In climate negotiations, as elsewhere, the question of money takes center stage. How will existing and future commitments be paid for, and who will invest in potentially capital-intensive infrastructure projects?
Estimates vary depending on a range of factors, but aggregating across sectors and regions reveals a large investment gap. A low-emission future has been estimated to cost an additional 9-27 percent on top of existing, business-as-usual infrastructure costs in the range of $4.1-4.3 trillion per year. How this plays out varies depending on the sector. In transport, for example, a low-carbon transition may be achieved through deep shifts in existing investment portfolios, while climate adaptation will likely require an increase in absolute volumes of funding.
What is clear is that much of these investments will be in cities, especially the fast-growing cities of the global south where the urban form is still taking shape. The momentum and ambition from mayors is there, but we need more to finance sustainable cities. As UN member states, their negotiators and the international community meet in Bonn for COP23 to discuss the implementation of the Paris Agreement, here are three ways to unlock financing for urban climate action.
1. Localize Climate Financing
By October 2017, more than 2,500 cities and 2,000 companies had committed to undertaking climate actions and the numbers keep growing. Known as “non-Party actors” in UN parlance, cities, states and private companies have the potential for huge emissions reductions and resilience contributions. Even if the federal government withdraws from the Paris Agreement, the United States could be halfway towards achieving its NDC by 2025 if all of the existing mitigation commitments are realized.
Cities and other non-Party actors need national governments and administrators of climate finance to find more ways to pass climate monies down the line. Notwithstanding their differing interests, capacity and resources, non-Party actors need support in realizing their commitments. Cities, for instance, often need support formulating investable projects and managing their typically constrained financing capabilities. In general, climate-smart investments benefit from support for experimentation with new technologies, new contract design and funding approaches, and broad cross-sector capacity- and coalition-building.
2. Use Limited Funds Intelligently
The term “climate finance” itself covers a broad range of money flows that help countries cut their emissions and adapt to climate change. Climate finance typically includes development aid and grants (which are non-reimbursable), as well as reimbursable types, such as equity, debt, and credit-enhancing guarantees and insurance.
The role of climate finance must be seen in the context of the task ahead. The combined resources of international climate funds – about $23 billion today – are actually small relative to the trillions needed globally every year to adjust consumption patterns, reorient economic incentives and more that is required to adapt to and mitigate climate change.
We will need strategic and purposeful deployment of limited funds, particularly those originating from public sources. Cities and other non-Party actors should tell their country representatives at the UN to use funds to leverage and unlock resources that would otherwise not be spent on climate-smart investments.
Within current debates, three ways of using climate financing more intelligently stand out:
- Blending: Blended finance consists of the strategic use of development and philanthropic funds to mobilize private capital flows. This approach is particularly important for unlocking investments in emerging markets as it mobilizes much-needed private sector capital while gradually building confidence in the market.
- Direct access: For the past few years, climate funds such as the Adaptation Fund have been allowing developing countries to access funding directly by accrediting national institutions. This allows national entities to surpass international intermediaries, which could in turn improve their ability to attract future investments. A similar arrangement could be developed for cities and subnational actors, for example through the Green Climate Fund.
- Financial aggregation: In sectors where climate-smart investments are small and spread across many individual transactions, as in the case of building efficiency, aggregating projects into a portfolio allows for risk-sharing and economies of scale. Intermediary organizations and dedicated investment vehicles are useful in this process, simultaneously mobilizing private investment while reducing risk, which is paramount for enabling private sector involvement.
3. Improve Tracking and Measurement
Official numbers put global climate finance flows at $741 billion in 2014, but we have little idea of how much is channeled to the local level. Despite recognition of the importance of non-Party actors by both the Paris Agreement and the Addis Ababa Action Agenda on Financing for Development, there is no common framework that donors and financiers can use to track the magnitude or destination of subnational climate finance flows.
The existence, and consistent application, of such a global tracking framework for subnational climate finance flows would enable a deeper discussion of how much climate finance should reach the local level, including cities.
Empowering Cities and Non-State Actors
Reaching the scale of investments required to keep warming below 1.5 degrees Celsius, as the Paris Agreement envisions, requires countries to mobilize and empower non-Party actors. As in sustainable development more generally, local governments and civil society should be recognized as essential partners in climate-smart development.
Indeed, when thousands of non-state actors from more than 50 countries gathered at the Climate Chance Summit in Morocco last September, how to finance action by non-state and subnational actors was one of the foremost questions from participants.
The investments required are substantial and the timeframes to deliver them are short. This means countries need to focus intently on localizing climate financing, finding the most appropriate use of limited public funds, and ensuring a balance between short-term, rapid gains through local projects and building capacity that sustains momentum in the longer term.
For more on COP23, read our full coverage.
Anne Maassen leads WRI’s work on the Financing Sustainable Cities Initiative, a partnership between WRI Ross Center for Sustainable Cities and C40 Cities, funded by the Citi Foundation, focused on helping cities develop business models to accelerate the implementation of sustainable urban solutions.
Christopher Moon-Miklaucic is the Urban Innovation and Finance Research Assistant at WRI Ross Center for Sustainable Cities.