined several challenges and recommendations. Urbanists added others. The consensus boils down to four outstanding issues, all of which present opportunities for donors and implementers working on urban development.

Discussions in Paris focused on the demand side: changes needed to help cities attract capital, especially from private investors and financial markets. “Most cities do not have the capacity to do bankable projects for climate change,” Stefanos Fotiou, head of the Cities and Lifestyles Unit at the United Nations Environment Program, told Devex.

To help address this, encourage more funding, and facilitate public-private cooperation, the CCFLA will be spun-off as an independent nonprofit next year, following an incubation period with the office of the U.N. Secretary-General, where it was founded last year. The coalition includes over 40 diverse actors, ranging from UNEP and the U.N. Development Program, to Local Governments for Sustainability, multilateral banks, U.S. and French governments, Deutsche Bank, and the World Wildlife Fund.

Some $4.1 trillion to $4.3 trillion per year will be needed for standard urban infrastructure, according to the report. To make that climate-friendly would add another $400 billion to $1.1 trillion (9-27 percent) to the bill. The incremental difference is low enough that Fotiou used the qualifier “only” when he described it.

Much of this cash can be generated from private investors and financial markets, if cities and national governments create the right conditions.

“Of the largest 500 cities in developing countries, only 4 percent are credit worthy,” Ede Ijjasz-Vasquez, senior director for the Social, Urban, Rural and Resilience Global Practice at the World Bank, told Devex, adding that unprepared cities translate into few projects and high transaction costs.

So how can this be changed? Here are the main recommendations gleaned from conversations in Paris:

National governments should let (and help) cities get down to business

Many cities do not control their own urban planning. Indeed, Fitiou told Devex that national capitals often set the agenda and Ijjasz-Vasquez said that the World Bank was working with national governments to “clarify the rules of the game.”

According to the CCFLA report, “development banks, international governing bodies, and NGOs can help national governments use grants, matching funds, tax transfers, and preferential loan rates to support wise investment.”

This doesn’t mean that heads of state should abandon mayors. “The financing of climate-smart cities will need broad partnerships,” noted Ijjasz-Vasquez. “Cities cannot go it alone without national governments. No city, not even in the developed world, can finance infrastructure alone.”

Municipal governments must improve their fiscal health

To forge public-private partnerships and tap private financial markets, mayors must demonstrate “the seriousness of their finances,” said Ijjasz-Vasquez.

Over 200 cities have taken steps to get their “financial basics” right through the World Bank’s Credit Worthiness Academy, a boot camp for municipal officials in bookkeeping, revenue collection, and audit preparedness.

“You also need clarity about revenue sources,” said Ijjasz-Vasquez. “They can be property taxes, water fees — different cultures will do it differently.”

Some local governments have implemented carbon trade and tax policies that could be replicated elsewhere, suggested Fitiou. Examples include Tokyo, Washington, D.C., and California.

Municipalities should develop expertise in project development

“There is a tremendous need for technical capacity in planning and implementation,” Ijjasz-Vasquez said. “They also need better data about the risks of landslides, floods and earthquakes.”

Fitiou called attention to the Cities Development Initiative, founded in 2007 by the Asian Development Bank and the German government, with other donor backing, which provides assistance to medium-sized Asian cities to bridge the gap between development plans and the implementation of infrastructure investments.

The result so far? Over 40 projects worth about $6 billion, noted the UNEP official.

“Project preparation facilities and their financing partners can change project selection criteria to favor low-emission, climate-resilient infrastructure” and provide technical assistance, noted CCFLA.

The financial side has to be right at the project level as well.

“Many people talk about bankable projects in isolation,” said Ijjasz-Vasquez. “Projects need to be technically good, but the finances also have to be run well, so that the project is delivered on time and revenues come through to companies in PPPs.”

Funding models should be developed and shared with mayors

The CCFLA report recommended the creation of think-tanks to “identify catalytic financial instruments and pilot new funding models.”

One such model could be the Global Innovation for Climate Finance, suggested Fotiou. Launched last year by the U.K, U.S. and German governments, it has so far captured $170 million from public and private donors.

Local institutions should be brought into the process too.

“Development-bank capital and co-financing arrangements for some programs can be channeled to local and regional banks, mortgage lenders, and other financial intermediaries to increase their awareness and experience of investing in low-emission, climate-resilient urban infrastructure,” suggested the CCFLA report. “Local financial institutions can also provide an important channel for aggregating and dispersing international climate funding to cities.”

Planet Worth is a global conversation in partnership with Abt Associates, Chemonics, HELVETAS, Tetra Tech, the U.N. Development Program and Zurich, exploring leading solutions in the fight against climate change, while highlighting the champions of climate adaptation amid emerging global challenges. Visit the campaign site and join the conversation using #PlanetWorth.

About the author

Bill hinchberger
Bill Hinchberger@hinchberger

Bill Hinchberger is Devex's Paris correspondent. In his spare time, he's a freelance writer, communications consultant and educator. A native of California, he lived in Latin America for over two decades, reporting for media such as The Financial Times and Business Week. He also served as president of the São Paulo Foreign Press Club and founded the online travel guide BrazilMax.com. Assignments have taken him to over 30 countries, from Cuba to Egypt, India, Kenya, Turkey, and beyond.


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