Editing IPCC:AR6/WGIII/Chapter-8 (section)

=== 8.5.4 Financing Urban Mitigation ===

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Meeting the goals of the Paris Agreement will require fundamental changes that will be most successful when cities work together with provincial and national leadership and legislation, third-sector leadership, transformative action, and supportive financing. Urban governments often obtain their powers from provincial, state and/or national governments, and are subjected to laws and regulations to regulate development and implement infrastructure. In addition, the sources of revenue are often set at these levels so that many urban governments rely on state/provincial and national government funds for improving infrastructure, especially transit infrastructure. The increasing financialisation of urban infrastructures is another factor that can make it more difficult for local governments to determine infrastructure choices ( [[#O’Brien--2019|O’Brien et al. 2019]] ). Urban transit system operations, in particular, are heavily subsidised in many countries, both locally and by higher levels of government. As a result of this interplay of policy and legal powers among various levels of government, the lock-in nature of urban infrastructures and built environments will require multi-level governance responses to ensure meeting decarbonisation targets. The reliance on state and national policy and/or funding can accelerate or impede the decarbonisation of urban environments ( [[#McCarney--2011|McCarney et al. 2011]] ; [[#McCarney--2019|McCarney 2019]] ).

The world’s infrastructure spending is expected to more than double from 2015 to 2030 under a low-carbon and climate-resilient scenario. More than 70% of the infrastructure will concentrate in urban areas by requiring USD4.5–5.4 trillion per year ( [[#CCFLA--2015|CCFLA 2015]] ). However, today’s climate finance flows for cities or ‘urban climate finance’, estimated at USD384 billion annually on average in 2017/18, are insufficient to meet the USD4.5–5.4 trillion annual investment needs for urban mitigation actions across key sectors ( [[#CCFLA--2015|CCFLA 2015]] ; [[#CPI%20and%20World%20Bank--2021|CPI and World Bank 2021]] ; [[#Negreiros--2021|Negreiros et al. 2021]] ). Low-carbon urban form (e.g., compact, high-density, and mixed-use characteristics) is likely to economise spending in infrastructure along with the application of new technologies and renewable energies that would be able to recover the increasing upfront cost of low-carbon infrastructure from more efficient operating and energy savings ( ''medium evidence'' , ''high agreement'' ) ( [[#Global%20Commission%20on%20the%20Economy%20and%20Climate--2014|Global Commission on the Economy and Climate 2014]] ; [[#Foxon--2015|Foxon et al. 2015]] ; [[#Bhattacharya--2016|Bhattacharya et al. 2016]] ; [[#Floater--2017|Floater et al. 2017]] ; [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ).

Governments have traditionally financed a large proportion of infrastructure investment. When budget powers remain largely centralised, intergovernmental transfers will be needed to fund low-carbon infrastructure in cities. During the COVID-19 pandemic, cities tend to rely more on intergovernmental transfers in the form of stimulus packages for economic recovery. Nonetheless, the risk of high carbon lock-ins is likely to increase in rapidly growing cities if long-term urban mitigation strategies are not incorporated into short-term economic recovery actions ( [[#Granoff--2016|Granoff et al. 2016]] ; [[#Floater--2017|Floater et al. 2017]] ; [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ; [[#CPI%20and%20World%20Bank--2021|CPI and World Bank 2021]] ; [[#Negreiros--2021|Negreiros et al. 2021]] ). Indeed, large and complex infrastructure projects for urban mitigation are often beyond the capacity of both national government and local municipality budgets. Additionally, the COVID-19 pandemic necessitates large government expenditures for public health programme and decimates municipal revenue sources for urban infrastructure projects in cities.

To meet the multi-trillion-dollar annual investment needs in urban areas, cities in partnership with international institutions, national governments, and local stakeholders increasingly play a pivotal role in mobilising global climate finance resources for a range of low-carbon infrastructure projects and related urban land use and spatial planning programmes across key sectors ( ''high confidence'' ). In particular, national governments are expected to set up enabling conditions for the mobilisation of urban climate finance resource by articulating various goals and strategies, improving pricing, regulation and standards, and developing investment vehicles and risk sharing instruments ( [[#Qureshi--2015|Qureshi 2015]] ; [[#Bielenberg--2016|Bielenberg et al. 2016]] ; [[#Granoff--2016|Granoff et al. 2016]] ; [[#Floater--2017|Floater et al. 2017]] ; [[#Sudmant--2017|Sudmant et al. 2017]] ; [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ; [[#Zhan--2018|Zhan and de Jong 2018]] ; [[#Hadfield--2019|Hadfield and Cook 2019]] ; [[#CPI%20and%20World%20Bank--2021|CPI and World Bank 2021]] ; [[#Negreiros--2021|Negreiros et al. 2021]] ).

Indeed, 75% of the global climate finance for both mitigation and adaptation in 2017 and 2018 took the form of commercial financing (e.g., balance sheets, commercial-rate loans, equity), while 25% came in the form of concessionary financing (e.g., grants, below-market-rate loans). However, cities in developing countries are facing difficulty making use of commercial financing and gaining access to international credit markets. Cities without international creditworthiness currently rely on local sources, including domestic commercial banks ( ''medium evidence'' , ''high agreement'' ) ( [[#Global%20Commission%20on%20the%20Economy%20and%20Climate--2014|Global Commission on the Economy and Climate 2014]] ; [[#CCFLA--2015|CCFLA 2015]] ; [[#Floater--2017|Floater et al. 2017]] ; [[#Buchner--2019|Buchner et al. 2019]] ).

Cities with creditworthiness have rapidly become issuers of ‘green bonds’ eligible for renewable energy, energy efficiency, low-carbon transport, sustainable water, waste, and pollution, and other various climate mitigation projects across the global regions since 2013. The world’s green bond market reached USD1 trillion in cumulative issuance, with issuance of USD280 billion in 2020, during the COVID-19 pandemic. While green municipal bonds still account for a small share of the whole green bond market in 2020, scale is predicted to grow further in emerging markets over the coming years. Green municipal bonds have great potential for cities to expand and diversify their investor base. In addition, the process of issuing green municipal bonds is expected to promote cross-sector cooperation within a city by bringing together various agencies responsible for finance, climate change, infrastructure, planning and design, and operation. Indeed, the demand for green bonds presently outstrips supply as being constantly over-subscripted ( ''robust evidence'' , ''high agreement'' ) ( [[#Global%20Commission%20on%20the%20Economy%20and%20Climate--2014|Global Commission on the Economy and Climate 2014]] ; [[#Saha--2017|Saha and D’Almeida 2017]] ; [[#Amundi%20and%20IFC--2021|Amundi and IFC 2021]] ).

On the other hand, cities without creditworthiness face difficulty making use of commercial financing and getting access to international credit markets ( [[#Global%20Commission%20on%20the%20Economy%20and%20Climate--2014|Global Commission on the Economy and Climate 2014]] ; [[#CCFLA--2015|CCFLA 2015]] ; [[#Floater--2017|Floater et al. 2017]] ). The lack of creditworthiness is one of the main problems preventing cities from issuing green municipal bonds in developing countries. As a prerequisite for the application of municipal debt-financing, it is an essential condition for cities to ensure sufficient own revenues from low-carbon urbanisation, or the default risk becomes too high for potential investors. Indeed, many cities in developed countries and emerging economies have already accumulated substantial amounts of debts through bond insurances, and ongoing debt payments prevent new investments in low-carbon infrastructure projects.

National governments and multilateral development banks might be able to provide support for debt financing by developing municipal creditworthiness programme and issuing sovereign bonds or providing national guarantees for investors ( [[#Floater--2017|Floater et al. 2017]] ). Another problem with green municipal bonds is the lack of aggregation mechanisms to support various small-scale projects in cities. Asset-backed securities are likely to reduce the default risk for investors through portfolio diversification and create robust pipelines for a bundle of small-scale projects ( [[#Granoff--2016|Granoff et al. 2016]] ; [[#Floater--2017|Floater et al. 2017]] ; [[#Saha--2017|Saha and D’Almeida 2017]] ).

In principle, the upfront capital costs of various low-carbon infrastructure projects, including the costs of urban climate finance (dividend and interest payments), are eventually transferred to users and other stakeholders in the forms of taxes, charges, fees, and other revenue sources. Nevertheless, small cities in developing countries are likely to have a small revenue base, most of which is committed to recurring operating costs, associated with weak revenue collection and management systems. In recent years, there has been scope to apply not only user-based but also land-based funding instruments for the recovery of upfront capital costs ( [[#Braun--2015|Braun and Hazelroth 2015]] ; [[#Kościelniak--2016|Kościelniak and Górka 2016]] ; [[#Floater--2017|Floater et al. 2017]] ; [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ; [[#Zhan--2018|Zhan and de Jong 2018]] ; [[#Zhan--2018a|Zhan et al. 2018a]] ).

In practice, however, the application of land-based or ‘land value capture’ funding requires cities to arrange various instruments, including property (both land and building taxes), betterment levies/special assessments, impact fees (exactions), tax increment financing, land readjustment/land pooling, sales of public land/development rights, recurring lease payments, and transfer taxes/stamp duties, across sectors in different urban contexts ( [[#Suzuki--2015|Suzuki et al. 2015]] ; [[#Chapman--2017|Chapman 2017]] ; [[#Walters--2017|Walters and Gaunter 2017]] ; [[#Berrisford--2018|Berrisford et al. 2018]] ). Land value capture is expected not only for cities to generate additional revenue streams but also to prevent low-density urban expansion around city-fringe locations. Inversely, land value capture is supposed to perform well when accompanied by low-carbon urban form and private real estate investments along with the application of green building technologies ( ''robust evidence'' , ''high agreement'' ) ( [[#Suzuki--2015|Suzuki et al. 2015]] ; [[#Floater--2017|Floater et al. 2017]] ; [[#Colenbrander--2018b|Colenbrander et al. 2018b]] ).

For the implementation of land-based funding, property rights are essential. However, weak urban-rural governance leads to corruption in land occupancy and administration, especially in developing countries with no land information system or less reliable paper-based land records under a centralised registration system. The lack of adequate property rights seriously discourages low-carbon infrastructure and real estate investments in growing cities.

The emerging application of blockchain technology for land registry and real estate investment is expected to change the governance framework, administrative feasibility, allocative efficiency, public accountability, and political acceptability of land-based funding in cities across developed countries, emerging economies, and developing countries ( [[#Graglia--2018|Graglia and Mellon 2018]] ; [[#Kshetri--2018|Kshetri and Voas 2018]] ). Particularly, the concept of a transparent, decentralised public ledger is adapted to facilitate value-added property transactions on a P2P basis without centralised intermediate parties and produce land-based funding opportunities for low-carbon infrastructure and real estate development district-wide and city-wide in unconventional ways ( [[#Veuger--2017|Veuger 2017]] ; [[#Nasarre-Aznar--2018|Nasarre-Aznar 2018]] ).

The consolidation of local transaction records into national or supranational registries is likely to support large-scale land formalisation, but most pilot programmes are not yet at the scale ( [[#Graglia--2018|Graglia and Mellon 2018]] ). Moreover, the potential application of blockchain for land-based funding instruments is possibly associated with urban form attributes, such as density, compactness, and land-use mixture, to disincentivise urban expansion and emissions growth around city-fringe locations ( ''medium confidence'' ) ( [[#Allam--2019|Allam and Jones 2019]] ).

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