Climate finance is important for achieving the 7 goals of the UN Sendai Framework for Disaster Risk Reduction and the Sustainable Development Goals (SDGs) because climate uncertainties influence all these goals. The implementation of the Paris Agreement will determine the role that climate finance will ultimately play in realizing the INDCs and ensuring resilient and sustainable development on Earth.

A universal definition of (urban) climate finance does not exist. Particularly at the city level, climate finance might not be a particular concept as many aspects of climate change adaptation (and, to some extent, mitigation) are blended in with other ongoing development initiatives. In the absence of an agreed definition of urban climate finance, this assessment framework considers it to be funding for projects with co-benefits for climate change mitigation and/or adaptation in cities. Such financing can come from public or private sources and can be sourced internationally, regionally, nationally or locally.

Further, appropriate legal frameworks and financial management capacities are required to access international donor funds, and private capital markets are often missing. A large amount of investment is required in adopting cleaner technologies and creating urban infrastructure, amenable to the mitigation of and adaptation to climate change. Considering this, it is important to mobilize financial resources from extra budgetary sources such as PPP (Public Private Partnership), CSR (Corporate Social Responsibility), borrowing from bilateral and multilateral agencies (World Bank, ADB, KFW, etc.) and issuing green bonds, etc.

Defining Climate Projects

A “climate project” should address one or both of the following objectives:

Mitigation: Entails reducing Greenhouse Gas (GHG) emissions through 1) reduced use of fossil energy carriers and other activities leading to GHG emission or 2) carbon sequestration. In an urban context, climate change mitigation can best be achieved by investing into low (or no) carbon buildings, transport, energy production, and waste management. Further reductions can be achieved by creating carbon sinks, e.g. green spaces.

Adaptation: Refers to all activities that reduce the effects caused by climate change, for example by strengthening adaptive capacity and reducing exposure or sensitivity to climate phenomena. Relevant urban projects include, for example, flood protection and drainage systems, measures to increase energy and water security, climate-resilient infrastructure, etc.

Climate activities can fall into both categories at the same time, as, sometimes by categorising such measures as either mitigation or adaptation, their total societal benefits will likely be missed. For example, investments into small-scale decentralised renewable energy to reduce greenhouse gas emissions from cooking with fuel wood while also improving poor households’ adaptive capacity.

Challenges and opportunities for urban climate finance

The challenges can be divided into internal and external ones:

• Internally, i.e. within municipal administration itself, such barriers include lack of awareness, political priority, capacity, institutional structures and tools.
• Externally, i.e. outside of municipalities’ direct sphere of influence, challenges include detrimental national regulation, unattractive risk-return profiles of climate projects, political and economic risks as well as lack or inadequacy of financial mechanisms.

But a set of opportunities for easing urban climate finance challenges exists. Where municipal revenues are insufficient, cities can attract additional revenues and investment capital through “new” financing instruments, such as land value capture and bonds. Financial intermediation through specialized financial institutions, in turn, can serve to pool risks and channel international funds directly to sustainable urban development.

National funding opportunities for climate interventions

National Action Plan on Climate Change (NAPCC) is the umbrella policy initiative which adopted a mission mode over policy because missions come with operational guidelines and budgets, and can be monitored. Out of 8 missions under NAPCC, National Mission on Sustainable Habitat is anchored with Ministry of Housing and Urban Affairs that has focus towards climate sensitive development. These eight missions have dedicated schemes and programmes that are detailed out in section 4 of the report, some of the prominent ones include renewable energy, human health and coastal resources management, PMUY, National Adaptation Fund and tax free Infrastructure bonds.

Climate Change Finance Unit, DEA8 discussion paper (2018) has assessed the climate finance requirements of developing around USD 4.4 trillion and further 2.5 trillion (at 2014-15 prices) for mitigation and adaptation measures for India over the next 15 years. The discussion paper has emphasized the need of the international public finance flows, from developed to developing countries as a critical enabler in ramping up these actions.

The different sectors under the assessment framework are being funded under different Government of India missions and schemes. A list of the sector-wise financing option (not exhaustive) available in the country is given in Table 12.

Other multi and bilateral public finance

Source: Government of India Missions/schemes

These sources as mentioned above can be accessed via the state governments or directly by the city, depending on the scheme that is applicable and applied for. The details of these schemes will be available on the websites of the different ministries as mentioned above.

State funding opportunities for climate interventions

India’s past experience with climate-induced disasters, projected to worsen following rising climate uncertainties, has an institutionalized disaster management authority at the national, state and district level with the National and the State Level Disaster Response Fund. Many states have also pioneered fiscal instruments to address environment and climate change. Sikkim Ecological Fund (SEF), Green Tax on motor vehicles by Tamil Nadu, Maharashtra and Andhra Pradesh are few notable examples. Further, financial institutions have also come forward to finance viable projects, e.g Yes Bank and NABARD. Projects funding under the State Finance Commission can be explored by the cities.

International climate and development finance

Multi and bilateral climate funds and development banks make up another potentially relevant source of funding for urban climate projects. Table 10 presents an overview of few funds and development financial institutions that provide funding for climate-related investments to the city, regional, and national governments.

International Climate and Development Finance

Source: Nakhooda et. al. 2015, websites

It is pertinent to mention that most of the international sources cannot be directly accessed by local governments as funding agencies are usually not encouraged to interact with cities directly. In fact, these are channelled through accredited implementing entities, most of which are international organizations (UN agencies, development banks etc). Till now, cities in India have accessed climate funding through developing joint proposals with implementing entities. Some opportunities for more direct access to international funds are provided in annexure V.