Reimagining funding for European cities’ transition to net-zero

In The News 05 Sep 2024

Achieving carbon neutrality is a key goal for cities across Europe, but they are confronted with a significant challenge: securing the vast funding needed to bring transformative climate projects to life. Navigating a complex web of financial constraints, regulatory barriers, and practical difficulties all contribute to slowing down progress, making cities rethink how to fund their projects in order to deliver large-scale green initiatives. These obstacles make the path to sustainability complex and demanding, but provide an excellent opportunity to develop innovative solutions and collaborative efforts. 

Addressing the funding challenge for Europe’s net-zero transition 

Securing climate funding often starts with a tough reality: transformative projects demand substantial upfront investment. Consider a city aiming to retrofit hundreds of aging buildings for better energy efficiency. The initial costs are high, and, while the long-term financial returns are significant, they take years to materialise. The complexity deepens when specific requirements and unpredictable regulations add layers of uncertainty — which can often deter investors seeking safer and quicker gains. 

Cities often face the challenge of piecing together funding from various sources like public budgets, grants, and private investments to support large-scale projects. This scattered approach can lead to gaps in funding – add to that the maze of regulations and red tape, and the result is delayed projects and increased costs. In this environment, finding a way to link these different funding sources and navigate regulatory obstacles is key to move climate action forward.  

“All in all, it often comes to the money questions like, ‘how do we fund our climate work?’” says Elena Ojala, the environmental director of the city of Lahti, Finland. “And there we also need private investors, and we need to find out how we can make it all happen and have all the things financed that we have planned.” 

The need for innovative financing mechanisms 

Given these challenges, traditional funding methods often fall short when it comes to meeting the ambitious scale of climate goals. The complexity and high costs associated with transformative climate projects require more than conventional financial approaches. And as these projects evolve, they will demand more innovative financial mechanisms that can adapt to shifting needs, support emerging technologies and scale up rapidly to match the urgency of the climate crisis. 

A key development in this space is the Climate City Capital Hub, launched by the European Commission in June 2024 – a game-changer for cities aiming to meet targets of the EU Mission on Climate-Neutral and Smart Cities. Managed by NetZeroCities, the hub offers expert advice and support to make climate projects ‘investment ready’, serving as a vital resource for cities, helping them navigate financial complexities and connect with potential investors. 

The Capital Hub is a crucial step in addressing the challenge of fragmented funding. By consolidating resources and expertise, it helps cities organise their financial needs and tap into innovative funding sources like crowdfunding and sustainability-linked bonds. This support is essential for moving from planning to action, making it easier for cities to turn their climate goals into reality. With 33 cities already participating and €114.1 billion set aside for climate actions, the hub is making a tangible impact and offering a clear pathway for cities to advance toward climate neutrality. 

From green bonds and impact investing to public-private partnerships and resilience funding, cities are tapping into a variety of innovative financing mechanisms to address the complex financial demands of ambitious climate projects and accelerate their transition to net-zero. 

Bridging gaps in Bristol: the power of public-private partnerships 

Public-private partnerships (PPPs) are proving to be a powerful tool in addressing climate challenges, and Bristol is leading the way. These collaborations blend the financial resources and innovation of private companies with the public sector’s ability to manage and execute large-scale projects. A good example is Bristol’s Net Zero Investment Co-Innovation Lab, funded by NetZeroCities. 

Confronted with the dual challenges of decarbonising and managing tight public budgets, Bristol is stepping up to bridge gaps between communities, financial actors, and climate projects. The lab is central to this mission, aiming to develop between three and six new investment funds while identifying new investor streams and investable projects.  

Showcasing how combining public and private resources can deliver tangible benefits for the city and its residents, a key component of the lab’s strategy is its community investment scheme, which allows individuals to contribute as little as £5 to climate projects and thus involve them in the transition. This not only democratises investment but also fosters local buy-in and support. 

This innovative approach is also mirrored in Bristol’s City Leap project, a public-private partnership with Ameresco UK and Vattenfall UK. Set to invest €1 billion over the first six years and more over a 20-year horizon, the initiative exemplifies the potential of combining diverse funding sources to drive substantial progress. Together, all these initiatives illustrate how Bristol is leveraging public-private partnerships to create a robust and inclusive financial ecosystem for achieving its climate goals. 

Financing retrofit in Budapest: tackling ownership and funding challenges 

In Budapest, outdated buildings are a major source of carbon emissions, contributing to 60% of the city’s total. With a large portion of Hungarian homes located within Budapest, tackling this issue is crucial for reducing overall emissions, but comes at a cost. The city faces an important challenge: upgrading its aging building stock while addressing ownership complexities and securing funding. 

To tackle this, Budapest is leveraging the NetZeroCities Pilot Cities Programme for grant funding and has established a dedicated Climate Agency to oversee home renovations, tasked with managing the financial and technical aspects of upgrading buildings. The city’s strategy involves detailed surveys to map building types and ownership, which will inform targeted financing strategies. By clustering properties in this way, Budapest aims to simplify the retrofitting process and collaborate with banks to create efficient financing models.  

“By categorising buildings and households into clusters with similar characteristics, we create a significant saving potential and a more attractive market for banks and financial institutions. We’ll then collaborate with these financial actors to develop tailored schemes for retrofitting these clusters,” says Ada Ámon, Head of Department for Climate and Environmental Affairs in Budapest. 

The Climate Agency, operating independently of local government constraints, is designed to act swiftly and effectively, driving progress without political or administrative delays. Through this strategic approach, Budapest is setting a precedent for how cities can address the complex challenge of building renovations while advancing their climate goals. 

How European cities’ financial strategies are opening doors for climate project funding 

Across Europe, cities are finding creative ways to overcome the financial hurdles of becoming carbon neutral. This wave of innovation isn’t limited to just a few cities. For example, Bologna is working on new financial tools to support energy-efficient upgrades and renewable energy projects, reflecting a growing trend among European cities to better align their finances with climate goals. 

The spirit of collaboration is spreading fast. Spanish cities like Madrid, Valencia, Zaragoza, Vitoria, and Valladolid are pushing for dedicated funds to help them reach their ambitious climate targets. Their goal to achieve emissions neutrality by 2030 highlights the need for specialised financial support to turn this vision into reality. 

By exploring new funding sources and forging strong partnerships, cities across Europe are not only addressing their immediate climate challenges but also setting a precedent for others to follow. Their efforts are paving the way for future climate initiatives, demonstrating how financial innovation can drive progress toward a sustainable future. 
 

This article is part of EIT Climate-KIC’s #LiveableCities Campaign, where we explore the pathways to a climate neutral, just, and more beautiful future. By 2030, our goal is to help transform over 400 cities into thriving, climate-resilient communities. This campaign captures the stories and lessons of ambitious cities in Europe and around the world. We want to show a vision of what’s possible when cities and stakeholders come together to tackle the climate crisis.