Introduction

The 2021 State of Cities Climate Finance report asserts that cities are at the forefront of global efforts to reduce greenhouse gas emissions and manage climate risks. Urban areas account for 70% of global carbon dioxide emissions from energy use, consume 75% of natural resources, and generate 50% of all waste. With approximately 2.5 to 3 billion people expected to move to urban areas by 2050, particularly in Africa and Asia, strategic planning is essential to prevent locking in carbon-intensive infrastructure. The report highlights that technically feasible measures could reduce urban emissions by almost 90% by 2050, potentially supporting 87 million jobs by 2030 and generating a global economic dividend of USD 24 trillion.

Despite this potential, cities face significant headwinds in mobilising finance for transformational action. The International Finance Corporation (IFC) estimates that urban sustainable investment opportunities in emerging markets alone reach USD 2.5 trillion annually through 2030. However, a critical gap exists between the demand for climate-smart infrastructure and available financing. This gap has been further exacerbated by the COVID-19 pandemic, which constrained municipal budgets as revenues dropped and costs for health and social crises mounted. To date, 6,150 cities representing 20% of urban residents globally have developed climate action plans, yet many lack the institutional authority or capacity to fund them.

A conceptual framework for mobilising urban climate finance at scale

The report establishes a conceptual framework that identifies three key enabling conditions: country-specific, city-specific, and climate-specific elements. City governments influence climate outcomes through two primary modes: as providers of infrastructure (direct spending) and as stewards with the ability to plan, regulate, and convene. Cities perform five core roles: consumer, provider, fundraiser, regulator, and champion of systems thinking. To mobilise finance at scale, the enabling environment must be vertically integrated from local to national levels and horizontally integrated across urban systems and planning processes.

Country-specific enabling conditions for mobilising urban climate finance at scale

National laws and fiscal architectures define what city governments can achieve. The report identifies four pillars of intergovernmental fiscal systems: expenditure responsibilities, revenue powers, fiscal transfers, and borrowing frameworks. While cities in high-income countries often enjoy high levels of autonomy, many developing nations utilise deconcentrated administrative models where cities are integral parts of the national budget. Only 21% of the 500 largest cities in developing countries have investment-grade ratings, and 56% are prohibited from borrowing. Consequently, many cities rely heavily on intergovernmental fiscal transfers, which accounts for over one-fourth of New York City’s operating revenues and over two-thirds of the City of London’s expenditures.

City-specific enabling conditions for mobilising urban climate finance at scale

Effective mobilisation requires alignment across four levels of planning: strategic, spatial, capital investment, and budgetary. Master plans generally provide a 20 to 30-year strategy, while spatial planning manages urban form. Adopting compact city principles—characterised by economic density, morphological density, and mixed land use—can reduce infrastructure costs by 15% on average every time a city doubles in population. The report also highlights land-value capture (LVC) instruments, including development fees and property taxes, as critical tools. High-income countries generate roughly four times more revenue from property taxes as a percentage of GDP compared to low-income countries.

Climate-specific enabling conditions to mobilise urban climate finance at scale

City climate action plans (CAPs) serve as the foundation for establishing a city’s vision for low-carbon development. Essential instruments include greenhouse gas (GHG) emissions inventories, vulnerability assessments, and clean energy transition plans. Carbon pricing is an emerging frontier at the municipal level, with tools such as emissions trading schemes (ETS), carbon taxes, and internal carbon pricing gaining traction. For example, the Beijing Pilot ETS covers 45% of the city’s total emissions. Integrating climate objectives into capital investment plans (CIPs) allows cities to screen and prioritise resilient projects, often reducing long-term operational and maintenance costs despite slightly higher initial capital requirements.

Mainstreaming climate-smart urbanisation and investment

Cities typically progress through four stages of mainstreaming: initial awareness, reactive responses to crises, incorporation into urban planning, and becoming mandated in law. The level of agency a city holds is directly correlated to its autonomy and capacity. Small or rapidly urbanising cities in developing nations have the unique opportunity to ‘leapfrog’ carbon-intensive urban forms and energy sources used in earlier transitions by developed countries. Strengthening municipal finance fundamentals, such as accounting systems and transparency, serves as a vital signal for creditworthiness to private sector lenders.

Conclusions and recommendations

The report recommends that national governments align climate policy both top-down and bottom-up, prioritising cities as partners in designing Nationally Determined Contributions (NDCs). Actions for officials include investing in national-level data systems for joint monitoring, integrating climate criteria into fiscal transfer systems, and directing green recovery stimulus funds to urban areas. City officials should review standards to promote compact growth and establish dedicated climate-smart teams to coordinate regional implications. International development partners should provide technical support for financial analytics and assist in developing robust climate-smart investment pipelines to reduce risks for private investors.