Subnational climate finance: filling the gap

Cities, states, provinces, and other subnational governments are taking a leadership role in fighting climate change. But how will they pay for it?  New mechanisms are starting to fill the gap.

Global investment in addressing climate change totalled $437 billion in 2015 and $383 billion in 2016. Despite these volumes, getting climate finance down to the subnational level can be politically and administratively difficult.

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In many cases, funding for renewable energy, energy efficiency and climate adaptation projects is channelled through national governments or supranational organisations. Institutions like the internationally-backed Green Climate Fund (GCF), have a broad mandate, limited resources and a significant administrative burden in disbursing funds. Subnational bodies rarely have direct access to international climate funding pools, and little decision-making power over their allocation. Given that cities alone account for some 70% of global emissions, subnational climate finance represents an important new trend–and an even bigger need.

For subnational actors seeking funding, the landscape of climate finance can be confusing and complex. For GCF administrators, ensuring that the right communities are served in the right ways is a daunting challenge. The accreditation-based system of National Designated Authorities and National Implementing Entities used by the GCF makes access for local authorities and civil society groups burdensome and indirect, and increases the risk of politicisation somewhere along the way. Research shows that vulnerability to climate change rarely determines financial allocations, with political and economic preferences of national governments typically drowning out subnational voices.

Individually, subnational efforts can indeed seem inconsequential, but in sum can produce significant emissions reductions. There is clearly also value in developing robust international knowledge networks of subnational actors able to pool collective experiences. A coastal city in East Africa may benefit substantially from avoiding the mistakes and replicating the successes of its counterparts in Western Europe, for example. Another, fairly obvious advantage of increasing subnational entities’ stake in funding allocations is their more detailed knowledge of the specific needs and opportunities in their city or region.

Publicly-funded climate finance tends to manifest itself in two primary forms: large-scale infrastructure projects requiring upwards of $100 million in investment and funded by international institutions (like the GCF, World Bank, or European Investment Bank), and smaller-scale community initiatives in the region of $1-2 million, typically funded or co-financed by subnational entities, NGOs, UN agencies and philanthropic foundations. In between these extremes lie medium-scale infrastructure projects in cities and subnational regions that are too small to attract institutional investors’ capital, but too large for subnationals and NGOs to finance.

An understandable focus on deployment of large-scale projects by international funds and institutions pursuing rapid decarbonisation can leave subnational actors with fewer financing options and less attention to their needs. They are generally further down the pecking order than their national counterparts, receiving less attention from the development community at large. As a result, regional transportation infrastructure, mid-scale energy efficiency and waste management projects, and renewable energy projects in the range of 10-30 Megawatts (MW), tend to fall through the cracks more often. In the GCF’s 2015 project selection round, not a single subnational project made it onto the final shortlist. Although in some cases subnational projects are embedded within national ones, a direct link to international funding bodies is still missing. Multilateral institutions with track records in national-level infrastructure development are being prioritised, while innovative projects at subnational scales remain on the margins.

The Local Climate Adaptive Living Facility (LoCAL) is attempting to addressing this by linking low income countries directly to the GCF, supporting subnational projects now in an advanced stage of implementation in Bhutan and Cambodia. The GCF’s Enhancing Direct Access program allows accredited entities to nominate subnational projects for funding consideration. But this does not get to the heart of the problem – sovereign states are still the go-between and source of legitimacy. Ultimately, the procedural burdens to which the GCF and similar funds are subject rob them of the agility to fund subnational projects at the speed and scale required for them to have an impact on climate mitigation and adaptation efforts globally.

At the UN Climate Summit this month, the R20 Regions of Climate Action coalition, Leonardo DiCaprio Foundation, and BlueOrchard, an impact investment manager, will launch the Sub national Climate Fund (SnCF). The fund, having already confirmed at least $100 million in investment, and aiming for $350 million by the end of the year, is designed to fill gaps in funding that will help catalyse climate solutions at the subnational level. The fund’s first incarnation will focus primarily on emerging and frontier markets in Africa – those most exposed to the economic consequences of climate change, with the OECD projecting the continent to take a 4% GDP hit by 2060 on average.

To identify the best projects and the most significant opportunities in energy efficiency, renewable energy and waste management worldwide, R20 and the DiCaprio foundation jointly ran the 100 Climate Solutions Campaign, selecting a shortlist of viable projects from over 650 applications sourced from networks of cities and regions across the globe. Shortlisted projects were combined with an existing portfolio of green infrastructure projects in the final stages of deal structuring, to form the initial project pipeline for SnCF.

Many of the selected projects were just not ready to be funded – not bankable, in the industry jargon, requiring significant legal and technical work to transform them into viable investments. A major barrier for otherwise viable projects aiming to become bankable is finding ways to meet these upfront costs. In most cases, particularly those bankrolled by international institutions, this means extensive due diligence, feasibility studies, environmental and social impact assessments, legal fees and more. To bridge this gap, the SnCF fund is accompanied by a technical assistance facility designed to help promising projects get off the ground and prepare them for receiving investment from the fund to take the project through development and construction, and finally to full operation. As a ‘blended finance’ vehicle containing private money, complemented by public money offered on more generous terms, SnCF is capable of taking on a greater amount of risk than a typical private investor. In principle, this can help to catalyse more private investment by reducing the risk burden on the private sector.

Although the SnCF is a major step towards bringing public and private sectors together on subnational climate issues, similar initiatives are under way across the climate finance landscape. The World Bank’s City Creditworthiness Initiative aims to strengthen municipalities’ financial performance to enable them to access financing for sustainable urban infrastructure. The ICLEI Transformative Actions Program focuses on driving capital flows to towns, cities and regions to strengthen their capacity to attract climate investment. Additionally, the International Finance Corporation (IFC) offers technical assistance to countries looking to improve the domestic environment for bond issuance, potentially helping to stimulate these capital flows. Cities already in a position to do so are increasingly issuing green bonds (for low-carbon infrastructure investment) or catastrophe bonds (as insurance against extreme weather events) as ways of increasing their capacity to pursue climate action independently.

Whether these programs are heralding a new way of thinking about climate finance that recognises the advantages of subnational networks remains to be seen. In many countries, circumventing the central government is neither feasible nor legal, or hindered by centralised monopolies on power, water and tax revenues. And, beyond catastrophe bonds, it is not yet clear how far financial instruments can go in meeting adaptation needs. In the subnational arena, accessing climate finance is one thing, but directing it to where it is most needed is quite another.

This article first appeared on Global Policy on 14 November 2017.

Alex Clark is an Assistant Analyst, Climate Finance at the Climate Policy Initiative in San Francisco. Previously the Henry Fellow at Harvard University, he also researches electric vehicles at the Harvard Kennedy School of Government and coordinates the Blavatnik School-based non-state climate action network, Galvanizing the Groundswell of Climate Action (www.climategroundswell.org). He holds an MSc in Global Governance and Diplomacy from Oxford University and BA (Hons) in Philosophy, Politics and Economics from Warwick University.

 

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