FINANCING THE MISSION

Cities should develop integrated climate action plans that include long-term goals for decarbonization, resilience, and sustainable development. Financing must align with long-term objectives to avoid short-sighted investments that could result in stranded assets or inefficiencies. Ensure investments account for multi-sectoral impacts (e.g., transportation, energy, waste) for a comprehensive urban transition.

Design financial strategies that ensure the benefits of climate-neutral projects are equitably distributed, especially to vulnerable populations. Create funding mechanisms that prioritize investments in low-income and marginalized neighborhoods that are most vulnerable to climate impacts. Address potential financial barriers to access (e.g., high upfront costs for energy-efficient housing or clean transportation) through targeted subsidies or grants.

Developing a well-defined investment plan is the first step toward ensuring that cities can make the necessary financial commitments for a climate-neutral future.

Quantify costs and benefits of reaching carbon neutrality

To create a viable investment plan, cities must first assess the costs associated with transitioning to carbon neutrality. This involves detailed financial modeling of infrastructure projects, renewable energy systems, transportation networks, and urban resilience initiatives. Additionally, cities need to evaluate the economic benefits of decarbonization, such as improved public health, reduced energy costs, job creation in green industries, and enhanced long-term resilience against climate-related disasters.

Assess the Investment Gap

Once the costs and benefits are quantified, cities must assess the investment gap—the difference between available financial resources and the total funding required to reach carbon neutrality. This gap will inform the scale of financing needed and help prioritize investments. By understanding the scope of the shortfall, cities can target specific areas where private investment, government support, or international funding can bridge the gap.

Policy frameworks at both the local and national levels significantly influence the success of climate financing. Cities must conduct a thorough review of existing policies to identify both enablers and barriers to achieving carbon neutrality.

Enabling policies

Enabling policies include tax incentives for green projects, subsidies for renewable energy installations, and regulations that promote sustainable construction and transportation. Cities should ensure that policies encourage investments in low-carbon infrastructure, such as energy-efficient buildings or electric vehicle (EV) networks, while facilitating access to climate finance from public and private sectors.

Restrictive policies

On the other hand, restrictive policies, such as outdated building codes or fossil fuel subsidies, can hamper progress. Cities should aim to eliminate or reform regulations that create obstacles to climate investments. For instance, zoning laws might need to be updated to allow for more sustainable urban development, or utilities may need regulatory changes to prioritize renewable energy over fossil fuels. Moreover, debt ceilings imposed from the national policies can drastically reduce the borrowing capacity of the city.

Implement environmental policies

Introduction of supportive policies, such as green procurement, increase in taxes for fossil fuels or congestion charges will play a fundamental role in securing diverse sources of capital to achieve climate-neutrality. The timing of these policies will affect the allocation of the available capital over time.

Successful climate finance strategies depend on involving a wide range of stakeholders from both the public and private sectors. Cities must identify and engage key actors to ensure coordinated action.

Government entities

Local governments play a central role in the planning, regulation, and implementation of climate policies. National and regional governments may also provide crucial funding, policy support, and regulatory oversight for city-level initiatives.

Private sector and financial institutions

The private sector, including banks, asset managers, and corporations, is a vital source of investment capital. Green bonds, corporate social responsibility initiatives, and public-private partnerships (PPP) are key mechanisms for mobilizing private funds for climate-neutral projects.

Community and civil society

Engaging the local community is essential for ensuring that climate investments are both equitable and effective. Non-governmental organizations (NGOs), advocacy groups, and local citizens can help drive public support for climate action, ensuring that investments benefit all city residents.

To help navigate the complex landscape of financing options cities can use the Finance Guidance Tool to identify the financing options suitable to their needs. Public capital alone will not be enough to address climate-neutrality, given the likely scale of costs. The adoption of innovative mechanisms allows cities to attract large scale private investments by effectively utilising public funds and resources. Blended finance refers to the strategic use of public capital to mobilize private investment for projects that deliver social, environmental, and financial returns. In the context of climate neutrality, blended financial instruments can be highly effective in de-risking projects and attracting private capital.

Public Private Partnerships

Engage the private sector in financing climate-neutral projects through public-private partnerships. Governments can use mechanisms like tax incentives, risk-sharing, or guarantee funds to encourage private sector investment. Collaboration with private players can help cities tap into innovative financing sources.

Green bonds and grants

Green bonds are increasingly popular tools for raising capital for environmentally friendly projects, such as renewable energy plants or energy-efficient housing. Cities can also seek grants and concessional loans from international development institutions, which can be blended with private funds to finance large-scale climate projects.

Financing a transition to climate neutrality is inherently risky, given the scale of investments, long time horizons, and uncertainties around technology, policy, and market trends. Cities need to evaluate all possible risks to the investments and identify mitigation strategies to overcome the primary and the residual risks.

Financial risks

Long-term climate investments can face financial risks, such as changes in interest rates, inflation, or volatile energy prices. To mitigate these risks, cities can lock in favorable financing terms through long-term contracts or utilize financial derivatives that hedge against price fluctuations.

Political and regulatory risks

Policy changes or political instability can jeopardize climate investments. Ensuring broad political support for climate policies and securing regulatory stability are crucial. Public-private partnerships can also help manage regulatory risks by locking in contractual obligations across political cycles.

Technological and implementation risks

Uncertainty around the availability and scalability of new technologies poses another significant risk. Cities can address this by diversifying their investments across multiple technologies and scaling projects gradually to accommodate technological advancements.

Capacity risks

A potential lack of capability or experience around transition finance in city officials could be a risk for the implementation of an Investment Plan if not responded to. Internal capacity and capability risks, institutional adaptation risks need to be addressed as the city moves towards climate neutrality.

To ensure sustained progress toward climate neutrality, cities need to mainstream climate considerations into all elements of a city's budget, capacity allocation and investment decisions, which will help unlock maximum level of support for the transition and ensure investor confidence.

Integrate climate into city budgets

Rather than treating climate projects as separate from other urban initiatives, cities should integrate climate goals into the overall budgeting process. This means allocating funding for renewable energy, green infrastructure, and resilience projects as part of the core city development agenda.

Climate impact assessments

Every major investment decision, whether related to transportation, housing, or energy, should include a climate impact assessment. This ensures that all city projects align with the broader goal of reducing emissions and enhancing resilience to climate change.

Foster a Climate-Smart Economy

Cities should aim to foster local economies that are aligned with climate objectives. This includes supporting the growth of green industries, encouraging businesses to adopt sustainable practices, and creating jobs in renewable energy, energy efficiency, and climate resilience sectors.