The way forward for urban local bodies to finance climate action

Climate finance in cities is back in discussions after the Conference of Parties (COP29), the annual climate conference in Baku, Azerbaijan, concluded with the developed countries pledging USD 300 million from 2035 instead of USD 1.3 trillion that the developed countries demanded. The fact is that 70-80 percent of greenhouse gas emissions globally are from cities. If India is the third largest emitter in the world, then its cities must be heavily contributing to global emissions. Climate action, and therefore, climate finance would be needed in cities. 

In recent years, climate change has manifested increasingly in India’s cities as heat waves, cloud bursts, excessive rain resulting in floods, scanty rains resulting in water scarcity, and so on. The Global Climate Risk Index 2021 ranks India as the 7th most affected country by climate-related extreme weather events based on recorded data of loss and damage during 2000-2019 in terms of fatalities per 1,00,000 inhabitants and losses per unit of GDP.^[1] Studies show that poor planning and management are expected to cost our cities between USD 2.6 and USD 13 billion (2.8 percent of GDP) annually.^[2]

As hubs of population, infrastructure and economic activities, India’s cities face a grim future on climate-related events – 21 cities including Delhi, Bengaluru, Chennai and Hyderabad are heading towards zero groundwater levels, affecting access for 100 million people; 18 out of 100 Smart Cities and 124 of 500 AMRUT Cities carry high risk of flooding; and 77 coastal cities, including some of the largest and most dense urban agglomerations, are prone to frequent cyclones. The latest report from the Coalition for Urban Transitions estimates that a set of proven low-carbon measures could reduce urban emissions by 89 percent in 2050.^[3] Finance is needed for this.

The important questions are what India’s cities are doing in terms of climate adaptation and mitigation, do they have adequate financial resources for climate action, how they are raising climate finance, what challenges they face, and what is the way forward. These need to be examined in the backdrop of COP29. 

Why cities and their finances matter
Ahead of the conference, in September, the ‘State of Cities Climate Finance 2024 Report’^[4] was released. It concluded that annual urban climate finance^[5]The report defines “urban climate finance” as including all sources of finance flowing within cities and channelled by all types of public and private actors (including households/individuals) for climate mitigation and adaptation. These tracked flows are a combination of primary project-level investments and capital expenditure estimations across different sectors.: The report defines “urban climate finance” as including all sources of finance flowing within cities and channelled by all types of public and private actors (including households/individuals) for climate mitigation and adaptation. These tracked flows are a combination of primary project-level investments and capital expenditure estimations across different sectors.

must increase more than five-fold to attain climate change goals – the annual average mitigation finance needs USD 4,328 billion by 2030 while it was only USD 814 billion in 2021 and 2022. The task of increasing finance flow by five-fold is not easy. The report identifies systemic challenges to closing the climate finance gap of cities: insufficient commitment to urban climate action, weak enabling environments and inefficient cooperation between levels of governments, city-level capacity gaps, and inadequate capital mobilisation as cities struggle with poor creditworthiness and limited fiscal capacity.

Are India’s cities financing climate actions adequately? The answer is ‘no’. From the $814 billion, the share of South Asian countries was USD 16 billion – or less than 2 percent. Even if we assume that the share of India’s cities is 75 percent of South Asia’s, it would be around USD 12 billion or just 1.5 percent of global urban climate finance. Beyond money, there are other gaps. The four challenges that the report identified apply to cities or municipal bodies across India: 

• Insufficient commitment and lack of focus on urban climate action – less than 50 of 4,800 cities in India are preparing or have city-based climate action plans and less than ten have started implementation of such plans. Mumbai leads in this by adopting climate budgeting. 
• Weak enabling environments – lack of city-level climate policy, predictable and stable regulatory and financial support for cities.
• Capacity gaps – municipal bodies or urban parastatals lack the technical capacity needed for climate action
• Inadequate capital mobilisation – municipal bodies have limited fiscal capacity; in 2018, only 36 cities got A grade credit rating while 136 cities got B grade which shows they lack creditworthiness; and only 17 municipal bodies have till date raised Rs 3,900 crore from the capital market during 1997-2024 which shows limited access to the market.

Climate action, and finance, cannot wait
As of 2017, India is the third largest emitter of greenhouse gas emissions in the world.^[6] While India’s per capita emissions are less than half of the global average, climate change is likely to have an impact on the economy and people if emissions continue at current rates.^[7] Under the Paris Agreement, India submitted its Nationally Determined Contributions (NDCs) and announced its net-zero commitment by 2070 at the COP 26 in 2021. 

It has put in place the National Action Plan for Climate Change (NAPCC) which is implemented through eight missions. Following that, 30 states prepared their State Action Plans for Climate Change (SAPCC). India has also set up the National Adaptation Fund for Climate Change. Though these plans do not provide for climate-resilient urban infrastructure, cities have been provided with advisory and technical support to prepare city-based climate action plans by the Union Ministry of Housing and Urban Affairs (MoHUA) through the Climate Centre for Cities (C-Cube), established in National Institute of Urban Affairs. The C-Cube has partner agencies which undertake studies and assist in preparing various climate-related plans. 

However, a review of budgets and accounting statements of a few cities show that cities are spending two-three percent or less of their annual budgets on climate-related activities. The C-Cube carried out a survey of 126 cities using Climate Smart Cities Assessment Framework (CSCAF) in 2021. Its findings, published in the Cities Readiness Report,^[8] show that India’s cities are at the preliminary stage of climate actions and there’s a very long way to go.

The report highlights, among other things, that only ten cities have more than 15 percent of their electricity needs met through renewable energy, only 19 cities have achieved National Air Quality Standards, 30 cities have initiated vulnerability assessment and greenhouse gas inventories for climate action plans, barely 38 cities have formulated strategies or allocated budgets for conservation or rejuvenation of water bodies and open spaces, and 87 cities have some kind of air quality monitoring stations. This year’s survey results of 226 cities have not yet been published. 

Climate finance in urban local bodies
The climate adaptation and mitigation activities of the Union government, and the budgetary provisions made, are in the right direction but they do not cover the creation of low-emission and climate-resilient urban infrastructure. Besides, there are no specific provisions in the Union budget except up to Rs 20 crore incentive if an urban local body raises a green bond.^[9] Grants are available for urban infrastructure under Smart Cities Mission, AMRUT, Swachh Bharat Mission, the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme 2.0 (E-Bus Scheme), and air pollution reduction and WASH infrastructure. 

Four urban local bodies have, so far, issued green bonds worth Rs 694 crore. The first was Ghaziabad, in 2021, for Rs 150 crore to set up a sewage water treatment plan followed by Indore for Rs 244 crore last year for a solar plant. In February this year, bonds worth Rs 200 crore and Rs 100 crore were issued by Ahmedabad and Vadodara respectively to set up water treatment plants. Vadodara was the first in India to be certified as a green municipal bond by a third party.

Each state government also has missions, schemes, grants for urban infrastructure but actions by state governments are hard to find on their websites. The missions and grants mentioned above do not specify or mandate any kind of technical or non-technical norms for building low-emission climate-resilient urban infrastructure. For example, neither the Bureau of Indian Standards, which issues National Building Code of India, nor central and state agencies like Central Public Health and Environmental Engineering Organisation, Central Public Works Department (CPWD), state Public Health Engineering Department or Public Works Department have adopted low-emission climate-resilient norms for the design, development, construction, and maintenance of urban infrastructure. 

Financing of climate-resilient urban infrastructure happens, to some extent, as reuse of waste water, flood management, greening of cities, use of renewable energy, controlling emissions but without scientifically prepared climate action plans and climate-informed budgeting. Importantly, the finance for low-emission climate-resilient urban infrastructure is miniscule. It is estimated that, from 2016 to 2024, approximately Rs 2,00,000 crore has been spent on various types of urban infrastructure but such norms were not adopted. More importantly, till 2027, approximately Rs 3,50,000 crore is likely to be spent on urban infrastructure under government grants. If low-emission and climate-resilient policies and technical norms are adopted, it would be a big step. 

Financing urban climate actions – the way forward
The need for incorporating climate action within existing and future investments in cities is paramount to ensure their sustainable economic and social development. Climate-resilient development is important for not only steering economic growth but equally for improving the quality of life for millions in cities. Coordinated and comprehensive action is needed on the finance front and a start could be made in 250 cities with more than 3,00,000 population each. 

The ‘State of Cities Climate Finance Report 2024’ should be implemented by all stakeholders, from national and state governments to municipal bodies. This includes improving the quantity (increase to five-fold) and quality (distribution among sectors, addressing inequities) of urban climate finance; strengthening domestic markets so that cities and local governments can better access both public and private finance; rapidly scaling urban adaptation finance especially in cities of Emerging Markets and Developing Economies; and improving data and tracking of urban finance flows and needs. 

Cities have to urgently build their capacities to identify climate risks and improve the resilience of essential services such as water and energy. Governments have to collaborate with the private sector to mobilise innovative financial instruments such as blended finance, green bonds, and resilience bonds which can attract private investments and diversify risks on adaptation finance. In terms of steps, the following could be undertaken:

• The Union and state governments, as well as government agencies should develop and adopt low-emission climate-resilient norms for design, development, construction, and maintenance of urban infrastructure.

• These norms should be mandated at every level as the default for urban local bodies and other urban parastatals. 
• The preparation and implementation of a city-based climate action plan should be mandated for all cities, in a phased manner if necessary, and these should be integrated with the Development Plan, Comprehensive Mobility Plan, and other plans of cities.
• To finance the climate action plan, urban local bodies should adopt the Climate (Green) Budgeting System as Mumbai has started (see box below). 
• A special line of grant should be introduced by the union and respective state governments to fund critical climate mitigation and adaptation activities identified in the plans. 
• Green municipal bonds issued by urban local bodies to finance climate projects should be given government or Public Securities status, present incentive should be increased, and the cap should be removed.
• The Corporate Social Responsibility rules should be amended to reserve a certain percentage of CSR Funds for funding climate-resilient urban infrastructure undertaken by urban local bodies or parastatals.
• The preparation and publication of the annual report on the implementation of climate action plans should be made mandatory, and a system should be instituted to independently audit the plans and their implementation.

It is imperative that all stakeholders – but especially urban local bodies – start paying close attention to climate finance as a necessary step in climate action. 

Dr Ravikant Joshi is an urban finance and management specialist. He is the former chief accounts officer of Vadodara Municipal Corporation with more than 40 years of experience. He has worked in India and abroad for all types of governments, multilateral and bilateral agencies. He has taught in various universities and institutions and has also worked with many civil society organisations. 

Cover photo: Wikimedia Commons