www.IFC.org/ThoughtLeadership Note 12 | September 2016 NEW WAYS FOR CITIES TO TACKLE CLIMATE CHANGE Cities, which are home to half of the world’s population, are on the front lines of climate change. Extreme temperatures, storms, and floods have a higher impact in crowded urban areas. And cities in emerging economies will bear an even greater burden of climate change threats. Given their vulnerability, as well as their ability to affect change, cities will be key players in shaping efforts to lessen the impact of climate change. Now a number of new initiatives are helping urban leaders better assess and respond to climate risks. In addition to the human and environmental cost of the changing of any one of these systems threatens all of them.2 In emerging climate and warmer temperatures, cities must also contend with countries this interdependence will grow as the size of cities major financial losses when natural disasters hit. About half of the themselves explodes. world’s population lives in urban areas, which are hubs of economic activity. These areas produce about 80 percent of the By 2030 the world will be home to 41 megacities, each with more world’s gross domestic product and nearly 70 percent of global than 10 million residents, and 90 percent of these megacities will emissions.1 As a result, a single major storm can cause billions of be in emerging economies.3 Of the top 20 cities at risk from dollars in economic losses, not to mention the devastating loss of natural disasters such as droughts, floods, and heat waves, 13 are life in urban areas to events such as heat waves. in emerging economies, including seven in China, according to the Lloyd’s of London City Risk Index. 4 By 2060, more than a Well planned urban growth and infrastructure development allow billion people will be living in cities in low-lying coastal zones, cities to prepare themselves for climate change. But the opposite the vast majority in developing countries.5 is also true: Unmitigated and haphazard growth can contribute to and exacerbate climate change risks for cities. A Multi-Layered Approach Because of their complexity, cities will need to tackle the threats People, transport, energy, water, and communication systems are from climate change on multiple fronts, finding ways to protect especially interconnected in urban areas, meaning that the failure transport, water, energy, buildings, and other infrastructure. Upfront investment in cleaner energy, transportation, and resilient infrastructure projects can ensure that a severe event doesn’t The Climate Departure Date and Emerging Markets become a physical or financial disaster. This upfront investment The climate departure date indicates the future date in which can help minimize emissions and the climate impact of urban the average temperature of the coolest year is projected to be growth across water, transport, buildings, and other infrastructure warmer than the average temperature of the hottest year critical for well-managed urban development. between 1960 and 2005. Essentially it marks the date when the shift to a new climate—as a result of global warming—is For example, a range of design and construction measures can complete. For the earth as a whole that date will be 2047. But protect buildings against climate change in the initial planning emerging market cities face more intense consequences from stage. Some of these measures are simple and low-cost, such as climate change. For major cities in emerging countries, the better insulation and windows on all buildings; more efficient climate departure date will occur years earlier—2029 in heating and cooling systems; the adoption of small-scale Lagos, 2034 in Mumbai, and 2036 in Cairo. renewable energy sources, particularly on rooftops; making sure Source: Max Fisher, “Map: These are the cities that climate change will hit first,” doors open out to be less vulnerable to high winds; closely spacing Washington Post, October 9, 2013. Climate Departure Dates around the World Source: Max Fisher, “Map: These are the cities that climate change will hit first,” Washington Post, October 9, 2013. nails in new construction projects; or installing critical building light rail and bike lanes. In addition, they can promote the use of components on higher levels above flood heights. efficient vehicles and cleaner fuels. Others, such as using fireproof materials or restricting For water—and especially wastewater—cities can lower the development altogether in some areas, are more politically effects of climate change through increased recycling and complex and expensive—but even so, they may be worthwhile efficiency measures. They can even convert gas produced by investments that are justified in economic terms. In particular, landfills into energy. Coordinated governance and planning will poor transportation planning can lead to increased congestion and be critical to ensuring that cities grow in a way that decreases pollution. But a number of initiatives can help keep cars off of the climate risk and increases sustainability. By creating standards road and lower overall emissions. City leaders can invest in a and strengthening regulations, urban leaders can encourage range of climate-smart public transportation initiatives such as developers to include measures that integrate climate considerations into their projects. Green building programs, for This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. example, have helped improve the energy efficiency of homes and While creditworthiness seems at first to have little to do with offices. New standards that make structures more resilient to helping cities deal with climate change, good credit ratings are climate change could be incorporated into existing green building essential for accessing the capital that cities need for infrastructure programs. Urban leaders, especially in emerging economies, can projects, including public transit, water, and sanitation systems. also more strongly enforce existing development regulations, Many emerging nations in the Caribbean and Southeast Asia including building codes and land use controls, among others. could come under financial pressure because of climate events, according to Standard & Poor’s. 6 Only about 4 percent of the The World Bank and the Global Facility for Disaster Reduction largest 500 cities in emerging markets are currently creditworthy and Recovery developed the CityStrength Diagnostic to help city in international financial markets.7 The ability to access finance planners and other stakeholders identify the increasingly complex can have a significant impact on a city’s ability to invest in range of climate shocks and stresses that a city may face. This measures to mitigate climate change. diagnostic also identifies high-priority actions and investments that can help make a city more resilient to climate change. The The World Bank’s City Creditworthiness Initiative is a multi- diagnostic identifies critical gaps and potential weaknesses within agency effort with support from the Rockefeller Foundation, a city, regardless of its size, institutional capacity, or phase of which addresses credit barriers to green growth in 300 cities in 60 development. low and middle-income countries. As of 2016, representatives from more than 80 cities in more than 20 countries have attended Once disaster strikes, however, insurance can help cities buffer one of the program’s City Creditworthiness sessions, which the economic and financial costs of climate change. With include in-depth training on climate-smart capital investment regulations and incentives that encourage insurers to design and plans and actions to enhance credit ratings of cities. price policies to be effective against climate change, policymakers in emerging countries can help protect against these threats. The Green Climate Fund is also funding projects that allow cities Insurance can also provide coverage for business continuity and to invest in infrastructure projects that help them mitigate the the potential loss of revenue for private companies and for the effects of climate change. One of its first projects is in the Satkhira public sector in terms of tax revenue losses. Both features are district in Bangladesh. The fund plans to invest in measures that included in the World Bank Group’s Pandemic Emergency benefit the lowest-income groups such as projects that improve Facility. city drainage, flood protection, water supply, sanitation, and transport in slums. International cooperation City leaders from around the world are cooperating to share City efforts experiences and strategies to address climate change. The 100 With most of the global population and capital goods concentrated Resilient Cities program supports cities selected through a in urban areas, cities are key to social development and economic competitive process with expertise, a resilience strategy, and a prosperity. They are drivers of national economic growth and network for sharing experience with other member cities. The R20 innovation and act as cultural and creative centers. But Regions of Climate Action, the C40 Cities Climate Leadership urbanization also brings challenges. Group, and the ICLEI network are other similar programs. In 2015 design firm re:focus partners created the RE.bound The R20, for example, set up a large-scale efficient street lighting program, which supports efforts to raise private financing for program in Brazil in 2013. The program installed locally infrastructure investments to mitigate the effects of climate manufactured light emitting diode lamps that can cut utility bills change. The program, designed by re.focus in partnership with by up to 65 percent. The savings from the program outweighed private financial institutions, adapts the model of catastrophe the costs to city budgets. R20 plans to replicate the program in 13 bonds to climate risk, creating resilience bonds. It starts with an cities across the country. analysis that identifies potential improvements to a design project and then examines the financial benefits of those improvements The Sendai Framework for Disaster Risk 2015-2030 sets specific for various stakeholders such as bond sponsors, project targets for cities to meet in order to better protect against natural developers, investors, and other public and private players. The disasters and warming temperatures. The United Nations Office program compares costs to a city if a particular trigger event for Disaster Risk Reduction’s Making Cities Resilient Campaign occurs with and without the project. provides a 10-point checklist for measuring the progress of local governments. It also helps cities work with the private sector to meet climate change goals. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Resilience bonds use the model of a catastrophe bond to help cities finance overall market for green bonds and may be a infrastructure projects that reduce the threat of climate change. promising new source of finance for cities.10 After floods in 2007, private insurers in London began excluding properties built after 2009 from flood insurance policies. The city of London, however, responded by working with insurers to create Flood Re, a reinsurance pool that covers properties at high risk of flooding. Flood Re is an original example of how private insurers can work with city governments to help protect people who face high risks from climate change. Starting in 2016, households under low to normal flood risk still have standard insurance, while the 1- to-2 percent highest risk properties can be passed to Flood Re by insurers.11 Financed by public funds in cases of extreme events, the program is expected to help phase out high- risk assets and incentivize flood proof building in risky areas. Source: re:focus partners Conclusion In a coastal protection project, for example, re:focus would look Cities are already on the front lines of responding to climate at how various locations and design parameters would change the change. As they become home to a steadily greater share of the effectiveness of a wall to protect a city against storm surges and world’s population in coming decades, the risks they face will whether the project would lower losses after a flood.8 only grow. In response, urban leaders have become vocal champions for climate action, preparing their cities against In July 2014 Washington D.C.’s water authority issued a $350 climate change threats with a range of public and private million bond with a 100-year maturity in order to upgrade its initiatives. water and sewer system. The bond, the first municipal century bond issued by a U.S. water utility, won a green certification Alan Miller is an independent consultant on climate change finance and because of its environmental benefits, which include reducing policy, retired from the IFC Climate Change Business department (astanley92@gmail.com). sewer outflows to improve water quality, lowering flooding risks, and boosting waterfront biodiversity.9 The concept of Stacy Swann is the former head of IFC’s Blended Finance Unit of the bonds for improving urban resilience is growing as part of the Climate Change Business Department, and is currently the CEO of Climate Finance Advisors, LLC (sswann@climate-fa.com). 1 K. Seto, S. Shakal, A. Bigio, H. Blanco, et al, 6 S&P Global Market Intelligence, “Storm Alert: Natural Disasters Can “Chapter 12: Human Settlements, Infrastructure and Spatial Planning,” in Damage Soverign Creditworthiness,” September 2015. Climate Change 2014: Mitigation of Climate Change. Contribution of 7 The Global Commission on the Economy Climate, “Better Growth, Working Group III to the Fifth Assessment Report of the Better Climate: The New Climate Economy Report,” 2014. Intergovernmental Panel on Climate Change, 2014. 8 re.focus partners, “Re.bound Program Report,” December 2015. 2 9 Nick Mabey, Rosalind Cook, Sabrina Schulz, and Julian Schwartzkopff, DC Water and Sewer Authority, July 2014. E3G, “Underfunded, Underprepared, Underwater? Cities at Risk,” 2014. 10 Cecilia Reyes, “Cities and Climate Change – the Funding Gap,” 3 United Nations, Department of Economic and Social Affairs, Population Environmental Finance, August 26, 2016 11 Division, World Urbanization Prospects: The 2014 Revision. Katie Jenkins, Swenja Surminski, Jim Hall, and Florence Crick, 4 Lloyd’s City Risk Index, 2015-2025. “Assessing surface water flood risk and management strategies under 5 Barbara Neumann, Athanasios T. Vafeidis, Juliane Zimmermann, and future climate change: an agent-based model approach,” Centre for Robert Nicholls, “Future Coastal Population Growth and Exposure to Climate Change Economics and Policy, February 2016. Sea-Level Rise and Coastal Flooding,” PLOS ONE, 2015. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.