Emissions Reduction in Cities: A Guide to Getting Started

By Alex Demosthenes

Alex Demosthenes is a Project Finance Analyst at a top tier bank and was previously a Climate Change Analyst and advisory consultant at the World Bank Group. He is interested in the role that finance plays in mitigating impacts of climate change. Alex holds a bachelor’s degree from Elon University in International Studies and Spanish and a master’s degree from Georgetown University’s School of Foreign Service in Economics and Policy.

Nov 27, 2017 | Environment, Governance | 2 comments

I recently spoke with a former colleague and air quality specialist about efforts to secure financing to improve air quality in his city. From my own experience I’m familiar with policy efforts to integrate environmental considerations at the city level, but I was curious to know if any major financing initiatives were underway in the city where he lives and works. He told me that he was working hard on bringing attention to the topic, but that decision makers in his city were not focused on the issue. He went on to explain that private capital and international development funds are increasingly looking for organized low-carbon infrastructure and transport projects to invest capital, and that he hopes that this will serve as encouragement to develop these kinds of projects.

Cities present the greatest opportunity in the fight for low carbon development that promotes sustainability. Around the world we see the growth of “megacities” with developing world countries experiencing some of the greatest urbanization rates. The UN Population Fund estimates that more than half of the world’s population lives in cities today, and the number of urban dwellers is expected to continue to grow. NASA estimates that cities produce 70% of all fossil fuel CO2 emissions.

This post examines three steps that cities can follow to achieve emissions reductions. This is by no means an exhaustive list of approaches, but following this broad sequence can help a city progress from establishing a baseline to inform strategy and planning, set the stage for investment in renewable energy or low carbon projects, and eventually attract investment.

  1. Establish a GHG Emissions Inventory
  2. Improve Investment Climate & Secure Revenue
  3. Matchmaking with Investors

Emissions Inventory

A comprehensive strategy for emissions reduction depends on a robust emissions inventory. Inventories typically measure air pollutants discharged into the atmosphere from various stationary and mobile sources, including the transport sector, electricity generation, the industrial and manufacturing sector, and domestic fuel use for heating, cooling, and cooking.

The establishment of a dependable emissions inventory helps a city identify sources of emissions, target specific sources in reduction strategies, and create a baseline by which they can measure progress. The International Council of Local Governments for Sustainability considers conducting a baseline emissions inventory “Milestone One” in their “Five Milestones for Climate Mitigation” and seven of the largest 10 cities in the US have established a baseline and set reduction targets.

Emissions inventories are effective when they adhere to international best practices. Software programs like ClearPath help cities create their inventory and also allow for geographical disaggregation. This is an important aspect to consider when establishing the inventory; if measurements are blurred across municipal, metropolitan, and state lines, they don’t allow for precise measurement of emission sources.

Strong Investment Environment

As cities grow, new infrastructure must be built and existing infrastructure upgraded. Sustainability planning should be coupled with strategic financing in order to seek growth with sustainability. Once a local government has established both an emissions baseline and a set of emissions reductions targets, local officials must ensure that the right conditions are in place to attract investment in renewable energy or climate resiliency.

The World Bank estimates that only 20% of the largest 500 cities in developing countries are creditworthy. In order to attract capital, a city must establish a sufficient level of creditworthiness, as assigned by an independent rating agency, communicating to lenders the city’s ability to meet debt obligations.

Through its City Creditworthiness Initiative, the World Bank has committed to helping cities achieve greater creditworthiness in order to support sustainable investments and green growth. In working toward this objective, the C40 Cities Climate Leadership Group points out that city revenues stand to increase as cities improve their financial management.

For cities that already have investment-grade credit ratings, strong planning supports long-term, sustainable investments. Lenders require assurance that loans will be repaid, and this is best achieved with finance packages that secure revenue streams until repayment. One such mechanism, which can be applied to solar and wind systems, is the Power Purchase Agreement (PPA), which provides terms for a government agency, in this case the public utility, to purchase 100% of electricity generated by a solar or wind system. The PPA provides several important benefits:

  1. Low or no upfront costs
  2. Lower electricity prices stemming from federal tax incentives
  3. Long-term (typically 15-25 years) fixed electricity costs that are not subject to market volatility

Matchmaking & Assistance

Once baselines and targets are in place and the stage is set for investment in renewable energy or climate resiliency projects, planners can spur sustainable investment by providing matchmaking services that match finance with organized projects that have strong long-term prospects both for emissions reduction and growth. In recent years the United Nations and others have pioneered such efforts, though the slow delivery of funds has had a negative impact on potential advances in the space. Local matchmaking can provide local expertise to support quicker investment.

One such initiative already underway is the Transformative Actions Program (TAP), which aims to catalyze capital flows to cities to accelerate low-carbon, climate-resilient development. By joining the TAP network, subnational governments can increase their visibility and position themselves to receive financing from potential investors in the network.

Municipal planning divisions or investment-attraction agencies could also work to develop or enhance matchmaking services for sustainable investment, which in many cases is facilitated by a third party. Whereas these agencies often provide high-level overviews and/or regulatory considerations for sectors amenable to climate-resilient investments, providing a pipeline of projects for investors to access could accelerate the pace of investment.

Conclusion

As global urbanization rates rise, the need to focus on cutting CO2 emissions from fossil fuels also grows. Cities can prepare to lead the charge toward greater sustainability by first establishing an emissions inventory that tracks their carbon footprint and aids in identifying areas for investment. They can create a more attractive investment environment through focusing on creditworthiness and/or securing revenue streams through the Power Purchase Agreement. Finally, through effective matchmaking cities can help pair sustainable projects with capital.

 

Meeting of the Minds originally published this article on October 26, 2016.

Discussion

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2 Comments

  1. Good article. Regarding “Step 2 — A Strong Investment Environment,” cities can take a big step in the right direction by shifting their property tax off of privately-created building values and onto publicly-created land values. Lower tax rates on buildings makes them cheaper to construct, improve and maintain. This improves the economics of energy-conservation improvements. And this is good for residents and businesses alike. Surprisingly, higher tax rates on land values help keep land prices more affordable by reducing the profits from land speculation and reducing the speculative demand for land.

    For more info, see “Funding Infrastructure to Rebuild Equitable, Green Prosperity” at http://revitalizationnews.com/article/funding-infrastructure-for-sustainable-equitable-revitalization/ .

    Reply
  2. When I was with EPA in California we established a program based on market forces. The situation was that in large urban areas, air quality exceeded national standards meaning the areas were in non-attainment. The policy we established was that any new emissions in such areas had to be offset. That meant that any proposed new emission source need to first include best available control technology, and then any remaining emissions needed to be off-set. That also meant that any emission sources which could reduce emissions below regulatory requirements could then do so with the expectation of selling the resulting reductions as “off-sets”. The State set up a bank which loaned parties wishing to create offsets funds to do so. The air pollution control districts controlled the process by first certifying offsets which were created. This gave them a status as a property right, which the district would then accept without question as an offset against a similar “new source”. In this situation, we also worked out agreement that the State would capture 20% of each offset transaction as a means of reducing overall emissions in order to progress toward standards attainment.
    A metropolitan area could use the same approach by working with a local bank. Where off-sets are created with a status as a real property, such rights are protected by well-established in property law. And where the regulators create a market as a condition of approving new emissions, then a knowledgeable local bank should be willing to finance the creation of offsets with an expectation of making a reasonable fee on offsets acquired to be submitted with new permit applications.
    While this approach was widely criticized by environmentalists at its inception (they called it selling pollution rights), it has now been generally accepted and recognized is indeed more widely known as a “cap and trade” strategy. One should recognize that such a process it is now recognized in Federal Law and widely supported. Some banks have even recognized the potential for business in the emission-offset trades. Analogies exists in both land and water, where one routinely recognizes the need to acquire a building site in order to build, and a water right in order to put a well in an area were the groundwater body is fully appropriated. Indeed, I base the initial emission offset banking proposal in California on well-established ground water law. In such analogous cases commercial financing is readily available.
    Russ Freeman

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