Cities and Markets Can Fight Climate Change

Lima, site of the UN's climate change conference, is an example of how cities can work with capital markets to invest in emissions-reducing projects.
Peru's economic growth rate is top-ranked in South America.

Representatives from every national government are meeting this week to work toward a global climate agreement, and the location of the conference -- Lima, Peru -- offers critically important lessons for negotiators.

In the debate over how to address climate change, there is a glaring gap between the levels of carbon reductions the world must achieve to avert the worst consequences of global warming and the levels of reductions that national governments have been willing to make thus far. Bridging that gap will require cities and businesses -- the chief drivers of carbon emissions -- to play a leading role, and Lima's experience points the way forward.

Lima recently secured an enhanced credit rating with the help of technical assistance from the World Bank and other agencies. That may not sound like a major advance, but consider: Without the credit rating, borrowing to invest in mass transit was too expensive for Lima's government. With the credit rating, the city raised $130 million to upgrade its bus rapid transit system. That will significantly reduce carbon pollution from one of the most extensive transportation systems in the world, while also helping to reduce traffic congestion, which saves companies money and improves productivity.

Investing in modern, low-carbon infrastructure is one of the best ways to reduce emissions while also spurring economic growth. Such investments hold enormous benefits for urban residents and businesses, but local governments are often unable to make them because they lack access to the credit markets.

QuickTake Climate Change

The World Bank estimates that only 4 percent of the 500 largest cities in developing countries have internationally recognized credit ratings, and only 20 percent have a domestic rating, leaving them with little ability to finance infrastructure improvements. Lima is one of the few cities in the region to obtain an enhanced credit status, but there are hundreds of cities all over the world that would benefit from this same step.

Providing cities with access to capital markets is unusually cost-effective. The $130 million that Lima raised was possible because the World Bank spent $750,000 providing the necessary technical assistance. In the field of global development, where resources are scarce, enhancing credit ratings offers attractive opportunities for countries and aid organizations alike.

Lima should be just the beginning. In the developing world alone, cities have about $700 billion in annual demand for sustainable infrastructure projects -- such as transportation, energy, waste treatment and water supply. Providing them with access to credit could become one of the most effective ways to fight climate change, drive economic growth and -- by reducing pollution -- improve public health.

About 70 percent of carbon emissions come from cities, and a recent report found that if the world's cities took bold yet achievable actions to reduce their emissions, the collective impact would be equal to halving global coal use over the next 40 years. With greater access to credit, those reductions would be far steeper.

Negotiators at the Lima conference should ensure that access to credit is squarely on the agenda. If more national governments empower cities to participate in capital markets, they will strengthen their economic engines while increasing their ability to set and achieve ambitious carbon reduction targets. There are few steps that offer such potential for progress at so low a cost.

There are also steps nations can take to unleash private sector investment in modern, low-carbon infrastructure -- and they need not involve subsidies. In much of the world, renewable energy sources are already more affordable than fossil fuels, a trend that is likely to continue as technology advances and production costs fall.

Consider Peru's southern neighbor, Chile. It is home to several solar companies that are building more than a gigawatt of new energy generation projects, which power cities and major industries, including the country's large copper mines. Solar -- long considered a niche energy source -- will form the backbone of the nation's low carbon power grid. This development was occurring before Chile enacted a modest carbon tax this year, which will spur even greater investment in renewable energy.

The changing market for renewables is creating opportunities for other nations to follow a similar path. A recent study by Bloomberg New Energy Finance found that Turkey could build a national clean energy market for roughly the same cost as its planned fleet of conventional coal plants, but with the added benefits of cleaner air, an improved balance of trade, more manufacturing jobs and lower carbon emissions. The same is true for so many countries around the world.

The recent climate agreement reached between the U.S. and China was an important step forward for global cooperation, because for the first time the world's two largest energy users came together, formally recognized a shared interest in tackling the issue and made concrete climate-related commitments.

The conference in Lima offers a great opportunity for national leaders to build on that progress. Cities and businesses are natural partners for national governments. After all, most businesses are in cities and most cities are on coastal waters. Both have the incentives to mitigate the worst effects of climate change. And with the right tools, both can help lead the way toward the ultimate goal of a global climate agreement in Paris next year.