Cities' Climate Infrastructure Financing: Urgency of Reform

The decisions cities make today will determine the planet’s future.

Cities are where the battle against climate change will be defined. Worldwide, cities are responsible for 70 percent of global greenhouse gas emissions. According to the Global Commission on Economy and Climate, under a low-carbon scenario $93 trillion needs to be invested worldwide in climate-resilient infrastructure by 2030; 70 percent of this estimate relates to urban areas. If cities are to contribute to their countries’ abilities to meet Paris Agreement commitments, they will need to invest trillions of dollars in renewable energy, transportation, water and waste management, green buildings, sustainable public spaces, and other climate-resilient infrastructure systems.

However, the current financing architecture does not offer cities the affordable options they need in order to make these investments. To address the dissonance between the insufficient supply and growing demand for climate-resilient infrastructure financing, two things are imperative: a comprehensive transformation of the international financial ecosystem, and an expansion of local capacity to receive financing and execute projects.

Supply of climate-resilient infrastructure financing

While the supply of financing mechanisms available to cities is increasing, it remains insufficient. Most of these financial instruments and funds are chained to sovereign debt and city creditworthiness and are highly politicized, which significantly delays the financial flows cities need. Financial supply architecture must undergo a paradigm shift in order to expand climate-change-related infrastructure funding as well as enable direct access by cities (without national governments as intermediaries) to these funds and lower cities’ transaction costs.

Historically, Global Development Finance Institutions (DFIs) in the form of Multilateral Development Banks (MDBs) have been the primary source of infrastructure funding worldwide. In order to help cover cities’ financing gaps, MDBs and other DFIs (such as bi-lateral banks) are taking important steps to channel more funding directly to cities. However, subnational governments still face obstacles in accessing these resources. In several countries, cities are not allowed to access international borrowing directly. In many others, cities are required to obtain a national sovereign guarantee or an authorization from legislative bodies, which pose a great risk since political disputes impede or delay access to credit.

At the national level, National Development Banks (NDBs) and Funds provide credit (or a mix of grants and loans) to local governments and other institutions investing in local infrastructure. These institutions, which provide credit at below-market prices, are intended to build capacity, improve the effectiveness of local investment, and set the stage for independent municipal credit systems. Although this model has worked in some countries, the lack of institutional capacity and financial reliability has often prevented cities from accessing these resources.

Public-Private Partnerships are another potential source of climate-resilient infrastructure funding. However, in many countries, Public-Private Partnerships’ regulatory frameworks are extremely confusing and complex, preventing cities from receiving private investment. A comprehensive benchmark analysis is necessary to develop policy recommendations and legal reforms in this field.  

On the bright side, DFIs and other financial institutions are developing financial instruments specifically for infrastructure projects that address climate resilience and mitigation. Green Bonds, in particular, are gaining popularity. Investment in Green Bonds reached $47.9 billion in the first quarter of 2019, surpassing the first quarter of 2018 volume of $33.8bn by 42 percent. For 2020, “credit-rating agency Moody’s had predicted a record-setting year for green bonds from the outset, but had to revise its projection to $250bn from $200bn after growth exceeded expectations.” This suggests investors see these instruments as an alluring option. Nevertheless, local governments encounter strict regulations on borrowing rights and creditworthiness, which are required to attract private funding.

New, innovative proposals to finance cities’ climate-resilient infrastructure projects are also emerging. The Green Cities Development Bank (GCDB) is a promising idea being developed by C40 Cities Climate Leadership Group and the Overseas Development Institute. It aims to be flexible, timely, and entirely focused on financing climate infrastructure in cities and will adapt to fast-changing technology and new lending practices. However, GCDB is still under discussion and will require further development in order to become a reality. 

Demand for financing climate-resilient infrastructure

Cities must also change how they plan, invest, and manage infrastructure projects in order to secure funding. Many cities are undertaking pioneering actions and setting ambitious goals to reduce emissions and meet the Paris Agreement. Cities have gradually started to modernize urban policy frameworks, build their capacity for developing “bankable” climate infrastructure projects, incorporate sustainable development planning, and raise their concerns in the international arena. 

However, local authorities need to build stronger business cases to secure funding. This is especially true for intermediary cities and cities in low-income countries, where the financing realities and capacities differ greatly from those in developed countries. These cities often struggle to fund basic services and have limited fiscal resources to cover infrastructure costs; as a result, demand for financing climate-resilient infrastructure is often overlooked. Lack of capacity for project preparation, limited financial knowledge, poor access to information, regulatory uncertainty, and corruption impede necessary capital flows.

Solving supply and demand weaknesses

Weaknesses from both supply and demand are hampering countries and cities in meeting the Paris Agreement goals. A complete redesign of the international financial architecture is necessary to ensure cities have access to the resources they need to transform their infrastructure. Simultaneously, cities need to turn ideas into “bankable” projects, update their policy frameworks, and improve their financial performance.

Novel city diplomacy initiatives like the U20, through its engagement with the G20, could be an appropriate forum for discussing policy reforms that would lead to an increase in the supply side.

At the same time, cities struggle to understand the supply side, the opportunities for project financing, and the resources available to help them prepare their business case for climate-resilient infrastructure projects. To close this information gap, the University of Pennsylvania’s Institute for Urban Research (Penn IUR), Kleinman Center for Energy Policy (KCEP), and Perry World House (PWH) are hosting the City Climate-Resilient Infrastructure Financing Initiative (C2IFI). Working side-by-side with partners like the Cities Climate Finance Leadership Alliance (CCFLA), C2IFI is building an open source knowledge-sharing platform that will enable mayors, city officials, and municipal stakeholders to find partners, data, financing instruments, best practices, funding models, and experts to assist them with project preparation and advance climate-resilient infrastructure. Cities need access to information that speaks their language and helps them understand the players, new models, and technical assistance available.

C2IFI will also provide tailored guidance directly to cities. The initiative is currently working with students from schools across the University of Pennsylvania on a pilot project with Freetown, Sierra Leone to identify financing options for the project preparation phase of a cable car construction project.

Investing in climate-resilient urban infrastructure will be exorbitantly expensive—but it is urgently needed. Multi-stakeholder collaboration, disruptive ideas, and a cross-sectoral approach are needed to overcome the imperfections of a financial ecosystem still mired in a country-centered approach.

Mauricio Rodas is Penn IUR, Kleinman Center for Energy Policy (KCEP), and Perry World House (PWH) Visiting Fellow. He served as Mayor of Quito, Ecuador from 2014 to 2019 during which time he oversaw major infrastructure improvements in the city, including construction of the nation’s first metro. He has had an active leadership role in some of the most important city networks worldwide, including: two terms as World Co-President of United Cities and Local Governments Organization (UCLG) and as a member of the boards of the Global Covenant of Mayors for Climate and Energy (GCOM), C40 Cities Climate Leadership Group (C40), and Local Governments for Sustainability (ICLEI). He is member of the Global Future Council on Cities and Urbanization of the World Economic Forum. In 2019, he was named one of the 100 World’s Most Influential People on Climate Action by Apolitical and received the Penn IUR Urban Leadership Award.