Five Steps for Financing Urban Adaptation to Climate Change

In early 2022, urbanists working on global warming anticipated the release of the International Panel on Climate Change (IPCC) 6th  assessment report with much trepidation. When Climate Change 2022: Impacts, Adaptation and Vulnerability—the section addressing capacities and limits of adaptation—appeared, its findings confirmed their concerns. One headline, “Investment in urban adaptation has not kept pace with innovations in policy and practice,” accompanied the observation that gaps particularly afflict cities of low- and moderate-income countries where the impacts are greatest and emissions lowest.

“Global urban adaptation finance is a debacle,” declared Jeffrey Sachs, University Professor, and Director, Center for Sustainable Development, Columbia University,[ii] in his keynote address for Financing Urban Adaptation to Address Climate Change, a workshop addressing these gaps in investment in urban adaptation. Jointly convened by Penn IUR, Perry World House, and the Kleinman Center for Energy Policy on March 23 and 24, the workshop brought together three dozen urban policy and finance leaders to find ways to spur investment in urban adaptation to climate change.

Sameh Wahba, Global Director, Urban, Disaster, Risk Management, Resilience, and Land Global Practice at the World Bank, echoed Sach’s assertion, noting that, of the $75 billion of tracked spending on urban climate finance, only $7 billion was spent on adaptation.[iii] Clearly, this spending is minimal in face of IPCC estimates of $127-$295 billion annual expenditures between 2030 and 2050 required for the developing countries alone.[iv]

But remedies are possible, concluded the workshop participants. They fashioned a currently aspirational but fully realizable, five-step roadmap. Its aim is to stimulate the needed funding and lessen the risk of cities becoming stranded assets in the battle to arrest global warming. The action-oriented roadmap has the following elements: 1. Map needs, 2. Coordinate adaptation and mitigation, 3. Determine appropriate policy instruments, 4. Support governmental subsidiarity, and 5. Design new financing approaches.

1. Map needs

Most cities do not have a comprehensive inventory of their adaptation needs. They lack climate projections and risk assessment related to water (flooding and drought), public health, air pollution, extreme temperatures, storms, fires, and so forth. Needed studies cover all geographies based on a strong multistakeholder process that engages all levels of government, civil society, and the private sector—especially informal settlements, often invisible to city managers.  A suggested output is a handbook to guide city leadership as it sets investment priorities over time. An accompanying product is a scorecard that measures successful adaptation using cross-cutting indicators such as the resilience dividend (the difference in the outcomes between the scenario with a resilience approach and without) developed by the Rockefeller Foundation and the Rand Corporation.[v] The idea is to use measurements that go beyond traditional metrics based on narrow or siloed approaches.

2. Coordinate adaptation and mitigation

Achieving the 1.5 degree global goal to manage climate change necessitates pursuing four transitional pathways that combine synergistic adaptation and mitigation activities. These involve cities but often have a larger geographic footprint. They are:

• moving the supply of energy away from fossil fuels,
• strengthening ecosystems to protect water and food supplies,
• reducing use of industrial materials such as cement and steel, and
• dealing with locational decisions retreating from coasts and other vulnerable areas.

Such coordination calls for purposeful action—that is, efforts that recognize and incentivize working across silos for the conception of projects or system improvements and employ the best-suited agencies to finance, operate, and maintain these improvements. While such an approach acknowledges the strength of traditional business lines and ensures accountability, it also leaves room for coordinated and collaborative work required for effective urban adaptation.  

One way to accomplish this goal is to implement a climate budget model as has Oslo and 12 other cities ranging from Mumbai to Barcelona.[vi] Under this arrangement, a city’s finance or budget department measures and allocates every capital investment decision against its climate reduction targets, a process involving integrating emissions and capital project investments.

Another solution is to appoint transversal leaders within city government. Examples are chief resilient officers or chief heat officers; some cities might combine functions in one position, as New York City has done with the joint appointment of a commissioner of environmental protection and chief climate officer, blending the climate mandate with a powerful, well-funded line agency. Success here depends on the local context.

3. Determine appropriate policy instruments

Urban adaptation entails both finance and regulation. Cities undertake both.Take, for example, efforts to deal with chronic or extreme event flooding. These efforts can encompass a municipality constructing flood gates, dikes, massive berms, or big open spaces. These are public goods, paid for by government sources such as taxes, intergovernmental transfers, or loans supported by sovereign guarantees. Accompanying these efforts are municipal restrictions on building in flood plains that devolve from zoning ordinances and land use rules.

Many places are at an important inflection point with regard to balancing regulation and finance. Rapidly urbanizing places in the Global South have the opportunity to engage in planning and rulemaking in what will become newly developed areas while those in the Global North have older systems ready for climate-friendly retrofitting and regenerating obsolete land uses.

Of special note, multi- or bi-lateral funding groups operating in the Global South are increasingly engaging in climate-resilient investment—project lending that integrates climate and development to yield co-benefits. Formerly, these institutions had separate funding streams, one for development and the other for climate. The World Bank, for example, recently revised its Climate Change Action Plan 2021-2025 to allocate 35 percent of all outflows to the newly aligned efforts with half to be used for adaptation.[vii]

4. Support governmental subsidiarity

The principle of governmental subsidiarity holds that functions are best allocated to and funded by the level of government best suited to accomplish them. For example, a national government would do a poor job collecting garbage while a local government cannot set national property rights legislation. Encouraging more constructive partnerships among different levels of government is the object. Some adaptation measures—such as ecosystem protection or large transportation projects—are beyond the capacity and mandates of local government and thus require good working multi-level partnerships.

5. Design new financing approaches

As mentioned earlier, the huge financing needs for urban adaptation in the Global South call for a multi-pronged approach. Approaches range from improving current practices, to linking public, private and philanthropic efforts for mutual benefit, to transforming the current system. Deeper exploration of each is beyond the scope of this essay, but each has benefits and drawbacks.

Among the improvements to current practices are:

• From national government:
  • Fixing intergovernmental transfers by making them predictable and connected to the existence of climate plans being implemented
  • Heightening decentralization with clear definitions of city competencies accompanied by technical assistance and local capacity-building
• From local government
  • Developing creditworthiness, including improving transparency in accounting practices and effective property tax systems
  • Encouraging local procurement policies to incorporate climate sensitive purchasing
  • Devising budget allocations to
    • Sprinkle funds across departments to incentivize collaborative adaptation work
    • Create a department focused on adaptation
    • Invest in specific projects focused on adaptation
• From both levels of government
  • Creating a “top off” fund to allocate under specific conditions the promotion of urban adaption

Linking public, private, and philanthropic effort for mutual benefit can include:

• Making public investments that stimulate private investment in urban adaptation projects, an effort that could have the added advantage of increasing the tax base
• Using techniques to capture increased land values attributed to public investment
• Developing or improving formulae for blended finance

Transforming the current system involves fashioning new institutions such as green banks, and developing legislation to allow direct borrowing by municipalities where not currently permitted.

The roadmap is a reaction to the urgent need to find ways to secure funding to implement urban adaptation, primarily in the Global South. Its five steps frame an enduring system built on trust and lasting relationships designed to surpass local political terms. Its execution involves extensive consultation with and among a full range of stakeholders. Finally, it lays out areas for exploratory research, policy innovation, and pilot testing, to move a series of ideas into practice and, ultimately, develop theories to support effective responses to climate change.

Visit the Penn IUR website to stream the workshop’s eight panel discussions as well as keynote addresses from Jeffrey Sachs, University Professor, and Director, Center for Sustainable Development, Columbia University, and Simon Richter, Class of 1942 Endowed Term Professor of German, Department Chair, Germanic Languages and Literatures, Penn School of Arts and Sciences, and a message from Maimunah Mohd Sharif, UN Undersecretary and Executive Director, UN Habitat.

Eugénie L. Birch is Penn IUR Co-Director and Nussdorf Professor of Urban Research and Education, Department of City and Regional Planning, Stuart Weitzman School of Design. Mauricio Rodas is Penn IUR, Kleinman Center for Energy Policy (KCEP), and Perry World House (PWH) Visiting Fellow and former Mayor of Quito, Ecuador. Together they lead the City-Climate Infrastructure Financing Initiative (C2IFI) a joint initiative of Penn IUR, KCEP, and PWH that supports mayors in creating inclusive and prosperous cities by locking in climate-resilient infrastructure investments that yield economic, social, and environmental benefits for decades.