Editing IPCC:AR6/WGIII/Chapter-15 (section)

=== 15.6.5 Widen the Focus of Relevant Actors: Role of Communities, Cities and Subnational Levels ===

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There is an urgency and demand to meet the financial needs of the climate change actions not only at the national level but also at the subnational level, to achieve low-carbon and climate-resilient cities and communities ( ''high confidence'' ) ( [[#Barnard--2015|Barnard 2015]] ; [[#Moro--2018|Moro et al. 2018]] ). Scaling up subnational climate finance and investment is a necessary condition to achieve climate change mitigation and adaptation action ( [[#Ahmad--2019|Ahmad et al. 2019]] ).

'''The importance of exploring effective subnational climate finance.''' Stronger subnational climate action is indispensable to adapt cities to build more sustainable, climate-positive communities ( [[#Kuramochi--2020|Kuramochi et al. 2020]] ). It has transformative potential as a key enabler of inclusive urban economic development through the building of resilient communities ( ''high confidence'' ) ( [[#Floater--2017a|Floater et al. 2017a]] ; [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ; [[#Ahmad--2019|Ahmad et al. 2019]] ). Yet the significant potential of subnational climate finance mechanisms remains unfulfilled. Policy frameworks, governance, and choices at higher levels underpin subnational climate investments ( [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ; [[#Hadfield--2019|Hadfield and Cook 2019]] ). To scale climate investment, a systematicunderstanding of the preconditions to mobilising high-potential financing instruments at the national and subnational levels is necessary.

'''Subnational climate finance needs and flows.''' Subnational climate finance covers financing mechanisms reaching or utilising subnational actors to develop climate positive investment in urban areas. The fragility of interconnected national and subnational finances affects subnational finance flows, including the impact of the social-economic crisis ( [[#Canuto--2010|Canuto and Liu 2010]] ; [[#Ahrend--2013|Ahrend et al. 2013]] ). The effect of deficit in investment for global infrastructure towards the growing subnational-level debt also creates pressure on subnational finances and constrains future access to financing ( ''high confidence'' ) ( [[#Smoke--2019|Smoke 2019]] ).

The International Finance Corporation estimates a cumulative climate investment opportunity of USD29.4 trillion across six urban sectors (waste, renewable energy, public transportation, water, EVs, and green buildings) in emerging market cities, cities in developing countries with more than 500,000 population, to 2030 ( [[#IFC--2018|IFC 2018]] ). However, the State of Cities Climate Finance report estimated that an average of USD384 billion was invested in urban climate finance annually in 2017–2018 ( [[#Negreiros--2021|Negreiros et al. 2021]] ). The International Institute for Environment and Development estimates that out of the USD17.4 billion total investments in climate finance, less than 10% (USD1.5 billion) was approved for locally-focused climate change projects between 2003 and 2016 ( [[#Soanes--2017|Soanes et al. 2017]] ).

'''Subnational climate public and private finance.''' Urban climate finance and investment are prominent in the subnational climate finance landscape ( [[#CCFLA--2015|CCFLA 2015]] ; [[#Buchner--2019|Buchner et al. 2019]] ). Finance mechanisms that can support climate investment for the urban sector include public-private partnerships (PPPs); international finance; national investment vehicles; pricing, regulation, standards; land value capture; debt finance; and fiscal decentralisation ( [[#Granoff--2016|Granoff et al. 2016]] ; [[#Floater--2017b|Floater et al. 2017b]] ; [[#Gorelick--2018|Gorelick 2018]] ; [[#White--2019|White and Wahba 2019]] ). Among these mechanisms, PPPs, debt finance, and land value capture have the potential to mobilise private finance ( [[#Ahmad--2019|Ahmad et al. 2019]] ). Better standardisation in processes is needed, including those bearing on contracts and regulatory arrangement, to reflect local specificities ( [[#Bayliss--2018|Bayliss and Van Waeyenberge 2018]] ) ( [[#15.6.1|Section 15.6.1]] .1).

PPPs are particularly important in cities with mature financial systems as the effectiveness of PPPs depends on appropriate investment architecture at scale and government capacity ( ''high confidence'' ). Such cities can enable infrastructure such as renewable energy production and distribution, water networks, and building developments to generate consumer revenue streams that incentivise private investors to purchase equity as a long-term investment ( [[#Floater--2017b|Floater et al. 2017b]] ).

National-level investment vehicles can provide leadership for subnational climate financing and crowd in private finance by providing early-stage market support to technologies or evidence related to asset performance and costs-benefits ( ''high confidence'' ). The use of carbon pricing is increasing at the subnational level along with regulation and standards on negative externalities, such as pollution, to steer investment towards climate financing ( [[#World%20Bank%20Group--2019|World Bank Group 2019]] ).

Debt financing via subnational bonds and borrowing, including municipal bonds, is another potential tool for raising upfront capital, especially for rich cities ( ''high confidence'' ). The share of subnational, sub-sovereign, and sovereign bonds could grow over time, given efforts to expand the creditworthiness and ensure a sufficient supply of own-source revenue to reduce the default risk. As of now, subnational and sub-sovereign bonds are constrained by public finance limits and the fiscal capacities of governments. However, while green bonds have potential for growth at the subnational level and may result in a lower cost of capital in some cases, the market faces challenges related to scaling up and has been associated with limited measurable environmental impact to date ( [[#15.6.8|Section 15.6.8]] ). Further, bonds with lower credit ratings drive higher issuance costs for climate risk cities, for example, costs related to disclosure and reporting ( [[#Painter--2020|Painter 2020]] ).

'''Key challenges of subnational climate finance.''' Across all types of cities, five key challenges constrain the flow of subnational climate finance ( ''high confidence'' ): (i) difficulties in mobilising and scaling-up private financing ( [[#Granoff--2016|Granoff et al. 2016]] ); (ii) deficient existing architecture in providing investment on the scale and with the characteristics needed ( [[#Anguelovski--2011|Anguelovski and Carmin 2011]] ; [[#Brugmann--2012|Brugmann 2012]] ); (iii) political-economic uncertainties, primarily related to innovation and lock-in barriers that increase investment risks ( [[#Unruh--2002|Unruh 2002]] ; [[#Cook--2018|Cook and Chu 2018]] ; [[#White--2019|White and Wahba 2019]] ); (iv) the deficit in investment for global infrastructure affects the growing subnational-level debt ( [[#Canuto--2010|Canuto and Liu 2010]] ); and (v) insufficient positive value capture ( [[#Foxon--2015|Foxon et al. 2015]] ).

'''Different finance challenges between rich and poor cities.''' Access to capital markets has been one of the major sources for subnational financing and is generally limited to rich cities, and much of this occurs through loans ( ''high confidence'' ). Different challenges to accessing capital markets associated with wealthy and poorer cities are compounded into three main issues: (i) scarcity and access of financial resources ( [[#Bahl--2014|Bahl and Linn 2014]] ; [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ; [[#Cook--2018|Cook and Chu 2018]] ; [[#Gorelick--2018|Gorelick 2018]] ); (ii) the level of implication from the existing distributional uncertainties to the current financing of infrastructural decarbonisation across carbon markets ( [[#Silver--2015|Silver 2015]] ); and (iii) the policy and jurisdictional ambiguity in urban public finance institutions ( [[#Padigala--2014|Padigala and Kraleti 2014]] ; [[#Cook--2018|Cook and Chu 2018]] ). In poorer cities, these differing features continue to be inhibited by contextual characteristics of subnational finance, including gaps in domestic and foreign capital ( [[#Meltzer--2016|Meltzer 2016]] ), the mismatch between investment needs and available finance ( [[#Gorelick--2018|Gorelick 2018]] ), weak financial autonomy, insufficient financial maturity, investment-grade credit ratings in local debt markets ( [[#Bahl--2014|Bahl and Linn 2014]] ), scarce diversified funding sources and stakeholders ( [[#Gorelick--2018|Gorelick 2018]] ; [[#Zhan--2018|Zhan et al. 2018]] ; [[#Zhan--2018|Zhan and de Jong 2018]] ) and weak enabling environments ( [[#Granoff--2016|Granoff et al. 2016]] ).

The depth and character of the local capital market also affect cities differently in generating bonds ( ''high confidence'' ). Challenges facing cities in developing countries include insufficient appropriate institutional arrangements, the issues of minimum size, and high transaction costs associated with green bonds ( [[#Banga--2019|Banga 2019]] ). Green projects and project pipelines are generally smaller in scale feasible for a bond market transaction ( [[#Saha--2017|Saha and D’Almeida 2017]] ; [[#DFID--2020|DFID 2020]] ). De-risking in the different phases of long-term project financing can be promoted to improve the appetite of capital markets (Section in 15.6.7).

'''Climate investment and finance for communities.''' There is insufficient evidence about which financing schemes contribute to climate change mitigation and adaptations at community level ( ''high confidence'' ). There is growing interest in the linkages between microfinance and adaptation in the agriculture sector ( [[#Agrawala--2010|Agrawala and Carraro 2010]] ; [[#Fenton--2015|Fenton et al. 2015]] ; [[#Chirambo--2016|Chirambo 2016]] ; [[#CIF--2018|CIF 2018]] ; [[#Dowla--2018|Dowla 2018]] ), the finance for community-based adaptation actions ( [[#Fenton--2014|Fenton et al. 2014]] ; [[#Sharma--2014|Sharma et al. 2014]] ), and the relations between remittances and adaptation ( [[#Le%20De--2013|Le De et al. 2013]] ). However, there is less discussion on community finance aside from the benefits of community finance and village funds in contributing to close investment gaps and community-based mitigation in the renewable energy and forest sectors ( [[#Ebers%20Broughel--2018|Ebers Broughel and Hampl 2018]] ; [[#Bauwens--2019|Bauwens 2019]] ; [[#Watts--2019|Watts et al. 2019]] ) The full potential and barriers of the community finance model are still unknown and research needs to expand understanding of favourable policy environments for community finance ( [[#Bauwens--2019|Bauwens 2019]] ; [[#Watts--2019|Watts et al. 2019]] ).

'''Implications for the transformation pathway.''' Cities often have capacity constraints on planning and preparing capital investment plans. Integrated urban capital investment planning is an option to develop cross-sectoral solutions that reduce investment needs, boost coordination capacity, and increase climate-smart impacts ( ''high confidence'' ) ( [[#Negreiros--2021|Negreiros et al. 2021]] ). In countries with weak and poorly functioning intergovernmental systems, alliances and networks may influence their organisational ability to translate adaptive capacity for transformation into actions ( [[#Leck--2015|Leck and Roberts 2015]] ; [[#Colenbrander--2018a|Colenbrander et al. 2018a]] ). Deepening understanding of country-specific enabling environment for mobilising urban climate finance among and within cities and communities, design of policy, institutional practices and intergovernmental systems are needed to reduce negative implications of transformation ( [[#Steele--2015|Steele et al. 2015]] ).

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