New roads to climate financing

Green Transition 7 November 2015 Henrik Stener Pedersen

Putting a price on an uncertain future is a delicate task for nations and cities alike. The costs of climate action and inaction continue to top the political agenda, but the lack of public funding is making cities turn to new and alternative ways of financing long-term solutions.

8 min

How much does it cost to save the world? It may seem in bad taste or apocalyptic to ask this question, yet the growing impacts of climate change are making finding its answer alarmingly relevant. Lives are being lost, physical infrastructure is crashing, the gap between rich and poor is widening, and economies are faltering

Reshaping the various sectors of society, such as infrastructure and energy systems, into a more resilient form does not come cheaply. Developed countries have agreed to support poor nations in their efforts to reduce emissions and adapt to climate change. With this aim in mind, the UN has established a Green Climate Fund (GCF) to channel much of the USD 100 billion required to advance this global paradigm shift, but only USD 10.2 billion has been mobilised in public funds so far.

The International Energy Agency has stressed the need for a stronger financial commitment. The organisation has slapped an annual price tag of USD 1 trillion towards 2050 on the investment required to limit global warming to 2 degrees Celsius worldwide.

Meanwhile, the cost of doing nothing is even more daunting. From a public-sector perspective, the potential value losses of a future with 6 degrees Celsius of warming are projected at USD 43 trillion in present value, or 30% of current assets, according to a 2015 report from The Economist Intelligence Unit.

Barriers make cities look for alternatives

The limited public commitment illustrates the magnitude of the financial barriers to action and the immediate demand for cities to find alternative funding methods, according to Johanna Partin, Director of the Carbon Neutral Cities Alliance. As the leader of a network of cities committed to ambitious long-term carbon reduction goals, she has seen tremendous progress at corporate and local government levels:

“Around the world we see that cities are the drivers of progress, but this progress is being hampered and hindered at national level.”

At a climate solutions conference hosted by the City of Copenhagen earlier this fall, Johanna Partin discussed her hope that COP21 and other future climate negotiations will give local players the binding support they need in obtaining resources to move forward. So far, however, progress in the UN negotiations and on national levels has come in slow motion, so city decision makers are turning to alternative financing methods, such as foundations, city networks, the private sector and, most recently, green bonds. Beyond the usual bond features, these bonds provide additional benefits to cities and investors.

In Seattle, for instance, the regional transit authority, Sound Transit, has issued more than USD 900 million in green bonds to implement a sustainable transformation of the bus and train system.

Green bonds differ from traditional bonds in that they undergo an independent vetting process aimed to ensure the funding goes to environmentally friendly projects. Since 2007, financial institutions like the European Investment Bank (EIB), the World Bank and the International Finance Corporation (IFC) have stimulated an increasing amount of investment in green bonds. The market is growing exponentially, with USD 37 billion in green bonds being issued worldwide in 2014, a development backed by growing commitment from utility companies, city network groups, philanthropic organisations and government agencies.

Green bonds can result in increased awareness, compared to traditional bonds, and ultimately green growth. This can explain the increasing interest from the private sector. In November 2015, the Goldman Sachs Group Inc. announced that the New York-based investment bank had almost quadrupled its targets for financing or investments in clean-energy projects by 2025, amounting to USD 150 billion.

“Environmental issues have become increasingly relevant to our clients and our investors, and have become core to our business,” said Kyung-Ah Park, head of Goldman Sachs’ Environmental Markets Group, in the statement.

“We are leveraging the talents of our people and the breadth of our businesses to facilitate the transition to a low-carbon future and promote sustainable economic growth.”

Beyond the financial benefits

Green bonds have also become attractive for public and private investors because the benefits of the projects they finance support both reductions in greenhouse gas emissions and society’s broader development. This is a decisive factor in the funding process at city and regional levels.

Cities need to understand the full costs and benefits of action and inaction. The cost of doing nothing is measured not only in material damages but also in lost investments, competencies and – in the worst case – lives. Therefore, decision makers should apply a holistic approach when analysing the economic, social and environmental consequences for all stakeholders involved. As an economic expert, I help cities analyse climate investments, which I believe must serve more than one purpose to be attractive:

Investments must be directed at energy and transport infrastructure, climate adaptation, cloudburst mitigation and blue-green infrastructure that reduce CO2 emissions and enhance quality of life. Only by designing multipurpose solutions can we support long-term, sustainable development.

A city that has won international recognition by applying this integrated approach is Copenhagen. The Danish capital has developed an ambitious climate plan, for which it was named the European Green Capital in 2014, and Johanna Partin highlights the political courage the city has shown in aiming to become completely free of fossil fuels by 2050. Financing remains a barrier, but focusing on added benefits could prove a game changer.

Jørgen Abildgaard, Executive Climate Project Director of the City of Copenhagen, argues that a city needs a system that allows knowledge sharing between cities and companies, and a new financial vehicle.

“Finding financing for this transformation is running into a lot of problems. We need financial systems that invite cities to invest massively in infrastructure and other climate solutions. In Copenhagen, we look at secondary benefits. For instance, if you can pinpoint the health benefits of a project, you have an argument to bring to the negotiation table,” said Jørgen Abildgaard during the climate solutions conference in Copenhagen.

The cost of inaction inspires cities to act

From 2010 to 2011, Copenhagen was hit by three destructive cloudbursts, the third one causing USD 1.18 billion in damage. An economic analysis of these climate events estimated that the costs of inaction would triple in 100 years, so Copenhagen included cloudburst mitigation in its climate plan, thus aiming to protect the city and use water as a recreational urban resource.

In the Middle East, the megacity of Jeddah, Saudi Arabia, has also found the cost of doing nothing to be an incentive for investment. An environmental degradation study by Ramboll shows that Jeddah will lose 2-4% of its annual GDP unless something is done to address rapid population growth, water scarcity and pollution. To meet the challenges and improve public life, Ramboll has developed an environmental and social masterplan. A team of 40 specialists has conducted in-depth studies, including environmental impact assessments and cost-benefit analyses, to help resolve current and future environmental and socio-economic problems.

The multidimensional plan will serve as a decision makers’ guide, thus paving the way for Jeddah to become a model for sustainable development in Saudi Arabia.