The Climate Crisis Is More than a Funding Problem

New forms of climate funding directly target cities, intending to provide them access to funds to adapt to climate change, for instance via bonds on the financial markets. A research project at the University of Zurich is studying the impacts of such programmes. In this interview, principal investigator Hanna Hilbrandt explains why she has compared these programmes with structural adjustment measures and how the narrow focus on the lack of financial resources for urban climate adaptation hinders the development of alternative funding options.

Hanna, you’ve investigated how international climate financing affects cities and urban planning in a number of projects. When did cities start playing such a crucial role in discussions on climate finance?

As of 2008, more people live in cities than in rural areas. Current forecasts predict that by 2050, as much as 70 percent of the world’s population will live in cities. This has put pressure on global climate policy to pay more attention to cities. This is something that the UN Sustainable Development Goals (SDGs), which were adopted in 2015, take into account: one of the 17 SDGs even directly refers to cities, which is a first. Goal 11 is about making “cities and human settlements inclusive, safe, resilient, and sustainable”.

This coincides with a second development: the financial markets have played a much more central role in climate and development policy since the adoption of the SDGs. Also adopted in 2015 was the Addis Ababa Action Agenda, which aims at formulating a strategy for financing the SDGs. This agenda emphasizes the role of private sector financing for climate change measures and climate change adaptation more than previous agreements have. Many international climate networks, global development initiatives, and multilateral bank programmes focusing on climate financing in cities now refer to this agenda — these include the FELICITY programme run by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ, German Development Cooperation), the World Bank’s City Creditworthiness Initiative, and measures by global city networks, such as C40 and ICLEI (Local Governments for Sustainability).

Why do these initiatives primarily address city governments?

Cities are not only economic engines; they also have a huge ecological footprint. This involves both the consumption of resources — such as through construction activities — and the enormous amount of environmental pollution that occurs in cities. The notion of an urban environmental policy thus usually relates to the fact that a lot can be achieved in cities within a limited amount of space. Moreover, cities are often more progressive than national actors. This is not only due to urban environmental movements and the fact that city dwellers often vote more progressively than rural populations, it’s also because city governments need to advance concrete solution for the acute effects of climate change in cities. Cities are thus seen as being particularly accessible to work with when it comes to climate financing.

But on the other hand, cities don’t have much manoeuvring room in many areas.

More than anything, they often lack the necessary financial resources. The expectation placed on cities to implement concrete solutions has not led to city governments having more resources at their disposal. And then, cities tend to lack the requisite administrative capacities and the right to operate on financial markets — to borrow money via municipal bonds, for instance. Apart from a few exceptions, cities can’t independently increase their tax revenues either. So, they’re dependent on the state or on private investments for climate financing.

New forms of climate financing are meant to change that. What form or forms of financing are these, and what exactly did you investigate?

In 2019, I looked at the introduction of green municipal bonds in Mexico City. Along with Johannesburg and Cape Town in South Africa, Mexico City was one of the first cities outside Europe and the US to introduce green and, later, sustainable bonds at the municipal level. It was considered a pioneering city for implementing this tool.

The climate crisis is often reduced to a funding problem — and the proposed solution is accordingly that the financial offerings have to be improved to increase investments.

Mexico City issued bonds in an amount of 1 billion Mexican pesos (equivalent to 53.3 million US dollars) in 2016 and did so again in 2018 with bonds reaching 1.1 billion Mexican pesos (equivalent to 56.9 million US dollars). The city used these funds primarily for infrastructure measures in the water and transportation sectors. Since they were issued in Mexican pesos, it was mainly institutional investors, such as local pensions funds, that invested in these bonds. Green municipal bonds are particularly interesting for these investors because they increasingly need to label portions of their investments as “green” and municipal bonds are also considered to be a safe bet.

So, the bonds have actually made a difference?

Not really. In Mexico City and in the other cities we’re looking at, a lot less money is being invested through this channel and other financial instruments than would be necessary to build the infrastructure that is urgently needed. Even though there’s a broad consensus among development actors that the GIZ and World Bank programmes — that is, global programmes that target cities to reduce risks to private investment in their infrastructure — are essential for solving the climate crisis, they have obviously not been able to finance robust adaptation measures on the scale required.

In the case of Mexico City, the city would have implemented the measures anyway, but would have financed them through normal municipal bonds. The principle of additionality — namely that green investments are made in addition to measures that are already underway — is not met in this case. The fact that these bonds were issued as “green” bonds drew a lot of international attention to Mexico City, but hardly any other cities in Latin America or Africa have been persuaded to use this tool.

Why is that?

Many cities are unable to borrow funds on the financial markets. That’s because national institutions are reluctant to assume the risks associated with guaranteeing loans for cities. In addition, introducing these tools requires a significant amount of bureaucratic labour. Establishing the technical, institutional, and legal conditions to introduce new financial tools is time-consuming and tedious. Green municipal bonds, for instance, have to be identifiable as such on the stock exchange. Certification organizations are required to verify whether bonds meet global standards. Government officials have to learn how to select appropriate projects, and so on.

That’s why, in our current project, The Urbanization of Climate Finance, we’re looking at the processes that precede the introduction of urban climate finance mechanisms. These processes include, for instance, studies aimed at providing investment certainty by promoting “climate action plans” and programmes designed to teach authorities how to operate on financial markets.

What have the results been so far? How does participation in this type of climate financing impact cities?

We’re seeing a series of changes in urban administrative bodies, which we describe as “municipal structural adjustment”. This term refers to previous global Structural Adjustment Programmes (SAPs) by the World Bank and the International Monetary Fund (IMF), which plunged many countries in the Global South into debt crises from the early 1980s on. Unlike the previous SAPs, urban adaptation measures don’t exert pressure on nation-states, but instead offer support structures that cities accept because they have no other means to obtain the necessary financial resources for expanding climate infrastructures.

But we’ve found that these programmes are comparable to SAPs with regard to their democratic deficiencies. Furthermore, they often aren’t used to implement the projects that municipalities and, above all, marginalized populations desperately need, but for those that attract the interest of global investors. Since projects often rely on interest from the private sector, it’s difficult to implement projects that don’t generate profit, for example. As a result, the promotion of waste incineration plants is more attractive than introducing circular recycling systems that don’t generate a profit, to provide an example.

What projects are actually being put in action?

Not much has happened in the cities we studied — Ciudad Juarez, Hermosillo, Rajkot, and Chennai — in terms of material changes since 2015. The interventions we found were often limited to pilot projects or to smaller infrastructure projects, such as a park. Other studies have indicated that the emerging infrastructures don’t meet criteria for climate justice.

The projects that are implemented are often built where communities already experience climate impacts to a high degree. Opportunities for community participation in building projects are minimal. At the same time, the grand narrative of the success of these programmes persists — mayors who implement the programmes receive honours or are celebrated. This is problematic because other possible financing mechanisms are then hardly discussed.

Is this something that can only be observed in large cities? Or are smaller cities also included in the new financing programmes?

In The Urbanization of Global Climate Finance, we investigate secondary cities — that is, cities that have smaller populations and lower administrative capacities than “global” cities, which are economically powerful and internationally connected major cities. As growing metropolises, they face significant challenges in adapting to climate change while often having limited financial resources to fund the necessary infrastructure measures. But whereas global cities often have access to financial markets already, secondary cities play a greater role in global climate initiatives — and rightly so, since these cities urgently need additional financial resources and capacities.

If climate financing in cities continues to develop in the same way it is now, then the gap in access to funds will widen between those cities that are deemed worthy of investment and those that are not.

The programmes we investigate often target cities in the Global South, which are relatively risk-free, yet profitable for investors. Very poor cities aren’t even in the picture. At the same time, we’ve observed that attention is focused on the few cities that have successfully been involved with global programmes.

Just as there are so-called “donor darlings” at the national level, which are favoured by global development banks for their promise of successfully implementing a programme, there are a few cities that receive special attention at the municipal level. In our research, for example, these are cities such as Mérida and Ciudad Juarez. These are not necessarily the cities that are in need of the funds the most, but rather those that have managed to build local structures that promise to successfully engage with global initiatives.

Do you have any reflections on experiences with these financial mechanisms yet?

The World Bank and other key financial and development actors in urban climate financing have turned the question of how necessary climate measures — urban infrastructure, for example — can be implemented into programmes working under the assumption that only private-sector solutions, meaning profit- and growth-oriented solutions, can enable climate adaptation. Consequently, there have been discussions in critical economic and urban geography for some time about the ways in which urban climate financing has itself been problematized. In other words, the questions that arise are: What is seen as the initial problem? What questions are being asked? And how are possible solutions predetermined or narrowed down as a result?

The climate crisis is often reduced to a funding problem — and the proposed solution is accordingly that the financial offerings have to be improved to increase investments. Gareth Bryant and Sophie Webber call this “gap talk” in their book on climate finance as a way to highlight that the climate issues are being translated into funding gaps. This gap talk obscures the fact that the existent green financial instruments in cities have structural limitations and are unable to solve a number of problems. And it also diverts attention from finding alternative financing options to keep the climate and environmental crisis in check.

What direction is climate financing currently taking? What can we expect in the future?

If climate financing in cities continues to develop in the same way it is now, then the gap in access to funds will widen between those cities that are deemed worthy of investment and those that are not. Researchers are already talking about “climate apartheid” with regard to the unequal impacts of climate change. For this to not be exacerbated, we’d need compensatory measures to ensure a more equitable distribution of funds, rather than further supporting the winners in the competition for climate investments.

Are there any alternative proposals? How could adaptation and avoiding greenhouse gases as well as the transformation of urban spaces be organized and financed differently or more fairly?

Overcoming the problems described above would require a paradigm shift in the basic ideas of climate financing. Firstly, I’m thinking about the democratization of knowledge: in many of the initiatives we’ve investigated, multilateral banks finance studies that external consulting firms conceptualize and conduct. Consequently, problems are diagnosed, data is collected, and solutions are proposed. These solutions correspond to the problem diagnosis that I described earlier as gap talk. For cities to reclaim the space to define the climate problems they’re facing, they would also have to decide which studies and data meet their needs. Part of that is knowing about alternative problem-solving and financial options.

Secondly, it would be necessary to decamp from the narrow focus on promoting investments in the private sector. Pragmatically speaking, the private sector will continue to play a central role in our current economic system — which includes urban climate financing — for the foreseeable future. Nevertheless, we urgently need solutions that do not primarily involve public financing when it comes to mitigating the risks from the private sector. This is not only a question of distributing investments more fairly or of approving projects that don’t generate profit. It’s also a question of longer-term investments. Aiming for quick results to secure re-election, city administrations often find short-term projects attractive. But adapting to climate change also requires long-term and large-scale measures.

And thirdly…

Thirdly, as already mentioned, financial mechanisms need to be expanded at all levels. In our case studies, we unfortunately found only a few concrete examples of redistributive financial mechanisms — that is, mechanisms that contribute to greater equality. But you can find ideas on how to expand urban financial capacities in many other discourses. Examples include land value capture instruments through which cities could generate funds for adapting to climate change and reducing emissions.

At the same time, there need to be international redistribution mechanisms that recognize the unequal impacts and causes of climate change and redistribute them through a financial mechanism for urban climate justice.

Translated by Shane Anderson and Anna Dinwoodie for Gegensatz Translation Collective.