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Public finance

Coping with climate change

Municipal governments must prepare for the impacts of global warming. To an important extent, they can also contribute to mitigating the phenomenon. Accessing funds is a major challenge however. Most municipal governments in developing countries depend on transfers from their national governments and support from international donors.

By Monika Wiebusch

Since 2007, more than half of the world popu­lation is living in urban areas. UN-Habitat, the United Nations Human Settlements Programme, estimates that, by 2050, the share will rise to two thirds. The UN agency expects future population growth to take place predominantly in cities and urban outskirts, and likely to be synonymous with the growth of poverty (UN Habitat 2010).

The obvious challenge is to make urban areas attractive places to live in, and there are reasons to be optimistic about the options. Cities are – and always were – centres of civil society, cultural activity, commerce, industry and sports, and as such are drivers of development.

Accordingly, cities also play a crucial role in climate change. Today, urban areas account for about 60 % of global energy consumption and close to 70 % of greenhouse gas emissions (OECD 2010). At the same time, it is becoming ever more evident that cities have to adapt to global warming. Floods and landslides are causing ever greater damages – the floods in Bangkok last year were a recent devastating example. In many places, adaptation is not about anticipating ­future challenges, but coping with today’s reality.

Mechanisms to fund climate change mitigation have been established at the global level, and new ways of adaptation are being developed. Unfortunately, urban settings are only rarely taken into ­account. Municipal governments struggle to access international adaptation funds. It is impossible to answer all questions in this essay, but I will tackle important ones from the perspective of Germany’s bilateral development bank, the KfW Entwicklungsbank (see box).

Budget constraints

Cities in developing countries face substantial challenges of poverty. Their infrastructure tends to be inadequate and overburdened, so massive investment is necessary. The municipal governments, however, only have very limited budgets. They depend on financial transfers from their national governments and support from donor countries.

Local policymakers, however, hardly have access to donor agencies. Funding from multilateral institutions and bilateral development agencies is normally organised top-down. For several reasons, the money is channelled through national governments:
– International donors usually negotiate developmental interventions with sovereign national governments. The interventions they agree on nor­mally focus on a limited number of areas because budgets are limited.
– In the past decade, the entry point of national governments was reinforced by the Paris Declaration on Aid Effectiveness in 2005. This multilateral agreement emphasised that donors must respect the policy ownership of developing countries and align their aid to national policies and institutions of the partner country concerned. The international community reaffirmed these commitments at the High Level Forums on Aid Effectiveness in Accra in 2008 and Busan last year.
– International development banks and donor governments have lim­ited options for direct cooperation with local governments. In many countries, local governments’ jurisdiction over financial affairs is quite limited, and they are hardly allowed to take loans. Creditors, moreover, want guarantees, which local authorities struggle to provide. The KfW Ent­wicklungsbank, for example, usually asks for a state guarantee before financing municipal investments.

An impact on global affairs

For these reasons, cities and local governments should accept the guiding role of their national governments. Since they face specific challenges, how­ever, it certainly serves their interests to become involved in debates on climate change at the national and international levels. The more they manage to influence national policy, the more likely they are to have an impact on global affairs. It makes sense, moreover, to engage in professional exchange and partnerships with local governments in other countries.

Action related to climate change, however, is only part of the more comprehensive issue of sustainable urban development. Any municipal strategy on climate change will obviously have to take into account the risks and assess options for managing them. But that, in itself, is not enough. Climate change has to be considered at every stage for integrated urban development.

To a large extent, “mitigation” and “adaptation” are two sides of the same coin. If a city improves its power supply with renewable energy systems, it reduces greenhouse gas emissions, so the intervention will technically be counted as mitigation. If a power plant is relocated to reduce disaster risk (from flooding, for example), that is counted as adaptation. Re-modelling houses with a view to reducing carbon emissions is considered a mitigation measure, but similar mea­sures that serve to cope with extreme weather are considered adaptation.

These examples show that the dichotomy of “mitigation” and “adaptation”, that many international funding agencies use, does not fit the needs of cities. Cities need financial tools that allow for dual use. International agencies must take note.

When cities draft strategies on mitigation and adaptation, they have to define fields of activities and investment: Infrastructure and housing need to improve; public and private vehicles should be mod­ernised. A crucial challenge is to find investors for meaningful projects. Financiers – whether from the private or public sector – appreciate well-defined projects. They want to know exactly what a loan will be used for and who is in charge.

Consider the example of a transport company that wants to modernise its bus fleet to reduce carbon emissions. Such an investment will imply higher ticket prices to cover the costs, but perhaps the local government will insist on low prices because it wants all citizens, including the poor, to benefit from public transport. Financial institutions will shy away from such settings unless they know for sure that the emission issue will not be mixed up with subsidised tickets. Local policymakers therefore must design measures and policies diligently.

Smart policy design

Generally speaking, private sector investors will be interested in financing projects that promise a reason­able return on investment. That is likely to be the case when projects are commercially viable (private building rehabilitation, industry upgrading et cetera). In other cases, smart financing can ultimately make ­projects cost-effective even if they do not look promising at first glance. That will be the case, for instance, when micro credit schemes empower poor people to become economically more active or when “social businesses” and not-for-profit organisations become involved in projects.

But some urban infrastructure will always be non profitable. It would be irresponsible to leave urban development entirely to the private sector. Vital infrastructure must be provided by governments and funded from public budgets. The same is true of pro-poor policies that serve social inclusion. Moreover, there is a need for public hospitals, schools and other pro­viders of social services. Otherwise, there will not even be an inkling of equal opportunities.

While single projects can be interesting for smaller and private investors, large donor agencies and development banks will focus more on programmes instead of “stand alone” projects. Municipal leaders would be well advised to network among one another. There are opportunities to bundle sub-projects in various locations into programmes that tackle an overarching issue such as climate change. If local governments manage to get the national government on board, funding from international agencies should prove rather easy to achieve.

In any case, local authorities can no longer afford to simply ignore climate change. If cities are to prove liveable in the long run, action is required now.


The UN Sustainable Development Goals aim to transform economies in an environmentally sound manner, leaving no one behind.