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Climate o’clock? Here’s how cities turn the budget from blocker to backer

Karolina Eklöw Mon, 23 January 2023

2023 has started with a bang. An injection of large-scale financial commitments to climate change is unfolding; from enabling green tech industries to thrive across Europe, to a global alliance turning philanthropy into climate investments. There is a healthy competition between the U.S’ Inflation Reduction Act and the EU’s Green New Deal – and China. 

Municipalities can use this momentum of political will, innovation and funds to build resilient cities. It starts with the budget. 

Despite the recent climate finance announcements attempting to bridge the gap for the $3 trillion needed in climate action each year, the typical municipality is still lacking 90% of the money they need. Cities, like any actors pursuing the Paris Agreement, are typically working within the confines of what’s allocated, instead of asking themselves what’s needed. “The entire way of thinking about climate transition in cities has to change,” says founder of ClimateView, Tomer Shalit. 

“Now is the right time to say ‘to make this happen, we need a billion’.”

Tomer continues: “We have civil servants working on climate strategy who are thinking ‘the city budget was 20 million last year, but the things we’re trying to do will need 25’. They’re trying to work within the confines of what’s available.” With such strong public sector commitments to green industries – whether the Inflation Reduction Act or the EU Green Deal Industrial Plan – and climate investments announced only a few weeks into 2023, cities working on environmental projects have wind in their sails. But where to start? Luckily, there are cases out there to draw ideas from.

Diversified budgets: 3 cases

To build a diversified budget, city resources could be generated from both public and private sources, national and municipal debts, tax systems and financial tools, like credit enhancements, loans, grants and bonds. Let’s take a look at three examples: bonds, grants and carbon taxes. 

Carbon taxes

A carbon pricing mechanism – such as a carbon tax or a cap-and-trade system – is a fee imposed on the burning of fossil fuels based on their carbon content. The revenue from the tax can be used to fund green initiatives – even social programs to help low-income households transition. In the U.S, cities can implement a Climate Action Revenue Incentive (CARIP) program – a revenue-sharing mechanism that returns a portion of carbon tax revenues to local governments. To top it off, the IRA's clean energy tax credits allows states and municipalities – and tax-exempt organizations like municipal utilities – to receive direct payments for tax credits that would only benefit tax paying entities. 

City of Oslo, Norway

Oslo, part of the Carbon Neutral Cities Alliance, has implemented a carbon tax on all companies operating within its borders, with the goal of reducing the city's carbon emissions. The tax is based on the amount of carbon emissions a company produces, and it has been successful in encouraging companies to reduce their footprint. Carbon taxing can also be seen as a way to give life to the polluter-pay principle. The revenue generated from the carbon tax is used to fund various climate-friendly initiatives within the city, such as public transportation and building retrofits. Oslo – aiming to go carbon negative – is a known role model for other cities looking to reduce their emissions.

A bond is essentially borrowing money from investors and promising to pay it back with interest at a later date. One way to do this is through municipal bonds, or ‘muni bonds’, which are securities issued by local governments to finance public projects such as roads, bridges or other infrastructure. Or, cities can go through a bond issuer, like a bank, which acts as an intermediary and guarantees repayment of the bond. The bonds are issued to raise capital for these larger projects and are repaid over a number of years – typically  supported by taxes or user fees generated by the projects.

City of San Francisco, California

The San Francisco Public Utilities Commission (SFPUC) has issued a series of green bonds to finance a range of projects. When the city issued its first bond in 2016, it became the first in the world to certify a green bond under the Climate Bonds Water Criteria by the Climate Bond Initiative. It targeted renewable energy, adaptation and transportation initiatives and attracted strong investor demand, with San Francisco receiving orders for more than the amount of bonds it had planned to sell. 
In October 2020, upon issuing another $342 million taxable Green Bond, listed on the London Stock Exchange, SFPUC received an award from Environmental Finance. The agency identifies, in its Green Bond report, how its projects, environmental and social impacts are aligned with the SDGs. 
Grants and funds

Cities can apply for grants to help them fund specific projects or initiatives related to emission cuts. These would typically be at a smaller scale than those boosted by a loan or bond. Cities can apply for grants from various sources – from national governments, to international organizations, and private foundations. For any city applying for a grant, the availability, criteria and application process vary widely between different countries, regions, and sources. It all starts with research. Cities must, of course, submit a proposal detailing the project or initiative, how it aligns with the goals of the grant program, how the funds will be used, and how the project will be implemented and monitored for success. 

Europe, U.S and Asia

  • In Europe, cities can apply for funds and grants from the EU through programs such as Horizon 2020 or the European Regional Development Fund, as well as within domestic programmes. 
  • In the U.S, private foundations are popular, like the Energy Foundation or the Kresge Foundation. But cities can also apply for grants from the federal government through programs like the Department of Energy's State Energy Program and ad-hoc via the Environmental Protection Agency. 
  • In Asia, there are more international organizations such as the Asian Development Bank (ADB), aside from leaning on grants from national governments. Some countries – like Japan, China and South Korea – also have their own prominent national programs for climate-related projects domestically and abroad. 
The world is changing – so will cities

There is no reason to downplay the upsides of city climate action – whether it’s long-term cost savings, private investment opportunities or new potential revenue streams. Future-oriented cities are already jumping on the momentum looking at financing instruments beyond the traditional fiscal tools, building new local carbon tax systems, experimenting with bonds and using EU and IRA funds. 

The urban future could be green, smart and resilient. Wouldn't it be a bummer if the budget was the block, and not the backer?