Around the world, cities are growing at an unprecedented rate. According to the UN, 68% of people will live in cities by the year 2050 (Ritchie and Roser 2019). And yet, many cities lack the necessary financial resources to deliver basic services consistently and universally to their citizens, including housing, clean water, electricity, education, and transportation. On top of this, cities face an additional challenge: the current and future impacts of climate change that will disrupt the efforts of city officials to deliver a safe, prosperous, and equitable future for their populations.
Many cities around the world understand the impact of climate change in urban areas and are committed to deliver climate action. A growing number of cities have developed or are developing climate action plans and have set net zero targets. Networks of cities such as the Global Covenant of Mayors for Climate & Energy, the Resilient Cities Network, C40 Cities, and FMDV are showcasing the role of cities in the global fight against climate change. Despite this increasing focus on the role of cities, cities around the world face incredible challenges in turning their ambition to action. Some of the main challenges faced by cities are:
- The urban finance gap: The New Climate Economy estimates that USD 90 trillion will be required for cities to invest in sustainable urban infrastructure between 2015 and 2030 (NCE 2016). But currently only USD 384 billion is being channelled into sustainable infrastructure financing per year, compared to the approximate USD 5 trillion of investment required (Negreiros et al. 2021). City governments therefore face an urgent task to increase green investment at the municipal level to help address this gap and transition cities to greener places for their citizens.
- Lack of knowledge and capacity on green budgeting: Even though many cities have developed climate action plans, many are constrained by a lack of knowledge and capacity to turn plans into action. Cities often face a skills gap, as well as methodological and technical gaps, in their planning and finance departments to (i) integrate carbon accounting and climate analytics into budgeting (ii) identify measures and projects that meet with support mitigation and adaptation goals, and (iii) develop financing strategies, including using innovative financing instruments and policies to generate revenue and deliver priority investments.
- Lack of pipeline of bankable projects: One of the biggest challenges faced by cities is the lack of available green projects that are ready for investment. Project pipelines are groups of projects that are in early-stage development prior to project commissioning (OECD 2018). They showcase upcoming opportunities for investors, providing them with early information on the proposed investment opportunity to attract financing for the project. Cities face two common challenges with project pipelines for green investment: an overall lack of supply of green projects and a lack of visibility of projects that are bankable and ready for finance.
As cities look at different options to finance their climate action projects, they need to ensure that their budgets are aligned with their climate goals. This policy brief aims to provide guidance on how cities can use green budgeting to identify suitable green investments.
Section 2 introduces green budgeting and highlights an example from Oslo of how green budgeting has been used to prioritize and deliver concrete climate projects. Section 3 outlines the strategic rationale for green budgeting and explains why cities should introduce green budgeting practices. Section 4 provides a step-by-step overview of the green budgeting process to introduce city officials to how it can be undertaken in practice. Section 5 outlines cross cutting enabling conditions that cities can implement to support green budgeting. Section 6 concludes with some recommendations on next steps for cities.