Low carbon cities Exploring new crediting a ­ pproaches to deliver carbon and climate finance Low carbon cities Exploring new crediting a ­ pproaches to deliver carbon and climate finance This report was prepared for the Carbon close collaboration and significant contribution to Partnership Facility of the World Bank and was organizing the ideas of the first draft of the report. led by Alexandrina Platonova-Oquab (World Bank) with the support of Ecofys, a Navigant company. The team would like to thank colleagues in the climate, carbon finance, and urban communities: The Ecofys team included Noémie Klein, Eric James Alexander (C40), Agnes Biscaglia (Agence Woods, Jialiang Zhang, Kristen Brand, David de Française de Développement), Cesar Carreño Jager, with inputs from Maarten Neelis and Ian (ICLEI), Miguel Rescalvo (Networked Carbon Trim. Markets), Puttipar Rotkittikhun (Thailand Greenhouse Gas Management Organization), and Klaus Oppermann (World Bank) provided Jorge Wolpert (National Housing Commission of substantial guidance and support in development Mexico) for sharing their vision and experience of this report. at various World Bank-led technical workshops, including “Implications of the Paris Agreement This work greatly benefited from the valuable for a New Generation of International Market contributions and perspectives of the following Mechanisms” held in Paris in 2016 and “Mobilizing World Bank staff: Martina Bosi, Nick Bowden, Climate Finance for Urban Mitigation” that took Peter Ellis, Stephen Hammer, Silpa Kaza, Taisei place at the Innovate4Climate (I4C) conference in Matsuki, and Juha Seppala. Special thanks is due Frankfurt in 2018. to Felicity Spors (now with Climate KIC) for her 2 LIST OF ABBREVIATIONS AND ACRONYMS °C Degrees Celsius G GDP Gross Domestic Product GHG Greenhouse Gas A AV Autonomous vehicles GIS Green Investment Scheme GPC Global Protocol for Community-Scale GHG Emissions B BAU Business-as-Usual GPSC Global Platform for Sustainable Cities GtCO2 Gigaton of Carbon Dioxide C CCFLA Cities Climate Finance Leadership Alliance GtCO2e Gigaton of Carbon Dioxide Equivalent CDM Clean Development Mechanism CER Certified Emission Reduction I ICLEI ICLEI—Local Governments for Sustainability CO2 Carbon dioxide IEA International Energy Agency CO2e Carbon dioxide equivalent IEA ETP IEA Energy Technology Perspectives COP Conference of the Parties IPCC Intergovernmental Panel on Climate CUD Compact Urban Development Change CURB Climate Action for Urban Sustainability J JI Joint Implementation D DSM Demand-Side Management K km Kilometer E ESMAP Energy Sector Management Assistance Program L LCC Low Carbon City ETS Emissions Trading System LCCDP Low Carbon City Development Program EV Electric Vehicle LED Light-Emitting Diode Low carbon cities 2018 3 M MAC Marginal Abatement Cost T t Ton (note that, unless specified otherwise, ton in this report refers to a metric ton = MRV Monitoring, Reporting and Verification 1,000 kg) MtCO2e Megaton of Carbon Dioxide Equivalent tCO2 Ton of Carbon Dioxide tCO2e Ton of Carbon Dioxide Equivalent N NDC Nationally Determined Contribution TGO Thailand Greenhouse Gas Management Organization P PMR Partnership for Market Readiness TOD Transit-Oriented Development PoA Programme of Activities TRACE Tool for Rapid Assessment of City Energy PPP Public–Private Partnership T-VER Thailand Voluntary Emission Reduction PV Photovoltaic Program R RBCF Results-Based Climate Finance U UCCRN Urban Climate Change Research Network RBF Results-Based Finance UK United Kingdom UNEP United Nations Environment Programme S SBSTA Subsidiary Body for Scientific and UNESCO United Nations Educational, Scientific and Technological Advice Cultural Organization SCP Scaled-up Crediting Program UNFCCC United Nations Framework Convention on Climate Change SDG Sustainable Development Goal US United States W WRI World Resources Institute Low carbon cities 2018 TABLE OF CONTENTS List of abbreviations and 2 3.3.3 Data limitations 3.3.4 Tracking climate action 35 35 acronyms 3.4 Summary 38 Executive summary 6 4. Role of crediting 40 approaches to scale up 1. Introduction 14 1.1 Objectives and scope of the report 14 urban climate mitigation 1.2 Structure of the report 16 4.1 What crediting approaches are 40 4.1.1 Market mechanisms 41 2. New opportunities 17 4.1.2 RBCF 42 offered by the Paris 4.2 Why the first generation of crediting 44 mechanisms had a limited success to Agreement deliver in cities 4.3 How scaling up urban crediting approaches 49 2.1 Explicit invitation to scale up mitigation in 17 impacts risks cities 4.3.1 Risks related to the use of crediting 49 2.2 Urban climate action included in Nationally 17 approaches Determined Contributions 4.3.2 Urban risks 52 2.3 New impetus for international cooperation 19 4.4 Summary 53 through Article 6 mechanisms 2.4 Summary 20 5. Preconditions for 54 3. Cities and climate 21 effective use of crediting change mitigation approaches in cities in 3.1 The importance of cities for climate 21 the context of the Paris change mitigation 3.1.1 An urban world 21 Agreement 3.1.2 The GHG mitigation potential of cities 21 5.1 Ensure an appropriate incentive structure 55 3.1.3 The need to act: the problems of lock-in 22 5.2 Go beyond technology-based interventions 56 3.1.4 Opportunities for urban mitigation 23 5.3 Complement other climate-related and 56 3.1.5 The finance gap 28 broader sectoral policy and financing 3.2 Governance, control, and coordination 29 instruments 3.2.1 Levels of action 29 5.4 Be embedded from the planning stage 57 3.2.2 Vertical and horizontal integration 31 onward 3.3 GHG accounting and tracking climate action 32 5.5 Mitigate and distribute risks 59 3.3.1 Defining cities’ boundaries 32 5.6 Plan for future climate policy instruments 64 3.3.2 Determining key emission drivers within 34 5.7 Summary 64 city boundaries 6. Way forward 65 16 First generation crediting mechanisms: Focus on technology-based intervention and 45 6.1 Design of flexible implementation modalities 66 exclusion of sectoral and policy crediting for urban programs using crediting 17 Preconditions for effective use of crediting 54 approaches approaches in cities in the context of the Paris 6.1.1 Decentralized modality 67 Agreement 6.1.2 Centralized modality 68 18 Full cycle of climate-related actions to be 58 6.1.3 Policy-driven modality 68 supported by multiple financial flows 6.2 Targeted policy and methodology research 72 19 Structure of the Czech Building Energy 61 6.3 Piloting 74 Efficiency GIS 20 Structure of LCC Program in Thailand 63 7. Conclusions 76 21 Enabling a new generation of crediting approaches in cities in the context of the 65 Paris Agreement 22 Implementation modalities for urban programs 66 using new crediting approaches: addressing Figures diversity 1 Preconditions for effective use of crediting 8 23 Example of potential piloting activities for a 75 approaches in cities in the context of the scaled-up crediting approach under Article 6 Paris Agreement of the Paris Agreement 2 Implementation modalities for urban 10 programs using new crediting approaches: Tables addressing diversity 1 Scaling up urban mitigation: the impact on 9 3 Enabling a new generation of crediting 13 crediting and urban risks approaches in cities in the context of the 2 Summary of a review of tools to assess 38 Paris Agreement integrated urban GHG mitigation strategies 4 Scope and objectives of the report 15 3 Scaling up urban mitigation: the impact on 50 5 Summary map of regional, national, 18 crediting and urban risks and subnational carbon pricing 4 Main features of the LCCDP in Rio de Janeiro 59 initiatives implemented, scheduled for 5 Main features of the Czech Building Energy 61 implementation and under consideration Efficiency GIS (ETS and carbon tax) 6 Main features of the LCC Program in Thailand 62 6 Status of NDCs with considerations for 19 7 Methodological approaches to ensure 72 actions in cities environmental integrity and facilitate the 7 Potential urban impact on global cumulative 23 accounting of the contribution of urban CO2 reductions in the IEA ETP 2 Degree mitigation actions to implement NDCs scenario (2DS) 8 Emission reduction potential from different 24 mitigation measures by sector Boxes 9 Potential sources of finance for municipalities 29 1 Expanding coverage of carbon pricing 18 to finance climate-related projects 2 Examples of application of CURB tool and EDGE 36 10 Hierarchy of drivers of urban GHG emission 30 3 Urban CDM—Numbers and examples 44 and policy leverages by urban-scale decision 4 Egypt Vehicle Scrapping and Recycling PoA 46 making 5 Caixa Solid Waste Management CDM PoA 48 11 Sources and boundaries of city GHG 33 6 The Low-Carbon City Development Program 59 emissions (LCCDP) in Rio de Janeiro (Brazil) 12 Achieving urban mitigation at scale: a 39 7 Czech Green Investment Scheme (GIS) 61 diversity of options program 13 Quantification of emission reductions/ 40 8 Low-Carbon City Voluntary Offsetting (LCC) 62 avoidance under crediting Program in Thailand 14 Example of a RBCF mechanism for 43 9 Building Energy Efficiency Policy Reforms in 71 residential solar power systems Morocco: The potential to mobilize carbon 15 Estimated disbursements from the 12 largest 43 or climate finance using crediting to support RBCF funds integrated policy approach 6 EXECUTIVE SUMMARY By 2050, two-thirds of the planet’s population ff By replicating discrete measures at sectoral and will live in urban centers, and nearly 90 percent subsectoral levels, e.g., dedicated investment in of the 2.5 billion new urban dwellers will live in mass transit, building energy efficiency programs, Africa and Asia.1 The world’s urban areas were or low energy street lighting. responsible for around 70 percent of greenhouse ff By broadening the scope of action to gas (GHG) emissions in 2013, and that number interconnected sectors to encourage synergy could grow by 50 percent by 2050 if current trends between measures, and facilitate a holistic continue. 2 approach to service provision, e.g., community- level energy programs that include smart In 2015, world leaders committed to limiting the buildings, energy-efficient appliances, LED street global temperature increase to well below 2°C lighting, and renewable energy. and to pursuing efforts to reach a 1.5°C limit in the ff By focusing on policy levers that lead to context of the Paris Agreement under the United transformational impacts in cities. Urban Nations Framework Convention on Climate planning that promotes compact cities, transit- Change (UNFCCC). The Paris Agreement invites oriented development (TOD) and mixed land- cities to scale up climate action, and over two-thirds use zoning is an example of such a policy lever. of participating countries’ Nationally Determined Contributions (NDCs) mention urban action. More than 70 percent of the global low emissions and climate-resilient infrastructure will be built According to the International Energy Agency in urban areas, at an estimated cost of US$4.5 (IEA), cities will represent 70 percent of the cost- to US$5.4 trillion per year.4 As highlighted by effective abatement potential of energy-related the Cities Climate Finance Leadership Alliance GHG emissions by 2050.3 Cities play various roles (CCFLA), scarce climate finance resources must in supporting urban mitigation, from policy maker, be used strategically to both increase the amount to regulator, service provider, and partner. Scaling of funding available and as part of a process of up urban mitigation will require action within and enabling and levering existing and new financing across sectors to replicate and broaden the scope to flow from a broad range of sources, most of impacts. Studies have highlighted the potential importantly from the private sector. It is essential for emission reductions in cities in the energy for cities to diversify and blend their sources of production, buildings, transportation, land use, and finance and tap the full spectrum of resources waste management sectors. The interconnected available to raise funds for climate action. However, nature of potential urban mitigation measures successful funding for climate action—notably in means that scale-up can be realized at multiple developing countries—needs to overcome barriers levels: such as the lack of creditworthiness of subnational governments, insufficient access to capital markets and international mechanisms, and lack of financial and technical skills and human resources. 1 Source: United Nations. 2018. 2018 Revision of World Urbanization Prospects. 2 Source: IEA. 2016. Energy Technology Perspectives 2016—Towards Sustainable Urban Energy Systems. Paris: IEA. 4 Source: CCFLA. 2015. State of City Climate Finance 2015. New York: 3 Source: IEA. 2016. Cities Climate Finance Leadership Alliance (CCFLA). Low carbon cities 2018 7 The complex and diverse modes of governance, Crediting approaches, mainly through the service delivery, infrastructure investment, and internationally regulated carbon market asset ownership of cities mean that there is mechanisms under the Kyoto Protocol of the no simple approach to prioritize, finance, and UNFCCC, have supported billions of emission implement urban mitigation policies and actions, reductions so far, but their application to cities has and to quantify their mitigation impacts. The been limited. Most notably just under 2 billion tCO2e report contributes to research on the ways to use have been reduced under the Clean Development the new generation of crediting approaches to Mechanism (CDM) of the Kyoto Protocol. However, deliver carbon and climate finance and nudge cities out of those, just over 109 million tCO2e were to incorporate climate change considerations in reduced in an urban context.7 Most existing urban planning, policy formation, and regulation. crediting mechanisms focus on a project-by-project Embedding climate-related issues in city strategies approach. Such an approach is limited in its ability can help align investor decisions and consumer to provide effective incentives for the creation and choices with transformational low-carbon urban enforcement of a conducive policy environment pathways. Cities need to work with public and private and to account for the GHG outcomes of combined partners, including different municipal organizations interventions. Combined with the complexity and and national authorities, to scale up mitigation. uncertainty of the crediting mechanisms, this This ensures compatibility of policy incentives and resulted in limited success in supporting mitigation regulations and enables a holistic vision for low- measures in cities. carbon and resilient urban development. The shape this collaboration will take needs to consider how The role that a new generation of crediting individual system operators (energy, water, transport, approaches could play in supporting urban etc.) operate. Cities also need international support to mitigation at scale needs to evolve from a narrow, develop appropriate financial instruments; strengthen marginal carbon-centric incentive toward a more capacities at the urban level to plan for action; help integrated form of financial support, cognizant of improve urban-scale GHG metrics, data collection, a broader policy environment and policy objectives and analysis methods; and bring implementation at the urban and national levels. Urban climate programs close to the investable grade. action is part of a broader policy and investment framework that covers economic and social The Paris Agreement shapes the way forward for development goals established at the national or a new generation of international collaborative urban levels, such as for job creation, environmental approaches to achieve climate change mitigation, and health protection, and energy performance. both under its finance (through Article 9) and The alignment of a scaled-up mitigation portfolio market (through Article 6) pillars. Crediting with wider priorities can facilitate both effective approaches rely on a baseline-and-credit technique operational and institutional design and mobilize to quantify the GHG emission reductions/avoidance sustained political and financial support. resulting from mitigation actions. They can be applied to support sectoral programs and policies that have demonstrable mitigation impact. Crediting 5 As per World Bank and Frankfurt School of Finance and Management. approaches can be used both in the international 2017. Results-Based Climate Finance in Practice: Delivering Climate Finance for Low-Carbon Development. Washington, DC: World carbon markets, in market mechanisms, and as a Bank, RBCF programs differ in the way they define “results” and modality to disburse results-based climate finance can use quantitative disbursement-linked indicators (e.g., MWh of installed renewable energy capacity, and energy saved by a group of (RBCF) when the GHG emission reduction metric rehabilitated buildings) and qualitative ones (e.g., the implementation of a policy or the strengthening of MRV capacity) or a mix between (tCO2e) is used to demonstrate the achieved unit-based indicators and qualitative milestone indicators. outcomes of the activities supported by RBCF.5 6 While there is no recognized definition for climate finance, it usually covers financing flows directed toward climate change mitigation or Therefore, crediting approaches can contribute to adaptation activities. 7 Only registered CDM projects considered. Urban context defined as efficiently allocate financial support to mitigation the following project types: Landfill gas, household energy efficiency, actions and leverage private finance.6 energy distribution, transport. Based on analysis of the UNEP DTU CDM pipeline: http://www.cdmpipeline.org/, accessed 10 April 2018. Low carbon cities 2018 8 The insights gained by RBCF—as a modality of their contribution to combating climate change and climate financing where funds are disbursed upon pursuing low-carbon urban development pathways. the achievement and verification of the pre-agreed Crediting approaches could in turn support set of climate action results—can bring useful RBCF to identify and measure the GHG emission elements to help achieve such an alignment. By reductions/avoidance that currently typically encompassing a full cycle of structural change from represent the targeted outcome of the RBCF. inputs to results, RBCF has demonstrated its ability to facilitate carbon pricing and market building, The success factors for crediting approaches support policy process to achieve NDCs, and leverage relate to the design of the supported programs, private sector activity and financing.8 If properly to the capacities of both the finance provider incorporated into the design and implementation and recipient, and to the ability to combine of crediting approaches, these RBCF features could financial support provided through crediting be instrumental in formulating recommendations with other sources of financing at different for the effective use of crediting, further enhancing stages of the program cycle (see Figure 1). Figure 1: Preconditions for effective use of crediting approaches in cities in the context of the Paris Agreement New opportunities offered by the Paris Agreement ‒‒ Explicit invitation to scale up mitigation in cities Preconditions for effective use ‒‒ Urban action included in NDCs of crediting approaches in ‒‒ Article 6 mechanisms that promote cooperation ‒‒ Article 9 that restates the importance of climate finance to support cities in the context of the Paris developing countries Agreement ‒‒ Ensure an appropriate incentive structure ‒‒ Go beyond technology-based A better understanding of urban mitigation challenges interventions ‒‒ Complement other climate-related and broader sectoral policy and financial ‒‒ Diversity of cities instruments ‒‒ Finance gap ‒‒ Be embedded from the planning stage ‒‒ Vertical and horizontal integration onwards ‒‒ GHG accounting and urban planning: increasing availability of tools ‒‒ Manage and distribute crediting and for urban planning, inventories, baseline setting, quantification of urban risks emission reductions, and MRV ff Crediting risks: institutional capacity, aggregation, regulatory requirements, monitoring ff Urban risks: planning uncertainty, Lessons from past crediting approaches in cities extended delivery periods, vertical/ horizontal coordination, financial and ‒‒ Complexity and uncertainty investment barriers ‒‒ Rationale for crediting based on marginal abatement perspective ‒‒ Plan for the future ‒‒ Ex post payments not directly contributing to address investment/ financial barrier 8 Source: World Bank and Frankfurt School of Finance and Management. 2017. Low carbon cities 2018 9 The report suggests that preconditions for the monitoring of performance of climate actions, effective use of crediting approaches to promote and ensure consistency with the approach to urban mitigation and leverage private sector track progress toward the achievement of the involvement include: NDC at both local and national levels. 5. Distribute risks so that actions can be taken at a 1. Ensure an appropriate incentive structure to level of governance where they would be most promote the most efficient allocation of financial efficient, both from economic and institutional resources and mitigation actions at the urban perspectives. level and crowd-in private finance. 6. Plan for the future to build readiness for 2. Go beyond technology-based interventions more comprehensive climate-related policy to achieve mitigation at scale and to facilitate instruments at the city or national levels, transformational impacts. including carbon pricing approaches, while 3. Complement other climate-related and broader minimizing transaction costs and ensuring sectoral policy and financial instruments and environmental integrity. be part of the urban policy processes to achieve transformational impacts while contributing to Given the intrinsic features and risks of the the overall efficiency of public resources. crediting approaches, the use of crediting could 4. Be embedded from the planning stage onwards be more effective to support interventions with to support the institutional capacity to implement reasonable urban risks, well embedded with evidence-based climate action planning and other urban development priorities (see Table 1). Table 1: Scaling up urban mitigation: the impact on crediting and urban risks Replicating Broadening Focusing on discrete measures scope of action to transformational at (sub-) sectoral interconnected actions level sectors Institutional capacity: ff Capacity requirements to design and implement a credible intervention to deliver results as per pre-agreed set of rules Low-Medium Medium-High High and planning Aggregation: ff Capacity to deliver pre-agreed mitigation outcomes within Crediting expected timelines and manage associated performance Low Medium High risks risks Regulatory risks: ff Compliance risk in relation to pre-agreed regulatory requirements and rules of crediting approaches Low Medium Medium-High Monitoring: ff Ability of the recipient to measure, monitor, and verify results in a robust and transparent way. Low Medium Medium-High Planning uncertainty: ff Risk associated with deviations from the pre-agreed implementation plans Low-Medium Medium-High High Extended delivery periods: ff Performance risk associated with the length of the period required to achieve mitigation impacts at scale Low-Medium Medium High Urban risks Vertical/horizontal coordination: ff Required amount of vertical/horizontal coordination between sectoral, municipal, and/or metropolitan and Low Medium High national institutions Financial and investment barriers: ff Risk associated with the limited access to finance to implement the mitigation activity Medium-High Medium-High High Low carbon cities 2018 10 Such interventions include actions that prioritize are likely to be supported more effectively by another and focus on the replication of discrete measures at type of mechanism. the (sub-) sectoral level (e.g., end-of-pipe mitigation options such as building retrofits or street lighting) Recognizing the diversity of cities, crediting and on interventions with a broader scope of action, approaches can be used by mitigation programs/ including the interconnected sectors (e.g., low- interventions that can take various forms, from a carbon communities and distributed renewables centralized modality led by the national government in the building sector). Table 1 shows how the risks and implemented by the city to a decentralized would evolve under a crediting approach for each of modality led and implemented by the city, or a the three scaling-up options introduced earlier. The modality more explicitly focused on policy levers risk profile relates to both the characteristics of urban (see Figure 2). Mitigation programs should ensure mitigation and the crediting approach itself. Risks are that the selected implementation modality allocates defined here as factors that might impact the ability risks related to the use of result-focused approaches of the carbon or climate finance recipient to deliver to finance in an appropriate manner. They should also emission reductions of quality (i.e., that represent real ensure that policies and actions are taken at a level emission reductions and maintain the environmental of governance where they would be most efficient, integrity of the instrument), in quantities as were both from economic and institutional perspectives, planned, and as per the agreed schedule and costs. to avoid complex coordination issues where possible. It is important to recognize that while the incentives Wider transformational interventions, such as provided by the crediting approaches may be the compact urban development (CUD) and TOD, call for most important in lower income countries, which a substantial revisit to the way crediting approaches are likely to be the ones urbanizing the fastest, can be combined with other sources of financing for their capacity to utilize these financing instruments cities. Without such an integrated, strategic approach effectively may also be the lowest. This reality to financing, covering the entire lifecycle of structural underscores the significant amount of effort needed change and policy processes to support the long- to build capacities and ensure pragmatic governance term delivery of results, transformational interventions and institutional solutions. Figure 2: Implementation modalities for urban programs using new crediting approaches: addressing diversity Decentralized Centralized Policy-driven National policy makers National policy makers Allocation of roles focus on demand lead on program National depends on policy creation & overall design & incentive targets & design level guidance structure Cities benefit Cities get support Cities lead on program from consolidated for enhanced design & prioritization international & implementation of actions City level domestic funds & enforcement Low carbon cities 2018 11 Crediting approaches need to be embedded in useful basis for tracking and have made significant the design of climate-related actions from the progress over the past few years, further work is start and combined with other climate-related needed to use them for crediting approaches and broader policy and financing instruments both under carbon market mechanisms and as through their lifecycle, starting with planning to a technique to measure and monitor mitigation monitoring of the performance of climate-related outcomes under RBCF. actions. Climate-related action is understood here as any action that helps mitigate and/or adapt to Taking action now to integrate crediting climate change. The actions can be implemented approaches as a vehicle for delivering carbon and through policies and interventions that target climate financing for urban mitigation could help climate change specifically and sectoral policies cities as follows: and actions that help achieve climate goals, such as energy policies, urban planning, land- ff Building readiness for crediting facilitates cities’ use regulations, and transport policies. Crediting contributions to national mitigation action approaches need to be part of the urban policy by mobilizing their mitigation potential and processes to have transformational impacts, triggering transformation impacts at the local including city planning. This can help plan and level. It thereby integrates cities in national develop implementation strategies and bring efforts toward NDC implementation and helps projects/interventions to investment readiness. To increase the ambition of mitigation action achieve this, international support is needed to help at both the city and national levels. It also improve urban-scale GHG metrics, data collection, helps avoid cities locking in carbon-intensive and analysis methods, and to develop appropriate infrastructure and moves toward a low-carbon financial instruments and strengthen capacities and resilient urban development pathway. at the urban level to plan for action and bring ff The result-focused actions can help reveal implementation programs close to the investable abatement costs of a variety of measures in grade. The application of crediting approaches can different urban sectors, in particular, those be supported by the growing body of tools that that are the main contributors to urban GHG cities can use to account for GHG emissions and emissions (transport, buildings, waste, and track their climate action, with the most notable water). This focus can also incentivize better examples of urban climate action planning tools quantification of impacts of more complex levers and inventories including the Global Protocol of urban emissions such as CUD and TOD. for Community-Scale GHG emissions (GPC), the ff The carbon price signal set through crediting Climate Action for Urban Sustainability (CURB) tool, approaches helps leverage private finance Calthorpe Rapid Fire/Urban Footprint, Compact and allocate efficiently the financial resources, of Mayors Emissions Scenario Model, City Climate both public and private, at the urban level. Planner, City Performance Tool, and Tool for Rapid Crediting approaches need to blend with Assessment of City Energy (TRACE).9 These tools, other instruments of (climate) finance and however, were not designed to track GHG impacts. effectively complement other climate-related As such, while existing tools can provide an initial policy instruments. Support to policies that 9 For CURB see http://www.worldbank.org/en/topic/urbandevelopment/ brief/the-curb-tool-climate-action-for-urban-sustainability; for Urban Footprint see https://urbanfootprint.com/; for Calthorpe Rapid Fire see http://getinsight2050.wpengine.com/wp-content/uploads/2015/07/ RapidFire_V_2.0_Tech_Summary_0.pdf; for the Compact of Mayors Emissions Scenario Model see https://www.wri.org/sites/default/files/ Compact_of_Mayors_Emissions_Scenario_Model.pdf; for City Climate Planner see https://cityclimateplanner.org/; for the City Performance Tool see https://www.siemens.com/global/en/home/company/topic- areas/intelligent-infrastructure/city-performance-tool.html; for TRACE see http://www.esmap.org/node/235. Low carbon cities 2018 12 create an enabling environment and target The proposed new global work program could behavioral change should also be covered cover issues such as: by blended instruments to allow for effective implementation. ff Design of flexible implementation modalities ff The establishment and use of monitoring, that capture the diversity of cities, with a reporting and verification (MRV) for GHG particular focus on opportunities to ensure emissions and mitigation outcomes can improve greater impacts of crediting approaches on the capacity to track achieved performance and the key levers of urban development and level of enforcement of policies and actions, infrastructure, such as urban planning and TOD, and provide feedback for future planning and and particularly in rapidly developing cities in additional policy reforms. MRV can also serve developing countries. broader policy objectives of cities and bring ff Targeted policy and methodology research multiple benefits by creating readiness to access to (i) fill in methodological gaps, (ii) improve other types of climate finance. understanding of the economics of urban ff By exploring new market mechanisms now, mitigation with a focus on the costs and urban actors have an early opportunity to help revenues of different types of urban mitigation design and pilot future market mechanisms, activities and relevant financing models, including under Article 6 of the Paris Agreement. including public-private partnerships (PPPs) Importantly, the experience learned from the for urban infrastructure investments, and (iii) implementation of Kyoto flexibility mechanisms explore how the crediting approaches would can inform future design. This maintains need to look to make a difference as a financial momentum between the key actors and informs instrument that provides an additional revenue broader discussions about the limitations of stream, depending on pricing of the mitigation current approaches and potential solutions. outcomes and (in the case of RBCF) monetization More widely, the city’s experience with crediting of other results. approaches can pave the way for using other ff Piloting to test the suggestions on the ground, market mechanisms and other forms of carbon build capacity at different levels in the pricing in the future. government and individual system operators, inform in-depth evaluation of the broader policy To realize these benefits and progress, further impacts of carbon and climate finance delivered research is needed to fill some important by crediting approaches, and give insights into remaining methodological gaps, and piloting how new crediting approaches could look. is needed to test options on the ground (see Figure 3). Further research could be carried out Piloting activities have the potential to test some under a global work program that would bring transferrable elements of the crediting approaches together leading urban initiatives, such as the but already show a significant commitment to a C40 Cities Climate Leadership Group (C40), ICLEI— policy outcome.10 Such transferrable elements can Local Governments for Sustainability (ICLEI), Global include institutions and methodological issues Platform for Sustainable Cities (GPSC), and CCFLA, and tools such as setting baselines, assessing as well as urban actors including cities, academia, the contribution of the city climate action to the think tanks, and financial institutions. Collaboration implementation of the NDC, refining emission will help ensure that the proposed solutions are simple, and practicable, and that they build on the existing practices. 10 Source: Partnership for Market Readiness (PMR). 2015. Low carbon cities 2018 13 Figure 3: Enabling a new generation of crediting approaches in cities in the context of the Paris Agreement Preconditions for effective use of crediting approaches in cities in the context of the Paris Way forward Agreement ‒‒ Design of flexible ‒‒ Ensure an appropriate incentive implementation structure Potential benefits for cities ‒‒ Go beyond technology-based modalities for urban interventions programs using crediting ‒‒ Build readiness for climate ‒‒ Complement other climate- approaches, including action related and broader sectoral centralized, decentralized, ‒‒ Reveal abatement costs policy and financial instruments ‒‒ Be embedded from the and policy driven ‒‒ Improve capacity to track performance of mitigation policy planning stage onwards concepts ‒‒ Provide early opportunity to ‒‒ Manage and distribute crediting ‒‒ Targeted policy and participate in Article 6 and urban risks methodology research to ‒‒ Prepare for broader market- ff Crediting risks: institutional capacity, aggregation fill gaps so as to leverage based instruments and scaling up, regulatory tools for urban planning requirements, monitoring and GHG accounting in ff Urban risks: planning crediting approaches uncertainty, extended delivery periods, vertical/horizontal ‒‒ Test through piloting integration, financial and investment barriers ‒‒ Plan for the future reduction calculation methods, and implementing While crediting approaches bring benefits that MRV systems in line with national tracking tools. go beyond mitigation, their success in cities will Cities around the world are working on defining ultimately rely on the demand for mitigation and implementing climate action plans, either outcomes (demand for credits for carbon finance unilaterally or under international cities initiatives. and willingness to pay for results in the form of Including crediting approaches in existing climate emission reductions for climate finance). At the action programs or key result-focused sectoral international level, this will depend on countries’ interventions and policies under development willingness to engage in international cooperative could help fast-track the testing. actions, where crediting approach is used as a modality of climate finance, and international Such a global work program, combined with transfers of mitigation outcomes in case of market piloting, would help build capacities on the mechanisms. In the context of limited international use of new crediting approaches as a vehicle demand for transferrable mitigation outcomes used to deliver finance through carbon markets or a for compliance, crediting approaches can be further RBCF approach to leverage private sector finance explored under the financing pillar of the Paris contributions in cities. It would also strengthen the Agreement, in particular RBCF, and domestically to dialogue between cities and national governments help compliance under a carbon tax, an emission to align efforts, policies, and instruments, and trading system, or other forms of domestic carbon to communicate on their contribution to NDC pricing, and/or to complement other sectoral urban implementation. policies and financing instruments. Low carbon cities 2018 14 1. INTRODUCTION In 2015, the global community pledged to limit 1.1. Objectives and scope the global temperature increase to well below 2°C compared to preindustrial levels and to pursue of the report efforts to reach a 1.5°C limit in the context of the United Nations Framework Convention on Climate This report discusses the use of crediting Change (UNFCCC) Paris Agreement. However, approaches to support global urban mitigation despite the commitment countries have put and to facilitate cities’ contributions to achieving forward, there remains an emissions gap between climate change goals established by countries the current emissions targets of countries and the in their nationally determined contributions required amount of emission reductions to achieve (NDCs) and in the Paris Agreement. To do so, the the 2°C goal. report focuses on the opportunities to increase the impact of the financial support that can be provided With dense populations and a diverse range of through crediting approaches, by using it as an emitting industries, activities, and services, as effective complement to other financial and policy well as being a locus of consumption of goods and instruments in urban sectors. These instruments services by their residents, cities are the origin of shape urban development choices and the behavior considerable greenhouse gas (GHG) emissions of individual infrastructure system operators, and can contribute significantly to bridging the investors, and consumers in key sectors that include, global emissions gap. Bloomberg found that action for example, urban development, transport, energy, in cities could close the emissions gap by at least and buildings. 10  percent in 2030 and by approximately 15 percent in later years. Cities can design and implement local The intent of the report is to provide preliminary policies and have influence over policy levers which options on how to use crediting approaches national actors may not have access to, for example to deliver carbon and climate finance (see urban planning and public transportation. They can Figure 4) and to identify areas that need further also directly implement national policies or enhance investigation.12 Specifically, the report explores the the effectiveness of policies enacted at the national following questions: level through independent action.11 Therefore, cities can be important partners in reducing emissions to ff How can crediting approaches help mitigation achieve and go beyond the reductions pledged at in cities, both under market mechanisms and the national level. results-based climate finance (RBCF)? ff How can the experience with the first generation Yet the complex urban policy and emissions- of crediting approaches and with RBCF help related environment of cities often makes financing inform the design of new crediting approaches these mitigation measures—including accessing in the urban context? climate finance—a challenge, and further support ff How can crediting approaches help quantify is needed if they are to achieve their potential in outcomes for RBCF where a GHG emissions meeting the goals of the Paris Agreement. metric is used? 12 This report does not consider the blended use of climate finance and carbon finance in detail. This topic will be addressed in a separate 11 SEI, Bloomberg Philanthropies. 2015. report currently under preparation by the World Bank. Low carbon cities 2018 15 Figure 4: Scope and objectives of the report MARKET MECHANISMS Market pillar ff (International) carbon of the markets Paris Agreement ff Compliance under an This report looks at: Carbon emission reduction ‒‒ How can crediting approaches regulation help mitigation in cities, both finance under market mechanisms and RBCF? URBAN CONTEXT ‒‒ How can the experience with ff Main levers of urban development the first generation of crediting ff Key sectoral policies CREDITING approaches and with RBCF ff Mitigation potential help inform the design of new ff Cities mandates & systems APPROACHES crediting approaches in the operators urban context? ff Financing instruments ‒‒ How can crediting approaches Finance pillar help quantify outcomes for of the RBCF where a GHG emissions Paris Agreement RBCF metric is used? Climate ff Nonmarket finance (international) modality to disburse climate finance Crediting approaches rely on a baseline-and-credit carbon price set by an emissions trading system technique to quantify the GHG emission reductions/ (ETS) or a carbon tax. Most notably, crediting avoidance resulting from mitigation actions. They instruments have been used successfully at the can be applied to support projects and sectoral international level under the Kyoto Protocol. programs and policies that have a demonstrable Dedicated, internationally regulated mechanisms— mitigation impact. Crediting approaches can be Clean Development Mechanism (CDM) and Joint used both in the international carbon markets, in Implementation (JI)—have been used to ensure market mechanisms, and as a modality to disburse environmental integrity of international transfers RBCF when a GHG emission reduction metric (tons of the mitigation outcomes (carbon credits) of of CO2 equivalent [tCO2e]) is used to demonstrate investment projects and programs. Crediting the achieved outcomes of the activities supported approaches are also increasingly used at the by RBCF.13 Therefore, crediting approaches can domestic level to provide flexibility under domestic contribute to efficiently allocate carbon and climate carbon pricing instruments. The Paris Agreement, finance to mitigation actions and leverage private through its Article 6, is viewed by many as providing finance.14 a new impetus for the use of crediting approaches among other market and nonmarket mechanisms Carbon finance. Historically, crediting approaches as a modality of international cooperative actions. have been used mostly in market mechanisms The report aims to investigate how crediting to provide flexibility to comply with mitigation approaches can support urban mitigation in new targets at reduced cost, compared to a (market) market mechanisms, including under Article 6 of the Paris Agreement. 13 As per World Bank and Frankfurt School of Finance and Management. Climate finance. The report also aims to explore 2017. Results-Based Climate Finance in Practice: Delivering Climate Finance for Low-Carbon Development. Washington, DC: World how crediting approaches can lend themselves to Bank, RBCF programs differ in the way they define “results” and can use quantitative disbursement-linked indicators (e.g., MWh of other international collaboration instruments that installed renewable energy capacity, and energy saved by a group relate to the finance pillar of the Paris Agreement of rehabilitated buildings) as well as qualitative ones (e.g., the implementation of a policy or the strengthening of MRV capacity) or a (Articles 5 and 9). Out of those, RBCF represents mix between unit-based indicators and qualitative milestone indicators. 14 While there is no recognized definition for climate finance, it usually one of the financing modalities that is considered covers financing flows directed toward climate change mitigation or in the literature to be particularly suitable to climate adaptation activities. Low carbon cities 2018 16 mitigation.15 Under RBCF, a donor or investor RBCF instruments based on different metrics disburses funds to a recipient with the achievement (i.e., other than tons of GHG emissions) to provide and independent verification of a pre-agreed upon flexibility for cities and influence a broader range set of mitigation and/or adaptation outcomes. of policy levers and actions. Such policy levers Crediting approaches can be used to identify and and actions are critical to the adoption of low- measure the GHG emission reductions/avoidance carbon urban development pathways, for example that are currently the typical outcome in RBCF. urban planning, compact urban development (CUD), transit-oriented development (TOD), deep Finally, the report also aims to bring some of the decarbonization of urban energy supply, and new insights gained by RBCF to expand the discussion on infrastructure for electric transportation. Including how to design new crediting approaches for cities. other metrics can also help countries include By encompassing a full cycle of structural change adaptation actions to improve urban resilience in from inputs to results, RBCF has demonstrated their NDC implementation. 
 its ability to facilitate carbon pricing and market building, support policy process to achieve NDCs, and leverage private sector activity and financing. 1.2. Structure of the report Therefore, these RBCF features could usefully inform the new ways of design and implementation Section 2 of this report discusses how the Paris of crediting approaches and help formulate Agreement and its adoption decision create a recommendations for the effective use of these favorable environment for climate action in cities. approaches, further enhancing their contribution Section 3 provides an overview of the role of cities to combating climate change and pursuing low- in urban mitigation and the challenges cities face to carbon urban development pathways. ramp up climate action. It also highlights some tools that facilitate the planning, delivery, and tracking This report mainly targets the carbon finance and of climate action in cities. Section 4 examines why RBCF community interested in urban mitigation, the first generation of crediting approaches had and governments willing to explore the new limited success to scale up urban mitigation and opportunities of using crediting approaches to what risks scaled-up crediting approaches bring mobilize carbon and climate finance. In the past when used in the urban environment. Based on decades of carbon markets, the use of crediting this analysis, Section 5 identifies the preconditions approaches for urban mitigation programs has been for the effective use of crediting approaches in perceived as high risk and low reward. However, cities, especially in the context of Article 6 of the given the importance of urban mitigation to achieve Paris Agreement and building on lessons learned global climate goals and the new context set by by deploying RBCF approaches in other sectors. the Paris Agreement and the NDC framework, this While this report emphasizes that demand for the report explores possible arguments in favor not only mitigation outcomes is one precondition for the of further exploring the potential for and possible success of crediting approaches, it also assumes forms of crediting approaches for urban mitigation, that the drive for increased ambition under the but also of piloting to test these concepts and Paris Agreement will contribute to creating such contribute to efforts around the important topic of demand both at the domestic and international urban mitigation. levels. Finally, Section 6 suggests possible ways to implement mitigation programs/interventions It should be noted that crediting approaches focus using crediting approaches in cities, and highlights on GHG emission reductions as the outcome. gaps that need to be addressed to operationalize However, it is important to explore in parallel these approaches, and potential solutions.   15 Source: World Bank and Frankfurt School of Finance and Management. 2017. Low carbon cities 2018 17 2. NEW OPPORTUNITIES OFFERED BY THE PARIS AGREEMENT 2.1. Explicit invitation 2.2. Urban climate action to scale up mitigation in included in Nationally cities Determined Contributions The Paris Agreement was signed in December 2015 The Paris Agreement introduces several new at the 21st Conference of the Parties (COP21) to elements that create a substantially different the UNFCCC and entered into force in November dynamic for domestic action and international 2016, less than 1 year after its initial adoption. cooperation as compared to the Kyoto Protocol.17 One World leaders agreed to keep the global average of the most significant is that all signatory countries temperature increase to well below 2°C for this (Parties) are now required to adopt commitments. century. Ambition was ramped up, with consensus These are communicated through the NDCs. NDCs reached on pursuing efforts to hold the increase to are voluntary commitments made by each Party 1.5°C. to reduce national emissions and adapt to the impacts of climate change. To ensure that countries’ Under Decision 1 on the Adoption of the Paris commitments are sufficient and are delivered, the Agreement, the cities are called to scale up their Paris Agreement requires each Party to prepare, efforts and support actions to reduce emissions, communicate, and maintain successive NDCs, and build resilience, and decrease vulnerability to the to strengthen their efforts at key stocktaking points. adverse effects of climate change. Decision  1 NDCs are therefore a critical component to achieve also recognizes the important role of providing the goals of the Paris Agreement. incentives for emission reduction activities, including through tools such as domestic policies The exact roadmap to implement NDCs is being and carbon pricing.16 As shown in Box 1, carbon worked out at both the international and national pricing is increasingly used by national and levels. This includes the actual content of NDCs, subnational jurisdictions, including cities, to the timeline for implementation, the definition incentivize cost-effective mitigation. of what qualifies as a conditional/unconditional commitment, the distribution of the mitigation efforts required to achieve the NDC commitment (e.g., between sectors, actors, technologies), and the modalities to track and report progress. 16 Source: UNFCCC, COP21. 2015. Adoption of the Paris Agreement” UNFCCC. https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf; 17 Source: UNFCCC. 2018. The Paris Agreement. https://unfccc.int/ Paragraph 135 of Decision 1. process-and-meetings/the-paris-agreement/the-paris-agreement. Low carbon cities 2018 18 Box 1: Expanding coverage of carbon pricing In 2018, about 45 national jurisdictions and over 25 subnational these carbon pricing initiatives implemented or scheduled jurisdictions are putting a price on carbon (see Figure 5). These for implementation would cover about 20 percent of annual include cities such as Saitama and Tokyo in Japan, and Beijing, global GHG emissions. This figure represents a fourfold Chongqing, Shanghai, Shenzhen, and Tianjin in China. Together, increase over the past decade. Figure 5: Summary map of regional, national, and subnational carbon pricing initiatives implemented, scheduled for implementation and under consideration (ETS and carbon tax)18 NORTHWEST TERRITORIES SASKATCHEWAN ALBERTA MANITOBA ICELAND CANADA ONTARIO EU KAZAKHSTAN REPUBLIC OF BRITISH QUÉBEC UKRAINE KOREA COLUMBIA NEWFOUND- LAND AND Tally of carbon pricing initiatives WASHINGTON LABRADOR implemented or scheduled for RGGI PRINCE OREGON JAPAN implementation EDWARD CALIFORNIA ISLAND VIRGINIA NOVA SCOTIA TURKEY CHINA NEW ­BRUNSWICK MEXICO 16 MASSACHUSETTS THAILAND VIETNAM COLOMBIA CÔTE D’IVOIRE 8 2 45 BRAZIL 23 25 21 RIO DE JANEIRO SÃO PAULO NEW CHILE SOUTH AFRICA AUSTRALIA ZEALAND National Subnational ARGENTINA level level NORWAY SWEDEN DENMARK FINLAND ETS implemented or scheduled BEIJING for implementation UK TIANJIN SAITAMA ESTONIA TOKYO Carbon tax implemented or IRELAND LATVIA scheduled for implementation HUBEI POLAND SHANGHAI CHONGQING FUJIAN ETS or carbon tax under consideration GUANGDONG TAIWAN PORTUGAL ETS and carbon tax implemented SHENZHEN or scheduled Carbon tax implemented or scheduled, ETS under consideration CATALONIA SLOVENIA SINGAPORE ETS implemented or scheduled, FRANCE LIECHTENSTEIN carbon tax under consideration SWITZERLAND representative of the size of the carbon pricing instrument, but show the subnational regions (large circles) and The circles represent subnational jurisdictions. The circles are not ­ cities (small circles). Note: Carbon pricing initiatives are considered “scheduled for implementation” once they have been formally adopted through legislation and have an official, planned start date. Carbon pricing initiatives are considered “under consideration” if the government has announced its intention to work toward the implementation of a carbon pricing initiative and this has been formally confirmed by official government sources. The carbon pricing initiatives have been classified in ETSs and carbon taxes according to how they operate technically. ETS not only refers to cap-and-trade systems, but also baseline-and-credit systems as seen in British Columbia and baseline-and-offset systems as seen in Australia. The authors recognize that other classifications are possible. Due to the dynamic approach to continuously improve data quality, changes to the map not only reflect new developments, but also corrections following new information from official government sources, resulting in the addition of the carbon tax covering only F-gases in Spain. The combination of carbon pricing instruments (taxes, ETSs, carbon taxes and/or other market instruments (e.g., crediting and offset crediting) is also becoming more popular. In South instruments) are used to support mitigation policies and Africa and Mexico, for example, carbon taxes permit the use activities that are less responsive to a carbon price (e.g., in the of offset credits. Another combination is where revenues from transport sector, and compact city development policies). 18 This map is taken from World Bank and Ecofys. 2018. State and Trends of Carbon Pricing 2018. Washington, DC: World Bank. Low carbon cities 2018 19 Figure 6: Status of NDCs with considerations for actions in cities19 51 out of 164 NDCs do not mention 4 countries focus on 17 countries focus climate action in mitigation measures on adaptation cities specifically and mitigation 34 countries mentioned measures neither adaptation nor mitigation measures 113 out of 164 NDCs 58 countries focus mention climate on adaptation action in cities measures in cities About two-thirds of the NDCs submitted as of the ff Articles 6.2–6.3 cover cooperative approaches end of 2017 mention planned action in cities.20 This between countries, under which countries sends a strong long-term signal for urban climate can opt to meet a part of their NDCs by using action. The majority of the NDCs refer to adaptation internationally transferred mitigation outcomes. actions in cities rather than mitigation (see Figure  6). ff Article 6.4 establishes a mechanism under the Adaptation is fundamental in cities given the authority of the COP for countries to contribute to concentration of population and rapid economic the GHG emissions mitigation in one country and growth. However, as highlighted in Section 3, cities have the outcomes used to meet the NDC targets have the potential to reduce emissions significantly of another, while contributing to sustainable and adopt a climate-resilient, low-carbon urban development and resulting in overall global development pathway. The limited focus on emission reductions. The latter requirement mitigation in NDCs might suggest that both urban means that mitigation outcomes cannot be used and national decision makers need support to purely to offset existing emissions. identify, plan, and realize urban mitigation measures. The main principles of Article 6 are environmental integrity, robust accounting to avoid double 2.3. New impetus for counting, sustainable development, transparency international cooperation including in governance, and, for Article 6.4, overall mitigation in global emissions. through Article 6 mechanisms The regulatory and implementation framework for Article 6 and any associated mechanisms are still being developed in the form of the Paris Agreement The Paris Agreement recognizes that countries can guidelines. These guidelines are expected to be voluntarily cooperate on the implementation of adopted at COP24 in Katowice, Poland, in December their NDCs to facilitate higher ambition in mitigation 2018, and to come into effect from 2020 onward. and adaptation actions. It reinstates market Although market mechanisms are not explicitly instruments as a key instrument for achieving referred to in the text of Article 6, it is commonly climate change mitigation. Specifically, Article 6 of understood that voluntary cooperation under the Paris Agreement shapes the way forward for Article 6 will allow and build upon, among other a new generation of international collaborative instruments, crediting approaches. Cooperative mechanisms: approaches can include international scaled-up 19 Source: UN-Habitat. 2017. 20 Source: UN-Habitat. 2017. Sustainable Urbanization in the Paris Agreement—Comparative review for urban content in the Nationally Determined Contributions (NDCs). Nairobi: United Nations Human Settlements Programme (UN-Habitat). Low carbon cities 2018 20 crediting under Article 6.4 21 (eventually going From the cities’ perspective, the national targets under beyond project-by-project approaches) and other the NDCs and the set of policies and actions that instruments that involve the use of internationally will be used to implement them post-2020 create a transferred mitigation outcomes toward NDCs favorable (upward) environment to promote and focus under Article 6.2. on scaled-up, transformative mitigation actions: As of April 2018, 76 NDCs from Parties that account ff Cities, through sectoral policies and regulations, for about 28 percent of global GHG emissions may receive a carbon price signal or may be state intentions to use international carbon pricing assigned a mitigation target as part of the effort initiatives (e.g., as sellers and/or buyers of mitigation sharing by the national authorities between outcomes). 22 This makes crediting approaches different sectors and subnational entities to under Article 6 of key importance as a potential contribute to the NDC targets. source of financing to help countries achieve their ff Even in the absence of a clear, shared effort NDC pledges. between different sectors and subnational entities, cities may perceive a stronger As mentioned in Section 1.1, crediting approaches incentive to prepare themselves for the carbon- can be used to efficiently allocate not only carbon constrained future. The leadership and voluntary finance through market mechanisms, but also action may pay off later on different levels and climate finance through RBCF. Article 9 of the Paris bring benefits beyond mitigation. These include Agreement reaffirmed that developed country a city’s competitiveness and attractiveness for Parties should continue to take the lead in mobilizing businesses, e.g., through reduced energy costs climate finance from a wide variety of sources, but also lower infrastructure costs and higher instruments, and channels to assist developing productivity (see Section 3). country Parties with respect to both mitigation and ff Cities will be influenced by the national policies adaptation. These instruments can include RBCF, as that target urban sectors of the economy. They highlighted in the context of Article 5 for forests. could contribute to incentivizing and enforcing Section 4.1 provides a more detailed explanation of compliance with such national policies (e.g., crediting approaches for both carbon and climate energy efficiency codes, renewable energy finance. generation, waste management). Interactions and policy complementarity between all levels of government are expected to progressively 2.4. Summary improve and become more aligned. ff Cities may be called in to contribute to the The new framework created by the Paris Agreement implementation of national market mechanisms, represents a fundamental change in the overall for instance through dedicated offset programs drive for mitigation efforts at the local, national, that would serve as a cost containment tool and international levels. Governments at all levels under a domestic ETS or carbon tax. can consider mobilizing carbon or climate finance through new crediting approaches to include cities This suggests that the new context created by the Paris as an integral part of NDC implementation. They Agreement could be conducive to the use of crediting can use these approaches as one of the levers to approaches—both under market mechanisms and achieve cost-effective mitigation, mobilize the as a climate finance modality—to effectively and private sector, and grow ambition. efficiently facilitate mitigation in cities. The following sections seek to investigate how this new context can help mitigate the perceived risks about the 21 Source: SBSTA. 2018. Informal document containing the draft elements of the rules, modalities and procedures for the mechanism sustainability and feasibility of comprehensive urban established by Article 6, paragraph 4, of the Paris Agreement. UNFCCC. https://unfccc.int/resource/docs/2018/sbsta/eng/sbsta48.informal.3.pdf. mitigation actions embedded in a longer term low- 22 Source: World Bank and Ecofys. 2018. State and Trends of Carbon carbon resilient urban development pathway. Pricing 2018. Washington, DC: World Bank. Low carbon cities 2018 21 3. CITIES AND CLIMATE CHANGE MITIGATION 3.1. The importance of 3.1.2. The GHG mitigation potential cities for climate change of cities mitigation It is estimated that cities currently account for 71–76 percent of global emissions and 67–76 percent of global energy use.25 The world’s urban areas were 3.1.1. An urban world responsible for around 24 gigatons of CO2 (GtCO2) emissions in 2013, and if current trends continue By 2050 the world’s urban population will have that could grow by 50 percent to 35.7 GtCO2 in reached 6.3 billion, and two-thirds of the people 2050.26 Overall, the potential emission reductions on the planet will be living in urban centers. Nearly related to urban energy use by 2050 are equivalent 90 percent of the 2.5 billion new urban dwellers to 70 percent of the total energy-related reductions will live in Africa and Asia, and three countries required to meet the International Energy Agency’s alone—China, India, and Nigeria—will account for (IEA’s) 2°C scenario for climate mitigation.27 35  percent of the increase. Although more than half of the world’s urban citizens live in Asia today, Rapid urbanization, the role of cities in the the continent is only 50 percent urbanized, and only world economy, and expanding demand for 43  percent of Africans live in cities. By 2050, Africa infrastructure, goods, and services in emerging will be 54  percent urbanized and Asia will have countries mean that cities are important focal reached 64 percent.23 points for mitigation. A series of studies have shown that transformative action in cities could The importance of cities to the development of a significantly contribute to the mitigation required to sustainable, global economy that can address the achieve a 2°C target for global warming. It has been need to increase prosperity, address climate change, estimated that actions within cities, using policy and ensure the well-being of all communities is levers currently at their disposal, could contribute widely recognized. There is an immense opportunity up to 15 percent of the global GHG reductions for climate change mitigation in the world’s cities. required to stay on a 2°C pathway. This contribution Equally important, mitigation can be closely corresponds to reducing annual GHG emissions by aligned with other transformational programs that up to 3.7 GtCO2e by 2030 and 8.0 GtCO2e by 2050. 28 will ensure the resilience, safety, and health of a burgeoning urban population. Health benefits, for example, may alone justify urban mitigation actions that contribute to improved air quality.24 25 Source: IPCC. 2014. Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Human Settlements, Infrastructure and Spatial Planning. 26 Source: IEA. 2016. Energy Technology Perspectives 2016—Towards Sustainable Urban Energy Systems. Paris: IEA. 27 Source: IEA. 2016. 28 Source: Broekhoff, Derik, Peter Erickson, Carrie Lee. 2015. What cities do best: Piecing together an efficient global climate governance. 23 Source: United Nations. 2018. 2018 Revision of World Urbanization Working Paper. Stockholm Environment Institute (SEI); Erickson, Peter, Prospects. Kevin Tempest. Advancing climate ambition: How city-scale actions 24 Source: IISD Reporting Services. 2018. CitiesIPCCBulletin. Vol. 172 can contribute to global climate goals. Working Paper. Stockholm No.42. 10 March. Environment Institute (SEI). Low carbon cities 2018 22 The IEA has estimated that addressing key areas 3.1.3. The need to act: the problems such as primary energy use, buildings energy, and of lock-in transportation could reduce global urban emissions to 8.7 GtCO2 by 2050, a 63 percent reduction on 2013 The C40 Cities Climate Leadership Group (C40) levels.29 In the same period, the urban population is estimated that 97 percent of the actions needed to expected to grow by 67 percent and urban gross achieve global emissions goals for 2050 will need domestic product (GDP) by 230 percent. to be implemented in the world’s leading cities by 2030 if the goals set out in the Paris Agreement are The challenges and opportunities presented to be met. 34 by urban emissions growth is most evident in emerging cities. 30 These cities are likely to account There is also a window of opportunity for emerging for over a quarter of global income growth and over cities to embed mitigation plans into their one-third of energy-related emissions growth over infrastructure development. This is important if the next two decades. The substantial emissions these cities are to avoid the problem of lock-in, growth from cities in emerging economies is due which can have long-term negative impacts on to a combination of national economic drivers their future emissions. The lock-in phenomenon (e.g., growth in GDP) and local drivers (e.g., city refers to the effect of built structures in urban areas size, population, economic structure, growth (i.e., roads and buildings) that establish a trajectory patterns, and the level of maturity of the urban for GHG emissions in the near and medium term infrastructure). 31 and can extend for a century or more. 35 Cities that fail to invest in low-carbon options to meet The expansion of the urban population in emerging infrastructure demands will, as a result, be locked economies has huge implications for energy into an emission-intensive pathway for the long consumption and GHG emissions. In China, the term. average urban dweller emitted 1.4 times as much energy-related carbon dioxide (CO2) as a Mature cities such as London, New York, Paris, and rural resident. Focusing on just the buildings and Milan have already experienced the impact of transport sectors, urban residents emit 1.7 times as this phenomenon, which limits options for policy much as rural residents, on average. 32 African cities makers to achieve a transformative low-carbon have the lowest GHG emissions per capita of any development pathway. Emerging and expanding region in the world with an average of 1.8 ton of cities have the potential to avoid the lock-in carbon dioxide (tCO2) per capita, but business-as- phenomenon, as much of their urban infrastructure usual economic growth is fueling significant growth has yet to be built or reconstructed. Unlike mature in aggregate emissions. Based on business-as- cities, emerging and expanding cities can still usual trends, emissions in the 69 African cities will influence the unbuilt urban infrastructure in such a grow by over 60 percent by 2030, reaching close to way as to realize low-carbon development pathways. 400 million tons of CO2 (MtCO2) per annum. 33 They therefore present an opportunity for decision makers to achieve effective transformational mitigation in urban environments. 29 2013: 24 GtCO2. Source: IEA. 2016. 30 Classified by New Climate Economy as those that are rapidly expanding, middle-income, and mid-sized (population of 1–10 million) in China, India, and other emerging economies. 31 Source: The Global Commission on the Economy and Climate. 2014. Better Growth Better Climate: The New Climate Economy Report. Washington, DC: World Resources Institute (WRI). 32 Source: Fridley, David, Nina Khanna, Xu Liu, Stephanie Ohshita, Lynn Price, and Nan Zhou. 2015. The role of Chinese cities in greenhouse 34 Source: C40 Cities and Arup. 2016. Deadline 2020: How cities will get gas emission reduction Briefing on urban energy use and greenhouse the job done. London: C40 and Arup. gas emissions. Seattle: Stockholm Environment Institute (SEI). 35 For more information about the lock-in phenomenon, see Unruh, 33 Source: Godfrey, Nick and Xiao Zhao. 2015. Technical Note: The Gregory. 2000. Understanding carbon lock-in. Energy Policy 28 (12): Contribution of African Cities to the Economy and Climate Population, 817–830 or Maassen, A. 2012. Heterogeneity of Lock-In and the Role Economic Growth, and Carbon Emission Dynamics. The New Climate of Strategic Technological Interventions in Urban Infrastructural Economy - The Global Commission on the Economy and Climate. Transformations. European Planning Studies 20 (3): 441–60. Low carbon cities 2018 23 By avoiding carbon-intensive urbanization pathways, Key urban sectors. Various studies have highlighted cities can not only reduce sunk costs and stranded the potential for emission reductions in cities in assets that may represent a significant burden on the key sectors of energy production, buildings, the urban economy, but they can also contribute to transportation, land use, and waste management a tangible reduction of the overall cost of national (see Figure 7 and Figure 8). A report by C40 and mitigation costs in the long run. 36 The long-lasting the McKinsey Center for Business and Environment impacts of the lock-in phenomenon and the fact identified decarbonizing the electricity grid, that rapidly growing emerging cities are best optimizing energy use in buildings, enabling next- placed to avoid this phenomenon makes mitigating generation mobility (including better land-use urban GHG emissions a matter of urgency in global planning), and improving waste management as mitigation efforts. the primary action areas, as shown in Figure  8. The IEA has similarly identified compact urban 3.1.4. Opportunities for urban mitigation development, energy-efficient buildings, public transport, and renewable energy as main areas for Figure 7: Potential urban impact on global urban action. 38 cumulative CO2 reductions in the IEA Energy Technology Perspectives (ETP) 2 Degree It has been estimated that investing in high impact scenario (2DS) 37 areas such as public transport, building efficiency, and improved waste management facilities could 60 save cities up to US$17 trillion globally by 2050 based on energy savings alone. 39 A review of potential investments in low-carbon solutions in 50 these sectors in five cities (Leeds, UK; Kolkata, India; Lima, Peru; Johor Bahru, Malaysia, and Palembang, Non- Indonesia) showed that savings of 13–26 percent in urban energy use and GHG emissions relative to business- 40 as-usual trends are possible in the next 10 years through investments, with payback periods of less than 5 years. The World Bank has identified at least 50 areas for action on urban climate emissions that GtCO2 30 can be integrated into city actions plans across Non- urban six key sectors including transportation, buildings, and energy generation.40 20 Urban Urban Non- 10 urban Urban 36 In the 2017 report from IEA and IRENA Perspectives for the Energy Transition: Investment Needs for a Low-Carbon Energy System, 0 stranded assets are described as “the capital investment in fossil World 6DS Urban Non-urban 2DS fuel infrastructure which ends up failing to be recovered over the CO2 emissions CO2 ­ CO2 emissions operating lifetime of the asset because of reduced demand or emissions reductions reductions reduced prices resulting from climate policy.” 37 Source: IEA. 2016. 2013 2050 38 Source: IEA. 2016. 39 Source: The Global Commission on the Economy and Climate. 2014. 40 Source: The World Bank. 2016. The CURB Tool: Climate Action for Urban Sustainability. http://www.worldbank.org/en/topic/ Power & heat Industry Buildings urbandevelopment/brief/the-curb-tool-climate-action-for-urban- Agriculture Transport sustainability. Low carbon cities 2018 24 Figure 8: Emission reduction potential from different mitigation measures by sector 41 Approx. share of C40 cities Average range of 2030 emissions reduction emissions Opportunity potential across city types,a % of 2030 targetb 0 10 20 30 40 50 60 DECARBONIZING THE ELECTRICITY GRID Centralized renewables c Distributed renewables c OPTIMIZING ENERGY USE IN BUILDINGS 60% New build standards Building envelope retrofits HVAC and water heating Lighting upgrades Building automation and controls ENABLING NEXT-GENERATION MOBILITY Transit-oriented development 30% Mass transit, walking, and cycling Next-generation vehicles (shared, connected EV-AVs) Commercial freight 10% IMPROVING WASTE MANAGEMENT a Emission reduction potential as modeled for a “focused acceleration” scenario across six illustrative city types, with highest and lowest outliers removed. b 2030 target is based on Deadline 2020 pathways for specific city types. c Percentages given are for system level mix. Balance between centralized and distributed generation will vary by region. Source: McKinsey analysis The mitigation potential within key sectors such as energy efficiency standards for new urban buildings, buildings and transportation is important, but so energy retrofits for existing urban buildings, and is the potential for cross-sector reinforcement, for stringent performance standards for urban building example, through linking building and transport lighting and appliances. innovation, and from an integrated planning approach that encourages CUD. One of the reasons that buildings are so important to the urban energy picture is the challenge of Improving urban building stock. Buildings are providing space heating and, increasingly, cooling responsible for around 30 percent of global final to buildings. The greater use of renewable sources energy use and around one-third of GHG emissions. for heating is therefore an important step forward. Urban areas account for around 60 percent of Space cooling is responsible for a relatively small building energy consumption globally.42 Steps to be portion of building energy use, around 5 percent, taken in the buildings sector include strong building but according to the IEA it is the fastest-growing end use and could increase by a factor of 10 in some regions if aggressive action is not taken. 41 Source: C40 and The McKinsey Center for Business and Environment. 2017. Focused acceleration: A strategic approach to climate action in cities to 2030. 42 Source: IEA. 2016. Low carbon cities 2018 25 In terms of cross-sector benefits, urban building TOD is also recognized as an important policy tool improvements can have an impact on air quality, for driving more sustainable development. TOD comfort, economic productivity, energy costs, and involves the integrated design of urban places to local job creation. Land-use planning can support bring people, activities, buildings, and public space increased densification and connectivity of the together, with easy walking and cycling connections urban landscape. Building regulations can also between them and near transit services to the rest reinforce initiatives to reduce transport emissions of the city.44 through closer integration with mass transit and support for electric vehicle (EV) infrastructure. Managing municipal waste. According to a study by the World Bank, the amount of urban waste Shifting to low-carbon transportation. Around generated is growing faster than the rate of 20 percent of a city’s GHG emissions can be urbanization.45 It estimated that roughly 3 billion attributed to private and public transportation, and urban residents in 2012 generated 1.43 billion tons approximately 70 percent of that amount can be of waste per year. By 2025, this is expected to attributed to road transportation. Urban transport increase to 4.3 billion urban residents generating emissions are growing at 2 to 3 percent annually. The 2.4 billion tons per year. This represents an increase majority of emissions from urban transport is from of 992 million tons in a little over a decade, a near higher income countries. In contrast, 90 percent of doubling of the total volume of waste generated. the growth in emissions is from transport systems in lower income countries. This also means there is Up to 3 to 5 percent of global GHG emissions come considerable potential to act before these countries from improper waste management. The majority lock in to a dependency on cars, offering multiple of these emissions are methane produced in trajectories for future transportation provisions.43 landfills. Even though waste generation increases with affluence and urbanization, GHG emissions The need to provide clean, decarbonized, and from municipal waste systems are lower in more efficient transportation is key to many challenges affluent cities. In Europe and North American cities, facing cities and is increasingly connected with GHG emissions from waste sector account for developments in urban energy systems. There are 2 to 4 percent of the total urban emissions, while three recognized pathways for cities to reduce in African and South American cities, emissions transport emissions: avoiding (e.g., through urban from the waste sector are 4 to 9 percent of the total planning policies that reduce the need for car use), urban emissions.46 shifting (developing a multimodal public transport infrastructure), and improving (through a shift to Studies have shown that measures such as low-carbon transportation including EVs). improved recycling, landfill gas capture, and enhanced composting of waste can help reduce To address these issues, cities are promoting the the growth in waste-related emissions. In Kolkata, adoption of low-carbon vehicles and a greater India, for example, waste-related GHG emissions emphasis on other mobility options. In an increasingly connected environment, cities have become the focal point for a range of new vehicle 44 Source: Institute for Transport and Development Policy. What is TOD?. mobility options such as carsharing, bikesharing, https://www.itdp.org/library/standards-and-guides/tod3-0/what-is-tod/. and rideshare applications. Leading cities are taking 45 Source: Hoornweg, Daniel, Perinaz Bhada-Tata. 2012. What a Waste: A Global Review of Solid Waste Management. Urban Development this multimodal approach to transportation a step Series Knowledge Papers No. 15. Washington, DC: World Bank. 46 Source: Rosenzweig, Cynthia, William Solecki, Patricia Romero-Lankao, further by connecting these different modes to Shagun Mehrotra, Shobhakar Dhakal, Tom Bowman, and Somayya Ali create on-demand, sustainable, personalized, and Ibrahim. 2018. Climate Change and Cities: Second Assessment Report of the Urban Climate Change Research Network. Other. In Climate flexible urban transportation systems. Change and Cities: Second Assessment Report of the Urban Climate Change Research Network, edited by Cynthia Rosenzweig, William D. Solecki, Patricia Romero-Lankao, Shagun Mehrotra, Shobhakar Dhakal, and Somayya Ali Ibrahim, xvii-xlii. Cambridge: Cambridge University 43 Source: IEA. 2016. Press. Low carbon cities 2018 26 could be cut by 41 percent by 2025, relative to a Going beyond mitigation benefits. Improving air business-as-usual scenario, through investments of quality is one of the key benefits of a reduction in INR13.1 billion (US$224 million) that would generate GHG emissions and associated pollution from urban annual savings of INR1.1 billion (US$18.8 million).47 traffic and industrial processes. The World Health Organization estimates that, globally, 3 million The importance of recognizing cross-sector premature deaths can be attributed to outdoor benefits. While there is significant potential for air pollution.51 A World Bank study estimated that reducing urban emissions on a sectoral basis, much exposure to ambient and household air pollution of the potential for urban mitigation comes from cost the world’s economy US$5.11 trillion in welfare cross-sectoral policy initiatives that link land use, losses in 2013. In the worst affected regions in Asia urban development, transportation, and buildings. this accounted for around 7.5 percent of the regional Land-use zoning policies, for example, influence GDP.52 the demand for transportation, reduce or increase commuting times, and improve integration with Urban mitigation programs are closely linked to low-carbon mobility options. Similarly, the ability to broader urban government and environmental reuse waste heat from industrial processes or the priorities. There are close links, for example, between provision of district cooling systems can reduce the potential climate actions and other sustainable energy required for heating and cooling buildings. development goals (SDGs) as agreed upon by UN Transportation policies are also increasingly linked members in 2015. The SDGs place an emphasis on with improvements in the energy infrastructure the role of cities, notably in SDG 11, which commits (e.g., EVs can be part of active grid management world leaders to “make cities and human settlements services to help integrate renewable energy). inclusive, safe, resilient, and sustainable.” Mitigation projects can also promote greater A study by the Urban Climate Change Research efficiencies, not only through reduced energy costs Network (UCCRN) identifies five pathways for urban but also lower infrastructure costs (e.g., through transformation to support climate action, including reduced road building and better coordination of the need to make a close link between adaptation, cross-sector investments),48 health improvements resilience, and mitigation in urban planning, urban (e.g., through improved air quality), and productivity design, and urban architecture.53 The study highlights (e.g., through reduced congestion). According to how increased resilience at the heart of adaptation the IEA, the gradual evolution of urban transport can also have positive outcomes for social equity, systems to encourage walking, cycling, and public economic development, and human well-being. transit could save US$21 trillion by 2050, while at the same time making a significant dent in GHG Cities will also need to explore new delivery models emissions.49 Integrated policies that reduce urban to commission design and maintain infrastructure sprawl and encourage more compact, connected and services that are robust in the face of complex development could reduce the required global environmental risks. As urban infrastructure assets urban infrastructure investment by more than have long operational lifetimes, they are sensitive US$3 trillion over 15 years (2015–2030).50 not only to the existing climate at the time of 47 Source: The Global Commission on the Economy and Climate. 2014. 51 Source: World Health Organization. 2016. Ambient air pollution: 48 Source: IRP. 2018. The Weight of Cities: Resource Requirements of A global assessment of exposure and burden of disease. Future Urbanization. Swilling, M., Hajer, M., Baynes, T., Bergesen, J., 52 Source: World Bank. 2016. The Cost of Air Pollution: Strengthening the Labbé, F., Musango, J.K., Ramaswami, A., Robinson, B., Salat, S., Suh, S., Economic Case for Action. Currie, P., Fang, A., Hanson, A. Kruit, K., Reiner, M., Smit, S., Tabory, S. 53 Source: Rosenzweig C., W. Solecki, P. Romero-Lankao, S. Mehrotra, Nairobi: United Nations Environment Programme (UNEP). S. Dhakal, T. Bowman, and S. Ali Ibrahim. 2015. ARC3.2 Summary for 49 Sources: IEA. 2016. City Leaders. Columbia University. New York: Urban Climate Change 50 Source: The Global Commission on the Economy and Climate. 2014. Research Network (UCCRN). Low carbon cities 2018 27 their construction but also to climate variations Achieving urban mitigation at scale. The over the lifetime of their use. These environmental interconnected nature of potential urban mitigation and climate risks require cities to look for new actions means that scale-up can be realized at ways to commission design and maintain urban multiple levels: infrastructure, and to consider ways to integrate and bolster capacity via the co-delivery of services. ff By replicating discrete measures at sectoral and subsectoral levels, e.g., through dedicated Looking at climate change mitigation in relation investment mass transit building energy to increasing resilience reinforces the need to efficiency programs, or low energy street assess each city’s complex and interconnected lighting. infrastructure and institutional systems spanning ff By broadening scope of action to interconnected the physical, economic, institutional, and socio- sectors to create positive synergies between political environment. individual measures, integrated into a holistic approach to service provision, e.g., community- Consumption-based emissions and demand- level energy programs that include smart side action. Most studies on the role of cities in buildings, energy-efficient appliances, LED street mitigation focus on local energy use and GHG lighting, and renewable energy. emissions. Work by Arup and C40 has looked at the ff By focusing on policy levers and interventions consequences of taking a consumption perspective that lead to transformational impacts in cities. on urban GHG emissions. For the 79 cities examined, Urban planning that promotes compact cities, there was a 60 percent increase in total emissions TOD, and mixed land-use zoning is an example when consumption-based emissions were factored of such a policy lever. in (emissions from imported goods and services). However, there are wide differences between cities. The incentives provided by the additional revenue Cities in emerging countries more often showed stream through crediting approaches can be a positive imbalance between consumption and deployed in a targeted manner, aiming to change production emissions figures, while cities in high the way individual system operators (energy, water, income countries showed the highest increase in transport, etc.) do business and therefore leverage emissions totals once consumption was accounted private or public-private investments in low-carbon for. options and practices. At the same time, the ability of cities to realize the opportunities for scaled-up Although cities have a limited influence on mitigation will depend on their level of control the carbon footprint of goods manufactured over urbanization processes and resources. There outside their boundaries, the study highlights also needs to be sufficient coordination between the significance of cities in addressing demand- different municipal organizations, as discussed in side policies and actions that can promote Section 3.2. Cities and national authorities need behavioral changes toward lower carbon lifestyles to work together to ensure compatibility of policy and consumption patterns including: “resource incentives and regulations and to enable a holistic productivity strategies and consumer policies, vision for urban development. It also requires city targeting carbon-intensive consumption categories climate financing to be linked with these deeper and lifecycle phases with the highest emissions, structural changes in urban form and transport and supporting shifts in consumption to goods and infrastructure if the value of investments is to be services with lower emissions, including through realized and the adoption of mitigation measures public procurement.” 54 accelerated. 54 Source: C40. 2018. Consumption-based GHG emissions of C40 cities. London: C40. Low carbon cities 2018 28 3.1.5. The finance gap available to raise funds for climate action. However, successful funding for climate action, notably in Inevitably, the financial requirements to support developing countries, needs to overcome barriers, the transformation of cities to low-carbon paths such as the lack of creditworthiness of subnational for development are significant. According to a governments, insufficient access to capital markets report by the Cities Climate Finance Leadership and international mechanisms, and lack of financial Alliance (CCFLA) on the state of city climate and technical skills and human resources. Investors finance, it is estimated that approximately US$93 are often unfamiliar with mitigation measures trillion will need to be invested in low-emission in cities and find it difficult to incorporate GHG and climate-resilient infrastructure globally. More emission reductions, improvements in air quality, than 70 percent of this infrastructure will be built increased resilience, and other relevant factors in urban areas, at an estimated cost of US$4.5 to into their cost/benefit analyses, in particular in the US$5.4 trillion per year.55 Overall climate finance absence of a clear price signal for these public flows were just under US$54 billion in 2014.56 The goods.58 average portion of overall climate finance that was channeled to urban areas was 31 percent. But even Due to the number of potential stakeholders, if all climate finance was targeted at cities, it would capacity constraints of the city authorities and the still only address a small portion of the overall diffuse nature of the emission sources, mitigation investment requirement. As the CCFLA emphasizes, measures and policy interventions in cities can be it is important that the deployment of such finance complex, both in design and implementation. Even is “as catalytic as possible” in driving investment for were proven funding models for climate-related low-emission, climate-resilient urban infrastructure. infrastructure projects to exist, many investors feel Climate finance must be seen as a movement not the returns do not compensate for the perceived only to increase the amount of funding available higher delivery risks (the risk that the results will not but as part of a process of enabling and leveraging be achieved) with mitigation measures in cities.59 existing and new financing to flow from a broad range of sources, most importantly from the private In their report Measurement for Management, C40 sector. It should also be recognized that climate found that municipal governments of C40 cities finance in cities has co-benefits such as helping (which are predominantly megacities) finance develop climate compatible industries, facilitating 64 percent of their mitigation measures from their technology transfer, and ensuring capacity own budgets. Only 7 percent of mitigation measures building,57 as are highlighted in the next sections. are supported by externally-funded grants and specific subsidies. The private sector provides Figure 9 shows the different sources that can 14  percent financing and the development banks provide funding at the municipal scale, from local less than 1 percent. This demonstrates a gap in financing (land-value capture, local taxes, etc.) terms of mobilizing private sector investment and to the traditional role of banks, and the more therefore optimizing the use of scarce financial innovative use of capital markets and international resources of cities. finance that can be dedicated to climate change. It is essential for regional jurisdictions and How new crediting approaches can help address municipalities to diversify and blend their sources the funding gap is examined in detail in Sections 4–7. of finance and tap the full spectrum of resources However, there are a number of issues related to the specific nature of urban interventions that need to be considered and addressed to successfully promote scaled-up urban mitigation. 55 Source: CCFLA. 2015. State of City Climate Finance 2015. New York: Cities Climate Finance Leadership Alliance (CCFLA). While there is no recognized definition for climate finance, it usually covers financing flows directed toward mitigation or adaptation activities. 56 Source: CCFLA. 2015. 58 Source: CCFLA. 2015. 57 Source: UN-Habitat. 2017. 59 Source: CCFLA. 2015. Low carbon cities 2018 29 Figure 9: Potential sources of finance for municipalities to finance climate-related projects Investment Investment SPECIAL PURPOSE RESIDENTS/FIRMS Taxes/Services Charge Investment VEHICLE Subsidy/Guarantee Investment NATIONAL Transfer GOVERNMENT Investment Expense PROJECTS DEVELOPMENT BANKS Borrowing Investment CAPITAL MARKET Bond Equity MUNICIPALITY Investment Expense PROGRAMS GOVERNMENT CITY CARBON PRICING INTERNATIONAL Borrowing Transfer Carbon Finance INSTRUMENTS INCLUDING PUBLIC FINANCE CREDITING, ETS, AND TAX LAND VALUE CAPTURE Tax Increment / Sales Climate Finance RBCF Source: Based on UCCRN, 2015 60 In particular, there is a need to address issues choice of climate actions by cities, considering the around governance (improved vertical coordination range of co-benefits that mitigation can bring to and alignment of national and city policies and meet these other priorities. actions, and horizontal, cross-sectoral integration) and the specific challenges of GHG accounting in Cities are potentially in control of a vast portfolio of an urban environment. potential mitigation policies and actions ranging from sector-specific activities (e.g., energy efficiency in buildings, fuel efficiency of public transport fleet, 3.2. Governance, control, efficient street lighting) to cross-sectoral, combined and coordination policies that influence fundamental drivers of city- wide GHG emissions (e.g., planning, CUD policies, land-use zoning, TOD). The complication for cities is that there is considerable variance in the control 3.2.1. Levels of action or influence that local government may have over these emission drivers. The significant mitigation potential of cities presents both national and urban policy makers Policy tools and actions available to cities alone with the opportunity to mobilize considerable may not be sufficient to deliver the level of scaled- contributions to global climate action. However, up mitigation that will allow cities to pursue the there is huge variation in cities in terms of their size, low-carbon development pathway consistent with maturity, economic development, infrastructure, the 2°C trajectory. There is a potential gap between environment, and governance models. The different top-down models of what cities could achieve and local priorities also play an important role in the the planned or implemented measures that are 60 Source: Rosenzweig C., W. Solecki, P. Romero-Lankao, S. Mehrotra, S. Dhakal, T. Bowman, and S. Ali Ibrahim. 2015. Low carbon cities 2018 30 Under an ideal policy scenario to achieve deep GHG reductions, feasible in many cities to achieve “national, state, and have a smaller or less quantified transformation. City mitigation local governments impact on GHG emissions, including programs need to address the major could coordinate energy systems integration, urban emitting sectors in the city, but these policies for renewables, and urban afforestation. may not be the areas where the city maximum ambition, In the middle are policy areas itself has significant traction. Cities efficiency, and commonly identified as central to therefore rely on close cooperation effectiveness.” 61 urban mitigation strategies, including with other government agencies technology efficiency requirements (national, sectoral, regional, or local) in building and transport, urban and their ability to incentivize and effectively infrastructure, and shaping urban forms toward regulate a range of private sector players and align low-carbon pathways (e.g., through a prioritization consumer choices to ensure participation in and of compact urban development). deployment of climate actions. While this representation generalizes the urban Figure 10 shows the Intergovernmental Panel on mitigation policy landscape and will vary depending Climate Change’s (IPCC’s) summary of how leverage on the local context, it does show the complex over particular urban mitigation policies compares relationship between the impact of cities on GHG with the policy’s impact on GHG emissions from emission drivers and the amount of leverage the major emission drivers. Local government has available solely at the urban policy level. It is vital little control over some of the most important that any action at the local level needs to be drivers of emissions, including those associated vertically integrated with national and subnational with national and international infrastructure, trade, policies and programs, and needs to be designed and economics. At the other end of the spectrum, efficiently in a way that respects and maximizes cities have considerable leverage over areas that the influence of each governance level. Figure 10: Hierarchy of drivers of urban GHG emission and policy leverages by urban-scale decision making 62 IMPACT ON GHG EMISSIONS High ‒‒ Economic geography (trade, industry structure, bunkers) ‒‒ Income (consumption) Low ‒‒ Technology: Efficiency of energy end use (buildings, processes, vehicles, appliances) ‒‒ Urban form and its interactions with urban infrastructures ‒‒ Fuel substitution (imports) High ‒‒ Energy systems integration (co-generation, heat-cascading) Low ‒‒ Urban renewables, urban afforestation LEVEL OF URBAN POLICY LEVERAGE 61 Source: Broekhoff, Derik, Peter Erickson, Carrie Lee. 2015. 62 Source: Seto K. C., S. Dhakal, A. Bigio, H. Blanco, G. C. Delgado, D. Dewar, L. Huang, A. Inaba, A. Kansal, S. Lwasa, J. E. McMahon, D. B. Müller, J. Murakami, H. Nagendra, and A. Ramaswami. IPCC. 2014. Human Settlements, Infrastructure and Spatial Planning. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, United Kingdom and New York, NY, USA: IPCC. Low carbon cities 2018 31 3.2.2. Vertical and horizontal integration operators (energy, water, transport, etc.), also have significant responsibilities that are key to influencing How the integration of policy actions is achieved urban climate-related actions. In addition, given will depend on the established relationship the restricted and highly variable scope of local between different levels of government and how far policy control, relationships with other municipal this can adapt to better support effective climate agencies—including within the metropolitan areas— action. The institutional and governance structures and private sector service providers are also a major of cities vary significantly, leading to different factor determining the range of action available to levels of control over the GHG emissions and their city governments. drivers. The ability of different levels to implement mitigation policies is also dependent on respective These two different aspects of local multilevel administrative capacity. C40 and Arup identify governance can be distinguished as: six categories that characterize the differences between cities’ capacities and mandates to ff Vertical integration, which refers to the implement mitigation actions via regulation, coordination across multiple levels of project implementation, service delivery, and government at national, state, regional, and partnerships.63 In examining the relationship city levels, and a recognition of the appropriate between national and local government, SEI64 allocation of responsibility. identifies three core roles for cities that allow them ff Horizontal integration, referring to the to focus on roles and actions for which they are coordination of activities and responsibilities highly capable and best positioned: across different sectors of urban economy including local governments, the private sector, ff As policy leaders and architects—notably civil society, and grassroots organizations. through spatial planning and transport policy interventions. An example of an important area where vertical ff As critical implementers of nationally applied integration needs to be improved is the allocation policies—particularly with regard to residential of funds between national and city government. and commercial buildings sectors. A study by C40 and Arup65 found that Mexico City, ff As strategic partners—taking actions to Rio de Janeiro, and Johannesburg all highlighted enhance the effectiveness of policies enacted issues around the lack of devolved funding to at higher levels of government. For example, the city from the federal level, particularly for cities can enhance national efforts through environmental and climate-related projects. The local regulation, permitting, economic and study also noted that, even when funding is made fiscal incentives, infrastructure development, available, restrictions on how it can be used limit and more broadly, through education and local flexibility. Lack of power to raise local revenue information sharing. for climate action is also an issue. The same report notes how Amman, the capital of Jordan, faces It is not only a question of coordination with challenges in securing international funding as national government. In many cases, state or income from tax revenue and is affected by taxes provincial governments, as well as individual system that are controlled nationally, in a way that makes 63 Source: C40 and Arup. 2015. Climate Action in Megacities 3.0: Networking works, there is no global solution without local action. London: C40 and Arup 65 Source: C40 and Arup. 2015. Potential for Climate Action: Cities are 64 Source: Broekhoff, Derik, Peter Erickson, Carrie Lee. 2015. just getting started. London: C40 and Arup. Low carbon cities 2018 32 it difficult to forecast the amount of public funding 3.3. GHG accounting and available to match to international funds. In combination, these and other funding challenges tracking climate action related to national and local cooperation restrict the opportunity for cities to access sufficient funds GHG accounting and understanding urban emissions for mitigation measures. trajectories (baseline setting) is critical to supporting evidence-based climate action planning and Often the absence of coordinated, vertically performance monitoring. To effectively contribute aligned processes can result in slow or inconsistent to and demonstrate their role in achieving NDC implementation of mitigation actions. Coordinating targets, cities need to ensure consistent tracking the design and implementation of actions and reporting of GHG emissions data and mitigation effectively across multiple levels of government outcomes with the methods used at the national can be challenging. Nevertheless, a growing body level. of knowledge suggests that improving integration of efforts between layers of government brings To define a city’s carbon footprint, identify mitigation potential for enhanced impact and efficiency of measures, and quantify and evaluate the impacts mitigation efforts. of climate-related policies and actions at the urban level, cities need to first define their boundaries One of the biggest opportunities to improve and then determine the emissions occurring within horizontal integration is to enable closer coordination them. However, for cities this is not a trivial task due across metropolitan authorities. In policy areas such to several challenges, which include: as regional transportation, collaboration across neighboring authorities is essential given the often 1. A lack of consensus on how to delineate a city highly fragmentary nature of local responsibilities. and its boundaries. Of the 59 municipalities in the metropolitan area 2. Complexity of determining key emission drivers of Mexico City, for example, only 16 are controlled within city boundaries. by the Mexico City government. The lack of an 3. Data limitations to allow for accurate calculation overarching framework for collaboration across of emissions from cities. municipal boundaries means that it is difficult to 4. Issues with attributing the mitigation outcomes coordinate actions on a larger scale. Similar issues to actions given the high level of integration and have also been found in Amman in relation to interaction of the actions. the coordination of regional transport, potentially hampering improvements to public transport 3.3.1. Defining cities’ boundaries services.66 To date, there is no internationally agreed upon Integration across the decision levels is needed to approach to defining a city’s boundaries or urban deliver effective action on climate change in cities. areas.67 For the purpose of reporting GHG emissions, This requires better collaboration, coordination, and cities can be defined according to their political communication between national governments, boundaries, their interactions such as economic the private sector, and other actors. activity, commuting etc., or based on the structure of land use/land cover of the built environment. Different definitions of a city’s boundaries can have a substantial influence on the final calculation of GHG emissions and emission reductions. 67 According to the United Nations, Department of Economic and Social 66 Source: C40 and Arup. 2015. Potential for Climate Action: Cities are Affairs, Population Division there is no common global definition of just getting started. London: C40 and Arup. what constitutes an urban settlement. Low carbon cities 2018 33 Figure 11: Sources and boundaries of city GHG emissions 68 agriculture, forestry in-boundary waste out-of-boundary other indirect & other land use & wastewater waste & wastewater emissions SCOPE 2 SCOPE 3 SCOPE 1 stationery fuel grid-supplied transmission combustion energy & distribution industrial processes in-boundary out-of-boundary & product use transportation transportation Inventory boundary Geographic city Grid-supplied energy from (including scopes 1, 2, and 3) boundary (scope 1) a regional grid (scope 2) Source: GPC. Efforts to address the determination of city and reporting principles (summarized in the IPCC boundaries in the context of GHG accounting and guidelines), and enabling city inventories to be in a way compatible with the approaches used at aggregated at subnational and national levels.70 the national level are being explored by initiatives such as the Global Protocol for Community-scale Evolving from the work of the GPC, four broad GHG emissions (GPC). The GPC was developed by approaches for assessing GHG emissions from cities the World Resources Institute (WRI), C40 and ICLEI— can be identified: 71 Local Governments for Sustainability (ICLEI).69 The standard provides guidance for cities on how to ff Purely Territorial (Geographic) Accounting: establish their GHG inventory, and how to account Takes GHG emissions from all sources within the and report their emissions. Figure 11 summarizes geographic area of an administrative boundary, the main sources of emissions and boundaries focusing exclusively on source activities; that per the GPC. The GPC puts emphasis on ensuring is, activities that are directly emitting GHG consistent and transparent measurement and emissions (Scope 1). reporting of emissions between cities in accordance ff Community Wide with Scope 1 + Scope 2 with internationally recognized GHG accounting Accounting (GPC Basic): Similar to the territorial approach but adding on the transboundary (Scope 2) GHG emissions from power generation for those communities that are 68 Source: WRI, C40, ICLEI, Greenhouse Gas Protocol. 2014. 69 Source: WRI, C40, ICLEI, Greenhouse Gas Protocol. 2014. Global importing electricity. The emissions associated Protocol for Community-Scale Greenhouse Gas Emission Inventories. with imported electricity are called Scope 2 An Accounting and Reporting Standard for Cities. 70 Source: WRI, C40, ICLEI, Greenhouse Gas Protocol. 2014. emissions while direct emissions are called 71 Source: Global Platform for Sustainable Cities (GPSC). Forthcoming. A Review of Tools to Assess Integrated Urban GHG Mitigation Scope 1 emissions. Strategies Incorporating Land Use, Technology, and Behavioral Change. Global Platform for Sustainable Cities. Low carbon cities 2018 34 ff Community Wide Infrastructure Footprinting Urban emissions are defined both by the economy- Analysis (CIFA; GPC Basic Plus): Builds upon wide as well as by local emission drivers. There is Community Wide Scope 1 + Scope 2 accounting no single model that can be used to define and by adding on Scope 3 emissions associated identify key emission drivers in cities. Extensive data with transboundary lifecycle production of are required to determine a city’s carbon footprint fuels and key materials needed to support the and foresee its evolution based on the type and provisioning of seven key infrastructure and scale of GHG sources, also considering the expected food supply sectors in cities. The seven sectors impacts of current and planned policies and actions. are those that provide energy, water, waste/ This makes the attribution of emission reductions to wastewater treatment, transportation, food, specific actions, and hence the monitoring process, building construction materials and public/ complex. However, as the discussion of mitigation green spaces in cities. potential revealed, it is possible to broadly identify ff Consumption-Based GHG Emissions major sectors of emissions in cities, which are Footprinting: A conceptually different approach typically the buildings, transport, industry, waste, from the first three in that it focuses exclusively and agriculture/food sectors. Based on this, the on final consumption activities, including IPCC distinguishes four clusters of emission drivers consumption by government, households, that affect urban GHG emissions through their and business capital. The consumption-based influence on energy demand in buildings, transport, approach specifically excludes the energy use industry, and services: and GHG emissions associated with business/ industry operations within a city that export ff The economic geography and income, often to other parts of the world, e.g., businesses expressed in terms of Gross Regional Product operations such as education, manufacturing, (i.e., GDP equivalent at the scale of human and others that export services/products to settlement normalized on a per capita basis). outside the city. ff Sociodemographic factors (e.g., population size, age distribution, and household characteristics). The complexity in determining key emission drivers ff The potential to deploy technology to support and their elasticities to different climate-related emission reductions. actions and policies is yet another challenge in ff Infrastructure and urban form. determining a city’s carbon footprint. The relative impacts of the drivers on emissions 3.3.2. Determining key emission drivers differ depending upon whether urban areas are within city boundaries established and whether the city is mature or emerging/rapidly growing. Technology drivers as Once a GHG accounting boundary has been well as CUD, land-use, and urban form planning can defined, it is necessary to identify the relevant help emerging or expanding cities drastically reduce emission drivers to inform the definition of potential emissions, but can have limited relevance among mitigation targets and strategies, and prioritize mature cities that are already experiencing the lock- implementation actions. As discussed above, for in phenomenon. Economic geography and income, cities, these drivers can be classified in different on the other hand, are considered equally important ways and vary according to city size, local climate, for both mature and growing cities. This is because geography, population, urban economic structure mature cities in developed countries often have high (e.g., balance of manufacturing versus service sector), income, high consumption, and are net consumers development level, energy mix, state and popularity of goods and services with a large share of imports. of public transport, urban form and density, and In contrast, growing cities with energy intensive maturity of the urban infrastructure. industries, for example, are likely to contribute a Low carbon cities 2018 35 higher total and per capita GHG emissions compared and sulphur hexafluoride. Section 6.2 discusses how to those with an economic base in the service these tools can be relevant in the context on RBCF sector. Infrastructure and urban form as drivers of for the quantification and monitoring, reporting emissions are of medium to high importance for and verification (MRV) of emissions and emission cities in emerging economies, whereas in mature reductions. cities, they have comparatively less impact on emissions due to slow growth and challenges to 3.3.4. Tracking climate action incentivize substantial behavioral patterns change (e.g., nudging residents to denser urban centers from Tracking, defined here as the quantification and suburbs). Sociodemographic drivers are of medium monitoring of the mitigation impacts of policies and importance in rapidly growing cities and of relatively actions on urban emissions, is imperative for cities to small importance in mature cities where growth is be able to quantify and report on their contribution slow and populations are aging.72 to global climate action, and to benefit from RBCF. Tracking is also essential to enable better planning 3.3.3. Data limitations and management of urban climate-related policies and actions and to align incentives, including The third key challenge in defining a carbon footprint under NDCs. This section discusses the parameters is data constraints. Major sectors responsible for that need to be tracked to quantify the mitigation emissions in cities tend to have diffuse sources (e.g., impacts of policies and actions, e.g., under an RBCF buildings and transport), which makes accurate instrument, and the tools and approaches that are accounting of the aggregate emissions challenging available for cities. and resource intensive. The GPC is one of the most widely used frameworks for cities and local The mitigation outcomes of supported policies and governments to identify, calculate, and report their actions can be defined as follows: emissions. Other existing frameworks include ICLEI’s International Local Government GHG Emissions Emission reductions resulting from supported Analysis Protocol, Covenant of Mayors Sustainable policy/actions [results/impacts] = Baseline emissions Energy Action Plan Baseline Emissions Inventory [hypothetical] – Emissions after implementation of (BEI), United Nations Environment Programme policy/actions [MRV-able parameter] (UNEP) and the World Bank’s International Framework for Reporting GHG Emissions from ff Emission reductions resulting from supported Cities, and GHG Regional Inventory Protocol. In policies/actions can either be calculated based general these are bottom-up approaches that use on actual measurements ex post or estimated samples and then scale up the results or top-down ex ante. approaches where global or national datasets ff Baseline emissions are a hypothetical parameter. are downscaled. The upscaling and downscaling They can be informed by snapshots provided can result in significant uncertainties in the final by inventories complemented by projections emission calculations. Available data may also be of the expected evolution of economic, policy, biased, since most of the urban GHG emissions and regulatory frameworks, i.e., aligned with the estimates that exist do not include smaller and NDC targets. For policies, baseline emissions medium-sized cities and the data focuses on CO2 can also be back calculated using the inventory and not all forms of GHG emissions, i.e., methane, data, by modeling the emissions that would be nitrous oxide, hydrofluorocarbons, perfluorocarbons, observed without a supported policy. 72 Source: IPCC. 2014. Low carbon cities 2018 36 ff Emissions after implementation of policy/ A growing range of urban climate action planning actions can be directly monitored through GHG tools and methodologies are now becoming available inventories (or direct measurements) or modeled to support ex ante calculations of impacts of urban on an aggregate level using the inventory data as interventions on GHG emissions/energy savings at well as appropriate benchmarks and/or default different levels starting from individual measures factors. and investment programs to sectoral measures and policies, and integrated urban planning. While An aggregated, inventory-based approach to these tools are not specifically designed to track tracking climate action has been put forward as GHG impacts under crediting approaches, they can one of the most straightforward options, since provide an initial useful basis for tracking. These tools the entire spectrum of policies and interventions include, for example, the Climate Action for Urban undertaken by cities to achieve climate action Sustainability (CURB) tool (see Box 2 for an example plans can be reflected. The situation, however, of its application), Calthorpe Rapid Fire/Urban quickly becomes complicated once there is a need Footprint, Compact of Mayors Emissions Scenario to attribute the mitigation outcomes to a specific Model, City Climate Planner, and City Performance set of policies and actions, such as under crediting Tool (Siemens).73 Other tools, such as the Tool for approaches. This is especially true given the high Rapid Assessment of City Energy (TRACE)74 and level of integration and interaction of the actions the GPC described in Section 3.3.1, also provide that is often observed in cities, as discussed in useful elements to set mitigation goals and track Section 3.2. performance over time. Box 2: Examples of application of CURB tool and EDGE Byblos is a coastal city in Lebanon 42 km north of investments include energy efficient buildings, the national capital, Beiruit. The city of Byblos is photovoltaic systems for buildings and street renowned as a UNESCO World Heritage Site, and lights, and improved management of organic one of the founding members of the Rockefeller waste. Foundation’s 100 Resilient Cities. The city of Byblos engaged the World Bank to conduct an analysis New Orleans is a city in the U.S. state of Louisiana, with CURB to identify scalable, low-carbon located on the Gulf of Mexico. The city was the investments that can be implemented rapidly in site of the devastating Hurricane Katrina in 2005 Byblos, and later implemented in secondary cities and continues to be threatened by sea level rise. across Lebanon. The CURB analysis evaluated six New Orleans previously took action through sectors and identified actions that could reduce memberships with the Global Covenant of Mayors the city’s emissions by 40 percent. Key targeted and the Rockefeller Foundation’s 100 Resilient Cities 73 For CURB see http://www.worldbank.org/en/topic/urbandevelopment/brief/the-curb-tool-climate-action-for-urban-sustainability; for Urban Footprint see https://urbanfootprint.com/; for Calthorpe Rapid Fire see http://getinsight2050.wpengine.com/wp-content/uploads/2015/07/RapidFire_V_2.0_ Tech_Summary_0.pdf; for the Compact of Mayors Emissions Scenario Model see https://www.wri.org/sites/default/files/Compact_of_Mayors_Emissions_ Scenario_Model.pdf; for City Climate Planner see https://cityclimateplanner.org/; for the City Performance Tool seehttps://www.siemens.com/global/en/ home/company/topic-areas/intelligent-infrastructure/city-performance-tool.html. 74 For TRACE see http://www.esmap.org/node/235. Low carbon cities 2018 37 program. The city launched a resilience strategy in needs using CURB. Lastly, the city can estimate 2005, and in 2017 it created a comprehensive climate the potential contribution to China’s NDC goal action plan. As part of the city’s climate action plan, based on the various scenarios modeled by using CURB was used to create a GHG inventory and to CURB. To address the opportunities in the building identify carbon reduction strategies for the city. sector, the EDGE tool was used to design the Three key areas of interventions were identified green buildings project component (including using CURB, including the modernization of energy LED lighting, efficiency cooling systems, and solar use, improvement of transportation, and reduction photovoltaic (PV) panels on residential roofs). EDGE of waste. is an approved green building certification tool in China and has an advantage of facilitating the As part of the China’s Yangtze River Economic connection of projects with financial institutions. Belt project of the World Bank, CURB was used The overall estimated impacts from the identified to identify and design low-carbon investment actions are as follows: projects across six sectors, including green buildings, landfill gas and capture, improving paper ff Up to US$10 million saved in energy costs by and organic waste management, and wastewater Fuzhou by 2035. treatment and biogas recovery. Moreover, Fuzhou, ff Consumption of fossil fuel reduced by the the capital and one of the largest cities in Fujian equivalent of burning 279,427 tons of coal. province in China, estimated cost savings, energy ff About US$250 million of investments leveraged reduction, and emission reduction investments in the city. The Global Platform for Sustainable Cities (GPSC) address urban mitigation. At the same time, these is currently reviewing tools to assess impacts of tools currently contain some significant limitations integrated urban planning on GHG emissions.75 The as in relation to the specific methodological needs main available modeling methods and tools have of crediting approaches. For example, while CURB been assessed and compared based on several includes the possibility to qualify urban mandates criteria including the specification of a baseline by sector, most of the tools in Table 2 do not accounting methodology and coverage of different provide the possibility to single out the impact of actions within various planning levers (CUD, single a pre-identified set of policies and measures in the sector strategies, cross-sector strategies, and presence of the multiple vertical and horizontal behavior change and policy). Table 2 provides a policy interactions discussed above. Section 6.2 summary of this analysis, which gives useful insights discusses how these tools might be used to support for the development of the new generation of crediting approaches and identifies other gaps that methodologies for crediting approaches to better need to be addressed. 75 Source: Global Platform for Sustainable Cities. Forthcoming. Low carbon cities 2018 38 Table 2: Summary of a review of tools to assess integrated urban GHG mitigation strategies 76 Tool Objective Link with GHG Comparability and transparency of Coverage inventories quantification CURB Help cities identify and prioritize Consistent with Activity data are transparent with some ff Single sector strategies: Y decarbonization actions GPC parameters relying on user input with ff Cross-sector strategies: N no guidance (e.g., elasticity—range of potential GHG reduction impact per unit of intervention, and participation rates in some programs, e.g., energy efficiency) City Performance Develop technology-based Consistent with Scenario development and estimates of ff Single sector strategies: Tool (CyPT) scenarios for meeting GHG GPC for energy, activity demand are transparent Y for buildings energy, mitigation targets buildings, and Elasticity and algorithms not publicly transportation, and transport available energy generation ff Cross-sector strategies: district energy UrbanFootprint/ Help assess whether Only scope 1 and Travel demand elasticities and algorithms ff Single sector strategies: Rapid Fire transportation and land-use plans 2 emissions are transparent; growth scenarios and Y for buildings energy comply with GHG mitigation building energy models are documented efficiency, transportation targets but not descriptive ff Cross-sector strategies: N ClearPath Forecast BAU and mitigation Consistent with Most component actions have ff Single sector strategies: strategy impacts; inventory GPC documented assumptions of elasticity Y for buildings energy development tool and participation rate efficiency, transportation ff Cross-sector strategies: N Urban Growth Help cities evaluate investment Only per capita New model, well-documented ff Single sector strategies: Scenarios needs for infrastructure GHG emissions Y for buildings, waste projects; Measure climate, ff Cross-sector strategies: N energy infrastructure cost, and accessibility indicators 3.4. Summary service provider, and partner (see Figure 12). Scaling up urban mitigation will require action within and The need and the potential for urban mitigation across sectors, and at the level of individual system has been well documented. However, the modes operators to replicate and broaden the scope of of governance, service delivery, infrastructure impacts. It is important to continue exploring the investment, and asset ownership (reflecting a ways to use carbon and climate finance to nudge diversity of cities types and development phase) cities to systematically incorporate climate change are complex. This means that there is no simple considerations. This starts with urban planning approach to identify mitigation policies and actions (which provides the basis for efficient and effective and assess their costs, prioritize and implement mitigation action). Cities also need to increase their them, and quantify their mitigation impacts. focus on enabling policies and regulations that can help align investor decisions and consumer Local governments need to work with public and choices with the transformational low-carbon private partners to create holistic approaches that urban pathways. The financial support that can be align with and are enabled by national frameworks mobilized through crediting approaches or other and policies. Cities play various roles in supporting international collaborative actions needs to be urban mitigation, from policy maker, to regulator, developed in a way that reflects the complexity 76 Source: Global Platform for Sustainable Cities. Forthcoming. Low carbon cities 2018 39 “The development of appropriate urban solutions requires a continued advance from purely sectorial and variability of the city context approaches to the urbanization, where the capacity and allows a better fit with holistic, more integrated and to utilize carbon or climate finance integrated approaches. This could holistic planning, instruments effectively may also be help maximize cities’ use of private construction, and the lowest. International climate finance and the effective use of management of finance is increasingly used by scarce public resources both at cities, and a policy, cities but uptake remains limited.78 national and international levels. legislative, and fiscal This is also true for the crediting environment that approaches that have been To achieve this, international supports action.” 77 deployed in the past, as discussed support is needed to strengthen in Section 4.1. capacities at the urban level to plan for action; help improve urban-scale GHG However, crediting approaches have the potential to metrics, data collection, and analysis methods; become more feasible under the Paris Agreement develop appropriate financial instruments; and if appropriately and flexibly designed. The following bring implementation programs close to the sections of the report discuss how such approaches investable grade. More specifically, this support can support urban mitigation in the context of the is critical in lower income countries facing rapid Paris Agreement. Figure 12: Achieving urban mitigation at scale: a diversity of options ff Incentive for public transport use City acting as policy ff Traffic regulation/parking policy maker, regulator and service provider ff Procurement of municipal services Focusing on the role of the ff Projects/programs in urban infrastructure city: shaping vs implementing ff Building codes City acting as implementing agent ff Waste management regulation of a national policy ff Vehicle efficiency standards ff Energy efficiency in buildings Replicating discrete measures at sectoral ff Efficient street lighting and subsectoral levels ff Bus rapid transit Achieving Broadening the ff Community-level energy programs scale at scope of action to interconnected sectors ff Distributed renewables multiple levels ff Planning for compact cities Focusing on policy levers that lead to ff TOD transformational impacts ff Mixed land-use zoning 77 Source: UN-Habitat. 2017. 78 Source: Tänzler, Dennis, Annica Cochu, Rainer Agster, Belynda Petrie, Cristobal Reveco, and Bedoshruti Sadhukhan. 2017. Challenges and opportunities for urban climate finance. Lessons learned from eThekwini, Santiago de Chile and Chennai. Bonn/Eschborn: GIZ. Low carbon cities 2018 40 4. ROLE OF CREDITING APPROACHES TO SCALE UP URBAN CLIMATE MITIGATION Crediting approaches to deliver carbon or climate 4.1. What crediting finance have demonstrated that they are an effective tool for mobilizing private sector finance and approaches are delivering market change.79 Yet, past applications of crediting approaches, mainly through international As introduced in Section 1.1, crediting approaches crediting mechanisms such as the UNFCCC Kyoto rely on a baseline-and-credit technique to quantify Protocol flexibility mechanisms (CDM and JI) have had the GHG emission reductions/avoidance resulting limited success in cities. This section first gives further from mitigation actions (see Figure 13). They can be details on the use of crediting approaches for carbon applied to support projects and sectoral programs and climate finance, building on the introduction and policies that have a demonstrable mitigation in Section 1.1. It then discusses the lessons learned impact. Crediting approaches can be used both from the first generation of international crediting in the international carbon markets, in market mechanisms and, more broadly, from RBCF that uses mechanisms, and as a modality to disburse RBCF crediting approaches to disburse climate finance for when a GHG emission reduction metric (tCO2e) is achieved mitigation outcomes. It closes by exploring used to demonstrate the achieved outcomes of the how the risks linked to the use of crediting approaches activities supported by RBCF. in cities evolve as climate action is scaled up to reach the goal of the Paris Agreement. Figure 13: Quantification of emission reductions/avoidance under crediting80 Emissions Historical emissions Baseline emissions Actual emissions Emission reductions Time Start of End of crediting period crediting period 79 Source: World Bank, Ecofys, and Vivid Economics. 2017. State and Trends of Carbon Pricing 2017. Washington, DC: World Bank. 80 Source: Authors Low carbon cities 2018 41 4.1.1. Market mechanisms Compliance with these conditions allows the mitigation outcomes to be converted into One of the most successful international carbon monetizable credits or other type of assets/units markets mechanisms—the CDM that was introduced eligible for international transfers and compliance under the Kyoto Protocol—relies on a crediting under respective crediting protocols and offsetting approach. The CDM enabled emission reduction schemes. The requirement for permanence is projects in countries without emission reduction unique to carbon sequestration activities (such as targets to earn carbon credits in the form of certified forestry and agricultural land-use projects) where emission reductions (CERs), each equivalent to CO2 taken out of the atmosphere and sequestered one tCO2, for reducing emissions below an agreed (stored) must not be released back. It can also, in business-as-usual scenario (or a benchmark) principle, be interpreted as a need to ensure the referred to as a baseline. These CERs can be traded nonreversibility of mitigation outcomes in other and sold, and used by countries with an emission types of interventions. reduction target to a meet a part of their target.81 The CDM created a carbon price signal to incentivize In the case of crediting, environmental integrity mitigation measures in developing countries while primarily means that market mechanisms (and giving industrialized countries flexibility in how they other forms of international cooperation used for meet their emission reduction targets. compliance purposes) should not result in higher global emissions than without crediting. The The additional revenues from carbon finance principle of avoiding double counting implies that enhance the overall financial viability of mitigation no two entities can account for the same mitigation measures and/or contribute to overcome important outcome to demonstrate emission reductions/ barriers to low-carbon investment (e.g., consumer compliance.82 behavior, technology choices, poor operational practices, etc.). They also create a positive incentive Market mechanisms using crediting approaches for good management and operational practices can be project-based, such as the CDM. In that case, that help to sustain emission reductions over time. emission reduction credits are mainly generated As such, carbon credits are not designed to directly through technology-based interventions at one address the capital investment needs of mitigation facility or a defined set of facilities. measures as payments for emission reductions are available upon the project’s completion and In a programmatic crediting mechanism, such as operation. Programmes of Activities (PoAs) under the CDM, emission reduction credits can be generated While rules can vary between market mechanisms through the replication of a predefined set of using crediting approaches, apart from similar measures within one of several sectors, e.g., demonstrating that the emission reductions are the installation of solar water heaters in residential additional to what would be generated under buildings and building envelope rehabilitation. a business-as-usual scenario, rules generally also require proof that in creating mitigation outcomes: Finally, a scaled-up mechanism credits emission reductions “achieved across a (large) number of ff The mitigation outcomes are real, measurable, GHG sources, or across whole sectors of a country’s verifiable, and permanent. economy. Key features that distinguish scaled-up ff Environmental integrity is maintained. approaches from project-based or programmatic ff Double counting is avoided. crediting include the following: 81 Note that when CERs are bought as a proof of emission reductions without being used to comply with an emission reduction target, the CDM is used to certify the mitigation outcomes (i.e., using a crediting 82 Partnership for Market Readiness (PMR). 2017. Establishing Scaled-up approach) that are rewarded by RBCF, as described in Section 4.1.2. Crediting Program Baselines under the Paris Agreement: Issues and In this case the crediting approach is used to disburse RBCF. Options. Washington, DC: World Bank. Low carbon cities 2018 42 ff Baseline emissions are established collectively While relatively new for climate finance, results-based for a predefined group of GHG sources (for finance (RBF) is well-established as an approach, and example, all sources within a sector or subsector has been used successfully in other fields such as of the economy). health and education.86 ff Credits are issued or recognized based on aggregate reductions achieved across all Literature on RBF 87 indicates that it can be a useful included GHG sources. tool for disbursing subsidies or lending in support of ff Actions that reduce GHG emissions can be climate-related policy, or for increasing the efficiency diverse and may be undertaken by multiple of procuring international support. At the center of entities responding to incentives, rather than a the choice between RBF and conventional financing single implementing entity. is a decision regarding the allocation of project risks ff Credits may be issued to a single entity, such as between the provider and the recipient. The Energy a government body, responsible for establishing Sector Management Assistance Program (ESMAP) and implementing policy incentives or notes that under an RBF approach, the risks borne requirements (including government enacted by the provider are reduced, although the degree of policies, for example) that drive emission autonomy of achieving defined goals is much higher reductions across all included GHG sources”.83 than under conventional financing models: if the project fails to deliver the expected results, then the 4.1.2. RBCF provider does not disburse financial resources. As a corollary, an RBF approach faces much greater risks Crediting approaches can also be used under other than a conventional approach, as the recipient will instruments of international collaboration such only receive additional resources in the event that the as RBCF, which is one of the financing modalities desired results are provided.88 Placing greater risks on to support climate mitigation.84 Experience with the recipient is both an advantage and a disadvantage broader RBCF, i.e., beyond RBCF using crediting that will determine whether an RBF approach is to approaches, can bring additional insights on how to be preferred. This is further explored in the context design new crediting approaches for cities. of using crediting approaches for urban mitigation under the Paris Agreement in the rest of the report. While there is no universally agreed upon definition of RBCF, it can be broadly defined as a financing An RBCF can be designed in a number of ways. A simple approach where the RBCF provider (e.g., investor model for how a RBCF mechanism would operate or donor) disburses funds to a recipient upon the for a hypothetical solar PV program supporting the achievement and verification of a pre-agreed set reduction of emissions through increased distributed of climate action results achieved by the recipient solar capacity is shown in Figure 14. (e.g., national, regional, or municipal government, implementers, and service providers).85 These Existing literature generally indicates that financing results are typically defined at the output level (e.g., must meet the following four criteria to qualify as RBCF: development of specific low-carbon technologies) ff Payments are made for climate change or outcome level (e.g., increase in renewable mitigation or adaptation results. generation or decrease in emissions). As RBCF is ff Payments are made ex post. based on the principle of providing payments if ff Payments are made once predefined results and when a climate action result is delivered, it have been achieved. provides incentives for climate actions to be taken. ff Reported results have been independently verified. 86 Source: World Bank, Ecofys, and Vivid Economics. 2017. 87 Source: Vivid Economics. 2013. Results-Based Financing in the Energy 83 Source: Partnership for Market Readiness (PMR). 2017. Sector: An Analytical Guide. Energy Sector Management Assistance 84 Source: World Bank and Frankfurt School of Finance and Program (ESMAP), Technical report 004/13. World Bank, Washington, Management. 2017. DC.. https://openknowledge.worldbank.org/handle/10986/17481, 85 Source: World Bank and Frankfurt School of Finance and World Bank and Frankfurt School of Finance and Management. 2017. Management. 2017. 88 Source: Vivid Economics. 2013, World Bank. Low carbon cities 2018 43 Figure 14: Example of a RBCF mechanism for residential solar power systems89 RESULTS RBCF INDICATORS INPUTS ACTIVITIES OUTPUTS OUTCOMES IMPACTS concessional solar panel new installed reduction in CO2 reduced climate finance installation capacity emissions impacts An interesting feature of RBCF is its flexibility as RCBF approach is in the various climate change a design element. It can be combined with other mitigation actions implemented around the financial instruments—such as upfront grants, world. However, as seen from Figure 15, RBCF is loans, or guarantees—and be a vehicle for delivering already well established in the forestry and land- the funding associated with those financial use sector as the annual disbursements by the instruments.90 As such, RBCF does not compete 12 largest RBCF funds globally are forecast to with existing financial instruments but rather can reach almost US$500 million in 2018 (the decline complement them. This feature makes it difficult in future disbursement is due to the respective to accurately determine how widely applied the funds’ lifespan). Figure 15: Estimated disbursements from the 12 largest RBCF funds91 600 Annual disbursements (US$ million) 500 400 300 200 100 0 2010 2015 2020 2025 2030 Others Energy sector Forestry and land-use sector 89 Source: World Bank, Ecofys, and Vivid Economics. 2017. 90 Source: World Bank and Frankfurt School of Finance and Management. 2017. 91 Source: World Bank, Ecofys, and Vivid Economics. 2017. Low carbon cities 2018 44 By encompassing a full cycle of structural change 4.2. Why the first from inputs to results, RBCF has demonstrated its ability to facilitate carbon pricing and market generation of crediting building, support policy process to achieve NDCs, mechanisms had a limited and leverage private sector activity and financing.92 As highlighted in Section 1.1, while the crediting success to deliver in cities approaches that are at the center of this report focus on GHG emission reductions as the outcome, the The first generation of crediting instruments, with use of different metrics (i.e., other than tons of GHG the CDM being the largest, was unable to support emissions), demonstrated by RBF in other sectors, urban mitigation at any sensible scale, and the could provide larger flexibility for cities and influence number of urban programs supported was limited a broader range of policy levers and actions. Such (see Box 3). Understanding the reasons behind this policy levers and actions are critical to the adoption can help determine what needs to change in the of low-carbon urban development pathways, new mechanisms that use crediting approaches— for example urban planning, CUD, TOD, deep including under Article 6 of the Paris Agreement—to decarbonization of urban energy supply, and new unlock the mitigation potential in cities. infrastructure for electric transportation. Including other metrics can also help incentivize adaptation The limited success of the CDM to deliver in cities actions to improve urban resilience. stems from some inherent limitations of this Kyoto Protocol flexibility mechanism, which were further Besides exogenous factors such as demand for amplified by the complexities and challenges of mitigation outcomes, the finance delivered through implementing urban mitigation, in particular: crediting approaches have some distinctive features that differentiate it from other conventional types ff The complexity and regulatory uncertainty of of finance such as loans and grants. Therefore, the the evolving rules of the mechanism. analysis of the first generation of crediting instruments, ff The strong focus on technology-based and most notably of the CDM, presented in the next interventions and exclusion of broader sectoral section can help define when, why, and how crediting or policy crediting. approaches may be suitable. Understanding these ff The marginal abatement perspective as the features is important for the subsequent discussion on main rationale behind crediting. the appropriateness and potential impacts of crediting approaches to support urban mitigation at scale. Box 3: Urban CDM—Numbers and examples 93 Out of the 533 projects registered in the CDM that likely reduce emissions from cities, 369 are landfill As of end of March 2018, the CDM has successfully projects, showing the concentration of the CDM witnessed the registration of over 7,800 projects and on one urban sector (solid waste management). has issued just under 2 billion CERs. However, out The gap in urban coverage becomes more glaring of those CDM registrations, just over 500 projects when examined from a mitigation perspective: of are likely to reduce emissions from cities, and they the 109 million tCO2e that came from projects likely issued close to 109 million tCO2e. That represents to address urban mitigation, only 7.9 million tCO2e about 7 percent of the number of CDM projects and (less than 0.5 percent of the total issued CERs) came 6 percent of the generated reductions. from sectors other than landfills. 92 World Bank and Frankfurt School of Finance and Management. 2017. 93 Based on analysis of the UNEP DTU CDM pipeline (http://www.cdmpipeline.org/), accessed 10 April 2018. Low carbon cities 2018 45 Figure 16: First generation crediting mechanisms: Focus on technology-based intervention and exclusion of sectoral and policy crediting ff The limited capacity of ex post payments associated with crediting to directly contribute POLICY-DRIVEN to overcoming investment/financial barriers. MITIGATION Complexity and regulatory uncertainty of the Not addressed in first Not addressed in first generation crediting generation crediting evolving rules of the mechanism. The CDM has mechanisms mechanisms been associated with regulatory complexity and uncertainty and heavy data requirement, resulting Territorial in high transaction costs.94 Regulatory risks and & transport restrictive eligibility requirements of crediting (e.g., policies Reduction of financial additionality) reduced the predictability Policy limiting distance travel and attractiveness of carbon finance to local personal vehicle use authorities and private service providers. GHG standards for sustainable communities These high transaction costs tended to skew projects toward large, single-installation projects with high Building codes emission reduction volumes, comparatively simple Life-cycle MRV, and hence lower transaction costs. optimization of waste management Focus on technology-based interventions and exclusion of sectoral and policy crediting. Under DISCRETE HOLISTIC the CDM, the methodological approaches to ACTIONS ACTIONS calculate emission reductions from an activity rely to a large extent on real measurement at facilities. This is hardly feasible for typical urban low-carbon policy Bus rapid Renewable measures, such as TOD, introduction of optimized transit energy Cycling lines generation mass transit transportation options, incentives to reduce waste generation at the consumer level, and establishment of building codes. This is Energy efficient Efficient street largely because of the highly dispersed sources of appliances lighting emissions, such as multiple individual buildings or vehicles, and the small mitigation outcome of individual actions, for example, a single trip by one Waste Energy passenger. The methodologies developed under recycling efficiency Landfills buildings the CDM could not accommodate the complexities, data limitations, and lower level of accuracy linked to the evaluation of consumers’ behavior changes. Covered by first Covered by first They also did not resolve the issue of the attribution generation crediting generation crediting of the mitigation impacts. This question is especially mechanisms mechanisms relevant for policy-driven actions, which were not addressed by the CDM in general, including for PROJECT-BASED MITIGATION cities, as shown in Figure 16. 94 Source: Ecofys and Climatekos. 2013. CDM Market Support Study. For Kreditanstalt für Wiederaufbau. Low carbon cities 2018 46 An important attempt to improve the CDM set of installations. Therefore, despite their ability included the expansion of rules to include PoAs to incentivize lower carbon choices of individual to accommodate a combination of several types systems operators (e.g., in power supply, district of mitigation actions, for example, using different heating efficiency, or building energy performance), methodologies under a common PoA umbrella (see CDM projects often lacked alignment with broader Box 4 for an example of a PoA).95 As such, the PoA policy objectives of cities, and were rarely integrated approach allowed the design and implementation at earlier stages of urban planning to support of citywide approaches to carbon finance. Cities sectoral policies that create demand for low-carbon had the flexibility to combine relevant technology investments. options across different sectors given their financial and institutional capacities, thus lowering the Despite the requirement to contribute to the transaction and administration costs that would sustainable development of the host country, carbon otherwise have been incurred to set up individual finance flows under the CDM had limited ability carbon finance projects. to account for and reward some of the important associated co-benefits of mitigation programs However, while PoAs enabled the replication of that directly contribute to the achievement of key predefined sets of similar measures, they did not urban developmental priorities and objectives (see address policy-driven mitigation where the exact Section 3). mitigation measures and outcomes are not known ex ante. First-generation crediting mechanisms did This led to low implementation sustainability, a not explore how to credit regulation/policies due shortage in deployment, participation barriers, and to the difficulties in accountability and attribution limited use of available carbon finance resources. of the impacts of these integrated measures, The main implementing agents for the CDM projects which are much more complex than clearly in cities were private investors and/or utilities defined single supply- or demand-side efficiency prioritizing relatively small investment activities with projects with relatively small coverage (i.e., with low scalability. Although PoAs allowed for broader, limited potential to achieve the sectoral-level, larger programs that enabled economies of scale, transformational impacts). Under the CDM, this their focus remained on maximizing emission led to a prioritization of project-based measures reductions while minimizing costs. that credit technical interventions (i.e., fuel switch, improvements in specific energy performance Ex post payments not directly contributing solutions in a building). to address investment/financial barrier. The revenues from the sale of project-based carbon Rationale for crediting based on marginal credits were not designed to directly address the abatement perspective. The CDM, as a market up-front capital investment needs as payments mechanism, was driven by marginal carbon for emission reductions were typically available abatement costs (MAC) and transaction costs upon the demonstration of the mitigation results, minimization, and focused on the outcomes during a project’s operation. The so-called advance expressed in the GHG emissions metric. This meant payments, which were disbursed up front in a technology and installation-based focus, with some CDM projects, represented a fraction of the mostly standalone projects in a single or a small expected overall amount of carbon finance and were essentially used to ensure the regulatory compliance of CDM projects and PoAs and set 95 The World Bank was instrumental in supporting the development up the necessary MRV systems, and not to cover and piloting of the PoA approach. In the urban space this idea was relevant to design an innovative, holistic city-wide approach pursued investment costs.96 by Amman municipality in Jordan (Green Growth program of the City of Amman) at the time of the introduction of the PoA approach. Today, the Great Amman municipality, with the support of the World Bank and its Carbon Partnership Facility, continues its pioneering efforts and works on designing and piloting a mitigation program under the new generation of crediting approaches under the Paris Agreement. 96 In addition to structural risks. Low carbon cities 2018 47 Box 4: Egypt Vehicle Scrapping and Recycling PoA97 The Egypt Vehicle Scrapping and Recycling PoA is part of a PM10 and other pollutants affecting air quality and human national program where owners of taxis, buses, microbuses, health. The equivalent of over 311,000 tCO2 was avoided and trailer trucks voluntarily surrender their old vehicles for between 2013 and 2017 as a result of the program. Since managed scrapping and recycling in exchange for financial all participating vehicle models must be assembled incentives used toward the purchase of new vehicles. The locally, the program also acts as an economic stimulus scrapping and recycling program is currently limited to taxi program, supporting the local auto industry. The Egyptian vehicles in the Greater Cairo Region, but there are plans to Ministry of Finance is planning to start the next phase of expand to other regions and vehicle types. All replacement the program with an expansion to other areas outside of vehicles are pre-approved by the government, in Greater Cairo. agreement with car dealers for cars that are manufactured or assembled in Egypt. The Ministry of Finance designed The one-stop-shop created by the Ministry of Finance to the project and collaborated in parallel with the World manage the program is innovative and the key to its success. Bank’s carbon funds to develop a PoA where the Ministry It streamlined the process for scrapping and replacing taxis of Finance sells carbon credits for reduced emissions to the and forced stakeholders to collaborate. It was paramount Carbon Partnership Facility. that taxi drivers not be without their source of income for too long, as that would discourage them from applying. By Since 2008, Egyptian traffic law states that owners of mass reducing the time between surrendering the old vehicle transport vehicles older than 20 years cannot get new or and receiving a new taxi to 5–7 working days, the process is renew their operating licenses. The law was designed not too cumbersome. The efficiency of the one-stop-shop to get old taxis off the streets to reduce GHG emissions, and the incentives that the Ministry of Finance provided improve air quality, and decrease traffic accidents. Because resulted in a great success, to the point where the scrapping the law did not specify how eligible vehicles were to be site was overwhelmed. disposed of, owners could choose to sell their vehicles in regions where the law did not apply, convert their vehicles The Ministry of Finance is authorized to disburse a subsidy to private use (private vehicles are not affected by the law), of up to EGP 5,000 (US$280) per eligible surrendered or dismantle their vehicles and sell the engines for use in vehicle. The entire transaction takes place in one location, other vehicles. Without a scrapping and recycling program where bank representatives assist with loan applications that encouraged older vehicles to be taken off the road and and where the Ministry of Interior inspects old vehicles ensured that vehicle components were permanently (and and issues registration documents for new cars that safely) disposed of, the law would not have had its intended are available to be picked up onsite. Each stakeholder impact on safety, air quality, and GHG mitigation. The carbon plays an important role in the program: the Ministry of finance revenue stream helped the Egyptian government Finance oversees the program, provides payments to old get this first-of-its kind program off the ground. The World vehicle owners, guarantees loans against default, pays the Bank provided an advance payment to the ministry to vehicle sales tax, exempts customs duties on imported create data monitoring and management infrastructure. car components, and maintains the project database. The Future carbon payments will help finance the monitoring Ministry of Interior provides land for the scrapping facility system throughout the lifetime of the program. and manages the vehicle inspections and licensing of new taxis. Four banks provide low interest loans. Five car dealers As a result of the PoA, more than 46,000 new taxis have provide vehicles at a discounted rate, install meters, paint replaced aging taxis in Cairo alone, some of which were exteriors, and provide a 3-year warranty and maintenance. over 50 years old. This represents over 90 percent of Cairo’s An insurance company provides insurance against all taxi fleet. This has reduced accidents and emissions of standard causalities (theft, fire, accidents, etc.). 97 CPF Fact Sheet. no date. Egypt Vehicle Scrapping Program. Low carbon cities 2018 48 Box 5: Caixa Solid Waste Management CDM PoA 98 Caixa Solid Waste Management CDM PoA provides project developers of different levels of credit worthiness both technical and financial assistance to the Brazilian and technical capacity to join the PoA, Caixa considered municipalities to scale up the use of landfill gas collection various financing options. These included using the CER systems and renewable energy generation technologies. revenue from the CDM activities to reduce the interest rates Caixa Econômica Federal (Caixa) is the main agent of public and as partial guarantee for the loans. policy for the Brazilian federal government and the second largest public bank in Latin America. Its network, the largest Strong financial intermediary. The length of administrative in Brazil, covers all 5,564 Brazilian municipalities with more and processing time at the level of the financial than 17,000 service points. Caixa is involved in financing intermediary/national program coordinator may become a public infrastructure construction, mainly focused on typical issue for programmatic approaches and may come sanitation, allocating resources to states and municipalities. on top of regulatory length and risks associated with the Caixa also acts as a broker for federal government funding carbon finance requirements. An arbitrage is necessary for the public sector. While Caixa is primarily a banking between the advantages of the “one window approach,” institution, it has developed the capacity to provide technical such as used in this PoA, and the potential delays to advice to its borrowers. Most of the municipalities in Brazil operationalize this approach. The choice of an appropriate have limited capacity to prepare concession processes, deal counterpart or a dedicated early effort to build readiness with issues related to waste pickers, process environmental becomes critical. Such a counterpart is also able to get the licensing, and conduct concession processes. From incentive scheme operational on time to keep commercial 2013–2018, the three projects under the program have and political momentum at the beginning of the operation collected and flared over 150 million m3 of methane, the to help mobilize response and adherence of targeted equivalent of over 3 million tCO2, reaching its emission implementing entities to the program. reduction target several years ahead of schedule. A pipeline of projects. The level of preparedness of the Financial innovation. The PoA introduced several targeted portfolio of subprojects at the outset of the innovative financial features from the onset, including the operation can be an issue for programmatic approaches. use of a strong sophisticated national financial intermediary This is relevant to any future sectoral-level mitigation (Caixa), the integration of carbon finance into the existing programs. A higher clarity on the subprojects can help practices of the national financial intermediary, and the better define the size of resources to be mobilized for the incorporation of the carbon finance performance into the operation. At the same time, it may require mobilization of definition of the financial cost faced by the municipalities potentially significant preparation resources and could defy and operators (blending of financial tools) as well as into the purpose of the programmatic approach that allows for the World Bank Group lending operation. To encourage the progressive inclusion of activities. In theory, carbon finance as a guaranteed source risky assets to many investors given the high of return could create the conditions needed for uncertainty of actual CER generation (often lower mitigation activity implementers (developers) to than estimates in CDM project design documents), approach lenders to secure the necessary up-front mainly due to CDM complex procedures and financing, based on the expected future revenues. technical and regulatory uncertainties. These risks In reality, this was rarely the case under the were compounded by uncertainty around CER CDM/JI as both lenders and developers generally prices due to market fluctuations. The Caixa Solid lacked experience with concrete carbon finance Waste Management CDM PoA is a good example programs to allow for accurate costs and returns of how an innovative financing structure leveraging analysis, and accounting for the various risks.99 expected CER revenues secured up-front payment Under the CDM, CERs were mostly deemed as (see Box 5). 98 Source: Own analysis and UNFCCC. PoA 6573: Caixa Econômica Federal Solid Waste Management and Carbon Finance Project. https://cdm.unfccc.int/ ProgrammeOfActivities/poa_db/Q9LW74OKAXMUZPCE3IJBVS16025HDT, CPF Fact Sheet, no date, Caixa Landfill and methane capture PoA. 99 Source: World Bank and Frankfurt School of Finance and Management. 2017. Low carbon cities 2018 49 For cities, sectors that hold important mitigation Sections 4.3.1 and 4.3.2. Risks are defined here as potential, such as transport or TOD, are likely to factors that might impact the ability of the recipient be caught by the initial financing barrier as their to deliver emission reductions of quality (i.e., that mitigation actions are often capital-intensive and represent real emission reductions and maintain associated with high MRV costs under the first the environmental integrity of the instrument), in generation of crediting mechanisms. The financing quantities as were planned, and as per the agreed barrier is also exacerbated in poor countries that schedule and costs. face scarcity of long-term capital for project implementation and gaps in the enabling business 4.3.1. Risks related to the use of crediting environment that would be critical for a successful approaches (and sustainable) investment. Securing sources of funding—both equity and debt finance—sufficient Institutional capacity: Risk associated with the to meet capital investment for mitigation measures requirements for both the finance recipient and has proved to be a major constraint in advancing provider to design and implement a credible projects, and is reflected in the fact that 87 percent intervention using a crediting approach as per of CDM projects are located in four of the largest a pre-agreed set of rules and planning. These emerging economies (China, India, Brazil, and requirements include capacity for technical/ South Korea).100 economic planning and managerial capacity to map out meaningful mitigation goals and achieve them, overcome the barriers of vertical/horizontal 4.3. How scaling up urban coordination, and align incentives. The recipient crediting approaches needs to be able to establish climate action plans and implementation strategies (e.g., mitigation impacts risks trajectory and/or carbon budget and link with the NDC coverage) and a robust and transparent Section 4.2 highlighted that to have a system against which payments can be made (e.g., transformational impact in cities, urban programs performance metrics, delivery milestones). using crediting approaches need to go beyond a project-based, technology-focused approach. As discussed in Section 3, scaling up mitigation This section examines how the risks of crediting action typically requires the involvement of a approaches would evolve for each of the three larger set of actors. As a result, the institutional scaled-up options defined in Section 3.1.4 and setting becomes more complex, and may require summarized in Figure 12 (i.e., replicating discrete the creation of an implementation or coordinating measures at [sub-] sectoral level, broadening scope agency for the activities supported by the crediting of action to interconnected sectors, and focusing on intervention. This brings up the risk insufficient policy levers that lead to transformational impacts institutional capacity. This risk increases with in cities). the complexity of the interventions supported by crediting, the level of vertical/horizontal The risk profile of interventions using crediting coordination required for implementation, and approaches in cities relates to both the characteristics the length of delivery periods. This institutional of urban mitigation and the crediting approach itself. capacity risk may also increase in the case of A summary of the level of these risks for each of limited technical support and should be assessed the three scaling-up options is proposed in Table 3, at the different stages of program development. and these risks are further discussed in 100 Source: UNEP DTU CDM pipeline, http://www.cdmpipeline.org/, accessed 10 April 2018. Low carbon cities 2018 50 Table 3: Scaling up urban mitigation: the impact on crediting and urban risks Replicating Broadening Focusing on discrete measures scope of action to transformational at (sub-) sectoral interconnected actions level sectors Institutional capacity: ff Capacity requirements to design and implement a credible intervention to deliver results as per pre-agreed set of rules Low-Medium Medium-High High and planning Aggregation: ff Capacity to deliver pre-agreed mitigation outcomes within expected timelines and manage associated performance Low Medium High risks Crediting risks Regulatory risks: ff Compliance risk in relation to pre-agreed regulatory requirements and rules of crediting approaches Low Medium Medium-High Monitoring: ff Ability of the recipient to measure, monitor, and verify results in a robust and transparent way. Low Medium Medium-High Planning uncertainty: ff Risk associated with deviations from the pre-agreed implementation plans Low-Medium Medium-High High Extended delivery periods: ff Performance risk associated with the length of the period required to achieve mitigation impacts at scale Low-Medium Medium High Urban risks Vertical/horizontal coordination: ff Required amount of vertical/horizontal coordination between sectoral, municipal, and/or metropolitan and Low Medium High national institutions Financial and investment barriers: ff Risk associated with the limited access to finance to implement the mitigation activity Medium-High Medium-High High It is also important to recognize that institutions performance risks of a targeted set of mitigation in lower income countries, which are often the measures, including multiple technologies, ones urbanizing the fastest, typically have the interventions, and policies within and/or across lowest capacity to use these financing instruments sectors. The aggregation of activities and/or their effectively. This reality underscores the significant cross-sectoral nature can increase performance risks, amount of effort needed to build capacities and which are closely linked with planning uncertainty ensure pragmatic governance and institutional and extended delivery periods. Nevertheless, if solutions. well designed, aggregation can also ease risk management through portfolio management, for Aggregation: Risk associated with the capacity example, through an appropriate flexible incentive to deliver pre-agreed upon mitigation outcomes structure and an appropriate mix of activities with within expected timelines and manage associated different risk profiles and schedules. Low carbon cities 2018 51 In the case of broadening interventions across technology or policy might not generate as many sectors, such as the development of low-carbon mitigation outcomes as anticipated. In the latter sustainable communities (including building case it can put at risk the environmental integrity construction, water supply, transportation solutions, of the intervention if the baselines are set higher and municipal service provision), more complex than the emissions level that would occur in the planning solutions and a higher level of vertical absence of the crediting approach. This risk is and horizontal coordination may be required. The exacerbated for the mitigation programs in the lead time to deploy the activities and demonstrate rapidly growing cities in developing countries. In achieved results in terms of energy savings or such cases, baseline emissions may continue to emission reductions may also increase. Therefore, grow significantly before reaching the peak or the associated risks may be significantly higher plateau to satisfy the increasing needs in energy compared to the replication of discrete activities, accompanying urban development. In the short and aggregation may come at the cost of increased term, the main impact of mitigation programs complexity and coordination/integration for the may be demonstrated in terms of reduced recipient of funds delivered through crediting carbon intensity of activities, and in the longer approaches. However, aggregating the different term in absolute emission reductions or avoided risk profiles—technological, financial, and carbon emissions. intensity—of covered mitigation actions may also ff Double counting: Risk related to the allow for the diversification of performance risks inconsistent definition of boundaries due to and give more flexibility to achieving pre-agreed the lack of appropriate accounting boundaries aggregate results (i.e., the community carbon when quantifying emission reductions, robust footprint). registries and tracking systems, and procedures to account for transfers of emission reductions.101 Regulatory risks: Risk associated with the design of For the crediting approaches used under the and compliance with the pre-agreed upon eligibility market mechanisms of Article 6—implying requirements and rules of the crediting approaches international transfers of mitigation outcomes— and the required standards and protocols. and where the urban mitigation programs cover sources that are included within a country’s NDC, For example: there is an additional risk of over transferring ff Compliance with methodologies to quantify emission reductions to another country. This risk ex ante the emission reductions expected from can jeopardize the country’s achievement of its the supported program/policy and to monitor NDC. It can be managed through a combination the achieved emission reductions ex post. of different approaches to baseline setting and/ The regulatory risks are associated with the or to restricting the transfer of GHG reductions,102 complexity of methodologies and their changes which requires coordination between the local over time, and the capacity to duly implement and national governments. monitoring and reporting requirements (see ff Attribution: Risk associated with the attribution also monitoring risk, below). Noncompliance of emission reductions to specific policies and with methodologies, such as a design not actions in presence of broader (complementary) covered by the methodology or development national policies. In case of horizontal/vertical of inappropriate baselines, can lead to under- or policy interactions and overlaps, both the over-quantification of mitigation outcomes. In provider and recipient may have limited ability the former case, it may have a direct, negative to manage the attribution of outcomes to a impact on the revenues expected from the crediting-supported intervention. crediting approach for the recipient, as the 101 Source: Partnership for Market Readiness (PMR). 2017. 102 Source: Partnership for Market Readiness (PMR). 2017. Low carbon cities 2018 52 Monitoring: Risk related to the ability of the Extended delivery periods: Risk associated with recipient to measure, monitor, and verify results in the performance of mitigation measures over the a robust and transparent way. In practice this risk period of time that is required to achieve mitigation may be associated with several factors, including: impacts at scale. The performance of mitigation measures is influenced by legal (e.g., operation ff Poorly defined performance metric or delivery permits), technical/commercial (e.g., delays in milestones against which to disburse additional construction, underperformance of equipment, revenues using crediting approaches. failure, environmental disaster, insufficient demand ff Complexity of the methodological approaches for the product), and capacities (e.g., to plan, build, that prevent the recipient from implementing and operate the equipment). This risk increases monitoring in due form and may result in lower for mitigation programs that include numerous levels of verified results; this risk is inherently mitigation measures and/or measures that are linked with the regulatory risks. implemented over a long period of time. The longer, ff Inappropriate monitoring system, faulty extended delivery period to deploy, implement, monitoring equipment, or misuse of the and demonstrate the mitigation outcomes means monitoring equipment. longer exposure to uncertainty in terms of delivery performance. This may induce the escalation of 4.3.2. Urban risks other risks. Based on the discussion of challenges and gaps Vertical/horizontal coordination: Risk associated of mobilizing urban mitigation at scale presented with the need to ensure vertical/horizontal in Section 3, this section looks at the main risks coordination between different sectors, municipal associated with the use of crediting approaches by and/or metropolitan institutions, and national cities specifically. institutions. This may lead to delays and weak performance of the activities. This risk may be Planning uncertainty: Risk associated with possible particularly high in the context of city-level actions, delays at the start, or other deviations from the pre- including where cross-sectoral or transformative agreed implementation plans for the mitigation actions are targeted (see Section 3.2.2). measures. As for the institutional capacity required for the intervention supported by crediting Financial barrier and investment risk: Risk approaches, reducing planning uncertainty requires associated with the limited access to finance to the development of sustainable climate action plans implement the mitigation activity. The crediting and efficient implementation strategies, but also approach alone is not well suited to reduce this the capacity to deliver—e.g., to secure construction type of risk that would remain comparable to the permits on time or build a transport infrastructure. situation without the revenue stream mobilized via a This risk increases with the complexity and level crediting approach, unless the financial institutions of vertical/horizontal coordination required to are ready to accept these future revenue streams as implement the activity and with the extended collateral for the future repayments. delivery periods. Low carbon cities 2018 53 4.4. Summary shows that crediting approaches are likely to be more appropriate and feasible to support The first generation of international crediting urban climate actions that prioritize and focus mechanisms provides insights into what future on the replication of discrete measures at (sub-) crediting approaches under the Paris Agreement sectoral level (e.g., end-of-pipe mitigation options will need to address, both from a design and a such as building retrofits or street lighting) and capacity perspective. Such instruments will need on interventions with a broader scope of action, to: including in the interconnected sectors (e.g., low- carbon communities and distributed renewables ff Keep rules simple and predictable while in the building sector). Wider transformational ensuring environmental integrity. interventions, such as CUD and TOD, call for a ff Enable a scale-up from technology-based substantial revisit to the way crediting approaches interventions to sectoral and policy-driven can be combined with other sources of financing actions. for cities. Without such an integrated, strategic ff Be combined with continuous support to approach to financing, covering the entire lifecycle capacity building to help planning and of structural change and the policy process development of implementation strategies, to support the long-term delivery of results, and bring projects/interventions to investment transformational interventions are likely to be readiness. more effectively supported by another type of ff Prioritize interventions with reasonable mechanism. (urban) risks, well embedded with other urban development priorities and avoid short-term Section 5 examines how these insights from the choices that may prevent achieving scale. past can be translated into preconditions for the effective use of crediting approaches in cities. The move from technology-based interventions to sectoral and policy-driven actions is crucial to scale up mitigation in the urban context. The level of scaling up will affect the risks borne by both the recipient and provider of finance, and their ability to deliver the planned emission reductions (i.e., inter alia quality, quantity, schedule, costs). These risks include crediting risks (institutional capacity, aggregation, regulatory risks, and monitoring) and urban risks (planning uncertainty, extended delivery periods, vertical/horizontal coordination, and financial and investment barriers). The high level assessment of the risk profiles for the various scaling-up options for urban mitigation Low carbon cities 2018 54 5. PRECONDITIONS FOR THE EFFECTIVE USE OF CREDITING APPROACHES IN CITIES IN THE CONTEXT OF THE PARIS AGREEMENT This section suggests preconditions for the One overarching precondition for the success of effective use of crediting approaches in cities. The crediting approaches is demand for the mitigation preconditions build on the findings of the previous outcomes that are generated (demand for credits for sections, most notably the new impetus given to carbon finance and willingness to pay for results in crediting approaches and urban mitigation by the the form of emission reductions for climate finance). new architecture of international collaboration under Both the upcoming rules for the implementation the Paris Agreement, the increasing availability of of the Paris Agreement, including Article 6, and tools that enable cities to quantify emissions and countries’ roadmaps for implementing their NDCs emission reductions, and the lessons from previous will shape how these mitigation outcomes can use of crediting approaches (see Figure 17). be used. This report assumes that the drive for Figure 17: Preconditions for effective use of crediting approaches in cities in the context of the Paris Agreement New opportunities offered by the Paris Agreement ‒‒ Explicit invitation to scale up mitigation in cities Preconditions for effective use ‒‒ Urban action included in NDCs of crediting approaches in ‒‒ Article 6 mechanisms that promote cooperation ‒‒ Article 9 that restates the importance of climate finance to support cities in the context of the Paris developing countries Agreement ‒‒ Ensure an appropriate incentive structure ‒‒ Go beyond technology-based A better understanding of urban mitigation challenges interventions ‒‒ Complement other climate-related and broader sectoral policy and financial ‒‒ Diversity of cities instruments ‒‒ Finance gap ‒‒ Be embedded from the planning stage ‒‒ Vertical and horizontal integration onwards ‒‒ GHG accounting and urban planning: increasing availability of tools ‒‒ Manage and distribute crediting and for urban planning, inventories, baseline setting, quantification of urban risks emission reductions, and MRV ff Crediting risks: institutional capacity, aggregation, regulatory requirements, monitoring ff Urban risks: planning uncertainty, Lessons from past crediting approaches in cities extended delivery periods, vertical/ horizontal coordination, financial and ‒‒ Complexity and uncertainty investment barriers ‒‒ Rationale for crediting based on marginal abatement perspective ‒‒ Plan for the future ‒‒ Ex post payments not directly contributing to address investment/ financial barrier Low carbon cities 2018 55 increased ambition under the Paris Agreement will would probably remain the most effective in contribute to creating demand for the mitigation stimulating efficiency and innovation, and to bring outcomes, and that countries will put measures in private sector investments. in place to avoid the double counting of these mitigation outcomes when international transfers Section 3 showed that the end-of-pipe mitigation of these outcomes occur. options in the urban sectors account for a large share of the urban mitigation potential. These To ensure effectiveness and efficiency, and to sectors include buildings, lighting and appliances, maximize their impact on urban action, the new and some measures in transport and land use that crediting approaches for cities will need to be do not imply heavy infrastructural investments, e.g., designed and implemented so as to: actions to shift mobility patterns such as parking restrictions, building of pedestrian walkways, and 1. Ensure an appropriate incentive structure introduction of bike lanes. For these interventions, 2. Go beyond technology-based interventions the incentives provided by the crediting approaches 3. Complement other climate-related and broader can effectively impact the investment choices sectoral policy and financial instruments and practices of individual system operators, 4. Be embedded from the planning stage onwards and therefore leverage private or public-private 5. Mitigate and distribute risks investments. For example, based on the estimates 6. Plan for the future by the New Climate Economy report, investments in energy efficient appliances and lighting in the These preconditions are an attempt to identify some residential and commercial buildings have short of the questions to consider when designing new payback periods of 0.2 to 1 year, respectively. In the crediting approaches, including through Article 6 transportation sector, the shortest payback period of the Paris Agreement, rather than a direct input of 4.5 years can be obtained for vehicle efficiency to inform the design of the rules governing these and electrification.103 crediting approaches. When designing interventions in urban sectors supported through crediting approaches, it is 5.1. Ensure an appropriate important to consider limitations that can be incentive structure associated with prioritizing policy interventions with reference exclusively to financial returns and MAC.104 For example, MAC models usually For some mitigation measures, crediting show that the up-front costs of energy efficiency approaches should continue to provide a financial measures in urban environments are more than incentive (or carbon price signal) to private investors, offset by the present value of the lifetime energy directly or through financial intermediaries and savings. However, energy efficiency measures are blended financial instruments, and help in the notoriously hard to implement and finance at efficient allocation of financial resources. scale. This is due to hidden costs, including the transaction costs of developing a project or activity, The direct financial incentive provided by the use closing finance, obtaining permits, and applying for of crediting approaches has demonstrated its grants. Other emerging approaches can be used efficiency for investment programs with a relatively to reflect transaction and policy costs that aim to low level of up-front capital investments—for end-of- pipe mitigation options (e.g., demand-side energy efficiency), or for options with rates of return close 103 These estimates are based on the aggregate data and are cumulated between now and 2030. Meanwhile, they are consistent with the to the market expectations. This type of leverage estimates used by SEI for the evaluation of sectoral mitigation impacts referred to in Section 3. 104 MAC curves are bottom-up models that are used to simulate the cost and potential of emission reduction measures associated with a climate change mitigation policy. Low carbon cities 2018 56 provide a more comprehensive assessment of the For example, the financial support mobilized real costs faced by the investors and the impacts through crediting could encourage effective that policies may have on their investment choices implementation of new building energy efficiency and entrenched behavior.105 codes by rewarding emission reductions generated through an improved aggregate energy/GHG The scaling up and prioritization of interventions performance per major category of buildings. using crediting approaches based exclusively on Instead of providing direct financial support to the mitigation outcomes may also be less appropriate, investors (project subsidies or fiscal rebates) or in in particular for urban authorities, since they ignore addition to such support, the incentive scheme local environmental and co-benefits associated could be designed to tackle major obstacles to the with mitigation actions. This includes building implementation of new building codes, therefore urban resilience, which is an important component maximizing impacts on the investors choices and of urban oriented action in the NDCs, improving air stimulating demand for compliance. For example, quality, job creation, etc. As mentioned in Sections crediting approaches could deliver funds to cover 4.1.2 and 6.2, the use of different metrics for the the costs of market facilitation (accompanying outcomes can bring in additional benefits. measures) (see the example of the Building Energy Efficiency Policy Reforms in Morocco in Box 9 in Section 6.1.3), in combination with the support 5.2 Go beyond to municipalities to cover the costs of monitoring technology-based policy performance and GHG impacts (MRV of policy impacts). interventions Crediting approaches should be flexibly designed 5.3. Complement other to support different types of—and relevant combinations of—mitigation policies and actions, climate-related and beyond technology-based interventions. broader sectoral policy In the urban context, the capacity of crediting and financing instruments approaches to support policy actions seems to be particularly relevant and should be further explored Crediting approaches should be used in and piloted. As highlighted in Section 3, policy and combination with other climate-related and regulation initiatives are key elements in realizing broader policy and financing instruments and the mitigation potential within cities of different be part of the urban policy processes to have types and maturities. Rationale to support policy transformational impacts. actions through crediting includes: Climate-related policies are part of a broader policy ff Incentivize the setting of more ambitious and investment framework that covers economic objectives for urban climate action. and social development goals established at the ff Improve policy enforcement and performance national or subnational/city levels. Therefore, an tracking. isolated, carbon-focused optimization of a scaled- ff Create a sustainable enabling environment for up mitigation portfolio may not be most attractive private investments, in particular by providing and should be aligned with other priorities to economic value to GHG reductions through facilitate both effective operational and institutional carbon pricing. design, and to mobilize sustained political support. 105 World Bank. Forthcoming. Aligning investor’s perspective with the energy efficiency targets in the Moroccan building sector: Strategies for the implementation of Morocco’s NDC. Low carbon cities 2018 57 For crediting approaches to mainstream climate benefits, such as reduction of local pollution and actions in cities and facilitate transformational health impacts, as outcomes of programs using impacts, the supported interventions will have crediting approaches may also represent challenges to be part of the urban planning, design, and for the fungibility and transferability of mitigation ultimately project financing process. This will outcomes between countries, in particular for the require developing a framework that includes the co-benefits that are linked to a location. Different planning process, elements of which are discussed implementation models could offer specific in Section 5.4. solutions to the issue of multiple priorities. One approach is to suggest a positive list of mitigation A more comprehensive cost-benefit analysis that options that are consistent with the adaptation reflects multiple benefits (for health, local pollution) priorities in a given context (region, country, climatic and incorporates longer term policy perspectives— zone, or city). In the future, if the connectivity of such as the alignment with the urban low-carbon carbon markets materializes, it may be important and resilient transition at the stage of urban to accompany such diversification with a system of planning—could result in a different portfolio of equivalence between different asset classes based actions. A combined use of financing provided on different prioritization approaches. through crediting with other financial resources could also contribute to reducing the financing When complementary policies are used, barrier and improving leverage of the overall accounting and allocation principles should efficiency of public spending on climate actions ensure transparency, but not necessarily prescribe (including by maximizing private investment). approaches to allocate the outcomes of mitigation Such a holistic approach could, for example, actions to different sources of finance. It may not be provide better support to mitigation policies in practical to define uniform rules of allocation and urban transport that would otherwise be placed attribution of mitigation outcomes, in particular on margins due to a higher range of abatement when different policies and instruments co-exist costs. To succeed in scaling up urban mitigation, and have overlapping effects on the mitigation the discrepancy between the ambition to scale up outcome. and the rationale of carbon finance “at the margin” should be reduced. 5.4. Be embedded from The use of broader prioritization criteria for the allocation of carbon and climate finance should the planning stage onward nevertheless take into account the potential increase in complexity of targeted interventions and Finance provided through crediting approaches possible implications for the overall cost efficiency of should be combined with other financing selected programs. Mitigation options would most instruments to support climate action through often offer some form of economic and financial their lifecycle, starting from planning to return (through energy savings or value capture) monitoring of performance (see Figure 18). Climate that can be required to incentivize private sector action is understood here as any action that helps engagement. Other options, for example, with a mitigate and/or adapt to climate change and can stronger adaptation/resilience component may be implemented through policies and actions that essentially be pure cost centers and may require target climate change specifically and sectoral different (economic) cost evaluation approaches and policies and actions that help achieve climate goals, financing solutions. Specifically, under international such as energy policies, urban planning, land-use market mechanisms, the inclusion of other co- regulations, and transport policies. Low carbon cities 2018 58 Figure 18: Full cycle of climate-related actions to be supported by multiple financial flows Climate-related actions Mobilization of Outcomes / impacts / imapcats climate and carbon finance Initiation ‒‒ Establish GHG inventories (BAU) ‒‒ Define scope and scale ‒‒ Set mitigation objectives Non-results-based ff Integrates carbon constraint into decision making Planning climate finance, ff Builds readiness for planning and MRV of ‒‒ Define action plan and readiness support, mitigation actions implementation model technical assistance to strengthen institutional capacity Design and development ff Inclusive of multiple benefits (health, ‒‒ Set institutional and financial Combined use of climate pollution) mechanisms and/or carbon finance ff Cost-benefit evaluation beyond individual with other financing interventions instruments for climate- related actions to increase impact on urban policies Implementation ‒‒ Deploy ‒‒ Operate Carbon and/or ff Rewards monitored performance ‒‒ Enforce policy ff Stimulates efficiency of public policies and climate finance programs mobilized ff Incentivizes innovation and cost efficiency through crediting ff Maximizes private investment MRV and evaluation approaches ‒‒ Demonstrate results ‒‒ Adjust and improve This lifecycle perspective helps secure resources for require initial (up-front) financial and technical cities to build comprehensive climate action plans support to help identify emission reduction options and implementation strategies and to identify the and their impacts and to support the deployment institutional changes needed to make effective of urban GHG inventories and performance use of crediting approaches for both carbon and tracking systems along the program cycle. climate finance. It also helps ensure consistency Therefore, even if the funds delivered by crediting in the approach to track progress toward the approaches kicks in only at these two later stages, achievement of the NDC at the urban and national the full cycle needs to be supported through levels. Urban tools, such as the ones discussed in blended instruments. Efforts should be made to Section 3.3, can support each step of the climate facilitate access of cities to the appropriate other action cycle. sources of support (e.g., non-results-based climate finance, readiness, and technical assistance funds) For scaled-up transformative action, the initiation, to avoid an entrance barrier. planning, and design and development stages are as critical as the implementation and MRV. Cities Low carbon cities 2018 59 5.5. Mitigate and urban programs using crediting approaches. The distribute risks risks, as introduced in Section 4.3, relate to both the characteristics of urban mitigation and the crediting approach: The design and implementation of programs using ff Crediting risks: Institutional capacity, aggregation, crediting approaches in cities should ensure that regulatory risks, monitoring the risks related to the use of crediting approaches ff Urban risks: Planning uncertainty, extended are mitigated and distributed between the actors delivery period, vertical/horizontal coordination, so that policies and actions are taken at a level of financial and investment barriers governance where they would be most efficient both from economic and institutional perspectives. Examples of potential risk mitigation measures observed in existing interventions and programs Risk mitigation and distribution helps provide that use crediting approaches are provided in certainty for the investors and implementer, ensure Boxes 6, 7, and 8, and possible implementation cost efficiency, and promote participation in the approaches are discussed further in Section 6.1. Box 6: The Low Carbon City Development Program (LCCDP) in Rio de Janeiro (Brazil) The LCCDP was developed by the Rio de Janeiro Table 4: Main features of the LCCDP in Rio de municipality with the support from the World Bank, Janeiro and was launched in June 2012. Later, the LCCDP was certified according to the LCCDP Assessment Main features Description Protocol (including ISO 14064, ISO 14001, and the GHG Protocol). This initial application of the LCCDP Objectives/ ff Support the implementation of city- outcomes level climate strategy at the level of approach became the basis for the development of a individual actions LCCDP guidebook that describes a systems approach to low-carbon development in cities,106 and suggests Incentive ff Carbon finance supports individual a roadmap for designing and implementing a LCCDP structure mitigation action and policies available to other cities. Quantification ff Project-based quantification using and MRV existing crediting and offsetting A distinctive feature of the LCCDP approach is its standards focus on mitigation measures that are under the ownership and/or control of the municipality, even Performance ff Project-based performance indicators ff City-level target to achieve a partially, through either direct implementation or predefined amount of emission agreement with a municipal department (e.g., with reductions a subcontractor, public-private partnership (PPP), Transaction ff Potentially high due to compliance or with a civil society organization). To encourage costs requirements of various standards and behavior change, the policy-based interventions are protocols also eligible under the LCCDP. Given the LCCDP’s Capacity ff City-level inventory recommended to main focus on measures implemented by the requirements define city target municipality, the eligible interventions are expected ff Significant need for horizontal coordination and portfolio integration, to be in a sector governed by the municipality. The registration at the level of municipality main features of this model are presented in Table 4. 106 Source: Authors and World Bank & DNV KEMA Energy and Sustainability. 2014. The Low Carbon City Development Program (LCCDP) Guidebook, IBRD. Low carbon cities 2018 60 While this implementation model mainly relies on flexibility could represent an interesting feature project-by-project implementation, it offers several in the context of current uncertainty around the advantages compared to the use of individual future international requirements for international project-based approaches. This example provides transfers under Article 6 of the Paris Agreement. insights into potential ways to address some of the risks linked to a decentralized implementation To mitigate regulatory risks linked to the modality for mitigation programs using crediting in quantification of emission reductions and the cities (see Section 6.1.1): monitoring risks, the LCCDP provides a pragmatic choice of quantification and MRV approaches The focus on activities that are under the ownership among the existing protocols and international/ and/or control of the municipality helps mitigate bilateral standards. The choice of approaches, based planning uncertainty and delivery risks, but on the availability of data and required monitoring also limits the exposure to vertical coordination capacities and costs, offers the possibility to make challenges. These risks are further limited through the program immediately operational while keeping the LCCDP guidebook requirements for lifecycle the option to enlarge the scope of methodologies coordination and integration to ensure that the and tools adapted to the local circumstances and LCCDP takes a strategic, comprehensive approach in line with the body of best practices. At the same in selecting a city-level mitigation portfolio. The time, it may require significant effort of alignment assessment of both policy and project-based between protocols at the program level. interventions includes three main aspects: eligibility, feasibility, and risk profile.107 An “optimal portfolio of To increase the control over the aggregate interventions” is defined as “including interventions performance, the LCCDP establishes a feedback with different levels of implementation risks (in the loop approach based on the systematic performance short and long terms), different starting dates, and monitoring and reporting. This process helps ensure both policy and project interventions in different timely improvements of the implementation and sectors.” The risks of vertical coordination with higher operational features of the program. This adjustment levels of government is reduced by ensuring that “the process is fully under control of the city. intervention is not legally mandated by higher levels of government, such as state or federal governments.” 108 On the flip side, the flexibility of the LCCDP requires significant institutional capacity to understand all To diversify regulatory (including methodology) eligible mitigation measures and standards, and risks, the LCCDP allows the use of different ensure coordination. standards and protocols (beyond CDM) depending on the targeted mitigation measures to enable wider Also, the LCCDP does not explicitly address the vertical access to carbon market mechanisms. That also integration of municipal and national decisions with increases the diversity of actions (and, potentially, regard to the use of emission reductions for crediting policies) that the LCCDP can accommodate within purposes under a market mechanism. In such cases, the urban mitigation portfolio.109 This flexibility is transferring mitigation outcomes generated at managed and coordinated through a citywide emission sources that are included within a country’s project approval and registry system. While it NDC can jeopardize a country’s achievement of somehow exposes the LCCDP to a higher horizontal its NDC if it over transfers emission reductions to coordination burden, this gives the possibility another country. This risk can be managed through to increase the scope and coverage of the a combination of different approaches to baseline mitigation options and also could contribute to the setting and/or restricting the transfer of GHG diversification of risks of noncompliance with the reductions,110 which requires coordination between overall objectives set at the level of the LCCDP. Such the local and national government. 107 See Section 3.3.1 of LCCDP Guidebook. 108 The intervention could still be eligible if the legally mandate exists, but is not enforced. (See discussion in the LCCDP Guidebook, Section 3.3.1.1.) 109 Similar to what CDM multi-sectoral PoA was intended to do. 110 Source: Partnership for Market Readiness (PMR). 2017. Low carbon cities 2018 61 Box 7: Czech Green Investment Scheme (GIS) program The Czech GIS program is an example of the use of established National Fund for Energy Efficiency also a crediting approach to voluntarily recycle (“green”) allows for the reduced risk of underperformance of the carbon revenues of transactions under Article 17 the program. The incentives are channeled through of the Kyoto Protocol (International Emissions the local commercial banks in a form of preferential Trading—IET). The program is based on a centralized loan conditions and grants, and have a predefined implementation approach (see Section 6.1.2) that minimum leverage ratio. While the capacity targets energy efficiency improvements in private requirements at the project level (individual private housing. The features are all essentially designed and investors) are limited, this model requires confident, managed at the national level. This programmatic strong program management. approach is accommodating the dispersed nature of small-scale individual actions by private homeowners. Table 5: Main features of the Czech Building Energy Efficiency GIS Under GIS, countries sell excess Assigned Amount Units, but the revenues from the sales must be invested Main features Description in “green” activities that reduce emissions (e.g., energy efficiency and renewable in buildings) and generate Objectives/ ff Accelerated pace of program outcomes implementation due to the release of monitorable and verifiable emission reductions. the capital (budgetary) constraint Several countries in the Eastern Europe and Central ff Increased stringency of efficiency requirements Asia region used GISs. The main advantage of this ff Ensure sufficient leverage of private approach is that it allows a full transfer of carbon finance through grant intensity revenues to the GIS implementing agent ex ante, Incentive ff Blending of carbon finance with other at the moment of purchase of emission allowances. structure sources for the better leverage of domestic sources Such purchase and transfer is preceded by a legally ff Grant for project preparation binding agreement on the operational and MRV modalities of spending the carbon revenues. Quantification ff Unified nationally appropriate and MRV approach The main features of the Czech GIS program Performance ff Aggregate performance set at the indicators program level are presented in Table 5. A distinctive feature of ff Performance of projects controlled this model as compared to the other examples through eligibility criteria ff Portfolio approach reduces risks of of implementation approaches (discussed in underperformance at the program level Section  6.1) is that the centralized approach allows for the better combination of different available Transaction ff Savings in costs of program costs management, MRV, quality control sources of finance, and thereby obtains a higher leverage of carbon finance (see Figure 19). The project Capacity ff Limited at project level, but requires requirements strong program management portfolio management at the central level by an Figure 19: Structure of the Czech Building Energy Efficiency GIS Ex ante quantification National dedicated Eligibility requirements fund Performance indicators Ministry of Carbon Markets Environment Program MRV Local banks Portfolio of projects Low carbon cities 2018 62 Box 8: Low-Carbon City Voluntary Offsetting (LCC) Program in Thailand 111 The LCC Program, established by the Thailand To reduce planning uncertainty and address Greenhouse Gas Management Organization challenges of limited institutional capacities, (TGO), will assist provinces and cities to design the TGO is planning to facilitate the transparency, and implement GHG mitigation actions through consistency, and comparability of City Climate undertaking projects that will apply the national Action Plans through the preparation of guidelines Thailand Voluntary Emission Reduction Program that cover four main elements: (i) the assessment of (T-VER) for certifying and issuing carbon credits, emissions sources (activities) and the quantification which has been functional since 2013. This model of emissions; (ii) emissions projections under a is designed to accommodate the high level of business-as-usual case to inform definition of autonomy that cities have in Thailand. The program the baseline; (iii) approaches to identify potential objective is to trigger participation of cities into the mitigation options and the criteria to select offset market supporting the domestic voluntary abatement technologies taking into account ETS currently under development. the feasibility of implementation, and their environmental and social impacts; and (iv) evaluation One of the key requirements for cities to access of project implementation, e.g., GHG emissions, co- a dedicated Urban Fund established by the LCC benefit assessment, and sustainable development. Program is to develop a comprehensive climate action plan at the city level. The projects selected by cities for support by the program have to be fully in line and contribute to these action plans (see Table 6: Main features of the LCC Program in Figure 20). The main features of the LCC Program Thailand are presented in Table 6. Main features Description This example provides insights into potential ways to address some of the risks linked to a hybrid Objectives/ ff Support implementation of domestic outcomes offsetting scheme implementation modality for urban programs using ff Purchase excess of offset supply to crediting approaches (see Section 6.1). ensure sustainable implementation Incentive ff Carbon price provided by the domestic To manage planning uncertainty, the LCC Program structure voluntary ETS requires a local GHG abatement plan (or City ff Grant to support cost of developing city-level climate action plans Climate Action Plan) that identifies GHG mitigation potential and assesses the economic attractiveness Quantification ff Mainly at the level of individual and MRV interventions (national methodologies) of specific options (based on a MAC assessment) and ff National guidance for the development expected co-benefits.112 This approach could bring of city action plans (participation requirements) clear advantages as compared to a pure, project- based approach. The development of climate action Performance ff Project-based performance below plans helps better prioritize the project portfolio, indicators business-as-usual ff Aggregate performance of the increases comparability between cities’ programs, participating cities as defined in the and enables the LCC Program to collect valuable climate action plans information about the trajectories and expected Transaction ff Potentially high at the initial stage of mitigation potential in different cities. The Urban costs program design, leaner in the medium Fund will support the development of action plans term through grants to avoid the entry barrier for cities. Capacity ff Increased requirements for cities (e.g., requirements GHG inventory, MAC curves, climate action plan) 111 Source: Partnership for Market Readiness (PMR), authors. 112 This approach is expected to identify “no-regret” options (not eligible for the support by LCC) and the additional mitigation options. Low carbon cities 2018 63 Figure 20: Structure of LCC Program in Thailand URBAN FUND URBAN MITIGATION PROGRAM Domestic voluntary market Program objectives Municipality & communities Eligibility requirements Program management Local banks & Performance indicators Other buyers development institutions Guidance & coordination MRV Furthermore, to avoid creating a participation carbon finance and comprehensive technical barrier, the TGO is planning to provide financial support to local municipalities and communities and technical support to the municipalities to (e.g., in terms of the preparation of the project prepare inventories of city- or community-level design document). The Fund serves as a one-stop GHG emissions, identify potential GHG emission service for buyers and sellers of approved carbon reduction activities, and develop local GHG credits under the LCC Program. abatement plans. To address regulatory risks and avoid double The status of City Climate Action Plans could be counting, the TGO will include only Scope 1 and strengthened further to reduce financial risks. 2 emissions under the LCC Program. Scope 3 There is an expectation that, in the future, the emissions are excluded due to the complexity of GHG abatement plans developed under the LCC setting up the GHG accounting system for this Program could be recognized as an integral part of scope. This approach is expected to avoid possible the provincial environmental management, which overlaps of accounting for direct and indirect is currently supported by the national budget. This emissions between the LCC Program, the national could reduce the exposure of the local governments T-VER program, and the Energy Performance to the financial and investment risks under the LCC Certificates scheme. For the Scope 2 emissions Program. This could also help ensure sustainable related to the use of electricity, the TGO will set and consistent implementation of GHG abatement the standard reference value for the national grid plans in the evolving local circumstances (electoral emissions factor. The reference value will be fixed cycles, economic and financial situations, etc.), throughout the crediting period for individual thereby addressing planning uncertainty and risk projects. The national T-VER has developed of delivery. provisions to avoid double counting with international standards (i.e., CDM, Verified Carbon Another feature of the LCC Program that Standard, or Gold Standard) through a dedicated contributes to the limitation of the financial registry and software to collect information on barrier is the establishment of the LCC Fund Thailand’s GHG emission reduction projects. The administered by the TGO. This Fund aims to support same provisions will apply to the LCC Program. the implementation of the LCC Program to deliver Low carbon cities 2018 64 5.6. Plan for future climate 5.7. Summary policy instruments Beyond demand for the mitigation outcomes, several factors impact the success of crediting approaches. Crediting approaches could be a starting point These preconditions relate to the design of the urban or an intermediary stage in the development of programs and policies supported by crediting and the relevant broader climate policy instruments to the capacities of the actors involved, including the at the city or national levels and prepare for more finance recipient and provider. They anchor crediting ambitious future action. approaches in a long-term and holistic perspective, across sectors and actors. The first generation of crediting approaches mostly focused on the emission reductions of a particular The key preconditions are as follows: intervention, without systematic consideration 1. Ensure an appropriate incentive structure given to how that intervention would fit with to promote the most efficient allocation of national targets or help the country increase its financial resources to mitigation actions at the climate action (with the notable exception of urban level and crowd-in private finance. large CDM PoAs where such attempts have been 2. Go beyond technology-based interventions more prominent). Countries can frame the new to achieve mitigation at scale and facilitate generation crediting approaches under the Paris transformational impacts. Agreement with the view of helping them achieve 3. Complement other climate-related and broader their NDCs and increase their ambition. For sectoral policy and financial instruments, and example, crediting approaches can be designed be part of the urban policy processes to achieve as a stepping stone toward other climate policy transformational impacts while contributing to instruments, including an ETS or carbon taxes. The the overall efficiency of public resources. use of crediting approaches can become a stepping 4. Be embedded from the planning stage stone by building readiness around: onwards to support the institutional capacity to implement evidence-based climate action ff Data collection, management, and analysis, planning and monitoring of performance of including GHG emissions inventories. climate actions, and ensure consistency with ff Baseline setting and mitigation outcomes the approach to track progress toward the quantification. achievement of the NDC at both local and ff Assessment of mitigation potential and discovery national levels. of costs and barriers to implementation. 5. Distribute risks so that actions can be taken at a ff Instrument design. level of governance where they would be most ff MRV systems and capacities both for the efficient both from economic and institutional mitigation outcomes and financial flows. perspectives. ff Institutional setup. 6. Plan for the future to build readiness for more ff Registries systems.113 comprehensive climate policy instruments at the city or national levels, including carbon pricing approaches, while minimizing transaction costs and ensuring environmental integrity. Section 6 looks at what is needed to operationalize the new generation of crediting approaches that include these preconditions. 113 Source: Partnership for Market Readiness (PMR). 2015. Crediting- Related Activities under the PMR Status and Support for Implementation, Washington, DC: World Bank. Low carbon cities 2018 65 6. WAY FORWARD This section proposes a way to advance the in rapidly developing cities in developing discussion on the implementation of crediting countries. approaches in cities—both under the carbon market ff Targeted policy and methodology research mechanisms and through RBCF—to effectively to (i) fill in methodological gaps, (ii) improve deliver carbon and climate finance (see Figure 21). understanding of the economics of urban It suggests three priority areas for policy and mitigation with focus on the costs and revenues implementation efforts to foster the agenda: of different types of urban mitigation activities and relevant financing models, including PPPs for ff Design of flexible implementation modalities urban infrastructure investments, and (iii) explore capturing the diversity of cities, with a particular how the crediting approaches would need to look focus on opportunities to ensure greater impacts to make a difference as a financial instrument that of crediting approaches on the key levers of provides an additional revenue stream, depending urban development and infrastructure, such on pricing of the mitigation outcomes and (in the as urban planning and TOD, and particularly case of RBCF) monetization of other results. Figure 21: Enabling a new generation of crediting approaches in cities in the context of the Paris Agreement Preconditions for effective use of crediting approaches in cities in the context of the Paris Way forward Agreement ‒‒ Design of flexible ‒‒ Ensure an appropriate incentive implementation structure Potential benefits for cities ‒‒ Go beyond technology-based modalities for urban interventions programs using crediting ‒‒ Build readiness for climate ‒‒ Complement other climate- approaches, including action related and broader sectoral centralized, decentralized ‒‒ Reveal abatement costs policy and financial instruments ‒‒ Be embedded from the and policy driven ‒‒ Improve capacity to track concepts performance of mitigation policy planning stage onwards ‒‒ Provide early opportunity to ‒‒ Manage and distribute crediting ‒‒ Targeted policy and participate in Article 6 and urban risks methodology research to ‒‒ Prepare for broader market- ff Crediting risks: institutional capacity, aggregation fill gaps so as to leverage based instruments and scaling up, regulatory tools for urban planning requirements, monitoring and GHG accounting in ff Urban risks: planning crediting approaches uncertainty, extended delivery periods, vertical/horizontal ‒‒ Testing through piloting integration, financial and investment barriers ‒‒ Plan for the future Low carbon cities 2018 66 Figure 22: Implementation modalities for urban programs using new crediting approaches: addressing diversity Decentralized Centralized Policy-driven National policy makers National policy makers Allocation of roles focus on demand lead on program National depends on policy creation & overall design & incentive targets & design level guidance structure Cities benefit Cities get support Cities lead on program from consolidated for enhanced design & prioritization international & implementation of actions City level domestic funds & enforcement ff Piloting to test the suggestions on the ground, of crediting approach under the Paris Agreement, build capacity at different levels in the the progress with methodological tools, and the government and individual system operators, lessons learned from the past implementation of inform in-depth evaluation of the broader policy innovative forms of the first generation of crediting impacts of carbon and climate finance delivered approaches. by crediting approaches, and give insights into how new crediting approaches could look. As highlighted earlier, the diversity of cities calls for flexibility to maximize the impacts of financial flows Each of these priority areas is discussed in that can be mobilized to support urban mitigation Sections 6.1 to 6.3, and Section 7 presents the through crediting. To be effective and cost-efficient, potential benefits cities can derive from starting crediting approaches must accommodate the these activities now. specificity and ability of different actors in cities to manage risks, as described in Sections 4.3 and 5.5. The variety of possible distribution of mandates, 6.1. Design of flexible roles, and risks between cities and national implementation modalities authorities, combined with the level of their institutional and implementation capacities, will for urban programs using imply different implementation modalities. crediting approaches For simplicity, the modalities at the ends of the implementation spectrum can be called This section proposes possible implementation “decentralized” and “centralized” (see Figure 22). modalities for programs using crediting approaches Policy-driven modalities can be conceptualized based on the findings presented in previous within this spectrum, depending on the most sections of the report. These findings include the appropriate governance level of decision making changing urban drivers, the demand for a new kind and implementation of a policy. Low carbon cities 2018 67 Note that the potential for these modalities to The national policy makers focus on the creation deliver urban mitigation at scale would be different of demand and on the overall guidance and in the context of strong diversified demand for establishment of a conducive policy environment to international collaborative actions (or for carbon promote mitigation actions in cities. Cities focus on credits) as compared to the current situation the mitigation actions that may be specific to the where the international demand for transferable main sectors of their urban economy, such as inner- mitigation outcomes is scarce and governments city transportation, street lighting, spatial urban may need to refocus on domestic demand first. planning conducive to the TOD, and diversification of public transport options. They are responsible for Each of these stylized implementation modalities establishing the conducive environment (regulatory is described in more detail below. In reality, and policy packages) and incentive schemes to most urban scaled-up programs using crediting align investment choices of private sector investors approaches are likely to be somewhere on the and service providers, as well as the consumption spectrum between decentralized and centralized. choices of the inner-city consumers with the overall For example, a program/intervention might allocate municipal government’s objectives in terms of a significant direct role to cities in the design and mitigation. These objectives can be defined in implementation of mitigation actions, recognizing different metrics, including emission reductions or the need to accommodate a high level of energy savings, the share of final renewable energy autonomy of municipalities and local communities. consumption, or other indicators of energy intensity At the same time, it might also feature elements that can be translated into quantifiable GHG of centralized governance, responding to a impacts over a predefined period. relatively low level of readiness and capacities of the municipalities and local communities in terms In the presence of NDCs, the need for vertical of their understanding of the carbon footprint, coordination between jurisdictional levels may mitigation options, and, potentially, emissions bring further uncertainty to the scope of eligible management. While the incentives provided by the interventions. The decentralized implementation crediting approaches may be the most important in can offer a relatively simple solution to this issue lower income countries—which are likely to be the by focusing on the interventions that are outside of ones urbanizing the fastest—their capacity to utilize the sectoral coverage of NDCs; such interventions these financing instruments effectively may also be would be screened out as not eligible, provided the the lowest. This reality underscores the significant boundaries of the NDC coverage can be established. amount of effort needed to build capacities, and Coverage of urban action can further be defined to ensure pragmatic governance and institutional through other criteria related to the ownership solutions. and control of a municipality over an intervention (such as in the LCCDP). The counterbalancing 6.1.1. Decentralized modality aspect of such an approach is that the scope of eligible activities may be significantly reduced The decentralized modality assumes a leading role and may not necessarily satisfy the objective and for a city along the entire lifecycle of the crediting the aspiration to achieve transformational impacts program, including the design and prioritization of over urban emissions. While it is also possible for actions, in relation to the private and public investors, crediting instruments to cover emissions that inner-city consumers, and service providers. The are also covered by the NDC targets, the main LCCDP in Rio de Janeiro, discussed in Box 6 in Section concern—in case of the use of crediting approaches 5.5, is an example of decentralized implementation. in market mechanisms—becomes to avoid over Low carbon cities 2018 68 transferring emission reductions, given that vehicle under the overall urban mitigation program corresponding adjustments to NDCs will be applied can provide an effective solution to consolidate the to any transfers. The risk of over transferring can financial incentives available to the participating be managed through a combination of baseline municipalities or private investors (for example, settings and withholding emission reductions.114 using participating commercial banks) and to streamline the participation requirements. The use 6.1.2. Centralized modality of recognized certification schemes, such as EDGE (discussed in Box 2, Section 3.3.4), can also contribute Under a centralized implementation modality, to simplify compliance requirements, including the the national policy makers and implementation approaches used to quantify mitigation impacts. agencies lead on program design and provide necessary structure to incentivize implementation The mitigation performance of such dedicated of mitigation actions by the inner-city economic programs could be defined based on the information actors and consumers. The Czech GIS, discussed in collected through climate action plans prepared Box 7 in Section 5.5, is an example of centralized by municipalities and local authorities (if this is an implementation. established planning instrument), or modeled at the level of the targeted energy efficiency segment. Under this implementation modality, cities may The performance indicators could be established at benefit from international and domestics funds the aggregate level for the entire energy efficiency that can be more effectively consolidated at the window, allowing for performance risk mitigation at national level to support implementation of cities’ the level of the portfolio and for a greater flexibility mitigation actions. In this case, cities essentially for participating municipalities to achieve pre- implement national climate change mitigation agreed mitigation outcomes. plans in line with national goals, policies, and targets, without necessarily identifying specific targets. Moving from project-based to policy-driven This can help facilitate action in case of limited approaches, the government or the relevant institutional capacities, for example. Depending implementation agencies could also consider on the design, the municipality could translate adopting dedicated DSM policy interventions that the national mitigation policies and objectives would set ambitious targets (e.g., for buildings at the local level. This could include, for example, or for appliances) to be achieved in a predefined low-carbon procurement approaches, enhanced (crediting) period and the performance indicators enforcement of energy performance standards of the energy efficiency program in accordance. (e.g., in the construction of buildings), or city-level Therefore, the program would contribute to regulations that may reduce perceived risks of low- achieving the policy targets at the national level. carbon consumer choices or allow better access to Methodological options could be considered to renewable energy for the citizens. accommodate for top-down MRV of the policy impacts on urban GHG emissions. Based on the experience with carbon finance operations, the use of a centralized modality often 6.1.3. Policy-driven modality represents an effective and pragmatic option for urban mitigation programs/policy interventions In the urban context, the capacity of crediting targeting demand-side management (DSM). The instruments to support policy actions seems to be example of Czech GIS is a good illustration for it particularly relevant as policy and regulations are (see Box 7). The use of a dedicated energy efficiency the prominent type of mitigation actions in cities, as 114 Source: Partnership for Market Readiness (PMR). 2017. Low carbon cities 2018 69 demonstrated in Section 3. An important rationale The crediting approach could be used as a vehicle for supporting policy actions through a new for an additional, targeted financial incentive generation of crediting approaches would be to: deployed in a way to maximize its leverage on private investments through addressing the major ff Incentivize the creation of a sustainable and barriers to the implementation of the new building conducive enabling environment for urban code. For example, the support may be provided mitigation investments and low-carbon to the following most important levers of policy consumer choices, for both private and public implementation: players. This could come in support of the national/energy sector policy reforms that are ff Coverage of the costs of market facilitation introducing carbon pricing such as fossil fuel measures (accompanying measures) through subsidy removal, green fiscal reforms, etc. comprehensive financial packages provided ff Improve policy enforcement and performance to the implementation agencies in charge of tracking. providing better access to information, technical ff Support and incentivize the adoption of guidance, and deployment of the certification more aggressive standards and performance schemes for more performant materials and indicators (e.g., building codes or traffic equipment for the domestic energy efficiency regulation). market (see Box 9 for an example of an innovative ff Allow the adoption of more ambitious mitigation approach to assess financial costs and expected targets in line with the Paris Agreement cycle. impacts of market facilitation measures for energy efficiency in buildings in Morocco). This approach would focus on rewarding the ff Direct support to the costs of designing mitigation outcomes of policy interventions through compliant buildings, auditing, and, if applicable, scaled-up crediting and hence increasing the certifying the performance outcomes achieved scope and coverage of these instruments beyond by the developers. technology-based implementation. Depending on ff Additional fiscal incentives to enhance the the specific context of each program, policy crediting existing incentive structure of a policy, such as could be deployed both through the decentralized existing direct subsidies. or centralized implementation modality. ff Deepening of the financial services through the improved financial terms of loans dedicated to Policy crediting approaches could focus on energy efficiency in the building sectors. supporting the effective implementation of ff Supporting national implementation agencies a specific policy intervention, such as the of municipalities to cover the costs of monitoring implementation of a new building energy of policy performance and its GHG impacts performance code. The objective of the intervention (MRV of policy impacts). using crediting could be to support better compliance and enforcement of the building code The most appropriate and cost-efficient approach in line with the pre-agreed rate of deployment, and to the quantification of the mitigation outcomes in the medium term, to progressively increase the and MRV could be to use aggregate impact stringency of the code. Low carbon cities 2018 70 assessment protocols, building on the reputed ff To use additional financial incentive mobilized building performance programs (for example, EDGE through crediting approaches to increase the or other standards) calibrated to the local context, chances to find interagency consensus on the type of buildings, and energy saving opportunities. level of policy ambition (if the target is yet to be Building on the findings of the recent study for the defined) or to increase the certainty to achieve Pilot Auction Facility on Using the Climate Auction the fixed objectives in the most cost-effective Model to Catalyze Energy, and Resource Efficient way for the budget. Buildings,115 the primary metric for allocating RBCF could be the modeled percentage reduction in While the integrated nature of the reforms may energy consumption per unit area versus a local significantly increase the challenges of attribution of benchmark. Given that the housing sector already mitigation outcomes to a specific intervention using uses unit area (usually square meters) as the basic crediting, it would provide essential flexibility to the input to assess projects, using the same metric for government to strategically allocate these additional allocating climate finance incentives would be easy financial resources in line with urban priorities. This to understand, and would maintain the design and approach could also be more appropriate to recognize the MRV costs at a reasonable level. This metric of the behavioral impact and give the economic value of energy consumption is also directly linked to GHG soft policy interventions. Such interventions include emissions from buildings, providing a possibility to market stimulation that targets the creation of evaluate the mitigation outcomes. As such, based favorable conditions for energy efficiency investments on this performance metric, the milestones for through the reduction of transaction costs, additional disbursement of carbon or climate financing using financial services dedicated to energy efficiency crediting approach could be defined in terms of investments (providing loans with longer repayment aggregate energy/GHG performance per major periods), and a reduction of the level of perceived category of covered building to be achieved by the risks of this type of investment through the removal end of a predefined period. of market barriers. Alternatively, the financing delivered through The specific performance indicators could be defined crediting approaches could also be used as at the level of cross-cutting or sectoral interventions to part of a blended financial package to support demonstrate that the targeted mitigation outcomes the integrated policy reforms with key sectoral have been achieved. An illustrative example of how and urban socioeconomic objectives resulting in a crediting approach could be used as a climate lower carbon impacts. Using again the example finance modality to support the implementation of the building sector, this approach would have of the NDC energy efficiency targets in the building the features of centralized implementation, where sector in Morocco is given in Box 9. This hypothetical the role of cities would depend—among other example shows that the performance indicators factors—on the level of autonomy of regional and could be established based on the (modeled) urban governments. The focuses for this approach mitigation outcomes of small renewable generation would be: systems used at the building level, such as rooftop solar panels, efficient appliances, and thermal ff To allow the government to use the crediting performance, which in combination, are expected to approaches strategically to reduce the cost of generate up to 90 percent of the energy savings in the integrated reforms for the national budget. the short to medium term. 115 Source: World Bank and The Carbon Trust. 2018. Study on Using the Climate Auction Model to Catalyse Energy and Resource Efficient Buildings. Low carbon cities 2018 71 Box 9: Building Energy Efficiency Policy Reforms in Morocco: The potential to mobilize carbon or climate finance using crediting to support integrated policy approach116 In its NDC, Morocco committed to reducing its This approach helps explore the impact of various emissions by 42 percent below business-as-usual policy options, including carbon pricing, market emissions by 2030 (conditional) and 17 percent facilitation, technical assistance, and industrial below business-as-usual emissions by 2030 strategy. It also provides quantitative data on (unconditional). The Secretariat for Sustainable expected performance of policy options in terms Development, the Ministry of Habitat, and the of achieved energy savings, emission reductions, Ministry of Energy of Morocco, with the support of cumulative cost of subsidies and other policy costs, the World Bank, developed a bottom-up, agent- and net present value for the investors. The modeling based economic model of the building sector in exercise, implemented in close consultation Morocco to assess the capacity of the building sector between relevant ministries and agencies, to contribute to the NDC commitments in terms of informs the development of the concrete policy energy efficiency. The model provides a comparative recommendations and facilitates the coordination assessment of impacts of different policy reform and dialogue between the line ministries in charge scenarios. These scenarios are evaluated in terms of the sectoral policies and NDC implementation. of achievable energy savings/mitigation outcomes, and budgetary costs that might be required to help This approach can provide useful insights into a align investors’ and consumers’ behavior with the potential way to conceptualize the policy-driven NDC energy efficiency targets. crediting approaches. First, it provides a quantified performance assessment of a “reference scenario” The modeling exercise is moving away from the (status quo) based on a detailed analysis of existing macro economy-wide perspective to look at the challenges to effectively implement energy investor perspective. The team used data on the efficiency policies and regulations in the building building stock as inputs (e.g., number of buildings sector, and identifies the marginal energy saving of different types, energy efficiency levels, heating costs that reflect the investor perspectives on the and cooling systems, distribution over climate commercial attractiveness of various energy saving zones, etc.) and investor’s decision-making criteria options in the short, medium, and long term (i.e., (e.g., actual transaction costs, hurdle rates for from the period from 2015 to 2030). Second, the investors, turnover of building stock). These data modeled scenarios demonstrate the essential role are combined with various current and planned of creating enabling environments to stimulate policies and the estimates of their transaction demand for energy efficiency investments as part costs. The investors include households/ of integrated policy reforms. Finally, it allows for the homeowners, building energy service managers, simulation of energy savings/mitigation outcomes and construction companies. The model includes of a targeted use of carbon or climate finance a dedicated module that simulates the process incentive provided through a crediting approach, of decision making by investors based on the for example, to support measures at the margin of type of investor (and its financial sophistication), commercial attractiveness for investors. entrenched behavior, and the evolution of the policy and regulatory environment. 116 Sources: World Bank. Forthcoming. Aligning investor’s perspective with the energy efficiency targets in the Moroccan building sector: Strategies for the implementation of Morocco’s NDC; Government of Morocco, 2016. Morocco: Nationally Determined Contribution Under the UNFCCC. http://www4. unfccc.int/ndcregistry/PublishedDocuments/Morocco%20First/Morocco%20First%20NDC-English.pdf. Low carbon cities 2018 72 6.2. Targeted policy and 2. Use of comparable and transparent GHG methodology research quantification tools for program design and planning (ex ante quantification of expected emission reductions through, e.g., modeling) Section 3.3 presented some of the tools that cities can and implementation (ex post quantification of use to help them with GHG accounting and tracking emission reductions based on monitored and of climate action. Important features of crediting verified data, e.g., based on inventories). approaches include the need to demonstrate 3. Use of aggregate performance indicators that, environmental integrity of the mitigation outcomes e.g., capture transboundary, cross-sectoral, and the accounting of the contribution of the urban and lifecycle emissions as appropriate and mitigation actions to the implementation of the NDC facilitate quantification of contribution to NDC targets, especially in market mechanisms. Tracking implementation. also enables better planning and management of urban climate-related policies and actions and to This section looks at how current tools support align incentives, which is imperative under NDCs. these approaches and the gaps that remain. Table 7 discusses the advantages and gaps of the The following methodological approaches can help three approaches. It builds on some of the tools in that direction: discussed in Section 3.3.4 and Table 1. 1. Use of compatible inventories and registries between local (city, metropolitan area), subnational, and national levels to ensure consistent tracking of climate action and its impact. Table 7: Methodological approaches to ensure environmental integrity and facilitate the accounting of the contribution of urban mitigation actions to implement NDCs Suggested Advantages Gaps approaches Inventories ff Enable comparison between cities ff Complex boundary setting and registries ff Facilitate integration into national policies and help avoid double counting ff Challenges in demonstrating impacts of compatible through the aggregation of local, subnational, and national emissions data mitigation actions in the rapidly growing between the local, ff This includes local inventories (and registries) feeding into national cities in developing countries, with increasing subnational, and MRV or NDC performance tracking systems (e.g., GPC is a recognized energy consumption (e.g., definition of baseline national levels tool consistent with the IPCC guidelines; which could help transversal emissions’ picking point) transparency; see Section 3.3.4) Comparable ff Climate action planning can inform the distribution of efforts to achieve ff Challenges of quantifying impact of dynamic and transparent national NDC targets (e.g., using the CURB Tool or other tools discussed in urban systems with transformational changes quantification Table 2) on GHG emissions of emission ff Promote use of national assumptions (e.g., consistent baseline setting) and ff Limited experience of integrated assessment reductions ex ante help integrate urban mitigation and communicate contributions of urban ff Multiple interfering of vertical and horizontal and ex post actions into the national effort policies impacts ff Facilitate use of modeling for policy impacts assessment ff Long-term impacts poorly understood and/or under quantified Aggregate ff Capture systemic impacts of complementary policies to facilitate ff No available benchmarks to show ambition performance sustainable implementation for policies indicators ff Use of different performance metrics that can be translated into CO2e by ff Limited capacity to attribute impacts in the the aggregator at the program level context of comprehensive policy reforms and ff Help identify impacts of cross-sectoral mitigation strategies cross-sectoral impacts ff Enable aggregate quantification of contribution of city mitigation to NDC ff Large data requirements to set a city-level implementation carbon budget ff Possible use of “city carbon budgets” aligned with NDCs to demonstrate sufficient level of ambition of urban action Low carbon cities 2018 73 Existing tools touch upon some of the points ff Ability to single out impacts of exogenous relevant in the context of crediting approaches, policies and measures. This feature is important as shown in Table 2 in Section 3.3.4. However, for tracing and allocating impacts of urban this table also highlights that a more specific actions on GHG emissions or energy consumption understanding is needed of how these tools can in the context of national policies. accomplish the following: ff Comparability and transparency of quantification. Tools that are compatible ff Facilitate comparable and transparent ex ante with IPCC inventories guidelines generally quantification of mitigation potentials in cities reflect higher quality assurance and are more and ex post measurement of impacts. likely to have adequate transparency of the ff Help simplify ex ante and ex post quantification, mitigation outcome quantification process. while preserving an acceptable level of Tools compatible with national approaches transparency and environmental integrity. (quantification of impacts; inventories and ff Identify priority actions that lead to mitigation at registries) have advantages in that: scale in each specific case. ‒‒ They facilitate climate action planning that ff Track cities’ contributions to the implementation can in turn facilitate the demonstration of NDCs. and allocation of efforts to urban mitigation action to achieve national targets (i.e., NDCs The improved quantification can in turn facilitate under the Paris Agreement). access of cities to carbon or climate finance through ‒‒ They can help reduce double counting risks crediting. Specifically, a comprehensive mapping (relevant for the use of crediting approaches and review of the tools would help get insights into in market mechanisms). the following features: ff Level of aggregation of impact assessment and performance indicators. Aggregate ff Coverage. Broad coverage is needed to address a performance indicators—different from tCO2e— variety of mitigation action and implementation allow the use of different performance metrics approaches in cities. The assessment of the and benchmarks and better capture systemic coverage will need to include: impacts of key sectoral policies. ‒‒ Sectoral actions and limitations in terms of sectoral coverage. Further research, for example, in the shape of a ‒‒ Cross-sectoral impacts. dedicated policy and methodology work program ‒‒ Linkage with urban planning to capture for crediting approaches in cities at the global future transformative changes in sectors and level, could map the existing urban mitigation urbanization patterns. tools and investigate whether and how they ff Modeling horizon. The ability of the tool to could be used/amended to be used in crediting assist decision makers to identify measurable, instruments. The work program needs to draw reportable, and verifiable mid-term milestones on and bring together leading urban initiatives, to monitor progress, take corrective actions, such as C40, ICLEI, GPSC, and CCFLA, and urban and manage delivery risk to allow for the actors, including cities, academia, think tanks, and disbursement of carbon or climate finance using financial institutions. Collaboration needs to be at crediting approaches. the heart of such a work program to ensure that ff Due account of local policy environment. the proposed solutions are simple, practicable, Whether the tool accounts for the impacts of and build on the existing practices. current and planned local policies and sectoral or urbanization strategies, which are critical for setting up a credible baseline. Low carbon cities 2018 74 It should be noted that crediting approaches focus Beyond megacities in developing countries on emission reductions as the outcome. However, that may already have a relatively high carbon the use of alternative metrics (i.e., other than ton footprint, priorities for piloting should include of GHG emissions), in particular where crediting urban programs in the developing countries with approaches are used to design RBCF disbursement rapidly growing cities. The capacity to use these indicators, could facilitate the assessment of other financing instruments effectively may be the lowest policy outcomes and benefits. This would allow in such cities, and would warrant the design of a better targeting of actions needed to influence appropriate, pragmatic approaches to governance, a broader range of policy levels, and actions that and institutional solutions to support the use of are critical to the adoption of low-carbon urban crediting approaches, accompanied by adequate development pathways (i.e., urban planning, CUD, capacity building. TOD, decarbonization of urban energy supply, new infrastructure for electric transportation, Specific attention should be paid to piloting etc.). Therefore, it is important to explore the use policy crediting approaches, both under the of such metrics to provide flexibility for cities and carbon market mechanisms and through RBCF, influence a wide spectrum of policy levers and given their potential to improve the contribution actions, including adaptation, to help countries of such approaches to deliver on key sectoral and meet their NDCs. urban socioeconomic objectives with lower carbon impacts. The innovative way to define financial costs and expected impacts of individual or 6.3. Piloting integrated policy reforms in terms of energy savings and GHG emissions, as discussed in Box 9, has a Piloting in the form of a limited-scale replication potential for various sectors. This could implementation of the new crediting approaches be instrumental to integrate crediting approaches with some type of up-front funding would help test into other financing instruments, such as the World some of the design options and tools described in Bank’s Program-for-Result lending instrument that previous sections. This would still deliver mitigation is successfully used to support urban interventions. results and possibly carbon finance under the new Useful insights could also be drawn from ongoing generation of market mechanisms established World Bank research, supported by the Carbon under the Paris Agreement. It would also help Partnership Facility, on the methodologies for develop a practical understanding of what new policy MRV, which currently focuses on energy crediting instruments could look like. sector policies.117 Cities around the world are working on defining Piloting activities have the potential to test some and implementing climate action plans, unilaterally transferrable elements of the new crediting or under international city initiatives. Including approaches while already showing a significant crediting approaches in existing climate action commitment to a policy outcome.118 Such programs or programs under design, rather than transferrable elements can include institutions and designing such piloting programs from scratch, methodological issues and tools, such as setting could help fast-track the testing in countries with baselines, assessing the contribution of the city an ongoing engagement. climate action to the implementation of the NDC, 117 World Bank. Forthcoming. Morocco Energy Policy MRV: Emission Reductions from Energy Subsidies Reform and Renewable Energy Policy. World Bank, Washington D.C. 118 Source: Partnership for Market Readiness (PMR). 2015. Low carbon cities 2018 75 Figure 23: Example of potential piloting activities for a scaled-up crediting approach under Article 6 of the Paris Agreement refining emission reductions calculation methods, PARTICIPATION OPTIONS and implementing MRV systems in line with Assessment of modalities and regulatory frameworks for national tracking tools. Piloting should have a clear participation in the international transfers of mitigation outcomes under Article 6 of the Paris Agreement evaluation mechanism so that it can be used to test the viability of certain approaches and capture learnings that can be used to scale up the crediting approaches. SUPPLY AND DEMAND FOR Piloting could also provide useful insights to the INTERNATIONAL CREDITS priority areas for further work identified above Overview of international, regional and bilateral sources regarding the economics of urban mitigation. This of demand and their characteristics could focus on the costs and revenues of different types of urban mitigation activities and relevant financing models, and will help build capacity at different levels of government and individual SCOPE AND COVERAGE OF A system operators, SCALED-UP CREDITING PROGRAM (under the market mechanism) Figure 23 gives an example of elements that could Assessment of relevant, preconditions and mitigation be investigated and piloted in the context of impacts of measures, including policy-driven interventions, under a scaled-up crediting program for cities (SCP) scaled-up crediting used in market mechanisms under Article 6 of the Paris Agreement. Even if the immediate opportunities for scaled-up crediting in cities under Article 6—and especially 6.4—might be MITIGATION POTENTIAL AND TARGET limited due to the uncertainty around demand and SETTING Evaluate techno-economic potential for mitigation and the absence of clear rules, there are opportunities to necessary policy and economic incentives and financial explore the use of crediting approaches under the resources to achieve the SCP targets financing pillar of the Paris Agreement, in particular RBCF. Besides demand, the piloting of crediting approaches under Article 6 requires specific attention to the question of environmental integrity IMPLEMENTATION MODALITIES and avoidance of double counting.119 Analysis of potential implications of scaling-up for the design and implementation of a SCP DEVELOPMENT OF A SCP Main steps for the development of a SCP and impact on the current and planned carbon pricing initiatives 119 Source: Partnership for Market Readiness (PMR). 2017. Low carbon cities 2018 76 7. CONCLUSIONS The Paris Agreement and its adoption decision phases mean that there is no simple approach to calls for scaling up mitigation globally, and in identify mitigation policies and actions and assess cities specifically. It also opens the door for a new their costs, prioritize, finance and implement generation of crediting approaches in both market them, and quantify their mitigation impacts. Local mechanisms under Article 6 of the Agreement and governments need to work with public and private in RBCF instruments. Crediting approaches could partners, including individual system operators, be an appropriate mechanism to support climate to create holistic approaches aligned with and action in cities at scale if designed with urban enabled by national frameworks and policies. In characteristics in mind. Given the intrinsic features such approaches, cities will play various roles, from of crediting approaches, their use could be more policy maker, to regulator, service provider, and effective when supporting urban climate actions partner. New crediting approaches need to be that prioritize and focus on the replication of discrete developed in a way that reflects the complexity and measures at the (sub-) sectoral level (e.g., end-of- variability of the city context and allows for a better pipe mitigation options such as building retrofits or fit with integrated approaches. street lighting) and on interventions with a broader scope of action, including in the interconnected The role that a new generation of crediting sectors (e.g., low-carbon communities and approaches could play in supporting urban distributed renewables in the building sector). mitigation needs to evolve from a narrow, Wider transformational interventions, such as CUD marginal, carbon-centric incentive toward a more and TOD, call for a substantial revisit to the way integrated form of financial support, cognizant of a crediting approaches can be combined with other broader policy environment and policy objectives sources of financing for cities. Without such an at the urban and national levels. The scale-up from integrated, strategic approach to financing, covering technology-based interventions to sectoral and the entire lifecycle of structural change and policy policy-driven actions is crucial in the urban context. process to support the long-term delivery of results, The level of scaling-up will affect the risks both the transformational interventions are likely to be more finance recipient and provider bear and their ability effectively supported by another type of mechanism. to deliver the planned emission reductions (i.e., inter alia quality, quantity, schedule, costs). These The need and potential for urban mitigation risks include crediting risks (institutional capacity, has been well-documented. However, the aggregation, regulatory risks, and monitoring) complex modes of governance, service delivery, and urban risks (planning uncertainty, extended infrastructure investment, and asset ownership delivery periods, vertical/horizontal coordination, reflecting a diversity of city types and development and financial and investment barriers). Low carbon cities 2018 77 Cities should ensure that the modality they select Taking action now to integrate crediting approaches to implement a crediting approach allocates risks as a source of financing for urban mitigation could related to the use of crediting in an appropriate help cities as follows: manner, and facilitates policies and actions at a level of governance where they would be most ff Building readiness for crediting facilitates efficient, from both an economic and institutional cities’ contributions to national mitigation perspective, at avoiding complex coordination action by mobilizing their mitigation potential issues when possible. Recognizing the diversity of and triggering transformation impacts at the cities and their risk profiles, crediting approaches local level. It integrates cities in national NDC can be deployed through different implementation implementation efforts and helps increase the modalities, from a centralized modality led by the ambition of mitigation action at both the city national government and implemented by the city, and national levels. It also helps cities avoid to a decentralized modality led and implemented by locking into carbon-intensive infrastructure and the city, or more explicitly focused on policy levers. helps cities move toward a low-carbon and New crediting approaches will need to recognize that resilient urban development pathway. most of the growth in urban emissions will happen ff The result-focused actions can help reveal in emerging economies, where cities will need to abatement costs of a variety of measures in expand, increase, and improve the quality of services different urban sectors, in particular, those and where a lot of infrastructure has yet to be built. that are the main contributors to urban GHG This will mean, in many cases, increases in energy emissions (transport, buildings, waste, and consumption, which need to be reflected in the water). This focus can also incentivize the better design of crediting approaches (e.g., baselines that quantification of impacts of more complex will capture this growth but ensure environmental levers of urban emissions such as CUD and TOD. integrity). This growth pattern also emphasizes the ff The carbon price signal set through crediting need to find ways to use climate finance to incentivize approaches helps leverage private finance and cities to incorporate climate change considerations allocate efficiently the financial resources— into urban planning and land-use regulations. both public and private—at the urban level. Crediting approaches need to blend with other Crediting approaches need to be embedded in instruments of (climate) finance and effectively the design of climate-related actions from the complement other climate-related and broader start and combined with other climate-related and policy instruments. Support to policies that broader policy and financing instruments through create an enabling environment and target their lifecycle, starting with planning to monitoring behavioral change should also be covered of the performance of climate-related actions. by blended instruments to allow for effective Crediting approaches need to be part of the urban implementation. policy processes to have transformational impacts, ff The establishment and use of MRV for GHG including city planning. This can help plan and emissions and mitigation outcomes can improve develop implementation strategies and bring capacity to track achieved levels of enforcement projects/interventions to investment readiness. of policies and actions, and provide feedback for To achieve this, international support is needed future planning and additional policy reforms. to help improve urban-scale GHG metrics, data MRV can also serve broader policy objectives collection, and analysis methods, and to develop of cities and bring multiple benefits by creating appropriate financial instruments and strengthen readiness to access other types of climate capacities at the urban level to plan for action and finance. to bring implementation programs close to the investable grade. Low carbon cities 2018 78 ff By exploring new market mechanisms now, ff Map the existing urban mitigation tools and urban actors have an early opportunity to help investigate whether and how they could be used design and pilot future market mechanisms, or amended to better respond to the needs of including those under Article 6 of the Paris crediting approaches. Agreement. Importantly, the experience learned from the implementation of Kyoto flexibility Such a work program would also help build mechanisms can inform future design. This capacities on the use of crediting approaches in maintains momentum between the key actors cities. This is important as most of the growth in and informs broader discussions about the urban emissions will happen in emerging economies limitations of current approaches and potential where capacity is, in some cases, limited. The work solutions. More widely, cities’ experiences with program would also strengthen the dialogue crediting approaches can pave the way for between cities and national governments to align using other market mechanisms and other efforts, policies, and instruments, and communicate forms of carbon pricing in the future. on their contribution to NDC implementation. While crediting approaches focus on emission reductions To realize these benefits and progress, further as the outcome, the use of other metrics (i.e., other research is needed to fill some remaining than tons of GHG emissions) should be investigated methodological gaps, and piloting is required to as this can provide flexibility for cities and influence test options on the ground. Further research could a broader range of policy levers and actions, be carried out under a global work program that including adaptation, thereby helping countries would bring together leading urban initiatives, meet their NDCs. such as C40, ICLEI, GPSC, and CCFLA, and urban actors including cities, academia, think tanks, and While crediting approaches bring benefits that go financial institutions. Collaboration will help ensure beyond pure mitigation, the success of crediting that the proposed solutions are simple, practicable, instruments in cities will ultimately rely on the and build on the existing practices. demand for mitigation outcomes (demand for credits for carbon finance, and the willingness to The proposed new global work program could pay for results in the form of emission reductions cover issues such as: for climate finance). At the international level, this will depend on countries’ willingness to engage in ff Refine the guidance on assessing preconditions international cooperative actions where a crediting for effective and efficient use of crediting for approach is used as a modality of climate finance achieving urban mitigation at scale. and international transfers of mitigation outcomes ff Demonstrate detailed concepts (blueprints) and in the case of market mechanisms. In the context the feasibility of various potential implementation of uncertain international demand for credits modalities and what they would look like under market mechanisms, crediting approaches in practice, covering issues such as baseline can be explored under the financing pillar of the setting, alignment with NDCs, different strategic Paris Agreement, in particular RBCF, and at the allocation/prioritization of crediting aligned domestic level to complement other climate policy with resilient urban development and other instruments to help compliance under a carbon urban social and environmental priorities, risk tax, an ETS, or other forms of carbon pricing. mitigation approaches, types of urban mitigation actions for which crediting approaches would be best-suited, most effective climate action planning, implications of blending, and so forth. Low carbon cities 2018 BIBLIOGRAPHY ff Broekhoff, Derik, Peter Erickson, Carrie Lee. 2015. 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