Introduction
Cities comprise 40 percent of the Indian population and will contribute close to 75 percent of the national GDP by 2030 (NIUA & TERI, 2020). They are a key contributor to climate change, as urban activities are a major source of greenhouse gas emissions. Estimates suggest that such urban areas are responsible for 70 percent of global CO2 emissions, with transport and buildings among the largest contributors (IPCC, 2022). There is a critical gap in the demand for climate-smart urban infrastructure and the required financing available (World Bank, 2021). To bridge this gap and achieve the goal of sustainable cities, the mobilisation of climate finance at a local level seems to be a possible solution.
The word climate finance refers to financial resources and instruments that are used to support action on climate change, mitigation and adaptation being the two major components. The need to address this challenge paves the way for the large-scale investments needed to transition to a low-carbon global economy to help societies build resilience (UNDP, 2023). However, the current landscape looks quite challenging especially when seen through the local level lens.
Issues
According to one of the CDP reports “Accelerating Climate Finance in Cities: A Global Snapshot of Opportunities and Needs” Most cities around the world struggle to implement climate action due to limited access to international finance and constrained institutional and financial capacities. The centralisation of climate finance is a significant barrier as it takes a lot of time for the allocated amount to reach the local governments, failing to address climate change on a real-time basis. This global issue mirrors India’s federal structure, where implementation of the 74th Constitutional Amendment Act of 1992, which mandates power devolution to urban local bodies (ULBs), remains uneven. Two key factors that drive this parallel are fiscal decentralisation gaps limiting local financial autonomy, and capacity constraints hindering effective climate project development and management.
Consequently, despite frameworks intended to empower them, local governments worldwide and in India struggle to access and utilise climate finance effectively. Therefore the centralisation is indeed a barrier, as it results in the reduction of local autonomy creating bottlenecks. This top-down approach ignores the unique and immediate requirements of various cities at different points in time. Furthermore, many cities struggle with creditworthiness, making it difficult to attract private investment. The lack of investor-ready, bankable projects of sufficient size and quality further exacerbates this issue (UNDRR, 2024).
Need
The necessity of a ’whole-of-economy approach’ to empower and finance innovative climate action in cities, which is also emphasised by the World Bank would primarily include mobilising new urban climate finance at a city level, aligning it with the existing urban finance systems and intergovernmental architectures at the local and national levels via conditional intergovernmental transfers or own sources of revenues. By incorporating dynamic greenhouse gas measurement and carbon price into investment planning choices, this will also serve as an urge for the development of green rules and design standards, enhancing the climate-smart effect of cities. In 2015, the National Adaptation Fund on Climate Change (NAFCC), supported this idea by providing financial assistance to states and union territories for the implementation of the adaptation projects. This helped in bridging the gap between national climate policies and local implementation underscoring how targeted funding can empower sub-national entities to take decisive action on climate change.
Cities are the providers of services and infrastructure, by paying for things directly they can leverage climate finance effectively and efficiently. However, they often lack the fiscal resources for such investments and will need to utilise a variety of financing sources and instruments to address this issue. (World Bank, 2024).
Successful Case Studies
Cities around the globe are finding innovative ways to address climate change by financing through different instruments primarily via green bonds issued at a local level. Paris has been the pioneer in financing various green initiatives such as the establishment of climate charging stations, energy-efficient social housing, and more such initiatives. Cape Town adapted to utilising localised financing for procurement of electric buses; energy efficiency in buildings; water resilience initiatives; sanitation treatment; and coastal structure protection and rehabilitation. Gothenburg had identified areas like renewable energy, green buildings energy efficiency, clean transportation, waste management water and wastewater management, sustainable land use and environmental management climate change adaptation via city level financing. Tokyo, a global megacity, is also an excellent example of harnessing local level financing and managing climate change by addressing the issues of smart energy & urban development, sustainable resource & waste management, and a few more. Vancouver also aligned its financing at a city level with ambitious climate goals emphasising renewable energy, energy efficiency, green buildings, and clean transportation. These examples demonstrate the potential of municipal level climate financing for addressing the issue of climate change.
The International Institute for Environment and Development along with a few non-government organisations provided technical assistance to various other countries and local governments in the drylands of Kenya, Mali, Senegal, and Tanzania have established local-level climate adaptation funds. This helps in easy access as the funds are ready for use as and when required for projects related to climate by prioritising investments.
India’s Frontier
Drawing inspiration from successful global examples, India can strategically adapt and expand its to finance localised climate action. By contextualising learnings from cities like Paris, Cape Town, Gothenburg, Tokyo, and Vancouver, India can also develop city-specific frameworks to address unique local environmental priorities while aligning it with national climate goals. Although cities like Indore were successful with their launch of green bonds for the cleanliness initiative. In 2022, the Indore Municipal Corporation (IMC) was the first ULB in Central India to issue green bonds for projects related to addressing climate change. Ahmedabad is another example of local climate finance used to implement the heat action plan funded via a combination of municipal resources and international climate finance (AMC,2019). The recent Mumbai Climate Action Plan (MCAP), published in 2022 outlines the roadmap to zero carbon emissions by 2050 via various funding sources out of which municipal green bonds were one (MCAP, 2022). These initiatives in India underscore the potential of the growing concept of climate finance at a local level.
Therefore, strengthening municipal financial capacities, creating robust project pipelines in key areas such as renewable energy, sustainable transportation, and water management, and establishing transparent reporting mechanisms. By fostering partnerships between local governments, financial institutions, and the private sector, implementing capacity-building programs, and encouraging inter-city knowledge sharing, India can accelerate its transition towards sustainable urban development. This strategic adaptation plan can help India not just address climate action but also improve the quality of life for millions of urban residents, setting a powerful example for other developing nations which are facing similar environmental and urbanisation challenges.
Way Forward
Local governments will play a leading role in combating climate change as cities are at the forefront of confronting and mitigating the impacts of climate change. They can therefore mobilise urban climate finance by ensuring proper planning and prioritising of initiatives which is dependent on the level of autonomy that a city has, to regulate and build such an environment, to plan and manage its finances. They require a significant amount of funding to address and overcome this challenge. The successful implementation of climate action via local climate finance truly underscores its potential. However, fiscal decentralisation by giving autonomy to cities, allows them to plan and raise funds depending on their needs. This could include the expansion of the authority concerning the issue of bonds or the implementation of taxes (ICLEI, 2021).
According to a WRI report, it suggested that the cities should invest to plan and deliver more resilient urban services. At the local level, cities must include climate change considerations at all levels. The creation of a national policy supported by the national government can help align national-level policies with those of local ones, guaranteeing credit enhancements for municipal climate projects (Climate Policy Initiative, 2022). By unleashing the power of local climate finance, we can aim to address climate change effectively and efficiently along with achieving sustainable goals and ensuring a better future for generations to come.
Lekhani Raja is an intern at Artha Global.
Banner image source: DALL – E
