Back to knowledge

Financing the ambition of NetZeroCities

Cities are at the forefront of Europe’s decarbonisation efforts. Through the EU Mission on Climate-Neutral and Smart Cities, they are leading the way in designing and implementing Climate Action Plans that set out pathways to climate neutrality by 2030. This ambition is vast, and while cities are demonstrating leadership, they cannot finance this transformation alone.

Recognising this challenge, the NetZeroCities programme has developed a set of dedicated tools, frameworks, and support services to help both Mission and non-Mission Cities mobilise the capital required to reach their climate goals. These resources are designed to guide cities through the complexity of investment planning, financing options, and project preparation ensuring that they can turn ambition into action.

On this page, you will find the collection of NetZeroCities resources on the topic of Finance.

(1) Climate City Contracts; (2) Investment Plan; (3) The Finance Guidance Tool; (4) All finance related content under the knowledge repository; (5) Videos on the training program on the investment plan; (6) Deliverables.

Climate City Contracts and Investment Planning

Like discussed under every other component of the project, the cornerstone of this approach is the Climate City Contract (CCC) developed under NetZeroCities specifically to support cities in reaching climate neutrality. The CCC is a governance innovation tool that helps cities work collaboratively with local, regional, and national stakeholders, also forms the foundation of the investment planning journey of the cities.

CCC is structured around three interlinked elements:

  1. 2030 Climate Neutrality Commitments
  2. 2030 Climate Neutrality Action Plan
  3. 2030 Climate Neutrality Investment Plan

Cities must mobilise unprecedented levels of capital to reach climate neutrality. To maximize climate impact and societal benefits, they must first map out viable decarbonization pathways and assess their funding and financing requirements. The Investment Plan is especially critical for furthering the financing goals of cities. It enables cities to map financing needs, strategically allocate public resources, and attract private capital. As part of the NetZeroCities programme, cities are provided with templates, guidance, and checklists to make their contracts coherent, actionable, and finance-ready.

Templates for Climate City Contract are linked below for a detailed understanding: 

There have been multiple sessions and video documentations curated over the years to guide the cities chalk out a well-thought investment plan. The modules on Investment Plan is available on video format in 3 parts:

Further complementary resources to aid cities throughout the investment planning process are listed below:

Tools to Support Cities

The Finance Guidance Tool

Achieving this ambition will require a diverse mix of financial instruments, institutions, and funding programs. Public funding alone cannot deliver climate neutrality by 2030—cities must redirect existing public investments while also unlocking private and participatory finance. Aligning public and private capital is crucial, as is tapping into new international and national funding sources to amplify their financial impact. Though challenging, emerging best practices across Europe demonstrate how cities can successfully steer their financial transition.

Developed under NetZeroCities, the Finance Guidance Tool helps cities Mission and non-Mission alike navigate the complex funding landscape. It offers:

  • An overview of EU funding opportunities (MFF 2021–2027, Next Generation EU).
  • City-focused initiatives and programmes that support climate projects.
  • A catalogue of financing products from public and private institutions.
  • Access to case studies and innovative approaches.

The tool’s interactive questionnaire makes it simple for cities to identify their needs and match them with relevant financing solutions. Though not an exhaustive material, it is a practical starting point for exploring resources beyond traditional funding streams.

The Climate City Capital Hub

Another pillar of support within NetZeroCities is the Climate City Capital Hub, a facility created to help Mission and non-Mission Cities secure the investment they need through catalytic support. The Hub is backed by leading multilateral banks in Europe through ringfenced technical assistance and co-financing programs as indicated below: 

  • Technical Assistance Programme: In collaboration with the European Investment Bank (EIB), the Capital Hub provides hands-on support to prepare projects for financing, including feasibility analysis, business model reviews, and investment-readiness assessments.
  • Capital Facilitation: The Hub works with cities to identify the best financial structures for their projects, leveraging public, private, and philanthropic funding. This ensures that cities can fill financing gaps and align with the goals of the European Green Deal.

The Capital Hub also supports climate adaptation projects in cooperation with the EU Mission on Adaptation to Climate Change and its platform MIP4Adapt. Further details on the hub and its working can be found on its dedicated page. 

Other Training and Learning Offerings 

Capacity-building is a central part of NetZeroCities’ support to cities. To extend access, NetZeroCities is also designing a MOOC (Massive Open Online Course) with dedicated online sessions. The course will include a finance module, providing city officials and stakeholders whether from Mission or non-Mission Cities with structured learning on investment planning, financing instruments, and innovative approaches to mobilising capital.

We have also curated a comprehensive landscape of 72 financial instruments to illustrate the diversity of mechanisms that cities can consider. Not all are covered by the Finance Guidance Tool, but together they demonstrate the range of pathways cities can explore as expanded below: 

Financial Instruments

Debt Financing

  1. Commercial loan: Loans from private banks/financial institutions to municipalities. Repayment includes principal plus interest, offered as lump sums or revolving credit lines.
  2. Syndicated loan: Multiple lenders collectively finance a single borrower. The syndicate typically includes banks, insurers, and institutional investors.
  3. Project-level market-rate debt: Senior secured debt repaid first from project cash flows. Collateralized by project assets through liens.
  4. Concessional finance: Below-market-rate loans for projects with high societal impact. Addresses market failures while generating public benefits.
  5. Term loans: Lump-sum financing repaid over fixed schedules. Commonly used by businesses for capital asset purchases.
  6. Margin financing: Brokerage lending enabling leveraged market positions. Profits come from amplified capital gains and interest differentials.
  7. Infrastructure debt funds: Investment pools specializing in fixed-income infrastructure assets. Hold bonds, securitized debt, and money market instruments.
  8. Yieldcos: Companies holding long-term revenue-generating assets like renewables. Provide predictable cash flows through operational contracts.
  9. Green bond: Bonds funding environmentally beneficial projects. Follow ICMA Green Bond Principles for designated use of proceeds.
  10. Green Sukuk: Sharia-compliant asset-backed certificates for green projects. Avoid interest through profit-sharing ownership structures.
  11. Climate bond: Bonds exclusively financing climate adaptation/mitigation projects. Function like conventional bonds with environmental use restrictions.
  12. Sustainability bond: Bonds funding combined environmental and social initiatives. Proceeds allocated to green and social project portfolios.
  13. Project bond: Bonds repaid solely from a specific project's revenue. Isolated from issuer's general finances.
  14. General obligation bond (GO): Municipal bonds backed by full taxing authority. Repayment secured through taxation or municipal revenues.
  15. Catastrophe bond: High-yield bonds acting as disaster insurance. Investors lose principal if triggering events occur.
  16. Climate Adaptation Notes: Debt instruments combining construction/refinancing for water projects. Streamline funding for adaptation infrastructure.

Municipal own source revenue (OSR) and policy steering instruments

  1. Land sales/auctions: Monetization of public land for infrastructure capital. Provides immediate upfront funding.
  2. Land/infrastructure leasing: Public assets leased to private operators. Generates revenue for infrastructure investments.
  3. Property tax: Recurring levies on real estate values. Provides stable municipal revenue streams.
  4. Tax abatements: Incentives (e.g., credits) for sustainable development. Encourage low-carbon, resilient projects.
  5. Tax/rebates on negative aspects: Penalties for carbon-intensive development (e.g., sprawl taxes). Rebates compensate municipalities for pollution impacts.
  6. Development charges: Fees on developers for infrastructure connections/impacts. Fund related public infrastructure improvements.
  7. Tax-lien financing: Repayment of energy/water upgrades via property taxes. Overcomes upfront cost barriers.
  8. City-based ETS: Municipal carbon credit trading markets. Polluters buy offsets from emission-reduction initiatives.
  9. Charges/pricing: User fees (e.g., congestion pricing, tolls) for services/behaviors. Revenue funds urban infrastructure.

Public-private partnerships (PPP)

  1. Management/O&M contracts: Short-term agreements for task-specific operations. Operators receive fixed fees without revenue risk.
  2. Leases/affermage: Private operation/maintenance of public utilities. Excludes capital investment responsibilities.
  3. Concessions (BOT/DBO): Private design-build-operate-transfer arrangements. Focus on service outputs for greenfield/brownfield projects.
  4. Power purchase agreements: Long-term energy offtake contracts with private producers. Underpin renewable energy PPPs.
  5. Energy performance contracts: Service agreements guaranteeing energy savings. Include financing, implementation, and performance risk.
  6. Privatization: Long-term asset/service transfer to private entities. Shares risks and leverages private capital.

Leasing and asset finance models

  1. Operating lease finance: Full-service leasing (e.g., electric buses). Includes maintenance with kilometer-based payments.
  2. Hybrid purchase-lease: Combining asset ownership with component leasing. Reduces upfront costs (e.g., buying buses but leasing batteries).
  3. 'As-a-service' models: Third-party ownership of critical components. Shifts cost/risk for specific elements.
  4. Pay-as-you-save: Utility-financed upgrades repaid through service bills. Enables scale without developer debt.
  5. Energy upgrade financing: Tripartite agreements for efficiency retrofits. Repayment via tax/utility bills with tenant cost-sharing.
  6. On-bill repayments: Third-party loans repaid through utility bills. Utilities act as payment intermediaries.

Internal climate finance

  1. Technical assistance grants: Donor funding for project preparation. Supports feasibility studies and capacity building.
  2. Competitive finance: Below-market loans for transformative climate projects. Correct market failures and generate social returns.
  3. Viability gap funding: Grants/sub-debt covering revenue-cost shortfalls. Enhances project bankability (e.g., credit guarantees).
  4. Dedicated credit lines: Donor-funded lending facilities via local banks. Target specific sectors with low interest rates.
  5. Blended finance: Public capital mobilizing private climate investment. Advances SDGs in developing economies.

Risk mitigation instruments

  1. Partial/full risk guarantee: Credit enhancement lowering project risks. Examples include subordinated debt and MDB guarantees.
  2. Loan loss reserve: Public-backed coverage for lender defaults. Covers predetermined portfolio losses.
  3. Risk insurance: Protection against political/financial project risks. Catalyzes private investment via cost coverage.
  4. Currency exchange funds: Hedging against forex/interest rate volatility. Attracts local-currency investments.
  5. Contracts for difference: Derivatives exchanging asset price differentials. Require minimal margin deposits.

Aggregation models

  1. Pooled procurement: Bulk purchasing for multiple projects. Reduces costs and improves efficiency.
  2. Pooled finance: Collective borrowing for small municipalities. Lowers financing costs through economies of scale.
  3. Aggregation platforms: Bundling small assets to attract investment. Enables securitization of distributed projects.
  4. Asset-backed securities: Securitization of small-scale green loans. Enhances liquidity for niche markets.
  5. Energy service companies: Implement efficiency projects financed by savings. Cover audits, installation, and performance.

National government transfers

  1. Intergovernmental transfer: Fiscal transfers from higher governments. Include earmarked grants and climate subsidies.
  2. Revenue support: Conditional subsidies bridging funding gaps. Tied to performance targets like emission reductions.
  3. Ecological fiscal transfers: Revenue-sharing based on conservation metrics. Compensates/incents subnational environmental protection.
  4. Carbon credits: Revenue from emissions trading participation. Funds local climate action.
Examples of successful deployment of select instruments by cities

Location: Germany

Year: Launched in 2016

Pay-for-performance (P4P) model for energy efficiency

Location: London, United Kingdom

Year: Initiated in 2015

Green bonds for sustainable transportation and infrastructure projects

Objective: To promote the adoption of digital technologies that improve energy efficiency across various sectors.

Programme description: The energy savings meter programme, initiated by the German Federal Ministry for Economic Affairs and Energy, incentivises ene rgy savings through digital solutions. Under this model, businesses receive funding based on the actual energy savings achieved by their customers. These savings are measured and verified using advanced digital tools, such as smart meters and energy management systems. The programme supports diverse projects, ranging from offices and retail spaces to industrial sites and public facilities like hospitals and swimming pools. This innovative approach ensures that financial rewards are tied directly to verified performance outcomes.
Results: (i) Improved energy efficiency across various sectors, contributing to Germany’s broader climate goals; (ii) adoption of advanced digital technologies for monitoring and managing energy use; (iii) increased engagement from businesses in offering efficiency solutions to clients.

Challenges addressed: (i) Encouraging the deployment of digital infrastructure to enable accurate measurement of energy savings; (ii) aligning financial incentives with verifiable outcomes to ensure cost-effectiveness.

Lessons learned: (i) Digital solutions play a critical role in enabling pay-for-performance models; (ii) the integration of advanced measurement tools ensures transparency and accountability in energy efficiency projects; (iii) public funding tied to measurable outcomes can effectively drive innovation and sustainability in the private sector.

 

Objective: To finance large-scale energy efficiency and renewable energy projects to advance sustainable urban development and meet London’s ambitious climate goals.

Programme description: London has emerged as a leader in green finance to promote sustainable urban development. A significant initiative is the issuance of green bonds by Transport for London (TfL). In 2015, TfL issued its first green bond, raising GBP 400 million to fund a variety of low-carbon transportation projects. By tapping into the bond market, TfL attracts a diverse range of investors interested in supporting environmental projects. This approach mobilises financial resources and establishes a robust mechanism for scaling up climate action efforts. The funds raised through green bonds have been allocated to: (i) expanding sustainable public transportation; (ii) investment in the London Underground and Overground networks to improve efficiency and reduce emissions; (iii) procuring low-emission vehicles; (iv) introduction of electric and hybrid buses to decrease carbon emissions and improve air quality; (v) improving cycling and pedestrian infrastructure; (vi) development of safer and more accessible routes to encourage low-carbon modes of transport. The innovative use of the bond market demonstrates how local governments can engage private capital to finance critical sustainability projects, ensuring long-term environmental and financial benefits.

Results: The issuance of green bonds in London has successfully mobilised substantial private capital, providing significant funding for sustainable infrastructure projects. These initiatives have contributed directly to reducing carbon emissions and improving air quality in the city, advancing London’s ambitious climate goals. Moreover, London has solidified its position as a global leader in green finance, setting a benchmark for other cities looking to leverage green bonds for urban sustainability.

Challenges addressed: London’s green-bond programme has effectively tackled key barriers to financing large-scale sustainability projects. By securing upfront capital through the bond market, it has alleviated the financial strain on public budgets, enabling the city to undertake transformative initiatives. The programme has also successfully engaged a diverse investor base by aligning financial returns with measurable environmental impacts. This approach has not only attracted private capital but has also established a scalable model for funding ongoing and future climate action projects.

Lessons learned: The success of London’s green-bond programme underscores the viability of green bonds as a financing mechanism for public sustainability projects. It also highlights the critical role of public-private collaboration in addressing environmental challenges, demonstrating how private investment can support public climate objectives. Lastly, the programme offers a replicable model for other cities, illustrating how green bonds can be adapted to finance large-scale sustainable development efforts and drive meaningful environmental change.

National, regional and municipal funds

  1. City climate funds: Municipal vehicles offering loans/guarantees for climate projects. Often feature revolving structures.
  2. Revolving funds: Self-replenishing pools recycling repayments. Sustain long-term project pipelines.
  3. Green investment funds: Public entities de-risking low-carbon projects. Channel institutional capital into renewables/efficiency.
  4. Regional development funds: Government funding reducing territorial disparities. Catalyzes sustainable infrastructure investment.

Land venture capture (LVC)

  1. Land banking/readjustment: Public assembly/repackaging of private land parcels. Generates value uplift for infrastructure cost recovery.
  2. Tax/fee-based LVC: Capturing land value gains via levies/taxes. Funds the original value-creating investments.
  3. Development-based LVC: Monetizing air rights/joint redevelopment. Funds infrastructure through strategic partnerships.

Equity financing

  1. Project-level equity: Sponsor capital in special-purpose vehicles. Features non-recourse/limited recourse structures.
  2. Private equity: Direct investment in non-public companies. Includes buyouts and venture capital.
  3. Equity futures: Contracts for predetermined asset transactions. Set future prices/dates.

Payment for ecosystem services (PES)

  1. National PES: Government-coordinated ecosystem service compensation. Supported by NGOs/international partners.
  2. Public-private PES: Partnerships scaling conservation investment. Foster innovation and market development.
  3. Voluntary PES: Direct buyer-seller conservation agreements. Common in voluntary carbon markets.

Individual and community financing

  1. Crowdfunding: Community investments/debt (mini-bonds) for specific projects. Funds small-scale infrastructure elements.
  2. Community funds: Locally managed pools for resilient infrastructure. Support flood management, mini-grids, etc.
  3. Philanthropic organizations: Cause-specific charitable grants for climate action. Funded by individual donations

Here are the Deliverables under the Finance and Investments theme that are publicly available for further reference:

References:

Todeschi, V., Bertoldi, P., Hernandez Moral, G., Clementi, E., Treville, A., Melica, G., Financial instruments for mitigation, adaptation and energy poverty actions - Covenant of Mayors Guidebook Complementary document 5, Publications Office of the European Union, Luxembourg, 2025, https://data.europa.eu/doi/10.2760/4912270, JRC142127.

Cities Climate Finance Leadership Alliance

Accelerating Climate Finance in Cities: A Global Snapshot of Opportunities and Needs - CDP

NUCA | Scaling Up Urban Climate Transition

The State of Cities Climate Finance 2024 | UrbanShift
 

Comments ()

Authors

Jayashiree Elango Project Manager - FS

Last update: September 1, 2025

Tags

FinanceFundingGovernance and policy
Under license CC BY-NC-SA
This license allows reusers to distribute, remix, adapt, and build upon the material in any medium or format for noncommercial purposes only, and only so long as attribution is given to the creator. If you remix, adapt, or build upon the material, you must license the modified material under identical terms.