8 municipal finance ec link (8mfml fs yz final) by Florian Steinberg

Municipal Finance November 2017

Principal authors Ute Zimmermann Frederic Asseline Michael Lindfield LAN Hong YAO Zhuo

EC-Link Position Paper Draft Version 1.5 EC-Link Working Papers: edited by Florian Steinberg, Li Chunyan and Yao Zhuo

PREFACE China’s Commitment to Mitigate Climate Change In 2015, China was one of the first Asian countries – besides Japan and South Korea – to come out strongly with a commitment to combat climate change, and to adapt to eventual future impacts. Context. With its population of about 1,300 million people, China is one of the world’s major emitters of greenhouse gases (GHG), and at the same time it is also one of the most vulnerable countries to the negative impacts of climate change. Commitment. In preparation for the 2015 United Nations Climate Change Meeting (COP21) in Paris, the government of China has announced that its GHG emissions will peak in 2030. Equally, it is committed to reduce by 2030 by 60-65% the intensity of its carbon usage in relationship to its gross domestic product (GDP), compared to 2005 levels. It will take on the responsibility to increase substantially its forest cover, and will ensure that by 2030 some 20% of its energy requirements will be covered by renewable energy. Actions. The country’s measures will include mitigation of its contributions to GHG emissions, and it will introduce adaptations measures to cope with negative impacts of climate change in food production, protection of its population, and in climate-proof infrastructure. China aims at biding climate change agreements under the COP21. The international community sees the proposed measures as ambitious but achievable. Since several years, China has started with low-carbon development. Today it is working towards a full-fledged program of green development of its economy.

Eco-Cities and Climate Change China’s activities to create eco-cities must be seen as part of its contributions to low-carbon development with aim to mitigate climate change. Among the various support mechanisms which exist, to support low-carbon development, the Ministry of Housing, and Urban-Rural Development (MoHURD), is being supported by the European Union (EU) through the Europe-China Eco-Cities Link Project (EC Link). Background.The main objective of the EC Link project is to serve as a support mechanism to the Ministry of Housing and Urban-Rural Development to implement its sustainable lowcarbon urbanisation agenda. The project will support the Ministry in 4 strategic areas: 1) Demonstrate best approaches to implement low carbon solutions by introducing appropriate urban planning tools. Best practice low carbon planning will be identified in both Europe and China and made available nation-wide to municipal governments. Advanced planning tools will be deployed at the local level with the support of the project, with a view to refining proposed low-carbon planning models and to scaling them up across Chinese provinces.

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2) Serve as testing ground for innovations in specific low-carbon policies (e.g. energy performance labelling for buildings, intelligent transport systems, smart cities, GIS planning tools, eco city labelling schemes) and technologies (in the 9 sectors selected by the project: compact urban development, clean energy, green buildings, green transportation, water management, solid waste treatment, urban renewal and revitalization, municipal financing, green industries). 3) Improve Chinese Municipalities' potential to finance low carbon solutions and notably their ability to attract private sector financing in the form of public private partnerships. The EC Link will support MoHURD to define innovative financial schemes, support feasibility studies and the formulation of finance and investment proposals, better coordinate and leverage investments undertaken by EU Member States, or to link projects to European financing institutions (e.g. European Investment Bank) and to European companies. 4) Establish knowledge networks and test the functionality of the support mechanism by leveraging, scaling up, and integrating transformative actions supported by the policy and technology tools developed under the project. The Knowledge Platform will demonstrate how strategic objectives have been translated at local level and how results have been integrated at national level for the definition of long-term best practices. Results will be shared via training and capacity building at local level, and via the knowledge platform setup by the project at national and international level. The EC Link Position Papers. MoHURD and the EC Link Technical Assistance Team (TAT) have identified 9 specific sectors for the deployment of technology based tool boxes. In all of these, Europe has a lot of knowledge and best practice to contribute to support the deployment of these solutions in China. These 9 sectors include:

        

compact urban development, clean energy, green buildings, green transportation, water management, solid waste treatment, urban renewal and revitalization, municipal financing, green industries.

MoHURD’s Department of Science and Technology, EC Link’s direct counterpart, has issued targeted objectives for the deployment of policy, research and development and engineering agendas. Users and Target Groups of Position Papers. The EC Link position papers will be utilized by personnel of the cities which are covered by MoHURD’s eco-city programme. This covers technical and managerial staff of these cities. Additionally, at central government level,

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MoHURD and other ministries may also make use of these position papers for the purpose of staff training and briefing1. Since these position papers are also going to be published in the EC Link website (www.eclink.org), also the general public is invited to make use of these position papers. Content of Position Papers Sector overview: The EC-Link position papers provide an overview of each thematic sector (compact urban development, clean energy, green buildings, green transportation, water management, solid waste treatment, urban renewal and revitalization, municipal financing, green industries). It begins with a state-of-the-art review of the sector, and presents sector challenges as development objectives. Sector policy analysis: As part of the sector overview, the EC-Link position papers provide sector policy analysis, and a comparison of EU and Chinese sector policies. Comparison of European and Chinese experiences: The comparison of real-life EU and Chinese project experiences are used to illustrate innovations and progress in the respective sector. Both for EU and Chinese cases, there is an overview of good practices, technologies and products, performance indicators, technical standards, verification methods, and lessons learnt from best eco-city practices. Tools: This position paper contains two primary tools. Throughout the text of this position paper there are flags to point at these primary tools ( Tool MF 1,  Tool MF 2). At the end of the position paper there is an Annex with short summary descriptions of these primary tools. The primary tools for Municipal Finance (MF) (GT) are:  

Tool MF 1: Green Investment Resources Plan (GIRP). Tool MF 2: Green Investment Financing Plan.

MoHURD and local HURD will have larger role in bridging the projects with the financing institutions in the sectors which are greatly relevant to MoHURD mandate, eg. green building, sponge city construction, water management and so on. MoHURD and Local HURD personnel will need more cross-sector knowledge (green building + finance) to better equip them for the future challenge. That is why the GMF is quite relevant to MoHURD and Local HURD. This also can be seen from the following official notification from MoHURD website regarding the cross-ministry cooperation between MoHURD and other ministries responsible for finance or financial institutions : “Joint Notification by MoHURD and CBRC on Energy Efficiency in public buildings” http://www.mohurd.gov.cn/zxydt/201706/t20170628_232395.html; “Joint Notification by MoHURD and China Development bank on Pledged Supplementary lending (PSL) for the underground pipeline” http://www.mohurd.gov.cn/wjfb/201704/t20170418_231538.html; MoHURD and other ministries issued the notice on” Encourage and guide private capital into urban water supply, gas, heating, sewage and garbage disposal sectors” http://www.mohurd.gov.cn/wjfb/201610/t20161031_229321.html “MoHURD and China Agricultural Development Bank jointly issue the notice on promoting the policy financing support to sponge city construction” http://www.mohurd.gov.cn/wjfb/201601/t20160111_226262.html “MoHURD and China Development Bank jointly issue the notice on promoting development financing to support sponge city construction” http://www.mohurd.gov.cn/wjfb/201512/t20151230_226176.html

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It is understood that these primary tools, do contain numerous secondary tools which cannot be elaborated in the context of this position paper.

Position Paper - a living document: This position paper will be updated based on city-level real-life project experiences in the EC-Link pilot cities. Possible misconceptions: These position papers shall not be mistaken for ‘cook books’, or ‘how to do’-manuals like we know them from other subject fields (car repair, computer servicing, etc.). Urban development is too complex for such an approach. Upon request of MoHURD these position papers are addressing good practices and seek to provide tools for complex issues of green urban development.

DISCLAIMER The illustration of EC Link Position Papers was only possible through the use of a wide range of published materials, most of these available online. The position papers’ authors have utilized illustrations which originate from internet sources, and these are reproduced here with proper citation and reference. The use of these materials is solely for the purpose of knowledge sharing, without any commercial use or intentions.

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CONTENTS Abbreviations ........................................................................................................................ 8 List of cases ........................................................................................................................ 10 List of figures ....................................................................................................................... 11 List of tables ........................................................................................................................ 13 Glossary of Terms ............................................................................................................... 13 1

THEMATIC BACKGROUND ........................................................................................ 15

1.1

Municipal finance and green investments ........................................................ 15

1.2

Green municipal finance.................................................................................. 19

1.2.1

Green municipal revenues ...............................................................................20

1.2.2

Green municipal expenditures ..........................................................................23

DEVELOPMENT OBJECTIVES OF GREEN MUNICPAL FINANCE ........................... 29

2.1

Enabling Framework ....................................................................................... 29 2.1.1

National Policies...............................................................................................29

2.1.2

Local level enabling policies .............................................................................32

2.2

GMF: Funding and Financing .......................................................................... 33 2.2.1

Funding Instruments ........................................................................................33

2.2.2

Financing .........................................................................................................36

2.3

Evaluating the Effectiveness and Impact of GMF ............................................ 48

2.4

Institutional and Process Issues ...................................................................... 51 2.4.1

Knowledge of technology options & costs and of financing options ..................51

2.4.2

Project development and financial structuring ..................................................51

KEY ISSUES --- KEY CONCEPTS ............................................................................... 53

BEST PRACTISES – PERSPECTIVES FROM EUROPE ............................................ 54

4.1

Enabling Framework ...................................................................................... 54 4.1.1

Policy Overview................................................................................................54

4.1.2

EU project development advisory and knowledge/ information .........................57

4.1.3

EU funding and financing .................................................................................58

4.1.4

Enabling framework overview...........................................................................59

4.1.5

Institutional and funding/ financing initiatives at EU/ national level ...................60

4.2

City Level Initiatives ........................................................................................ 68 4.2.1

Local institutional and funding initiatives ...........................................................68

4.2.2

EU Investment case studies .............................................................................79

4.3

Outlook ........................................................................................................... 88 4.3.1

Context and Future Needs ...............................................................................88

4.3.2

GMF in Europe .................................................................................................89

PERSPECTIVES FROM CHINA ................................................................................... 92

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5.1

Policy analysis and sector overview ................................................................ 92 5.1.1

Policy Analysis .................................................................................................92

5.1.2

Municipal finance and current state of play in China .........................................95

5.1.3

Green Finance and Current State of Play in China .........................................103

5.1.4

Green Municipal Finance in China .................................................................107

5.2

Good Practices - Illustrations......................................................................... 112

5.3

Policies and Standards.................................................................................. 117 5.3.1

Green financial policies and regulations .........................................................117

5.3.2 Definitions and standards for “green” ..................................................................123 5.4

Tools to Increase the Municipal Revenue ...................................................... 126

5.5

Monitoring and Evaluating Green Finance..................................................... 146 5.5.1

Indicators .......................................................................................................146

5.5.2

Evaluation Methodology .................................................................................146

5.5.3

“Green” V.S “Non Green” ...............................................................................147

5.5.4

Risk management ..........................................................................................150

5.6

Cases from China ......................................................................................... 153

5.7

Outlook ......................................................................................................... 159 5.7.1

Context and Future Needs .............................................................................159

5.7.2

Green Finance Framework and Institutions ....................................................161

5.7.3

Institutional Development Needs ....................................................................166

VALUE ADDED and CROSS CUTTING THEMES ..................................................... 168

AVAILABLE RESOURCES AND TOOLS .................................................................. 168

7.1

Policy ............................................................................................................ 170

7.2

Finance ......................................................................................................... 171

7.3

Adaption ........................................................................................................ 173

7.4

Individual Topics ........................................................................................... 174

ANNEXES .................................................................................................................. 176

8.1

Annex 1: Tool MF 1 – .................................................................................... 176

8.2

Annex 2: Tool MF 2 – .................................................................................... 186

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Abbreviations ADB

Asian Development Bank

BOT

Build-operate-transfer

BOOT

Build-own-operate-transfer

BREEAM

Building Research Establishment Environmental Assessment Method (UK)

CDM

Clean Development Mechanism

DGNB

Deutsche Gesellschaft fur Nachhaltiges Bauen (German Sustainable Building Council)

e.g.

for example

EEO

Energy efficiency obligations

EBRD

European Bank for Reconstruction and Development

EIB

European Investment Bank

ESCO

Energy service companies

EPC

Energy performance contract

ETS

Emissions trading system

European Union

GCF

Green Climate Fund

GEF

Global Environment Facility

GHG

Greenhouse gas

GMF

Green Municipal Finance

IEA

International Energy Agency

ILO

International Labor Organization

INDC

Intended Nationally Determined Contribution

JASPERS

Joint Assistance to Support Projects in European RegionS

JESSICA

Joint European Support for Sustainable Investment in City Areas

Joint Declaration

kW/h

kilowatt/hour

LDA

London Development Authority

LEED

Leadership in Energy and Environmental Design (US)

LEEF

London Energy Efficiency Fund

LGF

London Green Fund

Megawatt

NAMA

National Appropriate Mitigation Action

NDRC

National Development and Reform Commission

NIMBY

Not In My Back Yard

p.a.

per annum

POA

Program of Activities

PPP

Public Private Partnership

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Property tax

R&D

Research and Development

ROW

Right of Way

SEAP

Sustainable Energy Action Plan

TIF

Tax increment finance

UNFCCC

United Nations Framework Convention on Climate Change

VCT

Value capture tax

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List of cases Case 1ďź&#x161; North-Rhine-Westfalia, Germany:Sustainability Bonds .........................................40 Case 2: Sweden:Green Bonds of Komunivest ......................................................................41 Case 3: Italy:cat Bond, The Azzurro Re I Ltd June/July 2015 ...............................................61 Case 4: Knowledge on Mitigation Finance: Triangulum multi-country approach ...................61 Case 5: Knowledge-Smart Cities ..........................................................................................62 Case 6: EU-wide: Clean Development Mechanism ..............................................................63 Case 7 EU-National: Urban Development Fund Lithuannia ..................................................65 Case 8: Copenhagen Denmark: Coperhagen Climate Adaptation Plan ................................68 Case 9: Barcelona, Spain: Barcelona Province Mitigation Funding ......................................70 Case 10: London, United Kingdom: London Green Fund .....................................................72 Case 11: Hannover, Germany: Pro Klima .............................................................................73 Case 12: London, United Kingdom: Congestion Charges .....................................................74 Case 13: Stuttgart, Germany: "Interacting" a cities internal contracting ................................75 Case 14: Almada, Portugal: Almada less carbon fund ..........................................................77 Case 15: London, UK: Crossrail ...........................................................................................79 Case 16: Beddington Zero Energy Development (BedZED) .................................................80 Case 17: Millennium Site, London, United Kingdom: Thames River Restoration ..................81 Case 18: Nordhaven, Copenhagen, Denmark ......................................................................83 Case 19: Denmark: Kalundborg Sustainable City/symbiosis ................................................84 Case 20: Waste to Energy Plant-I/S Reno Nord, Denmark ...................................................86 Case 21: Industrial Bank issues green financial bonds .......................................................137 Case 22: Beijing Automobile Co., Ltd issues green enterprises bonds ...............................138 Case 23: Wanzhou Distirct of Chongqing: Yangliu Water Supply project ............................153 Case 24: Chongqing: Tongxing Waste incineration project.................................................155 Case 25: Beijing Subway line 4 project...............................................................................156 Case 26: Nanning, Guangxi Province: Nakaohe Watershed management project..............158

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List of figures Figure 1: CO2 emissions and energy demand of cities from 2006-2030 ...............................15 Figure 2: Green Finance and Funding ..................................................................................16 Figure 3: Interlinkage of Green Municipal Finance................................................................20 Figure 4: Revenues of cities by function based on 2010 figures ...........................................21 Figure 5: Urban infrastructure finance and development framework .....................................22 Figure 6: Definition of adaptation and mitigation ...................................................................24 Figure 7: Capital intensity and abatement costs ...................................................................25 Figure 8: Korea's Green Growth Initiative .............................................................................29 Figure 9: Alignment of policies and GMF ..............................................................................31 Figure 10: Sources, mechanism and instruments of Green Municipal Finance revenues .....33 Figure 11: Simplified overview of Public and Private Infrastructure Finance .........................37 Figure 12: Capital Market Financing Instruments..................................................................38 Figure 13: Development of Green Bonds .............................................................................39 Figure 14: Italian White certificate Scheme: avoided energy costs for three main fuel sources .............................................................................................................................................44 Figure 15: Economics of Energy Performance Contracting(EPC) .........................................44 Figure 16: Emission sources in cities....................................................................................45 Figure 17: Correlation between CDM and NAMAs................................................................46 Figure 18: Display of Cities' achievement- UN Climate Conference, Bonn, Germany, 2015 .48 Figure 19: Perspectives from Europe ...................................................................................54 Figure 20: Simplified display of aligning Europe's main climate policies with GMF ...............56 Figure 21: Increase in number of laws in the world ...............................................................56 Figure 22: Number and mode of national legislation .............................................................57 Figure 23: Complexity of EU funding ....................................................................................59 Figure 24: Key Institutional Supports from EU GMF .............................................................59 Figure 25: Focus areas of sustainable cities .........................................................................63 Figure 26: Trading Volume in EU emission allowances (in mill tons) ....................................65 Figure 27: Schematic outline of Lithuania's Urban Development Fund .................................66 Figure 28: The Risk of Floods in the event of Heavy Rain ....................................................69 Figure 29: Barcelona Province Funding Sources ..................................................................70 Figure 30: Barcelona, Spainďź&#x161;Funding sources by type of technology .................................71 Figure 31: Schematic outline of the London Green Fund ......................................................72 Figure 32: Structure of the Stuttgart Financing model, Stuttgart, Germany ...........................76 Figure 33: Cost savings through the Stuttgart financing model .............................................77 Figure 34: Almada's Funding for the low-carbon fund ...........................................................78 Figure 35: The urbanization rate in China from 2001-2015 ...................................................96 Figure 36: Local Government Expenditure and Revenue (2012-2015) .................................97 Figure 37: Breakdown of Central Government General Budget Revenue(2015) ...................97 Figure 38: National Fixed Assets Investment in Urban Service Facilities by Capital Source from Year 2011 to year 2015 ................................................................................................98 Figure 39: The components of local government debt as of June, 2013 ...............................99 Figure 40: Different level of local government debt distribution as of June, 2013 ..................99 Figure 41: The Main Source of Local Government Debt as of June 2013 ...........................100 Figure 42: Bond Issued by MoF on behalf of the Municipal Government (2009-2013) ........101 Figure 43: Green Finance Policy Development to promote energy pricing reforms.............105 Figure 44: Internaitonal comparision of Green Investments as part of total stimulus packages ...........................................................................................................................................105 Figure 45: Typical Sectors coverd by GMF .........................................................................110 Figure 46: Prospects for Green Venture Capital and Private Euqity Financing ..................112 Figure 47: Greening of the Economy to Increase Growth ...................................................117 Figure 48: Step by Step Guide to Issue Green Bond ..........................................................137 Figure 49: Proposed Evaluation Methodology for GMF ......................................................147 Figure 50: Theoretical Framework for the Impact of Internalizing Environmental Cost on Risk Faced by Commercial Banks ..............................................................................................152 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Figure 51: Flow Chart of Stress Test ..................................................................................153 Figure 52: Investment demand estimate for key sectors in the 13th Five Year Plan (20162020) ..................................................................................................................................161

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List of tables Table 1: Comparison of green job calculation models ..........................................................50 Table 2: “Green” development Sector planning in “The 13th Five-Year Plan” period .............93 Table 3: The typical municipal financing instruments in China: ...........................................101 Table 4: Bond Issued by Local Government Directly (2011-2013) unit: 100 million RMB ....102 Table 5: the important players of GMF in China .................................................................107 Table 6: An Overview of Green Definitions Endorsed by PBoC and NDRC ........................124 Table 7: Three Development Stage of Municipal Bond in China .........................................128 Table 8: Proposed Municipal Finance KPIs .......................................................................146

Glossary of Terms Build-operatetransfer (BOT)

Build-operate-transfer (BOT) is a modality of the public-private partnership arrangements for the construction and/or management of public services infrastructure.

Build-ownoperate-transfer (BOOT)

Build-own-operate-transfer (BOOT) is a modality of the public-private partnership arrangements for the construction and/or management of public services infrastructure.

Clean Development Mechanism (CDM)

Clean development mechanism is one of the flexible mechanism defined by the Kyoto Protocol of that provides for emissions reduction projects which generate certified emission reduction units (CERs) which may be traded in emission trading schemes.

Emission trading The emission trading system is a government-mandated, marketsystem based approach to controlling pollution, by providing economic incentives for achieving reductions in the emissions of pollution. Various countries, states and groups of companies have adopted such trading systems, notably for mitigating climate change. A central authority (usually a governmental body) allocates or sells a limited number of permits to discharge specific quantities of a specific pollutant per time period. Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them. Financial derivatives of permits can also be traded on secondary markets. Financing

Obtaining the financial resources to construct the project and to commence its operation.

Funding

Obtaining the financial resources to pay back/ provide agreed return to the financiers (who provide financing)

Green bonds

A green bond is a (tax-exempt) bond which is issued by federally qualified organizations and/or municipalities for the development of brownfield sites. Brownfield sites are areas of land that are underutilized, have abandoned buildings, or are under developed. They often contain low levels of industrial pollution.

Green municipal Municipal finance is about the revenue and expenditure decisions of finance municipal governments. It covers the sources of revenue that are used by municipal governments – taxes (property, income, sales, excise taxes), user fees, and intergovernmental transfers. It includes ways of financing infrastructure through the use of operating revenues and borrowing as well as charges on developers and public-private partnerships. Municipal finance also addresses issues around Municipal Finance – EC Link Woking Papers - Draft Version 1.5

expenditures at the local level and the accountability for expenditure and revenue decisions, including the municipal budgetary process and financial management. Smart cities

A smart city is an urban development vision to integrate multiple information and communication technology (ICT) solutions to manage a city’s assets – the city’s assets. The goal of building a smart city is to improve quality of life by using technology to improve the efficiency of services and meet residents’ needs. ICT allows city officials to interact directly with the community and the city infrastructure and to monitor what is happening in the city, how the city is evolving, and how to enable a better quality of life. Through the use of sensors integrated with real-time monitoring systems, date are collected from citizens and devices - then processed and analyzed. The information and knowledge gathered are keys to tackling inefficiency. ICT is used to enhance quality, performance and interactivity of urban services, to reduce costs and resource consumption and to improve contact between citizens and government. Smart city applications are developed with the goal of improving the management of urban flows and allowing for real time responses to challenges. A smart city may therefore be more prepared to respond to challenges than one with a simple 'transactional' relationship with its citizens.

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1 THEMATIC BACKGROUND Cities and green-house gas emissions. Cities occupy 2% of the world’s landmass, but are responsible for more than two-thirds of global energy use and greenhouse gas emissions. The majority of people already live in urban areas and in 2050 it is expected that two-thirds of the entire population will be urban citizens. Cities therefore have to exercise leadership to cope with the increase in population not only in regard to the renewal and expansion of urban infrastructure but also in regard to the environmental impact this development has. The International Energy Agency (IEA) has highlighted this in their World Energy Outlook 2008: in 2006 the energy demand of cities accounted for 67% of world primary energy demand and is expected to grow to 73% in 2030 which resulted in greenhouse gas emissions (GHG) of 70% in 2006, which would increase to 76% in 2030. Figure 1: CO2 emissions and energy demand of cities from 2006-2030

Source: ICLEI 2010, Cities in a post-2012 climate policy framework. http://ccsl.iccip.net/cities_in_a_post_2012_policy_framework.pdf

The construction of more infrastructure and, at the same time, environmentally friendly infrastructure calls for a transformation process not only in political decision making processes, human behavior and applied technologies, but also in the way cities are financing their future. What is green finance? Green Finance stands for the responsibility of the financial sector in supporting the reduction of GHG emissions and creation of a climate resilient economy. It includes all parts of finance such as green banking, green stock markets, green financial ratings, green insurance companies and, of course, green municipal finance (GMF). GMF is crosscutting through a number of green finance topics such as green banking and financial instruments such as loans, but also when the issuance of green bonds is discussed. Financial instruments have an impact in ecological factors in the sense that what they finance should follow “green” standards and criteria. For GMF it is important to understand how financial instruments can stimulate growth and green behavior of citizens and enterprises. This position paper explains what green municipal finance is about and provides examples from Europe and China.

1.1 Municipal finance and green investments Municipal Finance – EC Link Woking Papers - Draft Version 1.5

Decentralisation. Over the last 20 years many countries started to give more powers to local governments, decentralizing e.g. health, educational and infrastructure responsibilities to lower levels. However, worldwide revenues of municipalities have not kept pace with expenditure needs. Local governments rely on intergovernmental transfers while at the same time their own revenue source is not sufficient. Conventional funding sources for cities often depends on property tax and user fees, without being able to tap more buoyant taxes such as e.g. income tax. Some cities have been allowed to issue bonds in the local capital market, increasing their flexibility in financing, but also increasing their long-term indebtedness. In order to provide sustainable long-term finance for municipalities, a change of the institutional and regulatory framework is needed. The objective of this transformation process – independent of any “greening” aspects - must result in an increase in finance available to cities, preferably from own-source revenues, in relation to the services needed. In addition, the additional burdens of green or climate-related investments (hereinafter referred to as ‘’green investments’’ for simplicity) need to be addressed. Tool MF 1 Cities need to focus on two issues in relation to implementing investments generally and green investments in particular. Cities need to be able to:  

tap a broad base of finance for these investments; and to identify and tap appropriate funding in order to repay any debt financing and to pay for operation and maintenance costs.

BOTH of these elements are necessary components of any municipal finance strategy in general and of a GMF strategy in particular. The figure below shows key issues in relation to financing and funding green investments. Figure 2: Green Finance and Funding

Source: M. Lindfield, EC Link

Significant in the figure is the centrality of project development and the capacity of the borrowing/ fund mobilizing entity. Unless the development process is rigorous, the local government may pay too much for the wrong investments. Unless the implementing agency is well structured, its performance may be sub-optimal, increasing the operating budget of the local government and/or loading it with increased liabilities. Thus, the ability to structure

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projects for financing and to structure the implementing entity such that it has stable sources of funding constitutes another central consideration in GMF. Limited access to green and climate finance. The figure above shows several layers of constraints to cities accessing the finance they need for green projects. Each of these constraints needs to be addressed and this position paper will give examples of how this was achieved in a range of cities. In particular, the mobilization of private sector investments is of paramount importance for green investment as can be seen by the world-wide structure of climate finance:  

According to the Climate Policy Initiative 2 global climate finance reached USD 331 billion in 2013. The private sector was the largest contributor to global climate finance with 58% equaling USD 193 billion, leaving the public sector (excluding domestic allocations) with USD 137 billion and 42%. Almost 3/4 of the total flows were invested in the country of origin. Especially private sector investments stayed in the home countries where national climate change frameworks are well established and understood.

New report helps cities find the money they need for climate change projects Titled “New Perspectives on Climate for Cities”3, the document outlines ways in which cities can tap into financial markets to fund climate change projects. It also highlights successful case studies from around the globe. The study identifies possible routes for supporting climate-related projects and programmes, including bonds, where the market in labelled green bonds has risen substantially from US$0.8 billion in 2007 to US$42 billion in 2015. “There’s a lot of money out there… and a lot of (infrastructure) projects, but they’re not connecting.” Research by C40, a network of the world’s megacities committed to addressing climate change, showed that only 4 per cent of cities have a credit rating to access international financial markets. To address this, C40 has started initiatives with the World Bank and other institutions to help cities boost their credit worthiness and to access t the funding they need. It recommends six innovative financing mechanisms – and likely finance providers - for mobilizing investment for cities and looks at the benefits and challenges of each approach. These mechanisms include emission trading schemes; green bonds; international financial institutions; international and regional climate funds; city governmentbacked funds; and equity capital.

Climate Policy Initiative (CPI). 2014. Landscape of Global Climate Finance 2014; these numbers do not include domestic funding. The volume of total climate finance worldwide remains opaque. No official registry exists to which climate finance is reported, especially funds from the private sector, other development aid under a different heading than climate finance and flows from domestic climate actions are difficult to detect. Subsequently the international community is found to quote different figures. 3 http://w3.siemens.com/topics/global/en/intelligent-infrastructure/whitepaper/pages/climate-finance-for-cities.aspx

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Cheam, J. 2017. New report helps cities find the money they need for climate change projects. Eco-Business. 13 July 2017. http://www.eco-business.com/news/newreport-helps-cities-find-the-money-they-need-for-climate-change-projects/

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Funding municipal investments. Figure 1 above also illustrates constraints cities have on the funding side. This is a major problem because, in the end, any investment financing other than financing through current revenue, savings or some form of privatization, will need to be repaid. Funding thus ultimately constrains the capacity to invest. Capacity to recover costs through user charges is often constrained, as is the city’s ability to increase the taxes it levies on its citizens. National government compensating funds – such as Viability Gap Funds (VGFs) – are often inadequate to make up the difference and difficult to access. In China, local governments have been at the forefront in investing in their cities. Advances in public transport, water and sanitation, and other infrastructure have been remarkable. But, as set out in detail in Section 4, the funding model used to date is currently under some stress. New ways of funding (and thus financing) will thus be needed. This position paper sets out some of the options available and gives both Chinese and international examples.

1.2 Green municipal finance An important opportunity in the finance market. Not only the urbanization process and the increasing impact of cities on the environment calls for action, but also the fact that the current financial base of most cities is insufficient. GMF creates the opportunity to capture the need for an urgently required transformation process in municipal finance and funding – and to link this process to achieving environmental objectives. It can be the basis for implementing governments’ overall climate and environmental policies linked to international climate targets and is a major component of the overall green finance family. Green Finance encompasses the entire financial sector including e.g. green banking, green capital markets, green rating systems etc. Usually the national level is the decisive force in promoting bring Green Finance. But local governments have an important role in implementing national policies. They have a major impact at the local level: in the manner municipalities can raise money, provide incentives and hand out penalties to encourage environmentally positive behavior. GMF taps into initiatives in the overall green financing space, which, in turn, constitute some of the enabling environment for GMF. GMF has two main goals: 1. Revenues should come from environmentally friendly or green sources where possible; Tool MF 1 and 2. Expenditures need to be channeled to low carbon and climate resilient investments. Tool MF 1 Expenditures are divided into two categories: those for recurrent expenditure – including for operation and maintenance of already-constructed infrastructure, and the servicing of previously-contracted debt; and those for capital costs – for new infrastructure construction. These issues are discussed in more detail below.

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Figure 3: Interlinkage of Green Municipal Finance Green municipal finance

Green revenues

Green expenditures

Source: Ute Zimmermann, EC -Link

1.2.1 Green municipal revenues Sources of green municipal finance. Green revenue sources include public sector finance (intergovernmental transferals and municipalitiesâ&#x20AC;&#x2122; own revenues), private sector finance (through long-term transfer of financial risks to the private sector) and external finance (through climate finance, carbon markets and other sources). The main sources of municipal revenues are intergovernmental transfers, taxes, fees and charges. The greening of municipal revenues requires a focus on the transformation process of conventional instruments. It needs to be understood that the revenue sources are paramount to hinder or to promote an environmentally friendly policy. If charges are based on a tariff system where the usage of water gets cheaper, the more water is used, it has to be concluded that this is counterproductive to the idea of a green resource efficient municipality. Another example that would lead to non-green revenues are subsides that distort the price of natural resources and thus encourage irrational behavior by spending more natural resources (energy, water, petroleum) because they are cheap. Positive examples for taxes, fees and charges which promote the green idea are property taxes that restrict urban sprawl, transportation fees that stimulates car traffic and user charges that reduce water consumption. The main sources of revenues originate from buildings, transport, water, waste collection, and other environmental fees. Income from transportation and buildings are highest representing transportation fees (e.g. parking fees) and property taxes. It highlights the power that certain revenues have to contribute to a green direction. ď&#x192; Tool MF 1

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Figure 4: Revenues of cities by function based on 2010 figures

Source: OECD 2012, Financing green urban infrastructure. http://dx.doi.org/10.1787/5jz5pzw9mwzn-en

National agenda. The national political agenda sets the frame also for the greening of municipalities’ actions. Therefore policies and actions need to point into the same direction in order not to lessen the effects. A good example is the use of thermal power. National governments may need to protect existing interests despite the fact that at the local level 100% green energy is promoted. The greening of municipalities in a “hostile” national framework is bound to fail. National policies related to green municipal finance include the ability of cities to take up debt, their independence to set tariffs, fees and charges as well as the basis for tax collections. Relevance of private sector. In addition to public sector sources, the private sector can play a major role. To attract the entrepreneurs to invest in municipal infrastructure conditions need to be in place that fosters the investment climate for the private sector. Prerequisite is that cities are in the position to design infrastructure in a manner that contain the major policy objectives of a green infrastructure and have the private sector to see a business case in an investments that a) allows profits and b) has limited risks. Public-private partnerships. Conventional instruments such as public-private partnerships. (PPPs) rely on concession contracts that are mostly targeted at the production of volumes and amounts such as cm of water, MW of energy, number of cars using a road etc. The more the concessionaire produces, the higher the revenues will be. Subsequently the conventional PPP contracts do not set the right incentives for environmentally conscious behavior. The structure needs to be changed to reflect a performance based income situation. A utility will be paid based on the amount of customers that can be convinced to switch to renewable energy sources. In France e.g. about 75% of the water service is owned by the private sector. The contracts are either lease or concession based which link the revenues of the concessionaire to the amount of water consumed. Some cities are trying to change this by focusing on

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resource protection, reduction of water consumption and reduction of water losses, however, these are long-term contracts and renegotiations proof to be difficult. In addition to public and private sector finance (and the interlinkages through public private partnerships) external sources of finance have to be considered such as carbon finance and green bonds. In summary, while conventional municipal finance relies on an unspecified and uncoordinated system that maximizes income or reduces indebtedness in a general sense, green municipal revenues achieve the same amount (or more) of income but are based on a well-coordinated approach of environmentally relevant incentives and penalties. The variety of green revenue sources is the focus of the next chapter Development Objectives. Enabling framework. An enabling framework needs to be in place to bring together existing conventional financing resources. To “green” these conventional instruments a thorough analysis has to be made to understand their impacts and the mode of action of the incentive structure behind it. 4 Figure 4 below sets out the key elements of the enabling framework national and state/ provincial structures determine inter-governmental fiscal relations, local government powers of revenue collection, access to capital markets and the legal context of Public Private Partnerships (PPPs). 5 These issues will be addressed in the sections below. Figure 5: Urban infrastructure finance and development framework

Cited in: Lindfield, M., Latay, V., Docta, V.M. Financing Sustainable Cities. in: Lindfield, M. and Steinberg, F. (eds.). 2012. Green Cities. Manila: Asian Development Bank. Urban Development Series. Manila. pp. 296-372. http://www.adb.org/publications/green-cities

Godfrey, N. and Xiao Zhuo. 2016. Financing the Urban Transition for Sustainable Development: Better Finance for Better Cities. Working Paper. New Climate Economy. http://newclimateeconomy.report/workingpapers/wpcontent/uploads/sites/5/2016/12/NCE-Urban-finance.pdf 5

Source: Based on Lindfield, M., Latay, V., Docta, V.M. Financing Sustainable Cities. in: Lindfield, M. and Steinberg, F. (eds.). 2012. Green Cities. Manila: Asian Development Bank. Urban Development Series. Manila. pp. 296-372. http://www.adb.org/publications/green-cities Municipal Finance – EC Link Woking Papers - Draft Version 1.5

1.2.2 Green municipal expenditures Classifying green expenditures. The following reviews green expenditures and how they differ from conventional investments, classifies typical investments by type of likely funding source and provides for sector specific risks and rewards. The three major differences in conventional expenditures versus green expenditures are:  

   

Climate change is a pressing need. Investments have to be done in a much shorter time span to avoid detrimental effects on the municipalities well-being Municipalities have to invest in urbanization projects in urban expansion areas (¨greenfield¨) and urban renewal and revitalization (¨brownfield¨) projects as part of the urbanization process and at the same time have to renovate or modernize existing infrastructure to address ecological inefficiencies. This double-burden results in higher overall investment costs. The effects of green investments are the savings of long-term environmental costs. The current conventional financial instruments and mechanism do not capture the nature of this long-term benefits, because Positive social and environmental effects are difficult to quantify in monetary terms, any cost-benefit analysis could render conventional investments much cheaper. The effects of green investments are much longer than any conventional project and would need to be calculated to capture the long-term benefits. The risk of green investments may be higher due to changes in legislation, cost of carbon dioxide and energy costs. Pricing of new commodities such as carbon remain a threat for long-term calculations.

Green finance for adaptation and mitigation. There are significant differences in financing investments made to adapt to climate change, like protection measures against flooding, and mitigation investments, reducing Green House Gasses (GHGs) in projects such as transportation and waste management. Adaptation measures are likely to be crossjurisdictional (and sometimes even have a national or transboundary reach), and often do not generate significant income. They therefore often need finance from intergovernmental transfers and external climate finance related sources. Mitigation projects, such as electromobility for transportation and waste-to-energy often generate income and thus have a wide array of possible funding opportunities including the private sector, user fees, taxation and other.

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Figure 6: Definition of adaptation and mitigation Municipal green finance

Mitigation

Adaptation

(reductions in emissions of greenhouse gases (GHGs) increasing the capacity of carbon sinks)

(adjustments in ecological, social, or economic systems in response to actual or expected events)

e.g.

- renewable energy

- improved disaster risk managment

- energy efficiency

- remediation of heat islands

- reforestation

- flood mitigation against increased intensity of events

Source: Ute Zimmermann and M. Lindfield, EC Link

Looking at the classical infrastructure measures municipalities have to fund, the abatement costs (amount of GHG emissions that can be decreased) compared to investment costs are not allocated equally through the various sectors. In some sectors such as transportation the upfront capital costs are high with low abatement costs once the investment is done. Other sectors such as power are less capital intensive; however, abatement cost can be high over time. This is sometimes a disincentive for effective investment as municipalities shy away from transportation projects because of the high upfront costs and budgetary constraints, despite the high abatement potential. Subsequently next generations will have to deal with the emission problems in transportation resulting in much higher abatement cost. The abatement cost curve as presented below summarizes the technical opportunities to reduce GHG emissions at a cost of up to â&#x201A;Ź 60 per tCO2e of avoided emission 6. It shows the difference in potential to reduce GHG and waste, building and transportation are the low hanging fruit for decision makers to reduce GHG. The size of the bubbles indicates the abatement potential of each sector.

Source of the abatement discussion: McKinsey Report 2009, : Pathways to a low-Carbon economy, version 2 of the global greenhouse gas abatement cost curve Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

Figure 7: Capital intensity and abatement costs

Source: ICLEI. 2010. Cities in a post-2012 http://ccsl.iccip.net/cities_in_a_post_2012_policy_framework.pdf

climate

policy

framwork.

Typical investments of cities. Municipalities typically target green investments in the sectors set out below. They are described in general terms relating to the key financing issues related to them and highlights applicable revenue generating opportunities 7 . The objective is to maximize the finance and funding options available for projects and to minimize costs. Mitigation Investments Public and Non-motorised Transport: 

   

Right of Way (ROW) risk and relocation risk requiring funds for acquisition and streamlined court processes for compulsory acquisition as well as mechanisms for relocation minimizing disruption of poor communities and providing housing options (often including finance); ridership projections notoriously wrong – real outcomes often being much lower than projections (roads and Mass Rapid Transit) and much higher (Bus Rapid Transit); replacement/incorporation of informal service providers requiring difficult negotiations on governance arrangements and bridging finance; potential for land-based finance in right of way (ROW); NMT is usually low capital investment and provides significant health and environmental benefits if a significant proportion of commuters use it – given this there is potential for alternative funding such as crowd funding and CSR funding to make a significant contribution. PPP bike share schemes are potentially fully cost recoverable.

Green Buildings: 

  

development of green building as energy-efficient buildings, following standards of national or international certification systems (LEED, BREEAM; DGNB, etc.); applying for prior and post-construction certification; difficulty and expense of retrofiting existing older buildings to standards of national or international certification systems (LEED, BREEAM; DGNB, etc.); application of smart technologies for energy generation through photovoltaic technologies, and water heating through solar water heaters, may save money; application of smart systems for management of heating, lighting, ventilation, water usage in buildings.

Clean Energy (including distributed generation):     

Renewable energy source for distributed heating and/or cooling has high up-front cost, but lower operations cost; reliability is a potential issue although effective practices to mitigate these concerns through good planning and utilizing cogeneration possibilities for example, exist; Difficulty in getting collective agreement of owners of facilities and generating units to retrofit; Potential for distributed generation of energy eg street lighting; Form and reliability of tariff levels and adjustment, availability payments and/or treatment fees is an issue.

Water supply/ Waste water:    

Raw water source cost and reliability, ROW for trunk supply mains and collectors requires land acquisition; Water treatment, but particularly waste water treatment, sites are subject to the NotIn-My-Back-YARD (NIMBY) effect requiring action as above; replacement/incorporation of informal service providers requiring training and livelihood programs; form and reliability of tariff levels and adjustment, availability payments and/or treatment fees is an issue.

Solid waste management (including waste-to-energy):   

Disposal on acceptable sites. Objection by citizens -- (NIMBY effec) – may cause additional costs, requiring additional disposal sites; Replacement or incorporation of informal service providers require training and livelihood programs which represent extra costs; Form and reliability of fee collection for waste is an issue.

Urban renewal and revitalization:    

Urban renewal of existing assets through retrofitting and repair of buildings, their water, energy and heating or cooling systems; Difficulty in high density historical neighbourhoods to introduce modern service standards and new technologies (solar heating, photovoltaic technologies) or others; Absence of clear policy makes it difficult to define sectoral policy regarding protection of original, often poor, inhabitants and property owners; Increase of property values through urban renewal may lead to affordability issues for original residential population. Gentrification may lead to selling and resettlement of former property owners;

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 

Difficulty to retain character of urban renewal areas; Potential for levying local rates for increased amenity and other benefits exist, i.e. lowering heat island effects.

Urban Agriculture:    

Greening (and food production) on roof tops and/or facades. Some cities – e.g. Shanghai - already obtain a significant proportion of food from its immediate hinterland; Urban or vertical farming of more interest in the future – while currently energy intensive, research continues to increase its efficiency; If it achieves potential efficiencies, conventional commercial finance could be forthcoming.

Industry greening processes:   

Project formulation and development processes expensive (but often cost recoverable); Bridging funds required to finance upfront expenses; Dependent on energy tariffs and prices for recyclables and thus savings/ revenues are often uncertain. Adaptation Investments

Public and Non-motorised Transport:  

Raising of ROW requires relocation, in turn requiring funds for acquisition and compulsory acquisition; Some potential for land-based finance in ROW.

Building resilience:  

development of resilience to higher wind speeds and flooding; difficulty and expense of retrofitting existing older buildings to standards.

Energy resilience:  

Variety of renewable energy sources, distributed spatially, with key transmission and transformer sites ‘’hardened’’8 against climate events; Difficulty in getting collective agreement of owners to retrofit.

Water supply/ Waste water resilience:   

Rainwater harvesting and utilization for washing, flushing and cleaning purposes, or drinking after treatment; Recycling cost and reliability, ROW for new, separate trunk supply mains and collectors; Key treatment and trunk infrastructure ‘’hardened’’ against climate events.

Drainage and flood control:  

Identifying a potential revenue stream is difficult for some projects, but often possible; Potential land-based financing on dykes, drainage ROWs and retention basins used

Meaning that extra investment is needed to move critical infrastructure to less exposed positions and/ or to strengthen it to withstand more intense wind, floods etc Municipal Finance – EC Link Woking Papers - Draft Version 1.5



as revenue earning open/ recreational/ concession space; Potential for levying local ‘rates’ (increments to property tax) to recover costs in exchange for increased amenity and flood avoidance benefits exists.

Solid waste management resilience:  

Need to ensure solid waste does not clog drainage in extreme events; Need to ‘’harden’’ key facilities against such events.

Urban renewal and revitalization:    

 

City greening (including reduction of heat island effects):  



As with drainage, revenue streams for parks and other open spaces are sometimes limited; While parks and other open spaces are usually publically funded, costs of maintenance can be defrayed, and amenity often increased, by appropriate concession – charging providers of services for use of some land; Potential for levying local rates for increased amenity and other benefits exist, i.e. lowering heat island effects.

Urban Agriculture:  

Resilience of the city improved by lowering dependence on distant food sources; Need to ‘’harden’’ production, storage and distribution systems.

Industry resilience:  

development of resilience to higher wind speeds and flooding; difficulty and expense of retrofitting existing older buildings to standards.

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2 DEVELOPMENT

OBJECTIVES

GREEN

MUNICPAL FINANCE 2.1 Enabling Framework Objective of green municipal finance. The overarching objective of GMF is to support the development of cities to provide necessary infrastructure in a socially and environmentally sustainable manner. GMF is the foundation on which livable green cities are built. It is embedded in the context of national policies, the regulatory environment and the institutional framework under which it works. This enabling framework provides the mandates and mechanisms that enable local decision makers to undertake green investments and prioritize them as well as to design proper green revenue sources to pay for them. These enabling policies will be discussed in more detail below.

2.1.1 National Policies Aiming for more holistic concepts. Some countries, such as Korea have invented a holistic model encompassing all agents relevant to green finance. The key statement of this model is that all policies are aligned towards the common goal of Green Growth, covering both the supply and demand side of finance. The governments support green R&D which in turn fosters the production of green merchandises. Both the industry and the consumers are financially encouraged to buy-in the idea of green products, contributing to green growth, which is a quantitative and a qualitative objective. The green arrows (not in the original source) reflect the green tax income the government receives from the predominantly green activates of its citizens. This closes the green cycle of supply (revenues) and demand (expenditures). Figure 8: Korea's Green Growth Initiative9

The chart has been adapted slightly to reflect green tax income as denoted by the two green arrows. This is not part of the original chart as displayed in: Lindfield, M., Latay, V., Docta, V.M. Financing Sustainable Cities. in: Lindfield, M. and Steinberg, F. (eds.). 2012. Green Cities. Manila: Asian Development Bank. Urban Development Series. Manila. pp. 296-372. http://www.adb.org/publications/green-cities Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

Relating this concept to the level of GMF and assuming that most countries do not have such a comprehensive model, the alignment of national policies with local policies will be key for success at the local level. Relevant national policies are described below. It goes without saying that the impact of these policies go beyond the scope of GMF and reflect a green economy as a whole. 

Environmental and Climate Change policies need to be distinct in what the development objective is, formulate clear visons and define what role municipalities have to play. The responsibilities have to be broken down to the different levels of governments: federal states/provincial level, different layers of municipalities and smaller towns and communities. Depending on the responsibilities the levels must take on board, financial resources need to be provided. This may either be in form of direct intergovernmental support and/or in the provision of sufficient leeway to increase municipalities own revenues. In many countries governments themselves become green in their actions (“leading by example”). This relates to the way they operate (paperless communication, online linkages and provision of online services) and the way they appear and behave (energy efficiency measures in public buildings, greening of official carpark, and greening of procurement procedures).



Bank and Capital Market policy need to adapt to the new requirements of a green economy and society. Central banks and the security commissions have to be explicit in setting their guidelines. This relates to the way financial institutions present themselves (“leading by example”) and to the way they play their role in the economy (Figure 7). Clearly, green finance includes a whole different due diligence procedure whereby only environmentally friendly actions should be financed. The granting of loans, issuance of bonds and stocks need to pass environmental and social impact assessments as common procedure. The risk costs (e.g. interest rates) may otherwise be very high (penalty costs). But also the entire process of monitoring and documentation, rating systems and insurances must go green10.



Private Sector policy is an element often neglected when it comes to GMF. One reason is that private entrepreneurs are hesitant because they fear the risk of political interference in the long-term contract structure and changes in legislation. In some country the political view of what a public good is (water, transport etc.), can be very strong and a private investment may be mistaken for a full privatization and definite increase in the pricing structure. The private sector may be open to public critics. Municipalities are therefore encouraged to handle this matter with great care. Private sector policies include an enabling environment for private investments such as a reliable legal framework, a legal basis for PPPs and a fair risk allocation between the public and the private sector in coordination with a transparent procurement system. (see also PPP discussion below.)



Inter-governmental fiscal transfers and subsidies. How, how much local governments receive from higher levels of government, and in which sectors and for what, is a central issue for local government finance in general and for GMF in particular. What are their taxation mandates? Their flexibility in setting rates? What subsidy funds are available, what will they finance and under what terms and conditions? And so on.



Land use planning and development control powers. The relationships among local governments, state/provincial governments and the national government impact on the capacity to provide a clear and consistent context for investment, in particular for green investment, and thus on the capacity of local governments to finance such investment.

See http://www.unepfi.org/, UNEP FI is a global partnership between UNEP and the financial sector and provides a wealth of information on green finance. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

Figure 9: Alignment of policies and GMF

National policies/ legislation: •Environmentat and climate policy •Green finance policy (capital market, banking etc) •Private sector policy •Inter-governmental policies •Land use policies

GMF Sources: Local Implementing Entity

- local taxes - user charges - environmental charges - own funds/ assets

Source: Ute Zimmermann and M. Lindfield, EC Link

As a result of the need to align local funding and finance with policy (see Figure 8), local levels need to be empowered to:  



Issue new environmental charges and fees and be allowed to keep them. In the case of Denmark for example the congestion charges levied at the local level is considered a new tax and needs to be re-transferred to the national level11.12 To take up external debt up to a certain level for the refinancing of green activities. The rate of indebtedness should be clearly communicated and linked to transparent benchmarks. The issue of contingent liabilities to the national governments must be clarified beforehand13. Become beneficiaries of government grant schemes that reward environmentally friendly behavior. Because a large amount of municipalities’ own income relates to property charges and development fees the urban sprawl is an unintended consequence but a severe disadvantage to compact urban development. In order to compensate cities for not acting and preserving the environment in nearby areas, local governments need to be incentivized. To follow clear guidelines at the national level as to what is expected of them when planning certain infrastructure measures. For example, the Netherlands waste management guidelines issued to municipalities set a quantitative target of how waste should be treated. The process started as early as 1995, when a landfill tax was issued to reduce the amount of untreated waste being dumped while at the same time promoting recycling, composting and incineration as more attractive waste management options. This tax was later diversified to reflect the different quality of waste. Combustible municipal solid waste was charged with a high tax, while waste that was assumed to be noncombustible with no other favorable recovery was charged with a low tax. This process

See http://transportpolicy2013.blogspot.de/2013/05/copenhagens-failed-congestion-charge.html ¨… Beijing's policymakers will follow in the footsteps of London and Singapore in their efforts to ease traffic and cut down on air pollution, though details have not been announced. … [It is]… estimated that the congestion fee could be 20 to 50 yuan (US$3.50 to US$7.60).¨For many citizens this will be a considerable amount.Severe traffic congestion at a highway toll station is a common sight in Beijing. Local authorities are working on solutions to ease traffic pressures in the city. Beijing residents brace for fee on congestion. China Daily. 6 June 6, 2016. http://www.china.org.cn/china/2016-06/06/content_38611409.htm 12

See also ADB Policy Note on the Impact of Non-sovereign lending to the Ministry of Finance, China 2008 prepared by Ute Zimmermann. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

continued over years with more and more fine-tuned regulations to stir municipalities in the right direction. Today Netherland is one of the frontrunners in recycling and thermal waste treatment in Europe14.

2.1.2 Local level enabling policies Guiding principles. Breaking the development objects of GMF down to the micro level of financial instruments and mechanism the following guiding principles apply: 



Getting the incentives right Sources tapped and mechanism or instruments used to finance green municipal infrastructure should avoid setting the wrong incentives. Investors and users should bear the full marginal social costs of their actions in regard to the environment. This means that green municipal finance mechanism and instruments need to include externalities (e.g. depletion of ground water resources through extensive use of water needs to result in higher fees) as much as possible. Maximizing own source revenues Municipalities’ own revenue sources need to be maximized to cause changes in behavior of citizens and to increase the income base. Taxes, fees and user charges need to address directly the unwanted behavior. People need to understand how to save natural resources and what it costs if they don’t. This allows local governments to stir their fiscal budget in a balanced and environmentally friendly manner. Increase resilience of GMF Conventional instruments do not adequately reflect the needs of environmentally desired investments due to their static interpretation of risks and rewards. As discussed above this may impact the finance of new technologies, but the range is much broader when it comes e.g. to finance energy efficiency, where a rethinking process has to take place in banks because not an increase in production capacity is financed but the saving of energy and other resources. It needs to be understood that this leads to a reduction of operation costs from where the loan will be repaid and not an increase on cash-flow due to a higher turn-over.

It is at this micro level that green municipal revenues have to match green municipal expenditure to set the incentives right. Figure 9 summarizes the key sources of funding, the mechanisms and instruments used. The instruments will be explored in more detail below.

See also: http://www.legco.gov.hk/yr13-14/english/sec/library/1314in10-e.pdf

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Figure 10: Sources, mechanism and instruments of Green Municipal Finance revenues

Sources Public sector •own source revenues •government transfers •green bonds aother financing •asset sales/ leverage Private sector

Mechanisms

Instruments

Own source revenues •emmission charges based on quality or quantity of waste water •property taxes •tax increment finance

Charges, fees, taxes, subsidies, financial support programs

PPPs, PFIs, energy service contracts

Various instruments based on contractual relationships and convential finance

CDM, onlending facilities, straight finance

Sales of CERS, grants, concessional loans, marketbased loans, guarantees

Other sources •Carbon finance •Climate funds •Official development assistance

Source: Ute Zimmermann, EC Link

2.2 GMF: Funding and Financing 2.2.1 Funding Instruments Greening property tax15 Property taxes are one of the major income sources of local governments and are a highly effective tax if used intelligently. They should be analyzed to understand their impact on GMF. Property Taxes (PT) are levied on land and improvements or on the underlying land (of course at a higher rate). ‘’Improvements’’ meaning buildings, infrastructures and other investments made on the land. The way a PT is levied can strongly influence the way land is used. If levied on land and improvements, a higher tax discourages and a lower tax encourages land use. If levied on land on the basis of ‘’highest, best use’’, it does exactly the opposite – higher taxes encourage maximization of development potential. This can have an effect on urban sprawl, depending on the manner the PT is structured. Usually PT is levied on residential, multiresidential, agricultural, commercial and industrial properties. If a PT covers land and improvements, lower-value improvements are favored as they result in a lower tax rate. This favors e.g. single-family homes versus multi-residential ones, which typically can be found in less densely populated areas thus leading to an expansion of cities. A low tax on single-family home gives the wrong incentive. It is also important to understand in terms of urban sprawl on what value the tax is based, how it is determined and what percentage of the value is actually taxable. PT has to be seen in connection with other instruments most importantly the land use planning policy, which determines the future use of land. PT as an individual tax has little impact if the land use system is pointing in a different direction. Another point is the impact of fuel taxes and toll road fees. If a city is spread-out and citizen need to commute to work they become an important determinant in the decision making process. Empirical evidence cited in the OECD working paper (see footnote 10) suggests that property tax in combination with other instruments has a positive impact on urban sprawl, especially when the tax on the building is 15

The following relies on: Brandt, N. 2014. Greening the Property Tax. OECD Working Papers on Fiscal Federalism, No. 17, OECD Publishing. http://dx.doi.org/10.1787/5jz5pzw9mwzn-en Municipal Finance – EC Link Woking Papers - Draft Version 1.5

lower than on land. Property taxes do not have to be direct and based on land and/or building valuations – they can be based on rental income (or imputed rental income).Thus in countries where such valuations are difficult, ‘’proxies’’ for property taxes are available.. Currently the property tax usually does not reflect any externalities such as cost of environmental degradation or the cost (financial and environmental) of extending public infrastructure services. Few governments have tried to internalize the ‘’external’’ cost of development in PT, for example the infrastructure that needs to be built to connect to new developments or remote areas to public services and transportation, although Australia and other countries do this routinely through development charges (see below). The US and Canada are in the forefront of testing different forms of PT. In Toronto the city government taxes multi-residential buildings at the same rate as single-family homes to discourage a further spreading of the city. Another test is ongoing to reduce the PT for those who install certain energy efficient measures or renewable energy devices. In the US, PT is surcharged to pay for green investments undertaken by the householder through the Property Assessed Clean Energy (PACE) program – thereby avoiding the disincentive to such investment resulting from the lack of full benefit being recognized in the sale price of a house.Tool MF 1 Value capture tax (VCT) This tax is levied on businesses, the industry and private land owners who directly benefit from municipal improvements in infrastructure in their area of location. The logic behind it is if e.g. a new public transport hub is created surrounding shops and small services will participate due to the increased movement of people in their neighborhood. The same goes for industries or private home owners, who would generate windfall profits through cities’ infrastructure improvements.16 VCT can capture the aspects of GMF very well because the measure is introduced by the local government to transfer to a low carbon and climate resilient city. They have all the leeway to decide which measure to take. Historically most of the projects where VCT (also called betterment tax) was introduced related to public transport. Good examples are found relating to urban metro systems: “The Hong Kong metro system is “the only underground mass transit railway in the world which earns unsubsidized fare revenue sufficient to cover all costs, including depreciation plus operating profit margin”. The MTR Corporation is comprised of 91 km, with 53 stations and deploys over 1000 rail cars with an average weekday patronage of over 2.5 million. The construction of the MTR was announced in 1973 with an initial cost of HK$ 5000 million, and the Hong Kong government, which was the only shareholder, provided one third of the initial capital investment, and the rest of the investment was raised by other financial mechanisms. The Hong Kong government was able to raise the capital investment also by capturing economic rents from the nationalized land. In the case of Hong Kong all land is state property and the government leases the land based on a specific land contracting system. Between 1996 and 2000, for instance, annual revenues generated from public land leasing “where more than enough to cover the costs of all infrastructure. On average, lease revenues accounted for 17% of total government revenues” (Hong, 1998). For the Hong Kong Metro System land value capture represented a financial windfall. In 1982 the system was already showing a profit, partly due to the increase in land value along the metro line. However, it is interesting to observe how this income from land value increase and development “was deliberately not taken into account in the original viability projections”. The financial performance of the MTR Corporation presently leverages the railway assets by including rental of station retail units, advertising in trains and stations, developing residential property, and owning shopping centers and offices. The betterment taxes in Hong Kong are based on full market value.”17 The theoretical justification for such taxes/ levies is set out in ‘’Land Value Capture: Treasury Working Paper ….’’ 17 Source: http://www.ucl.ac.uk/qaser/pdf/publications/ernst_young 16

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A more proactive form of value capture, which can both encourage, and pay for, green infrastructure investments is ‘plus value’ tax. Under this scheme, an area of land, for example along a public transport corridor, is rezoned for higher density (the rezoning may include provisions requiring increased energy efficiency and ‘’greenness’’). The local government takes some of the increased value of the property either upfront (as in Colombia) or as a tax on the rental of developed properties (as in China). This increased revenue can be used as the funding base for the finance of investments (as in TIF below) Tool MF 1 Tax increment finance (TIF) TIF is a mechanism which will allow local authorities to borrow against locally raised future income. The cost of building infrastructure will be paid for through future extra taxes generated by the property development. Local governments would be enabled to take up finance (against this new source of income) generated by areas that need to be recovered or are brownfield developments. Cities designate a certain area as TIF district and earmark all future increases in property tax to pay for other infrastructure developments. TIF is practiced in the US since 1953 and has shown mixed results as to their impact on greening municipal revenue sources. One of the main reason is that these developments have not been undertaken at places that would most need an (environmental) redevelopment but at places that generates the largest income. This has often been areas that are already well-off, because – as the experience in the US showed - they have a higher up-ward potential for investors than poorer and socially less developed areas. Considering TIF as on mechanism for green municipal revenues municipalities need to be mindful of the fact that they depend very much on market forces. If significant financing has been based on projected tax increment, and the TIF area does not pick up as expected, no additional income will be raised, leaving the future budget in disarray. Tool MF 1 Fees and Charges Innovative fees and charges. In addition to taxes, municipalities are mandated to collect certain fees and charges. As discussed above, detrimental effect on the environment should be avoided. Therefore in the following a selection of innovate charges and fees are introduced that safeguard natural resources and provide incentives for change in human behaviour.

The instruments used must be well planned and provide the right incentives. That takes time and thorough planning. The measures may be very specific in what they address, but the main message must be that they are transparent and easy to handle. In Singapore e.g. the congestion charges is not a flat fee but vary by the time a car passes through a specific area, by the type of car, by the type of area the car passes etc. The price is highest where the action is least desirable. This level of detail is necessary to set the right agenda: don’t drive alone in your car during rushhour! Examples for innovative charges18 are:   

User charges that cover the full cost of services, such as water and electricity, including the cost of providing the supply and of damages caused by usage, and the opportunity cost of taking the resource from other potential users, including the ecosystem; Emission (effluent) charges based on quality or quantity of waste (usually wastewater); Product charges on products that pollute surface or groundwater during or after consumption, based on the actual value of damages caused by their use;

The list does not claiming to be complete. It is amended from: Lindfield, M., Latay, V., Docta, V.M. Financing Sustainable Cities. in: Lindfield, M. and Steinberg, F. (eds.). 2012. Green Cities. Manila: Asian Development Bank. Urban Development Series. Manila. pp. 296-372. http://www.adb.org/publications/green-cities Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Tradable rights to use a quantity of a resource (usually water or air shed for emissions) and the establishment of a market for such rights; Marketable permits entitling an entity to treat its waste and sell its permit, or to not treat its waste and purchase more permits; and Refund systems for commodities packaged in nonreturnable containers to ensure that these are returned for proper disposal or reuse.

 

Development charges. Development charges are a one-time payment levied on developers to finance the cost of infrastructure provided by the municipality due to the growth impacts new and redevelopment areas have on the immediate surroundings. These costs would include the extension of roads, water and wastewater systems as well as the enhancement of schools and hospitals. In the past, the developer already paid for public on-site costs such as roads. The development charge should cover the cost of these new infrastructure measures. The idea behind it is that due to the new development surrounding areas need to adapt, which creates costs that should not be borne by the cities but by those who benefit from it. The ultimate beneficiary will be the new tenant. This at least is the argument of developers who shift the extra cost to the new owners. Development charges can also be pinpointed at environmental costs that occur due to the new occupation of land. It would represent a targeted approach to internalize externalities. Also, the level of development charges can be used as a political instrument to manage urban sprawl, the higher the development charges the less financially attractive it becomes. In Canada, the Ministry of Community Services has issued a Best Practices Guide for development charges, based on feedback from local governments and the development community19. It provides a good insight up to which level the development charges can be differentiated to target the environmental purpose efficiently. Tool MF 1 Shared Taxes In some countries, local governments can surcharge income, profit or sales taxes (eg Value Added Taxes). Such surcharges (and indeed the underlying tax if higher levels of government cooperate) can be structured so as to provide green benefits or incentives – such as through allowing a tax deduction for green investments, the loss of revenue needs to be carefully and transparently weighed against the environmental benefit attained.

2.2.2 Financing Overview To meet the challenge of green development, and in the context of the national and state/ provincial enabling framework, local governments, having worked to maximize their revenue available to support investment, must spend it effectively and transparently on priority investments. The range of instruments and their possibilities available are much wider than generally perceived. They are simply little known or have been insufficiently explored because change in implementation and investment systems is highly political and potentially requires not only changes in laws and regulations, but also reform of the institutions collecting and spending revenues and those monitoring the revenue flows. But the need to make green investment sustainable is pressing and there are many examples of successful innovation in financing. They include better:     19

Instruments for managing inter-governmental transfers; Debt instruments – including those utilizing the capital markets; Risk mitigation instruments; Partnership-based instruments (PPPs etc);

See http://www.cscd.gov.bc.ca/lgd/intergov_relations/library/DCC_Best_Practice_Guide_2005.pdf

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ď&#x201A;ˇ

Asset management instruments;

The Figure below sets out these instruments in some more detail and the actors involved. Figure 11: Simplified overview of Public and Private Infrastructure Finance

Source: R. Teipke and M. Lindfield condensed from OECD Infrastructure Financing Instruments and Incentives 2015

In relation to the financing instruments available from the capital market, Figure 11 sets out an overview of the variety available. The actual instruments available and their use in particular countries and cities will depend on the regulation and depth of the local capital markets.

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Figure 12: Capital Market Financing Instruments

Source: OECD Infrastructure Financing Instruments and Incentives 2015

The following sections describe some specific instruments that are currently important in China, but it should be remembered that a large range of instruments are already available, and should be canvassed in relation to specific investments. Tool MF 2 Debt Instruments Green Bonds Green bonds. The issuance of bonds increases the level of indebtedness of municipalities and at the same time helps to leverage private finance. To make these “green” bonds, cities have to use the proceeds of the bond to finance green projects. Often it is a combination of various projects and undertaken ranging from greenfield developments to the renovation of existing infrastructure. Since the bond has to be repaid at end maturity most of the projects financed under a bond are income earning and thus fall under the mitigation categories. When national government support the bond issue (through takes exemptions or subsidies) adaptation projects are likely to be included. The amount of green bonds to refinance municipalities remains small, but the World Banks has for example issued green bonds. 20% of the proceeds were invested into municipal infrastructure. For example a USD 100 mill. was issued for the city of Wuhan, China to develop an integrated, safe, and environmentally-friendly urban transport system that supports coverage and quality services, and the safety of pedestrians and cyclists. The project will

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reduce 459,000 tons of CO2eq. emissions annually20. In the US bonds and also green bonds are a common source of finance for municipalities. These bonds are tax exempt for the buyer and help to raise finance especially for cities with a financial rating lower than that of the US. Examples are the Clean Energy Renewable Bonds (CREBs) established under the federal ''Energy Policy Act of 2005'' (EPAct 2005) as a financing mechanism for public sector renewable energy projects 21 , the Qualified Energy Conservation Bond (QECB) 22 which enables qualified state, tribal, and local government issuers to borrow money at attractive rates to fund energy conservation projects such as  



Reducing energy consumption in publically owned buildings Implementing green community programs (including loans, grants, or other repayment mechanisms) such as efficient street lighting replacements and loan programs for residential energy efficiency improvements Developing rural capacity, specifically involving the production of electricity from renewable energy resources

Green bonds usual require a close cooperation between local governments and the national level. One reason is the above discussed matter of contingent liabilities: what happens if the bond cannot be repaid by the city, will the national level take some sort of liability? The second point is that the rating of the national government is usually better than that of second or third tear cities and thus impacting the level of interest rate at which the bond is priced. It would be just more economical, if the national government raised the debt. Though green bonds are still in the minority as compared to the overall quantity of bond issues23. Municipal green bonds are not yet quantified. The following cases set out some of the relevant EU experience in this field. Tool MF 2 Figure 13: Development of Green Bonds

Source: KPMG. 2014. Gearing up for green bonds. http://www.kpmg.com/global/en/issuesandinsights/articlespublications/sustainable-insight/pages/gearing-up-forgreen-bonds.aspx

Source: http://treasury.worldbank.org/cmd/pdf/ProjectExampleinChina_WuhanSecondUrbanTransport.pdf Source: http://energy.gov/savings/clean-renewable-energy-bonds-crebs 22 See http://energy.gov/eere/slsc/qualified-energy-conservation-bonds 23 See http://www.kpmg.com/global/en/issuesandinsights/articlespublications/sustainable-insight/pages/gearingup-for-green-bonds.aspx 21

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European case Studies of Green Bonds Case 1： North-Rhine-Westfalia, Germany:Sustainability Bonds

Source: People’s Bank of China, Research Bureau and GIZ. 2016. Green Bonds and Green Finance in China. Seminar. Beijing. 7 April.

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Case 2: Sweden:Green Bonds of Komunivest

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Source: People’s Bank of China, Research Bureau and GIZ. 2016. Green Bonds and Green Finance in China. Seminar. Beijing. 7 April.

PPPs: Leveraging private sector finance. For municipalities to attract private sector co-finance for infrastructure measures requires a number of things:  The business case for the private sector needs to be convincing  The return on equity needs to be clearly defined  The risk for the private sector needs to be containable Because the municipal market as compared to the national market is relatively small, municipalities are well advised to communicate their aspirations well. To create a win-win situation meaning that the advantages for the municipalities and the private sector are clearly defined, this process needs a long and thorough planning period. It must be analyzed for what reason the private sector is invited to participate (financial reasons, operational efficiency, and Municipal Finance – EC Link Woking Papers - Draft Version 1.5

technical innovation). This will determine the sort of arrangement between the public and the private sector. Below the most common forms are introduced. In the past public-private partnerships [PPP]24 were the most prominent form of leveraging private sector finance. A PPP is a partnership between the public and the private sector in which the private party provides a public service and assumes substantial financial, technical and operational risk. The government or in this case the municipalities contribute often by providing the asset, the land or sometimes become equity partners. The benefit of such arrangements which often take place e.g. in municipal water or energy projects that the public sector does not need to make any financial investments and that the public service is provided with the efficiency of the private sector. Common risks are the quality and quantity of services the private sector produces and the payment for the services the private sector is providing which is often higher than the tariffs or fees the infrastructure project is producing. Conventional PPPs are based on concession contracts such as BOTs (build-operate-transfer) or BOOTs (built-own-operate-transfer) and other forms determining the role of the private sector. As opposed to traditional public sector procurement, where the private sector simply executes as per public sector orders, in PPPs the private sector bids for a certain project and the role they play at different stages (design, construction, completion, operation etc.). For this the private sector receives a fee over the lifetime of the contract. As mentioned above conventional PPPs rely on concession contracts where the private sector bears the demand risk. Therefore the interest of the concessionaire is to meet the demand and even outperform it. The more the concessionaire produces, the higher the revenues will be. Subsequently the conventional PPP contracts do not set the right incentives for environmentally conscious behavior. PPPs are worldwide used and the general experience is positive, if the pitfalls such as high transaction costs, length and inflexibility of contractual structure and the complexity of the project structure are managed well. To green PPPs, the objectives must change. A good example is the need to include energy efficiency obligations (EEOs) for utilities are set qualitative targets such as the amount of water that need to be reused. The PPP arrangement as such remains, but the objectives are formulated in a way that internalizes externalities. EEO is part of the so-called demand side management, whereby energy companies and utilities are obliged to fund measures that lead to energy or carbon reductions. A penalty will be levied on the company if energy savings targets are not met. In other words, utilities are made to make their clients save energy. For example energy companies give or finance advice to their customers how to save energy and install the relevant measures. These actions are measurable and can be verified. Subsidies may be provided initially for each kW/h saved. The results of such actions are quantified in energy saving accreditations back to the energy company or so called White Certificates. They state how much energy has been saved and can also be produced by third parties such as energy service companies and other firms like insulation companies. In some countries these certificates can be traded, helping the energy company to meet the targets. White Certificates can be issued for electricity savings, gas savings and other fuel source savings depending on government objectives. Some forms of EEOs are also called on-bill finance because the utility takes the (high) upfront costs and the customer is repaying the investment with the energy bill. To sustain EEOs, energy companies can be supported by local governments through subsidies to incentives the clients. Subsidies can range from 0-100% contingent for example on the necessity to cushion off social adverse effects. The customer has to pay at least a part of the EE investment to assure their continued interest in the measure and their active contribution to save energy. The results of EEOs have been promising, as can be seen in energy costs saved.

For the discussion on PPPs see also OECD 2012, Financing green urban infrastructure. http://www.oecd.org/gov/regional-policy/WP_Financing_Green_Urban_Infrastructure.pdf Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

Figure 14: Italian White certificate Scheme: avoided energy costs for three main fuel sources

Source: European Council for Energy Efficient Economy (ECEEE). 2012. Energy Efficiency obligations – the EU experience. http://www.eceee.org/policy-areas/EE-directive/energy-efficiency-obligations

An innovative form of PPPs is energy performance contracting (EPC). Specialized companies, so called energy service companies (ESCOs) enter into a contract with the local community to undertake energy upgrades that are funded from saved costs. The contracts may cover energy efficiency upgrades and the switch to renewable energy. The idea behind both is that either the saved operation costs or the sale of the newly produced renewable energy will finance the investment costs. The ESCO will only get paid once the energy savings is achieved. There are different contractual models - guaranteed savings and shared savings – which reflect the level of risk allocation between the two contracting parties.

Figure 15: Economics of Energy Performance Contracting(EPC)

Source: EU Joint Research Center http://iet.jrc.ec.europa.eu/energyefficiency/european-energy-servicecompanies/energy-performance-contracting

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In addition to the contractual structure of a PPP and an EPC the before mentioned development charges, tax increment finance and value captured tax also count as forms of leveraging finance from the private sector. External Public Sources CDM. Carbon finance under the United Nations Framework Convention on Climate Change (UNFCCC) provide under the Kyoto Protocol for two methods to offset GHG emissions, one being the Clean Development Mechanism (CDM) and the Joint Declaration (JI). CDM allows developed countries to offset their emissions by buying certified carbon credits from developing countries and the JI from developed countries. Neither mechanism has in the past had a significant impact on GMF. The nature of emissions in monopolies is spread over a larger variety of sectors. Tool MF 1 Figure 16: Emission sources in cities

Source: UNEP. 2012. Cities and Carbon Finance: A feasibility http://www.unep.org/urban_environment/PDFs/UNEP_UrbanCDMreport.pdf

study

urban

CDM.

The project types of municipalities, which have dispersed characteristics, are not properly reflected in the current CDM framework. The extension of the CDM mechanism through the concept of Program of Activities (POA), which allows the bundling of different projects, points in the right direction. However, also here only different projects that use the same methodology and technology can be clubbed, limiting the bundling of activities. Currently energy efficiency measures in buildings and waste management are tired. Having said this it needs to be noted that the expiry of the EU Emission Trading Scheme as the main market puts a shadow on those POAs that have not been registered before end 2012. This, and the bullet points highlighted below, are the main reason, why CDM finance for municipality has not been widely used:    

High transaction costs of CDM procedures/limited municipal budgets as income form CDM occurs only ex post; Limited local autonomy of cities versus national governments to control GHG/ limited support by national governments; Technical procedures such as measuring the effects of urban mitigation projects due to their mixed nature and the lack of standardized approaches (standardized baselines, benchmarks and default values) at the urban level; Limited technical knowledge, institutional and human capacity.

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National Appropriate Mitigation Action (NAMAs)25. Due to the termination of the EU trading scheme one of the main markets has broken off and the attractiveness of CDM finance for municipalities given the issues mentioned above is limited. The new mechanism supporting National Appropriate Mitigation Actions (NAMAs) is seen by many as an alternative. “NAMAs refer to any action that reduces emissions in developing countries and is prepared under the umbrella of a national governmental initiative. They can be policies directed at transformational change within an economic sector, or actions across sectors for a broader national focus. NAMAs are supported and enabled by technology, financing, and capacity-building and are aimed at achieving a reduction in emissions relative to 'business as usual' emissions in 202026.” NAMAs have the advantage of being able to aggregate projects of different natures at a much higher regional, technical or other level. Also, the CDM mechanism is a very technical approach that is focused on quantitate aspects of saving GHG in a mechanical manner. Programs designed to support the implementation of NAMAs take into account the political perspective and are thus more ‘’practical’’ in their approach. Thus, it has to be concluded that NAMA implementation support schemes (where available) may be a more appropriate instrument for GMF than CDM. Experience from the technical issues such as standardization of baselines can be taken and put to use in a NAMA. Tools MF 1 & 2 Figure 17: Correlation between CDM and NAMAs

Source: UNEP. 2012. Cities and Carbon Finance: A feasibility http://www.unep.org/urban_environment/PDFs/UNEP_UrbanCDMreport.pdf

study

urban

CDM.

External Development Bank and Climate Finance. A number of development banks and climate funds support municipalities in financing green infrastructure. It should be noted that these funding sources usually are approved by national governments and are then on-lent or passed through as grants to the municipalities. Rarely these funds would cover all costs, but they will definitely lower funding cost and thus make the difference between viable and not viable projects. Some additional sources of grant technical assistance can be accessed to help prepare projects and to structure financing. In some cases they may be able to access capital grants or guarantees. Such funds are:   

Cities Financing Facility; Cities Development Initiative for Asia; The Urban Financing Partnership Facility of the Asian Development Bank (ADB)27.

http://www.nama-database.org/index.php/Main_Page Source: http://unfccc.int/focus/mitigation/items/7172.php 27 Source: http://www.adb.org/site/funds/funds/urban-financing-partnership-facility 26

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Other external funds include the well-known climate funds such as those under the leadership of the UNFCCC. The Financial Mechanism was founded to facilitate the agreement that developed countries shall provide financial resources to assist developing countries. The operation of the Financial Mechanism is partly entrusted to the Global Environment Facility (GEF). In addition four special funds were established: the Special Climate Change Fund, the Least Developed Countries Fund, the Green Climate Fund (GCF) and the Adaptation Fund. 

The Global Environment Facility Trust Fund supports the implementation of multilateral environmental agreements, and serves as a financial mechanism of the UN Framework Convention on Climate Change. It is the longest standing dedicated public climate change fund. The GEF aims to help developing countries and economies in transition to contribute to the overall objective of the United Nations Framework Convention on Climate Change (UNFCCC) to both mitigate and adapt to climate change, while enabling sustainable economic development. The GEF is intended to cover the incremental costs of a measure to address climate change relative to a business as usual base line. The GEF is a partnership of 182 countries and international institutions, nongovernment organizations, and the private sector to address global environmental issues. Since 1991, it has allocated $9.2 billion, supplemented by more than $40 billion in co-financing.



The GCF was founded in 2010 and is poised to become the fund for channeling international climate finance. Up to the end of 2014 over USD 10 billion were pledged. The fund will have a window for mitigation and adaptation and a private sector facility. 50% of all resources are committed to adaptation and of this another 50% is targeted at vulnerable countries. World Bank will act as the interim trustee to the fund. The Fund will promote the paradigm shift towards low-emission and climate-resilient development pathways by providing support to developing countries to limit or reduce their greenhouse gas emissions and to adapt to the impacts of climate change, taking into account the needs of those developing countries particularly vulnerable to the adverse effects of climate change.



A third range of funds are the so called Ethical Funds. They pool the money of hundreds of investors into a single fund which, in turn, invests in the stock market. The choice of investments is influenced by a range of social, environmental, or other ethical considerations and funds employ various criteria to exclude or include a company in a portfolio.

International climate funds may prove to be difficult for municipalities to access. Among the many reasons that are often cited is the matter of inflexibility in the application of criteria used to determine access. Behind this argument lies the experience that cities need funds for a certain purpose that they have clearly defined and that fits into their overall planning. The funds available however provide finance, but often the objectives of the city do not fit well with these criteria. The city then modifies its objectives, resulting in a less effective project in relation to its original objectives. This may not always be bad, however the following challenges remain:   

Technical (e.g. timeframes, knowledge and information base, competing municipal priorities); Institutional (e.g. understanding the local policy directives, relationship between national and local governments); and Financial (high upfront investment costs, ways to access funds).

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Part of the reason is that the international climate funds seldom focus on the needs of municipalities. In summary, it has to be concluded that a strong and well thought-through policy supplies the framework under which cities can develop on their environmental objectives with new and innovative green revenues. The recent UN Climate Conference in Bonn, Germany forcefully showed the action cities have committed to undertake. Figure 18: Display of Cities' achievement- UN Climate Conference, Bonn, Germany, 2015

Source: http://www.iclei.org/details/article/iclei-member-cities-demonstrate-climate-commitments-at-bonn-climateconference.html

2.3 Evaluating the Effectiveness and Impact of GMF Standards There are no common denominators for GMF standards. GMF relates in its standard procedures to general public finance processes which are formulated by the respective regulations, guidelines and circulars within the legal framework. This includes for example the debt capacity of municipalities and the ability to levy charges and fees. But also in general municipal finance no standards exist. What is expected to become a norm is the analyses of the impact of financial instruments and mechanism cities use on greening the environment, when financing infrastructure and services. Finance can be used to incentivize and penalize the behavior of enterprises and the general public. Explanatory note on green municipal finance. The difficulty to present ïndicators¨, ¨verification methodologiesänd ¨technologiesïs that such terms are not used in the financial sector. They relate to industries and are quantitative factors such as reduction of CO2 emissions and how much energy a certain technology has saved. This however has no match in the financial sector, let alone in the small area of GMF. GMF uses standard financial techniques. It can be quantified by way of length of loan, interest rate level, repayment schedule and others, but the finance instrument itself is neutral, not green or any other colure. It is a transmission mechanism facilitating a certain investment. The investment itself may have an impact on the environment, which can be measured but not the financial instrument. Therefore all of the below is an auxiliary means to suffice a standardized reporting outcome. Technologies and Products Municipal Finance – EC Link Woking Papers - Draft Version 1.5

The standard sources of GMF are own source revenues, which include taxes fees and charges, external finance including green bonds and support from international climate finance sources and intergovernmental transfers. Often used products in GMF comprise of the range of typical banking products such as loans and guaranties. In addition PPPs have proven to be successful mechanisms as well as finance that stems fromCO2 trading. Technologies in terms of finance relate to payment systems solution, online security and fraud prevention, but are not a typical subject when it comes to GMF. In green finance the usual instruments of the financial sectors are used, such as loans, guarantees, stocks and bonds. They are “greened” in the sense that the purpose of their utilization is analyzed in terms of their environmental impact. If a chemical plant wants to get a loan, banks will undertake special due diligence to understand whether or not the new investment will have a negative impact on the environment. In their due diligence the banks will rely on sector standards, national norms and seek confirmation that these provisions are met and that the client is in compliance with national environmental procedures. This due diligence process is a “technique” which is based on clients’ compliance with industries’ norms and national certification processes as an auxiliary vehicle in the absence of environmental impacts of financial instruments. Indicators There are no official indicators for GMF. Three unofficial benchmarks, the amount of external funds the government funding can leverage, the amount of natural resources saved per dollar used and the number of additional employment created are used to describe successful GMF or in general green finance. None of the three indicators have a standard calculation base. Leveraging additional finance. Usually the total investment sum e.g. in energy efficient buildings is taken and the amount the public sector invested is deducted and set into relationship with the total amount. The result would give the leverage ratio. In PPPs this leverage can be very high because the government often makes (small) in-kind contributions and the private sector puts in equity and debt. Financial efficiency. This benchmark is often used by banks to show how much of their loans have saved how much energy, water and other natural resources. It leads to statement of how green a banking portfolio is. The loan amount is set into relation with the (expected) savings. This benchmark has to be taken with a grain of salt because in practice not the entire investment amount is green, but only a part of it. Green employment. In effect, this indicator is a proxy for leveraging economic development. The international Labor Organization (ILO) has come up with a paper of how to calculate green jobs28, opening the way how to standardize the calculation of green investments and their impact on the job markets. The main methodologies used worldwide are summarized below with their main advantages and disadvantages: Inventories, surveys and employment factors, Input‐output analysis and Social Accounting Matrices Computable General Equilibrium models

http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---mp_ent/documents/publication/wcms_176462.pdf

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Table 1: Comparison of green job calculation models

Source: http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---mp_ent/documents/publication/wcms_176462.pdf

3 indicators have been presented above related to what can be called successful municipal green finance. The indicators embody different ways of looking at the broader issue of success in the financial sector in general: 1. Leveraging additional finance: how much additional funding was the initial investment of the municipality able to attract from other sources? 2.

Financial efficiency: what is the ration of CO2 savings per $ invested?

Green employment: how many new jobs have been created by a green investment?

Evaluation Methodology There is no established verification methodology for the effectiveness (or efficiency) of GMF. Based on the above indicators, potential evaluation methodologies are suggested below. Evaluation of Indicator 1: Leveraging additional finance. Municipalities may seek to understand how much in additional funds, especially private sector funds, can be leveraged for $1 investment from their side. The verification method depends on the measure taken. Following examples serve as illustrations. There are no standardized or international measures established at this point. 1.

PPP: the municipality invests together with the private sector in the financing of e.g. a wind farm. It can be easily calculated that for 1$ municipal investment the private sector invests a certain amount of money ($ x).  Incentives through taxation and other fiscal instruments: the verification process is much more difficult because it would need to be measured at the end of collection of tax. It is here that those who benefit from a taxation scheme would claim a reduction.  Subsequently the taxation bureau would need to collect these information at their different sub-branches and report collectively back to the municipality. From there conclusions can be drawn how much the private sector invested (due to the fiscal incentive) and what the costs (losses in taxes) have been. Grant/subsidies finance through banks or funds: The government budget dedicated to banks or a fund needs to be put in relation to the investments financed from the fund. The

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municipality would have to rely on reports from the financial sector, who would need to collect the relevant data. According to the amount the dedicated funds are paying out, the municipality can calculate how much the private sector in addition was willing to invest. It should be noted that all these are ex-post verification measures. Evaluation of Indicator 2: Financial efficiency. The municipality would need to collect data from e.g. banks, financial institutions, funds who report the amounts they have invested in renewable and energy efficient projects and what the CO2 savings of these investments are. The emission reductions are quantified in terms of CO 2 equivalent tons converted in accordance with global warming coefficients set forth in the UNFCCC. For this, international verification standards exists. The difficulty here is to segregate between investments that were incentivized by municipality measures (such as tax reductions) and those the investors have made without any government incentive. The municipality would need to rely on figures they cannot control. The international climate finance community has up to day not developed a transparent methodology how to calculate CO2 savings/$. Evaluation of Indicator 3: Green employment. Explanations from the International Labor Organization was referred to earlier.

2.4 Institutional and Process Issues 2.4.1 Knowledge of technology options & costs and of financing options New opportunities through technology advancements. Technology change can have a significant impact on GMF. Technological developments in such areas as new filter technologies in waste water reuse, efficiency of heat recovery systems and others change capital and operating costs significantly. New technologies need to be available and understood by local decision makers. They must be able to compare life cycle costs of different technologies. Thus local governments need to be enabled to be part of a relevant information system on such new technologies. Many countries have established networks and platforms for lessons learned and exchange of information and at the global level, city networks such as C40 have sectoral networks which keep abreast of latest technology. Also local research and development (R&D) must be part of this knowledge exchange. However, the financing of new technologies is a tricky issue. Financiers prefer proven and tested technologies to minimize defaults in the repayment of loans due to technical errors. Much of the state of the art technology however only exists as a small scale pilot with a short operation period. This makes professional finance through banks for example more expensive as the perceived risk is higher. New financial instruments need to reflect this issue e.g. of upscaling technology and be resilient to mirror the required flexibility. There is a role here for guarantee instruments.

2.4.2 Project development and financial structuring To have a transformative impact at both the city level and the global level relating to green investments, it will be necessary to provide technical assistance to the city administration to support the development (through to financing) of a transformative sustainable infrastructure project. As part of this process, capacity development within the city provides the skills and structures to allow the city to undertake similar projects more independently in future. Finally, through extensive knowledge dissemination, other cities and partner organizations learn from the experiences in the CFF-supported cities and are able to successfully replicate similar projects, realizing significant reductions in carbon emissions through infrastructure projects in multiple cities across the world.

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Such support needs to provide technical assistance directed at business case development, financial structuring and procurement. In addition, it may also be necessary to provide limited support to earlier stage technical feasibility studies and analyses. Such support also needs to tap into networks of like-minded cities through such agencies as the C40. The approach to the provision of support is to ensure that the support is given to an agency/ office within the local government that is mandated by the city leadership to produce sustainable results in relation to green investments. As part of the project development process, the city will also need capacity development, aiming to build, within the city administration, many of the skills, structures and processes necessary for the city to undertake similar projects in future. In order to extend the learnings relating to green investment projects as far as possible, and catalyze similar climate action in other cities, support should also be directed towards disseminating knowledge, tools, case studies and guidance, enabling cities of all sizes to learn from and replicate successful practice. Support provided to cities needs to be demand-driven, strategic, sustainable and catalytic. It needs to work in the best interests of the supported city and its citizens. It should not be linked or accountable to any capital provider or company, or promote any particular financing mechanism or technology. Its advice needs to be agnostic in regards to technology and financing source, and its recommended procurement processes need to be transparent and based on clear performance criteria.

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3 KEY ISSUES --- KEY CONCEPTS Key issues to be addressed Key concepts recommended FUNDING ISSUES National policy framework needs to Link NAMAs/ NDCs to investments and budget for foster GMF them. Integration of GMF in overall Green Finance policy by central banks Transfers for local governments need to National transfer systems need to be more be more effective effective including using performance-based challenge funds – need to leverage other funds including private sector Low carbon, climate resilient cities place Funding base of municipalities need to enlarged in an extra burden on cities and current light of investment needs and indebtedness of revenues insufficient cities need to be reviewed Municipal revenues need to come from Funding sources and instruments have to be sustainable sources adapted the new demands FINANCING ISSUES Financial programs complicated and not Capacity to access finance increased easy to access – especially green/ climate change finance Private sector not interested in investing Municipalities have to develop attractive business into municipalities (projects not cases that are risk reduced and provide a clearly commercial) defined profit PPPs not well structured and based on Change of PPPs objectives to include qualitative, quantitative objectives, which ignore environmentally relevant targets environmental outcomes Climate finance issues: - Adaptation for cities difficult to Adaptation is a public good - national government finance support needed - CDM financial potential limited Cities need to consider local cap and trade schemes INSTITUTIONAL/ PROCESS ISSUES High upfront cost of infrastructure measures keep municipalities away from investing despite high CO2 reduction potential

National governments to support knowledge base, foster good practice examples, set targets and provide appropriate incentives for appropriate investment (including for private participation)

New climate technologies difficult to Knowledge of new technologies needs to be better finance disseminated – technology agnostic procurement processes Lack of structures and capacity to Need to assist cities in project development and develop projects for: financial structuring - Sustainable finance - Implementation and sustainable funding

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4 BEST

PRACTISES

–

PERSPECTIVES

FROM

EUROPE In the following the European way of financing city development is presented. The chapter will explain the major policies in which it is embedded as well as the financial tools and instruments that support the implementation process. The following Figure highlights the topics covered. Figure 19: Perspectives from Europe

EU policies

National policies

EU financial support

GMF National source finance

EU advisory and information

Source: Ute Zimmermann, EC-Link

4.1 Enabling Framework 29 4.1.1 Policy Overview Green municipal finance (GMF) in Europe is not an individual policy, but it is embedded in a complex system of various legislations, strategies and supporting measures. The basis for GMF is the Europe 2020 strategy set in March 2007. It is part of Europe’s overall objectives for smart, sustainable and inclusive growth. The EU is subscribed to limit Global Warming to below 2°C compared to the average temperature in pre-industrial times to prevent the most severe impacts of climate change and possibly catastrophic changes in the global environment. To deliver, the strategy focusses on 5 key areas being employment, innovation, education, poverty reduction and climate/energy. Europe 2020 represents an integrated approach to climate and energy policy that aims to combat climate change, increase the EU’s energy security and strengthen its competitiveness. Known as „20-20-20" the following targets have been set for 2020:  A 20% reduction in EU greenhouse gas emissions from 1990 levels  Raising the share of EU energy consumption produced from renewable resources to 20%  A 20% improvement in the EU's energy efficiency The climate and energy package is binding legislation, meaning that EU member countries need to adopt and implement it through their national legislative procedures. Currently the EU 29

http://ec.europa.eu/clima/policies/package/index_en.htm

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has 28 member countries30. Each of them has or is in the process of adopting their individual climate policy. How this is done differs a lot and depends on a whole range of factors such as historical setting of decision making processes, current baseline scenarios, economic and financial situation, legislative framework etc. To ensure that the Europe 2020 strategy pushes through, a strong and effective system of economic governance has been set up to coordinate policy actions between the EU and national levels. The climate and energy package comprises four pieces of complementary legislation which are intended to deliver on the 20-20-20 targets:31    

Reform of the EU Emissions Trading System (EU ETS) National targets for non-EU ETS emissions National renewable energy targets Carbon capture and storage

Energy efficiency targets are not included in this packed, but addressed though the 2011 Energy Efficiency Plan and the Energy Efficiency Directive32. In addition and to extrapolate Europe 2020 the following main policies and strategies have been adopted which have an impact on GMF: 



The 2030 Framework33, which was agreed upon in October 2014 foresees to reduce GHG emissions by 40% compared to 1990 baselines and also sets a target of at least 27% for renewable energy and energy savings by 2030. The law is comprehensive and unifies various aspects of climate change. The extension of the EU 2020 package was felt to be necessary to provide regulatory certainty for investors, acknowledging the great importance of the private sector and to help coordination efforts between member countries. The 2050 roadmap 34 set the longer-term perspective already in 2011 looking beyond short-term objectives. It aims at a reduction of GHG emissions by 80-95% below 1990 levels through domestic reductions alone by 2050 as part of the Resource Efficient Europe flagship initiative. It provides a perspective how the main sectors responsible for Europe's emissions - power generation, industry, transport, buildings and construction, as well as agriculture - can make the transition to a low-carbon economy most cost-effective. The EU Adaptation Strategy which was formulated in April 2013 was the strategy supports action by promoting greater coordination and information-sharing between Member States, and by ensuring that adaptation considerations are addressed in all relevant EU policies. The Energy Efficiency Directive of 2012 is a legally binding measure to step up the use of more energy efficiency measures at all stages of the energy chain. Measures include the requirement to establish energy efficiency obligations schemes (or equivalent alternative measures), a 3% annual renovation obligation of central government buildings, the promotion of energy audits and others.

The EU splits its policy in climate change mitigation and adaptation:

http://europa.eu/about-eu/countries/member-countries/ http://ec.europa.eu/clima/policies/package/index_en.htm 32http://ec.europa.eu/energy/en/topics/energy-efficiency and http://ec.europa.eu/energy/en/topics/energyefficiency/energy-efficiency-directive 33http://ec.europa.eu/clima/policies/2030/index_en.htm and http://ec.europa.eu/clima/policies/brief/eu/index_en.htm 34 http://ec.europa.eu/clima/policies/roadmap/index_en.htm 31

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Figure 20: Simplified display of aligning Europe's main climate policies with GMF

GMF

EU Adaptation Strategy

Energy Efficiency Directive

EU 2020 climate/energy

EU 2030 framwork

EU 20150 roadmap

binding legislation for 28 member countries

28 national policies

Source: Ute Zimmermann, EC-Link

The London School of Economics has come up with a worldwide study on climate relevant legislation in individual countries35.The study covers 98 countriesâ&#x20AC;&#x2122; national laws and policies directly related to climate change mitigation and adaptation (EU is taken as one block of countries). Since 1997 the number of policies has increased substantially from 446 in 1997 to 804 in 2014. Figure 21: Increase in number of laws in the world

Source: The Grantham Research Institute on Climate Change and the Environment of the London School of Economics and Political Science. 2014. The 2015 Global Climate Legislation Study. http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/05/Global_climate_legislation_study_20151.pdf

See http://www.lse.ac.uk/GranthamInstitute/legislation/countries/ and the related study http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/05/Global_climate_legislation_study_20151.pdf. Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

Framework laws, such as the EU 2030 are seen as an efficient instruments because they unify existing policies and encourage new policy measures. Most countries combine under the framework laws on mitigation and adaptation actions: Figure 22: Number and mode of national legislation

Germany for examples passed a framework law in 2014 which included various activities such as transport specific measures, a reform of the ETS trading system and energy efficiency in houses and buildings. The national budget was increased for energy efficiency measures from â&#x201A;Ź2.4billion p.a. to 4.2 billion p.a.

4.1.2 EU project development advisory and knowledge/ information To see the EU 2020 policy through at the level of municipalities, the EU has launched the Covenant of Mayors36. It is a platform to endorse and support the efforts deployed by local authorities in the implementation of sustainable energy policies. This is direct municipal support coming out of the EU 2020 strategy. Local and regional authorities commit voluntarily to increasing energy efficiency and use of renewable energy sources on their territories to achieve the 20-20-20 objectives. Currently 6348 cities have signed the Covenant of Mayors ranging from small villages to major metropolitan areas such as London or Paris representing over 204 million inhabitants (of about 506 million inhabitants in total). Signatories commit to a baseline inventory from which the Sustainable Energy Action Plan results, which will then be implemented, monitored and documented. The SEAP is the key document in which the Covenant signatory outlines how it intends to reach its CO 2 reduction target by 2020. It defines the activities and measures set up to achieve the targets, together with time frames and assigned responsibilities37 and is part of the local. The post 2020 period requires so called intended nationally determined contribution (INDC), which is a vehicle to communicate how a country will cope on a national basis38. Each country decides its own

Source: http://www.covenantofmayors.eu/index_en.html Source: http://www.eumayors.eu/about/covenant-step-by-step_en.html 38 Individual EU country intended nationally determined contribution (INDC) can be found here including the main implementation plans: http://www4.unfccc.int/submissions/indc/Submission%20Pages/submissions.aspx 37

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appropriate contribution to reduce emissions. The INDC will include domestic policies and planning processes that will drive transformative change over the longer term. The Covenant of Mayors works with so called Covenant Coordinators which are public administrations providing strategic guidance, financial and technical support to municipalities signing up to the Covenant of Mayors but lacking necessary skills and/or resources to fulfil their requirements. They may be sub-national authorities (e.g. other municipalities) and national bodies (e.g. national energy agencies). They play an important role in the distribution of best practices, alignment of EU and national polices and regional integration.

4.1.3 EU funding and financing To see the various policies through, the EU provides funding in support of the EU 2020 strategy. At least 20% of the EU's €960 billion budget for 2014 to 2020 (about €180 billion) should be spent on protecting the climate. This is on top of funding from individual EU countries. To comprehend GMF in Europe it is important to understand the leverage effect and impact EU funds have. Most EU funds are designed to either co-financed or supporting financial instruments that attract a multiple of funds from financial institutions and other investors. This lead to an “EU mobilized size” of funds of €2 trillion or 2% points of GDP, i.e. two times the investment39. Based on this experience e.g. the energy and external action related funds such as the European Energy Efficiency Fund and others are expected to increase the fund size from €1 billion in EU support to €25 billion. Funds and projects under the EU-funds are therefore measured as to the leverage effect they have. The European Investment Bank (EIB)40 plays an important role in financing GMF as it is the bank for the European Union representing the interest of the EU. More than 90% of the overall activity is focused on Europe, where the multilateral bank finances sustainable investments as part of the EU policies. The instruments used are 1. Lending: The vast majority of the financing is through loans, but guarantees, microfinance, equity investment, etc. are also offered 2. Blending: Through the EIB support financing from other sources is unlocked, particularly from the EU budget. This is blended together with banks’ own funds to form the full financing package. 3. Advising: EIB takes to role of an advisor to help with administrative and project management capacity which facilitates investment implementation. Climate finance is one of their four strategic focus areas. Project development support and catalyst finance for regard to urban environment, sustainable transport, energy and water projects are available through two main EU funds – the Joint Assistance to Support Projects in European RegionS (JASPERS) and the Joint European Support for Sustainable Investment in City Areas (JESSICA). At the same time the EIB is manager of a number of municipal funds in other countries such as Turkey41. These funds are partly funded by the EIB and leverage with national resources. Another major European bank is the European Bank for Reconstruction and Development (EBRD). It was founded in 1991 to create a new post-Cold War era in central and Eastern Europe, furthering progress towards ‘market-oriented economies and the promotion of private and entrepreneurial initiative. It is owned by 64 countries, the European Union and the European Investment Bank. As such, part of the funds used by the EBRD are also EU budget

Source: http://www.ceps.eu/system/files/SR%20No%2086%20Effects%20of%20the%20EU%20Budget.pdf Source: http://www.eib.europa.eu/about/index.htm 41 Source: http://europa.eu/rapid/press-release_BEI-13-130_en.htm 40

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related financial sources42. The Figure below gives an idea on how complex (and confusing) EU funding can be: Figure 23: Complexity of EU funding

Source: Smart Cities, Stakeholder Platform, Nov. 2013 https://eu-smartcities.eu/

The Covenant of Mayors generated a table of available sources from the EU that support them best, see Figure 22. The programs help in the planning and/or in the implementation process of the SEAP. In addition to these EU funding sources, other financial programs can be tapped some of which support municipal finance directly, some of which target climate finance and include municipalities as eligible recipients such as the aforementioned JESSICA and JASPER.

4.1.4 Enabling framework overview The key enabling institutions for EU GMF are described in the following figure. Figure 24: Key Institutional Supports from EU GMF

EU/ National level

Grant Challenge Funds (Regional, KfW etc)

Project Development Funds (Jessica etc)

Knowledge – technology & finance (political – Covenant of Mayors – technical – Smart Cities etc)

Leverage Private debt & equity (OEMs, Funds etc)

Debt Windows (EIB, KfW etc)

Implementing Entity (Utility, Development Corporation etc)

Local level

Special Purpose Vehicle (if applicable)

Green Investments Source: M. Lindfield, EC Link

Source: http://www.ebrd.com/home

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While not perfect or fully resourced, this structure constitutes a model that can be discussed with Chinese regulators and cities in order to structure their approaches to green/ climate investments. Key elements of the structure, at its best, are:     

Grant challenge funds to address, inter alia, the issue that there are Viability Gap funding issues relating to environmental investments with external benefits; Project development facilities to ensure appropriate design and structuring of projects/ programmes; Knowledge networks – at both the political and technical levels; Large scale financing institutions with capacity to ‘’crowd in’’ the private sector; and Well-structured implementing entities – many ‘’off balance sheet’’ of local governments – capable of utilising a wide range of financing and funding models and having flexibility in structuring projects.

The system works best if all components are present, coordinated and functioning effectively.

4.1.5 Institutional and funding/ financing initiatives at EU/ national level Adaptation Finance Adaptation/ Resilience to Climate Change. Financing adaptation in EU countries does not follow a standard approach. While city level adaptation plans have arisen through a number of different opportunities, they were mostly initiated through EU funding options. EU funding is extremely important to the process it is, however seen as a disadvantage that the funding is only project specific and does not finance a whole stream of activities related to adaptation in cities. Mayors Adapt43 is an EU initiative to train and exchange knowledge among stakeholders in support of the EU Adaption Strategy at the level of the Covenant of Mayors initiative. The Urban Adaptation Support Tool* provides a step-by-step guidance through the planning and implementation cycles and links to a data-base and other information underlining each step. The six stage process is a practical guidance to help project partners develop individual Climate Change Adaptation Action Plans. The tool is constantly fed by users, who give input and additional help so that it stays a very dynamic instrument. There is no individual EU financing program for adaptation, but the topic is cross-cutting through all EU financial support initiatives. The European Structural Investments Fund 44 , LIFE45 and Horizon202046 are expected to support the bulk of the investments in addition to countries own national funds and funding stemming from EIB and EBRD.

Source: http://mayors-adapt.eu There are two Structural Funds: a) The European Social Fund (ESF)will among other support the shift towards a low-carbon and climateresilient economy through reform of education and training systems, adaptation of skills and qualifications, upskilling of the labour force, and the creation of new jobs. b) The European Regional Development Fund (ERDF) will among other promote energy efficiency in smalland medium-sized enterprises, housing and public buildings; production and distribution of renewable energy; lowcarbon strategies for urban areas; and resilience to climate change and extreme weather events. Furthermore, the ERDF will support European Territorial Cooperation (ETC), for example cross-border co-operation between Member States, including on climate action. 45 The Life program contributes to improving the implementation of EU environment and climate policy and legislation. In the field of adaptation, LIFE will co-finance actions to support the development or implementation of national, regional and local adaptation strategies and lighthouse adaptation projects to address key cross-sectorial and cross-border projects, encouraging projects with a high innovation, demonstration, and transferability potential. Awareness raising on adaptation will also be promoted. 46 Horizon 2020 is the EU's new program for research and innovation. Over a third of its budget will be allocated to address major concerns such as climate change, developing sustainable transport and mobility, making renewable energy more affordable, ensuring food safety and security. 44

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Auxiliary instruments to adaptation finance are insurances as they help manage the impacts of climate change. Relevant for cities are the so-called cat bonds* (municipal catastrophe bonds) through which cities can insure themselves against the financial impacts of a disaster such as flooding, earthquakes and other. Cities may group a number of risks, however, they must be clearly defined to specify the event and nature of the risk. Cat bonds are issued by insures who diversify their risk and at the same time extend their ability to insure cities. The bond is sold to mainly institutional investors, who are attracted by the higher yield of the bond and of its non-correlation with equity and other bond markets. Cat bonds are a kind of risk sharing mechanism: in the event of a disaster, the city will have immediate access to finance, the investor however, may lose principle and interest rates and/ or the repayment will be deferred. Cat bonds become an interesting option for municipality to hedge the latent climate change risks in Europe. Case 3: Italy:cat Bond, The Azzurro Re I Ltd June/July 2015 The Azzurro Re I Ltd. cat bond is sponsored by Italian primary insurer UnipolSai Assicurazioni S.p.A., a first-time entrant to the cat bond market seeking reinsurance coverage from the capital markets in securitized form for its portfolio located across Italy. The Italian insurer is seeking at least €150m of reinsurance protection from the issuance by Azzurro Re I, a recently registered Irish domiciled special purpose vehicle, of a single tranche of European quake risk linked notes. The fully-collateralized reinsurance protection provided by the cat bond will protect UnipolSai against losses from earthquakes occurring in Italy, metropolitan France (but not overseas territories), Corsica, Austria, Switzerland, Slovenia and Monaco. The focus of the protection is however on Italy. The reason for including surrounding countries within the covered area is to capture earthquakes that could occur in a neighboring country, but which cause losses to UnipolSai’s portfolio. Protection will be in effect over a 3.5 year term, with maturity scheduled for January 2019. The Azzurro Re I cat bond features an indemnity trigger and will provide the sponsor with per-occurrence protection. The single tranche of Azzurro Re I cat bond notes will cover losses from an attachment point of €500m up to an exhaustion point of €700m. The notes have an attachment probability of 0.4%, an exhaustion probability of 0.22% and an expected loss of 0.31% which appears to be a low risk cat bond. The coupon is estimated to be at a range of 2% to 2.25%.The deal is expected to push through in June/ July 2015. Source: http://www.artemis.bm/deal_directory/azzurro-re-i-limited/ Further information/sources: Examples of cat bonds can be found under the following two websites: http://www.triplepundit.com/2011/11/municipal-catastrophe-bonds-incentivize-natural-disaster-mitigation/ and http://www.munichre.com/en/ir/bonds/catastrophe-bonds

Mitigation Finance In contrast to adaptation, there a number of different initiatives relating to the financing of mitigation projects. Key initiatives are described below. These cases are divided into knowledge initiatives at the EU level and financing/ incentive systems at the EU and national level. Case 4: Knowledge on Mitigation Finance: Triangulum multi-country approach Triangulum is a research project focusing on reduction in carbon emissions while stimulating economic growth and disseminating the results of the research to other European cities. It is thereby an example for the importance of R&D and the best use of new technologies. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

Triangulum stands for three points: demonstrate, disseminate and replicate. Starting on 1st February 2014, the project is implemented in three cities: Manchester (UK), Eindhoven (Netherlands), and Stavanger (Norway). Subsequently, the concepts will be transferred to Leipzig (Germany), Prague (Czech Republic), and Sabadell (Spain). The objective of the project is to demonstrate ‘smart green growth’ – reducing carbon emissions while boosting the economy. The project aims to transform designated urban districts into smart quarters in 3 pilot cities and then translate the concept to other cities. In Manchester for example the project focusses on the transformation of the student quarter known as the Corridor, which contains around 72,000 students. This will entail renovating historical buildings and building up an autonomous energy grid to supply the entire district with heat and electricity. The grid will combine geothermal and district heating with two independently operating electricity grids and a fuel cell that can store excess energy. In Eindhoven, two districts will be transformed into sustainable living environments. The former Philips industrial complex in the “Strijp-S” neighborhood will become a creative smart district. An innovative concept to clean up contaminated land will be utilized as a means of producing energy. Funding Sources Triangulum has received €25 million of funding from the EU Horizon 2020 program which is the lead financial source for R&D in Europe. This fund is leveraged by local resources of the individual partner in the cities such as the universities, research institutes, private companies (e.g. in the case of Manchester it is Siemens who is interested in the research results) and local utilities. Since the project is still ongoing it is difficult to say, what the leverage rate of the project will be, also given that the projects results will be translated into the needs of other European cities. The impact of R&D has however in general been analyzed by the EU as summarized below: EU research program produce excellent value for money for the European taxpayer not only because they generate the significant impacts of public R&D outlined above, but also because EU projects are selected to have a higher impact than national public R&D support. Specific studies have examined the effects of EU funding and have demonstrated the following economic impacts: · 1. 2. 3.

€1 of Framework Programme funding leads to an increase in industry added value of around €13. Member States' own evaluations demonstrate the high impact of the FP: the FP’s annual contribution to, for instance, UK industrial output exceeds £3 billion. · On the basis of econometric modelling, the long-term impact has been estimated at an extra 0.96 percent of GDP, an extra 1.57 percent of exports, and a reduction of 0.88 percent in imports. ·The potential value added generated by eco-innovation pilot and market replication projects under the EU Competitiveness and Innovation Program (CIP) could be calculated in some € 3.4 million per million € invested Studies have shown that the rate of return for publicly funded R&D usually exceeds 30%, and that each extra 1% in public R&D generates an extra 0,17% in productive growth

Source: http://ec.europa.eu/research/horizon2020/pdf/proposals/horizon_2020_impact_assessment_annexes.pdf Further information/sources: http://www.iao.fraunhofer.de/lang-en/business-areas/mobility-and-urban-systemsengineering/1112-eu-sponsors-sustainable-city-concepts.html; http://universitylivinglab.org/news/horizon-2020triangulum-demonstrate-disseminate-replicate-smart-green-growth

Case 5: Knowledge-Smart Cities Municipal Finance – EC Link Woking Papers - Draft Version 1.5

Smart cities are at the heart of the 20-20-20 strategy. Like for other strategies the EU has set up EU Innovation Partnerships (EIPs) to put the ideas forward which are designed to mobilize partners across the innovation cycles and across sectors The European Innovation Partnership on Smart Cities and Communities (EIP-SCC) brings together cities, industries and citizens to improve urban life through more sustainable integrated solutions. This includes applied innovation, better planning, a more participatory approach, higher energy efficiency, better transport solutions, intelligent use of Information and Communication Technologies (ICT), etc.47. The eleven priority areas linked to the area of transportation, ICT and energy are considered to be most important.

Figure 25: Focus areas of sustainable cities

Source: EU. 2013. European Innovation Partnership on Smart Cities and Communities Strategic Implementation Plan. http://ec.europa.eu/eip/smartcities/files/sip_final_en.pdf

The program is funded by a large variety of different funds, such as JESSICA and ELENA, but also other sources. To guide cities through the process the EU has issued guidelines how to use which funds (*Guidance instrument: Using EU funding mechanism) and how to best leverage EU funding sources (*Guidance instrument: Financing Models for smart cities). In addition, the Market Place of the European Innovation Partnership on Smart Cities and Communities was established, an online platform leading to additional information on topics such as urban mobility, creating online clusters and linkages between cities and regions48. Case 6: EU-wide: Clean Development Mechanism The Clean Development Mechanism (CDM), allows a country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one ton of CO2, which can be counted towards meeting Kyoto targets. It is the first global, environmental investment and credit scheme of its kind, providing a standardized emissions offset instrument, CERs. A CDM project must provide emission reductions that are additional to what would otherwise have 47 48

Source: http://ec.europa.eu/eip/smartcities/index_en.htm https://eu-smartcities.eu/

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occurred. The projects must qualify through a rigorous and public registration and issuance process. 49 The CERs are traded on markets such as the EU emissions trading system (EU ETS)50. , It is the the biggest international system for trading greenhouse gas emission allowances and one of the main cornerstones in the EU 2030 framework designed to help reduction in GHG emissions of industrial enterprises in a cost-efficient manner. Altogether the EU ETS covers around 45% of total greenhouse gas emissions from the 28 EU countries. The EU ETS works on the “cap and trade”' principle. A cap works like a limit which is given to an enterprise specifying the amount of GHG that can be emitted. This cap is reduced over time to ensure a continuous reduction of GHG emissions. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. Participation in the EU ETS is mandatory for companies operating in certain sectors, but in some sectors only plants above a certain size are included. An over-supply of CERs occurred, largely because of the economic crisis which has depressed emissions more than anticipated. This has led to a severe decrease in prices. The EU is taking actions to combat the oversupply of emission allowances. Even in the 3. Phase (2013-2020) the back log is not expected to declines significantly, which is potentially undermining the market substantially and thereby the ability of the EU to finance low carbon projects. Two measures are adopted to support the system: 1. Switch the auctioning to a later stage: this measure does not reduce the number of certificates but postponing the auctioning of 900 million allowances until 2019-2020 to allow demand to pick up. By shifting the auctioning to a later stage, at least in the short term, relief from oversupply is expected and prices can stabilize at a higher level. 2. Proposal of a market stability reserve: Beginning with the next trading period in 2021 a stability reserve should be in place that is able to balance demand and supply in the long term. This structural measure would operate in a EU unified manner leaving no leeway for EU Countries to interpret the rules51. The EU endeavors to create international linkages to other national carbon markets based on compatible domestic cap-and-trade systems. The fist one of these links will be with Australia, which will become fully operational in 2018, but an interim link is expected to in place in July 2015. It would open the way for Australia to use EU allowances to cover emissions under the Australian scheme. Greenhouse gases and sectors covered are: Carbon dioxide (CO2 ) from  

Power and heat generation Energy-intensive industry sectors including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals  Civil aviation Nitrous oxide (N2 O) from production of nitric, adipic, glyoxal and glyoxlic acids Perfluorocarbons (PFCs) from aluminium production Because the Eu tools are not linked to finance but mainly to monitoring and Reporting (MRR) and Accreditation and Verification Regulations (AVR) the following website is recommended 49

Source: http://unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php Source: http://ec.europa.eu/clima/policies/ets/cap/index_en.htm 51 Source: http://ec.europa.eu/clima/policies/ets/reform/index_en.htm See:http://ec.europa.eu/clima/publications/docs/factsheet_ets_en.pdf and http://ec.europa.eu/clima/policies/ets/index_en.htm 50

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which

details

and

provides

guidance

relevant

topics:

http://ec.europa.eu/clima/policies/ets/monitoring/documentation_en.htm

The trading volume below shows clearly the upward trend and thus the importance of the EU ETS as a financial instrument. The relevance of carbon trading for GMF is still relatively small. It ranges between 1%-2% of overall contracts implemented. The main reason is that local authorities have only limited influence on industries. Therefore the SEAP as supported by the EU platform of Covenant of Mayors suggests excluding those industries that are covered by the ETS in the baseline analysis52. In cooperation also with the private sector initiative have started to include e.g. energy efficiency as one of the few spheres, where local governments can exercise direct influence into the overall calculation (see example Almada, Portugal). Figure 26: Trading Volume in EU emission allowances (in mill tons)

Source: http://ec.europa.eu/clima/publications/docs/factsheet_ets_en.pdf Source: http://mayors-adapt.eu

Case 7 EU-National: Urban Development Fund Lithuannia

The urban development fund is an example how national budgets together with professional support through the EU fund Jessica can leverage finance from commercial banks. The government of Lithuania sought the support of the EU Funding source JESSICA to set up an urban development fund to achieve the objectives of the national plan and refurbish 24000 apartment block buildings by 2020. After the refurbishment, it is estimated that the average energy savings for a single house will be approximately 50 per cent or 125 MWh a year. Funding sources:

http://www.eumayors.eu/IMG/pdf/template_instructions_en.pdf

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In 2009, the Lithuanian government established a €227m JESSICA holding fund, managed by the EIB, as a way to mobilise funds (€127m from the EU and €100 from national funding), aiming to also leverage €20-40m from commercial banks to promote energy efficiency measures in multi-apartment buildings. In 2010, the first loan agreement was signed between the EIB and the Lithuanian bank Šiaulių bankas53, in which the latter commits to provide 20 year, low interest loans (3 per cent for the entire loan period) to homeowners for the total amount of €6 million. For the schematic outline please also refer to Figure 25. By April 2011, approximately 100 projects and five project loan agreements (amounting to more than €1m) had been approved. The goal is to support the renovation of 1000 buildings between 2010 and 2015. Figure 27: Schematic outline of Lithuania's Urban Development Fund

Source:https://eu-smartcities.eu/sites/all/files/Guideline-%20Financing%20Models%20for%20smart%20citiesjanuary.pdf

Lessons learned:    

political support is important significant demand for renovation of the existing housing stock, the inability of existing national financial schemes to adequately respond to the issue, the use of established national institutions such as the housing and urban development agency (HUDA).

Further information/sources: Information of JESSICA and the fund management http://bteaminitiative.eu/wp-content/uploads/2012/11/3.pdf More examples and details on the Lithuanian example

Šiaulių bankas is the fourth largest bank in Lithuania by loans, catering especially for small and medium sized clients. 53

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http://www.deutscherverband.org/fileadmin/user_upload/documents/Brosch%C3%BCren/Urb.Energy_Innovative_Use_of_EU_Fund s_WP5_Guidelines.pdf

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4.2 City Level Initiatives In the following examples are provided explaining how EU cities implement the various commitments under national and EU policies. When it comes to the topic of finance, quantitative information are scarce and can seldom be directly compared. This has a number of reasons one of which is that for example planning cost, project development costs and other “soft” costs are not stated in full or it is unclear how much of these components have been included. Also, within the government more than one entity usually works on a climate related project making it difficult to assess the different cost at a department level. Often “climate” is only part of the overall objective and cannot be split from the overall investment. Therefore, what will be presented below is more the methodology and the idea behind it than hard numbers. The initiatives will be divided into sections on city institutional and local funding mechanisms, and on investment case studies.

4.2.1 Local institutional and funding initiatives The following section looks at examples of cities around Europe and their innovative ideas to create revenues – undertaken on their own or in partnership with other actors. More in more local and regional authorities try to create permanent budget lines or revenues from specific local taxes or other income and earmark them for climate related projects. The success of these instruments depend mainly on the political will and commitment. As discussed in the first chapter Thematic Background, the linkage between green energy revenues and green energy expenditures make up for the most sustainable financial sources at the local level. Tool MF 1 Case 8: Copenhagen Denmark: Coperhagen Climate Adaptation Plan Copenhagen is the capital of Denmark with 550 000 inhabitants. The need for an adaptation strategy was identified by the City of Copenhagen in 2009. The Adaptation Plan pursues a general green approach with a focus on green and blue areas i.e. green spaces and water bodies. The key challenges were   

Extreme precipitation (primary risk) Sea-level rise (primary risk) Overheating as a result of the heat island effect, heat waves and higher mean temperature

The Adaptation Plan suggested 9 projects for implementation regarding the two main risks, and 17 more projects for related risks and to overheating. The following calculation was made: Cost of Damages over the next 100 years:   

Sea: Rain: Total:

2-2.6 bill Euro 2-2.1 bill Euro. 4-4.7 bill Euro.

Cost of adaptation measures:    

Sea: 530 mill Euro Rain: 800 mill - 1.1 bill Euro Total: 1.3 - 1.6 bill Euro Savings: 2.6 - 3.2 bill Euro.

Funding Sources

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Because Copenhagen city does not have severe financial problems, the municipality is in the position to support a great number of projects from the budget. However since these are large amounts the following prioritizations were made to conceptualize the proceedings:    

Projects with a sound economic background will be put forward first. This would include e.g. energy savings measures Projects need to be phased and the conversion will happen gradually. Vehicles and machinery s will not be replaced before time and buildings will not be renovated before it is necessary Switching to green technology will be done gradually to allow new technical ideas to be integrated The initiatives are multipurpose and not limited to CO2 reduction only.

In addition to public funds the city cooperates with the private sector e.g. Copenhagen Energy, Copenhagen Properties and housing and insurance companies. Private partnerships are formed and business cases created, where the private sector contributes finance, but is also allowed to make a profit. Many of these models are still in the planning process. Lessons learned:   

Copenhagen is not allowed to issue green bonds. The mayor of the city initiated with the local government a discussion to allow Green bonds to be issued by Copenhagen. Many financing models come up as the result of discussion involving the private sector and the general public. The adaptation plan was linked to the longer-term Agenda 2015, which objective is to turn Copenhagen into a carbon neutral city by 2025. This helped to put the adaptation targets into perspective

Figure 28: The Risk of Floods in the event of Heavy Rain

Source: http://en.klimatilpasning.dk/media/568851/copenhagen_adaption_plan.pdf Further information/sources: The full adaptation report: http://en.klimatilpasning.dk/media/568851/copenhagen_adaption_plan.pdf Municipal Finance – EC Link Woking Papers - Draft Version 1.5

Agenda 2025 with good economic leads: http://kk.sites.itera.dk/apps/kk_pub2/pdf/983_jkP0ekKMyD.pdf Financing the adaptation plan: http://resilient-cities.iclei.org/fileadmin/sites/resilientcities/files/Webinar_Series/Webinar_Presentations/Leonardsen__financing_adaptation_in_Copenhagen_ICLEI_s ept_2012.pdf

Case 9: Barcelona, Spain: Barcelona Province Mitigation Funding This example showcases how with very little own funding energy efficiency projects were implemented through the involvement of energy service companies (ESCOs) and the development of public-private partnerships for renewable energy investments in public buildings. After Barcelona province54 went through the process of SEAPs (sustainable energy action plans) in 2013 investments of more than € 1, 172 Million were identified to save energy. The plan was to focus on energy efficiency in public buildings and lightning and on bio thermal heating. Expected results were savings in energy of MWh 5,517 Million and an increase in energy production of MWh 600tsd. Barcelona province is characterized by a reduction of incomes of it 5.6 million inhabitants due to the economic crises and little to no investment and borrowing capacity. Funding Sources The project started out with as little as €0.6 Million investments on the side of the provinces, which were leveraged with €2 million from the ELENA fund. The object was to raise €50 million. The province used the following own sources, displayed in Figure 26: Figure 29: Barcelona Province Funding Sources

Source: http://www.managenergy.net/lib/documents/1065/original_Presentation_AVendrell_Istanbul.pdf

Through various forms of PPPs the Province of Barcelona was able to sign contracts with ESCOs, leasing contracts for energy efficient equipment, maintenance contracts including energy efficiency investments. Between 2010 and 2013, projects are to target the installation of photovoltaic plates on the roofs of public buildings, retrofitting of public lighting and traffic lighting systems and the refurbishment 54

http://www.managenergy.net/lib/documents/1065/original_Presentation_AVendrell_Istanbul.pdf

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of municipal buildings. ELENA promotes and analyses potential project applications by municipalities and provides technical support to municipalities in the implementation of the projects. The leverage factor for this operation is estimated to be between 50 and 250. Please refer to Figure 27 as to where funding sources came from. In the best case scenario, it is expected that an additional €500m will be mobilized for the investment program. Expected outcomes include 114 GWh/y PV electricity production, 280 GWh/y energy savings, 185.000 tCO2eq/y CO2 reduced, 3,000 jobs created/sustained in PV installation and maintenance, and 2,000 jobs created/sustained in energy efficiency. Tool MF 1 Figure 30: Barcelona, Spain：Funding sources by type of technology

Lessons learned:    

It is important to keep the know-how internally instead of depending on external engineering or consultancies; The cost of each external study has been reduced significantly as the REDIBA moved forward; It is important to take into consideration the elections calendar at the city councils in the investment program; A tailor suit for every tender and initiative it is of great significance. REDIBA technical staff has to stand next to the councilor and the council technical staff in order to help the council against the lack of knowledge and the influence of private companies. technical and legal assistance necessary from the very beginning to the very end.

Further information/sources: Factsheet: http://www.eib.org/attachments/documents/rediba_project_factsheet_en.pdf Presentations: http://www.mayorsinaction.eu/fileadmin/user_upload/general_folder/Trainings/ELENA_experience_in_Barcelona_Vendrell.pdf http://www.managenergy.net/lib/documents/1065/original_Presentation_AVendrell_Istanbul.pdf Source: http://www.managenergy.net/lib/documents/1065/original_Presentation_AVendrell_Istanbul.pdf

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Case 10: London, United Kingdom: London Green Fund The London Green Fund (LGF) is an example of JESSICA supporting the development of green infrastructure to contribute to London’s ambitious carbon reduction targets. The LGF consists of three urban development funds targeting investment in energy efficiency, waste and greener social housing. To date, the LGF has invested EUR 117 million in 15 projects with a combined project value of EUR 800 million. Forecast impacts envisage the creation of over 2,000 jobs including construction, 215,000 tonnes per annum CO2 saving, and 330,000 tonnes per annum waste to landfill. The EU leverage effect is 6.77 times the ERDF input. Tool MF 1 Funding Sources Initially the LGF was a EUR 118 million fund constituted by EUR 59 million ERDF, EUR 21.2 million cash from London Waste and Recycling Board (LWaRB) and EUR 37.8 million of land assets from the London Development Agency (LDA). (The European Commission’s approval was secured to match land assets to ERDF in lieu of cash due to LDA’s financial constraints at the time.) In 2010, the LDA made a cash contribution of EUR 37.8 million to the LGF, to allow for the removal of the LDA-owned sites committed to the fund; the focus of LEEF had shifted from support for large-scale decentralised system and district heating networks to other energy efficiency measures. (Following its abolition in 2012, the LDA was replaced by the Greater London Authority (GLA), as the Intermediate Body and Funding Partner). In August 2014, an additional EUR 11.8 million of ERDF plus EUR 1.8 million in interest generated on ‘idle funds’ was added to the Fund’s resources (into the LEEF). Please also refer to the schematic outline in Figure 28. The fund provides loan and equity funding for projects ranging from the city’s first plastics recycling plant to the energy efficiency upgrading of London public buildings. The fund is divided into three sub-funds: The London Energy Efficiency Fund (LEEF) was set up in August 2011 with £50 million and is managed by Amber Infrastructure Ltd, who are responsible for securing additional funding and deciding which projects are funded. LEEF provides primarily debt financing (where applicable, equity can be provided) to projects involving:  

The adaptation or refurbishment of existing public, private and voluntary sector buildings to make them more sustainable and environmentally friendly; and Decentralised energy systems.

The waste fund, which is known as the Foresight Environmental Fund, was established in March 2011 and £35 million was allocated to it from the LGF. It is being managed by Foresight Group LLP; and provides finance, via equity or equity-type investments, for the construction or expansion of:   

Waste to energy facilities Value added re-use, recycling or reprocessing facilities Other facilities displacing fossil fuel such as ‘waste to fuel’.

The Housing Finance Corporation Limited (THFC) was allocated £12m from the LGF in March 2013. This Fund invests in the refurbishment of social housing buildings to make them more environmentally friendly. Investment will be primarily in the form of loans to registered social housing providers. Figure 31: Schematic outline of the London Green Fund

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Source: http://www.eib.org/attachments/documents/smart_jessica_investments_in_london_en.pdf

Lessons learned: 1. 2. 3.

4. 5.

Independent Investment Board to ensure sound decision making The structure of a revolving fund has been economically and led to investment discipline Having a mix of skills and experience at governance levels, with a combined understanding of commercial investment requirements and of economic development objectives, and for all parties to appreciate the complexities in generating (sometimes innovative) green infrastructure projects Adjusting the fund to fit into the regular structure is time consuming It took some time for the fund to develop a project pipeline that produced economic viable projects

Further Information/sources: Lessons learned:https://www.fi-compass.eu/sites/default/files/publications/case-study_london-green-fund_uk.pdf View from EU side: https://www.london.gov.uk/priorities/business-economy/championing-london/london-and-europeanstructural-funds/european-regional-development-fund/jessica-london-green-fund http://www.leef.co.uk/

Case 11: Hannover, Germany: Pro Klima In 1998 the cities of Hannover, Hemmingen, Laatzen, Langenhagen, Ronnenberg und Seelze in the North Germany founded the ProKlima fund together with the public utility enercity. The objective of the fund is to finance climate relevant measures that go beyond the usual, such as e.g. the so called passive houses, which follow a rigorous voluntary standard relating to heating and cooling, energy consumption and insulation of the house. In Passive Houses the cost savings from dispensing with the conventional heating system can be used to fund the upgrade of the building envelope and the heat recovery ventilation system. Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

The support programs include grants and loans for 1. 2. 3. 4. 5. 6. 7.

measures for old buildings measures for new buildings energy efficiency programs programs for schools Cogeneration of heat and power non-residential buildings pilot advisory programs

Green housing

Source: http://www.proklima-hannover.de/ueber_proklima/

Funding Source 



The majority of the funding comes from the utility (about 77% or up to €5 million) resulting from sales proceeds from gas to residential clients and profits from its overall activities. Enercity is one of the 10 largest utilities in Germany and the first to create a brand name (enercity). The company has a number of shareholdings among others in contracting companies. It has thereby diversified it activity scheme including own renewable energy plants such as in wind power and biomass. Hannover, which is the capital of the federal state of Lower Saxony in Germany owns another public utility for energy supply and transportation, which receives 3,25% of the profits of enercity. These funds make are earmarked for the ProKlima fund and make up 20%. . The other cities mentioned above contribute the remaining 3% stemming from 2.5% of the license fees from gas or energy.

 Lessons learned   

Strong political will and regional anchorage important success factor Innovative and diversifies utility important success factor Support programs that go beyond the usual activities and thereby attract the interest of innovative enterprises as well as residents fits into a demand gap

Further information/sources: http://www.proklima-hannover.de/ http://www.passreg.eu/upload/PassREg_International_EN/Flipbook.pdf

Case 12: London, United Kingdom: Congestion Charges The London congestion charging scheme was introduced in February 2003 and subsequently extended to the city's Western districts in February 2007. It consists of a camera enforced number plate recognition system. Between 2004 and 2007 Transport for Municipal Finance – EC Link Woking Papers - Draft Version 1.5

London (TfL), through the Technology Trials Program, investigated different road user charging technologies and their suitability to provide more flexibility to the operation of the scheme and/or potential to reduce operational costs. Since then a number of improvements have been made, which included that automated payment schemes and discounts for low CO” emitting cars. The world's first "Ultra Low Emission Zone" is planned to be established, meaning by 2020 only zero or low-emission cars would be allowed into central London. Electro vehicle are congestion charge exempted. Today the Congestion Charge is an £11.50 daily charge for driving a vehicle within the charging zone between 07:00 and 18:00, Monday to Friday. If the vehicle is photographed in the Congestion Charge zone and the records show that the vehicle owner has not paid the daily charge by midnight on the following charging day, a charge to the registered keeper of the vehicle will be issued outlining the penalty charge payable for the contravention date. The charge can be as high as £ 130. The objective of the congestion charge was to cut traffic levels and reduce CO 2 emissions. By law, all revenues raised by the congestion charges were to be invested in the improvement of traffic in London. Tool MF 1 Automated internet-linked payment both

Source: http://www.vtpi.org/london.pdf

Lessons learned 1. 2.

Congestion pricing is technically feasible and effective Pricing program indicates that private automobile travel is more price sensitive, which is good news when it comes to combat congestion but bad news when it comes to revenues. Optimize the incentives by a more layered pricing system with prices that vary depending on the type of vehicle, when, where and how much it is driven would result in. Implementation and public support is not easy to get. Since the income from congestion charges has by law to be invested to improve traffic in London the benefits should be equally spread amongst all active citizens.

Further information/sources: https://tfl.gov.uk/modes/driving/congestion-charge?cid=pp020 http://www.bbc.com/news/uk-england-london-21451245 https://tfl.gov.uk/modes/driving/congestion-charge

Case 13: Stuttgart, Germany: "Interacting" a cities internal contracting

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Stuttgart is the capital city of the German regional state (Land) of Baden-Württemberg; the regional state, located in the south-west of Germany and home of Mercedes. Like in many municipalities, budgetary constraints have been preventing the performance of effective and necessary energy conservation investments for several years now. In the past, in many cases the individual local authority departments have not been in a position to implement proposed improvements. Departments have rather focused upon user satisfaction, attractiveness or image. Thus often only small measures could be realized within the context of ongoing building maintenance. Also, those departments that realized energy savings did not get the benefits in terms of higher budgets. Funding sources: In 1995 the City’s Energy Management Department introduced the ‘internal contracting (intracting)’ model together with the City Treasury. It takes up the idea of contracting, but operates exclusively with the budgetary funds of the city. The clients are host departments or city-owned enterprises. Investments are financed by the Environment Department from a special budget item, to which the energy cost savings are later returned. Consequently, such an item can be set up for a limited period of time. The budget item is replenished from ongoing savings, so that, after an initial start-up phase, further funds can be made available for new intracting measures. The Environment Department thus grants an earmarked, interest-free loan to the host department. No mark-up for business risk and profit or for interest on capital deployed is incurred. Examples of internal contracting includes 1. 2. 3. 4. 5. 6.

New controls for heating, ventilation or lighting Insulation of walls or top floors Cover of swimming pools Heat recovery systems Renewal of light Combined heat and power plants

Figure 32: Structure of the Stuttgart Financing model, Stuttgart, Germany

Source: www.energy-cities.eu/db/stuttgart_136_en.pdf

In the period of up to 2011 more than 200 contracts were signed. About €14.2 Million were saved in costs from a budget of € 8.8 Million (= the revolving fund). A financial benefit of €5.4 Million was achieved. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

From 1995 up to 2011 water in the amount of 435 000 m3, energy of 196 000MWh heat and 33 000 MWh electricity were saved, resulting in GHG reductions of 87 000t CO2. Figure 33: Cost savings through the Stuttgart financing model

Source: www.energy-cities.eu/db/stuttgart_136_en.pdf

Lessons learned: 1. 2.

3. 4.

It is important to keep the time of the tendering process in check in order to manage the projects and get results For the internal budget it is important to understand, at what time the customer would pay from the savings back to the revolving fund in order to be able to manage the pipeline of projects. The user profile will change over time. It is necessary to keep a certain degree of flexibility in the scope of contracting. It may be necessary to provide internal trainings/capacity building to some clients. Some clients may have difficulties in defining the quality standards they want to chive (and keep them over time).

Further information/sources: http://www.energy-cities.eu/db/Stuttgart_Intracting_2013_en.pdf and http://www.energy-cities.eu/db/stuttgart_136_en.pdf (source of the above)

Case 14: Almada, Portugal: Almada less carbon fund This is an example for how to combine EU Funds with innovative financing instruments and Energy Performance Contracting. In 1999, the Municipality of Almada created the Local Energy Agency of Almada, AGENEAL. With 15 stakeholders (both public and private), representing all the most important sectors of activity in Almada – energy, water and solid waste utilities, public transport, education, service providers, building and public work companies and the Municipality of Almada, AGENEAL is a private, non-profit association whose objective to promote energy efficiency and rational use of energy at local level. The Inventory of Greenhouse Gas Emissions and the “Local Strategy for Climate Change of the Municipality of Almada” formed the basis for the Municipal efforts in the rationalization of Municipal Finance – EC Link Woking Papers - Draft Version 1.5

energy use. AGENEAL, with the support of the Municipality of Almada, has been responsible for local energy efficiency projects and for the task of promoting educational projects aimed raising awareness of the importance of energy efficiency among citizens and key players. Funding sources: Finance came from a combined approach of EU and local funding. The latter is again a combined approach comprising of 1. 2. 3.

The “less carbon climate fund” The “financial” fund Tax reduction.

The less carbon climate fund is supported by a budget line which internalized the compensation of previous years´municipal CO2 emissions. As can be seen from the Figure 33, the city started off with a municipal fleet (electric bicycles), energy efficiency measures in public buildings and a change to LEDs in public lightning. This built the base for the CO2 savings, which were priced and resulted in the initial equity for the low carbon fund. Figure 34: Almada's Funding for the low-carbon fund

Source: http://www.energy-cities.eu/db/almada_573_en.pdf

Lessons learned 1. Strong political commitment essential 2. Community meetings and including the public in a transparent manner helps to bring in the “WE” instead of the “You” 3. Essential elements for fruitful meetings include defining a clear program for each Forum, focused on a specific subject, and providing a technical presentation structured around the chosen subject to avoid excessive and unnecessary distraction of the participants off the main subject. The facilitator’s role is to keep the discussion centered on the proposed topic and create a favorable atmosphere to obtain the desired level of inputs from the participants. 4. Since Almada has different funds to finance its local plan it was important to keep each fund separately from each other and define its objectives well Further information/sources: http://www.energy-cities.eu/db/almada_573_en.pdf More examples can be found here. The web page can be sorted by countries, cities and number of population. http://www.energy-cities.eu/cities/case_studies.php?lang=en

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4.2.2 EU Investment case studies With the exception of Case 13, the case studies below have been described and discussed from a technical viewpoint in other position papers. The technical descriptions of the projects are thus only summarized so as to give a context for the discussion of the financing, funding and institutional issues relating to GMF. Public Transport Case 15: London, UK: Crossrail

New Crossrail rolling stock By Sunil060902 - Own https://commons.wikimedia.org/w/index.php?curid=60734410

work,

BY-SA

4.0,

In London, the city uses land value capture to partly fund its new metro line – Crossrail which includes ten new stations and around 118 kilometres of new and upgraded line, including 42 km of new rail tunnels through central London. Policy Context: National and Local Infrastructure budgets are highly constrained in the UK which is struggling to reduce its fiscal deficit. Preconditions The law allows local governments, in this case the Greater London Authority, to surcharge property taxes as a contribution to ‘’betterment’’ Financing & Funding The 2005 business case identified tenants and owners of large commercial properties in the financial districts in the City and Docklands as key beneficiaries of the project. As a result, three value capture mechanisms were implemented: A Business Rate Supplement (BRS) of 2% on commercial properties with a rateable value of more than £55,000 in the Greater London Area. Income from the BRS will generate a £4.1 billion. In addition, £600 million from development revenues, including through the Mayoral Community Infrastructure Levy (CIL) and development application charges known as Section 106 charges. The resale of surplus land is expected to contribute a further £500 million. Voluntary contributions were secured for about 35% of the project’s total funding package, with an additional 30% to be raised from projected Crossrail fares (user charges).

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Value capture mechanisms contributed 32% towards the total cost of the project. In Hong Kong’s metro system, land value capture (known as “betterment taxes”) represented a financial windfall. By the 1980s, the system was already showing a profit, in large part due to capture of the increase in land value. Institutions & Management Transport for London is managing the project – this organisation runs the entire ‘’Tube’’ network under the Greater London Authority. Lessons Learned Surcharge of taxes is accepted if residents see direct benefit. These taxes do not have to be land taxes but they do have to be geographically targeted. Information/ Sources: https://tfl.gov.uk/travel-information/improvements-and-projects/elizabeth-line accessed 2 Nov 2017 Using Value Capture To Help Deliver Major Land Transport Infrastructure: Roles for the Australian Government http://investment.infrastructure.gov.au/files/value_capture/ValueCapture-Discussion-Paper.pdf accessed 2 Nov 2017.

Green Buildings Case 16: Beddington Zero Energy Development (BedZED) BedZED is an environmentally friendly housing development in Hackbridge, London, England. It is in the London Borough of Sutton, 2 miles (3 km) north-east of the town of Sutton itself. Designed to create zero carbon emissions, it was the first large scale community to do so.[1]

By Tom Chance from Peckham flickr: BedZED, https://commons.wikimedia.org/w/index.php?curid=11884918

2.0,

The 82 homes, and 1,405 square metres (15,120 sq ft) of work space were built in 2000– 2002. As BedZED's low-energy-emission concept eco friendly concept, cars are discouraged; the project encourages public transport, cycling and walking, and has limited Municipal Finance – EC Link Woking Papers - Draft Version 1.5

parking space. There are good rail and bus links in the immediate area. They also have a car-share scheme. Policy The local government was extremely supportive of the project and facilitated planning and other required approvals. Preconditions The project was undertaken by a very large and experienced developer of social housing, the Peabody Trust, which brought its expertise to the project. While the Trust is a non-profit entity it operates on a commercial basis. Financing and Funding The project was funded as part of the Peabody Trust’s normal program of capital works. The local government provided a subsidy to the project by providing the land at below-market rates. in the form of a lower cost of land. The Trust, through its finance subsidiary Peabody Capital, raises long term loans and bond finance from the capital markets as needed. As of June 2017, it had GBP 2.4 billion of outstanding credit facilities and over GBP 100 million in reserves. Given its size the Trust has very low borrowing rates. The Trust mainly earns income by providing social housing to local authorities. Lessons Learned Green building needs to be institutionalized in more proactive ways. This one-off project was a good experiment – even if it did not reach its ‘’zero emissions’’ target – but stronger regulation it needed to make such activity routine. Such action will also reduce the premium currently paid for these buildings and will enable large scale development by such bodies as the Paebody Trust. Sources/ Information: http://www.bioregional.com/bedzed/ accessed 2 Nov 2017 http://www.bioregional.com/wp-content/uploads/2014/10/BedZED_seven_years_on.pdf accessed 2 Nov 2017 https://www.peabody.org.uk/home accessed 2 Nov 2017

City Greening Case 17: Millennium Site, London, United Kingdom: Thames River Restoration The unique opportunity presented by the Millennium site has enabled the Environment Agency to demonstrate best practice approaches to providing new open space and flood defence works.

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Source for the above two photos: https://de.images.search.yahoo.com/search/images;_ylt=AwrSbl9luw1XvxQAyX4zCQx.;_ylu=X3oDMTByNWU 4cGh1BGNvbG8DZ3ExBHBvcwMxBHZ0aWQDBHNlYwNzYw-?p=Millennium+Site+Greenwich+Peninsular&fr=ush-mailn

In the year 2000, Greenwich hosted the Millennium Exhibition on the Greenwich Peninsular site. Bounded by the River Thames to the North and north east, the highly contaminated and largely derelict site has a total of 2,200 metres of river frontage. Environment Agency Interests  Contaminated land from previous industrial uses.  Poor condition of tidal defences and threat of encroachment.  Opportunity to promote innovative riverbank design.  Opportunity to promote access and education initiatives. The Environment Agency encouraged the developer to provide an innovative flood defence wall, incorporating some setting back to create enlarged beaches, an ”ecological sculpture”, tidal terraces, timber fendering on vertical flood defence walls, beach replenishment/creation and improved habitats for a potential multitude of wildlife. The cost of the terrace flood defences is lower than traditional sheet pile walls and the land value of hte site has improved as a result of the ecological enhancements. As part of the riverside scheme, education signage, riverside paths and cycle ways will be a permanent feature of the site. Policy The project was a high-profile investment strongly supported by the then national government. Preconditions The site was largely in government hands and that of a large utility, British Gas, which had no operational need for the site. Financing and Funding The Millennium Commission was funded by proceeds from the National Lottery and through Visitor charges. Some GBP 603 million came from the former with GBP 189 million from ticket sales.

Institutions It was implemented through the Millennium Experience Company, the development entity of the Millennium Commission. In respect of the river greening, British Gas and English

Partnerships worked closely with Photo Source: URBED. 2009. Greenwich Millennium Village. the Environment Agency to create London. website: www.urbed.co.uk the best practice riverbank scheme http://urbed.coop/sites/default/files/05%20TEN%20Group,%20 at the Millennium site. The dome Report%20of%20Meeting%205,%20Series%2005_Greenwich_ %2024%20March%202009.pdf constructed on the site was subsequently sold to, and redeveloped into an entertainment venue by the Anschutz Entertainment Group. Lessons Learned The exhibition part of the project was highly controversial, and would probably not have been undertaken if any rigorous economic analysis was applied to the project. However, the eventual out turn is a benefit to the community as a whole. Source – Environment Agency, 25 Case Studies of river restoration work in London and the south east of England http://www.therrc.co.uk/publications/enhancing-environment-25-case-studies-thames-region

https://www.publications.parliament.uk/pa/cm200506/cmselect/cmpubacc/409/409.pdf accessed 2 Nov 2017 Municipal Finance – EC Link Woking Papers - Draft Version 1.5

Compact Development Case 18: Nordhaven, Copenhagen, Denmark The agency By og Havn has started the 668 million DKK expansion of Nordhavn into Øresund. The project is the largest construction job in Denmark. The City Circle Line is being extended to Nordhavn with at least one station. The new cruise ship quay is 1,100m long with 3 passenger terminals. The agency By og Havn has proposed plans to develop Nordhavn as a new city district that would have 40,000 residents and 40,000 jobs.[3][4] The Municipality of Copenhagen also plans to build 600,000 m²for residence and industry in the area, which expected to be fully developed within 20–25 years.

Source: (WT-en) Elgaard at English Wikivoyage Policy The City of Copenhagen intends to make this area a model showing how cities can reverse climate change – including the use of sustainable energy generation solutions, heat storage, solar installations, wind turbines and geothermal, and greening the transport system by focusing on public transport (the metro) and cycling. Preconditions Copenhagen has established a development corporation for the site – By og Haven which has the flexibility to joint venture with the private and institutional sectors. It is owned 95% by the City and 5% by the Danish state. Funding and Financing The development corporation joint ventures with private sector developers for specific projects – to which they bring equity, capacity to finance the development and expertise. These projects range across many sectors including housing, retail development or port development. Its share of investments in FY 2015 was DKK 172 million (fixed assets net of value appreciation) which leveraged several times more private investment. The development corporation is also contributing to the construction cost of the metro extension. The development corporation raises funds through the capital markets as an entity of the Danish state. It’s cost of funding is consequently low. Outstanding debt at the end of financial year 2015 was DKK 19.7 billion. The corporation must however service the debt from its own revenues and has been able to do so. In 2015 debt service amounted to DKK 396 million. Its revenues come from land leasing and sales, revenues from joint ventures such as parking, and from port operations. Institutions Municipal Finance – EC Link Woking Papers - Draft Version 1.5

The structure of the development corporation and specific-purpose joint ventures has been highly successful. Such joint ventures have also enabled institutions (eg pension funds) to participate in financing the development. Lessons learned In a geographically-focused green development, the use of a development corporation enables an integrated approach to large scale investment. Sources/ Information: http://www.byoghavn.dk/english.aspx retrieved 2 Nov 2017 Annual Report 2015 at http://www.byoghavn.dk/english/about/economy-uk.aspx retrieved 2 Nov 2017 Green Industry Case 19: Denmark: Kalundborg Sustainable City/symbiosis Size Number Companies More information

3,831 jobs, 50,000 inhabitants of 9 http://www.symbiosis.dk/en http://www.dac.dk/en/dac-cities/sustainable-cities/allcases/waste/kalundborg-industrial-symbiosis---waste-makes-resource/ Kalundborg Symbiosis – 40th Anniversary publication https://greenexchange.earth/wp-content/uploads/2016/07/KalundborgSymbiosis-40th-anniversary-publication.pdf retrieved 2 Nov 2017

Description In 1961 the world’s most well-known example of an Industrial Symbiosis and Eco-Industrial Park was constructed, located in Kalundborg in Denmark.The ongoing development of the cluster demonstrates that growth and climate-friendly solutions need not be in contradiction to one another, but can actually go hand in hand and create new jobs. In 2012 alone, 230 new privatesector jobs were created in Kalundborg Municipality, which is exceptional in a time when employment in other regions of Denmark was going in the opposite direction. Policy The initial cooperation was relatively ‘’bottom-up’’ but its success has been supported by the city. Kalundborg City is now setting its focus on renewable energy and resources. Asnaes Power Station has recently pledged a 50% switch to renewables by 2020. Another future goal is to facilitate more collaboration where public and private enterprises buy and sell residual products, resulting in mutual economic and environmental benefits. Industrial symbiosis has now become part of the overall Danish strategy for developing business. The Danish Business Authority supports activities all over Denmark to identify and start potential systems of resource exchange. http://we-economy.net/case-stories/kalundborg-symbiosis.html Preconditions The local scarcity of water was the motivation factor behind the project and led to cooperation among the different economic players. By using surface water from a nearby lake for a new oil refinery, the limited supplies of groundwater were saved. The reduction of costs led to even more

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innovative approaches. The focus was especially on how to income-produce uses for “waste” products Funding and finance To address the water shortage, the City of Kalundborg built a pipeline financed by the refinery. Starting from this initial collaboration, a number of other collaborative projects were subsequently introduced and the number of partners gradually increased. All investments were private sector financed. Institutions and management Encouraged by the City government through its ‘’Environmental Club’’ established in 1988, companies in physical proximity studied potential uses of their ‘’waste’’ products. Among the companies participating in the symbiosis are the world’s largest producer of insulin (Novo Nordisk), the world’s largest enzyme producer (Novozymes), the largest sewage treatment plant in Northern Europe (Kalundborg Forsyning A/S), the largest power plant in Denmark (DONG Energy) and the largest oil refinery in the Baltic Region (Statoil). In recent years, the municipality realized that the symbiosis project has become an important factor in the local economy; to keep the large companies and factories, and to attract new activities and talents to an otherwise somewhat distant part of Denmark. In 2011 the official Symbiosis Center was established: It focuses on education and courses in creating resource exchange systems, and the center also works pro-actively on identifying potential candidates for new, similar exchange projects in the region. Lessons learned Such initiatives need to grow naturally around a common core issue (eg water) or sector. Local governments can encourage such activitiy by BOTH providing support AND enforcing pollution regulations, and if possible using more sophisticated incentives as exterded polluter pays schemes as in the EU (see SWM Position paper) and/or using emissions trading schemes as in Tokyo. The basis of the Industrial Symbiosis cooperation in Kalundborg is open communication and mutual trust between the partners. The diversity of businesses, the relative geographical isolation of the companies and the awareness of the economic value added of the synergies facilitated the emergence of the network. Cooperation between companies in Kalundborg Symbiosis has occurred from the bottom-up, initiated by the companies themselves with continuous support from the Kalundborg Municipality. Industrial Symbioses in Kalundborg

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Source: http://www.symbiosis.dk/en/lokalomraadet

Clean Energy Case 20: Waste to Energy Plant-I/S Reno Nord, Denmark I/S Reno Nord is treating MSW from 225.000 inhabitants from 7 municipalities in the northern part of Denmark.I/S Reno Nord is a partnership owned by the 7 municipalities. Figure 35: Waste to Energy Plant I/S Reno Nord, line 4

(illustration: I/S Reno Nord)

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In October 2005 one of the most modern and efficient waste-to-energy plants in Denmark was officially opened at I/S Reno Nord in Aalborg. The nominal capacity of the plant is 20 t/h waste at a calorific value of 12 MJ/kg, corresponding to approx. 160,000 t/year. The total cost was 680 million DKK (92 million Euro). Reno Nord line 4 in Aalborg, Denmark, is a state of the art incineration plant that produces both electricity and district heating. The turbine generates approx. 18 MW of electricity, which will be fed into the main grid. Furthermore, the plant will supply approx. 43 MW of heat to the district heating network in Aalborg. The efficiency is approx. 100%, and the energy produced will supply approx. 16,000 houses with electricity, and approx. 30,000 houses with district heating. Policy and preconditions The plant complies with the EU’s directive on waste incineration which sets out minimum performance criteria. The Danish government is committed to improving the environment of its cities and to fighting climate change. Finally, the local governments in the region combined to develop a regional facility which would meet the expectations of EU and Danish law and of their constitutents. Funding and Financing The table below sets out estimated revenues for the facility.

Item

unit price

Gate fee incoming waste

635 DKK/ton (85 €/ton) 72 DKK/ GJ (9,66 €/GJ) 500 DKK/MWh (67 €/MWh)

Sale of Heat Sale of electricity Total

Total *1000 DKK

*1000 Euro

83.000

11.140

87.000

11.675

20.000

2.685

190.000

25.500

It is not possible to obtain a specific operation budget for the incinerator as the annual accounts are consolidated. However, based upon official figures from I/S Reno Nord on gate fees and incoming waste amounts, data from the district heating company in Aalborg and the unit prices on electricity and heat, it is estimated that the annual turnover is 28% of the investment, indicating that the plant is profitable. This is born out by the annual report (2016) where total debt is DKK 388 million, indicating debt has been paid down http://www.renonord.dk/media/aarsrapporter/renonord_aarsrapport_2016_web.pdf Other forms of waste to energy are also profitable, which opens up a potential opportunity. In the US, companies are offering ‘’turn key’’ finance for fuel cells generating electricity from methane capture from waste water treatment plants. These companies make a commercial profit and also pass on some of the savings made from significantly lower electricity input to the plant. In relation to retrofitting buildings to promote distributed clean energy, the Property Assessed Clean Energy PACE) initiative in the US is innovative.The costs of investing in solar photovoltaic systems, energy-efficient windows, and insulating a home will not be recovered when the home is to be sold. These up-front costs are considered to be one of the most significant barriers to solar and energy-efficiency retrofits. Using PACE, property owners can finance energy-efficiency and renewable-energy measures in homes and commercial buildings without the need for government subsidies. This is because the PACE initiative enables them to “mortgage” these improvements, recovered through the property tax, and Municipal Finance – EC Link Woking Papers - Draft Version 1.5

thus to pay only for the benefits they derive during the period they own the property in question. Institutions and management The operation is corporatized and run as a business separate from the local governments involved. They are however represented on the Board. Lessons learned Given economies of scale are significant in energy generation, grouping local governments together to make investments in green technology is sensible. The key issue is the regulatory context of such groupings, which must be very clear in order to ensure smoothe operation of the facility. Source: I/S Reno Nord http://www.renonord.dk/ B&W Vølund a/s http://www.volund.dk/Waste_to_Energy/References/Reno_Nord (Retrieved 15th June 2015) Annual Report 2016 http://www.renonord.dk/default.aspx?m=2&i=101 accessed 2 Nov 2017

4.3 Outlook 4.3.1 Context and Future Needs55 Europe provides a good reference point for China in relation to creating the right environment for low carbon financing. Like China, Europe also has large-scale investment needs as many of its infrastructure and power plants are due for upgrades. Furthermore, in order to achieve the emission reduction targets of at least 40% by 2030 and 80% by 2050, Europe needs huge amount of investment in energy efficiency and low carbon and clean energy, its transport system and building stocks. For example, power sector investment needs to increase by 2.5 times from BAU levels over the next 10 −20 years.55 Investment in energy efficiency needs to increase significantly – with over EUR60 - 100 billion per year needed for buildings just to 2020 56 – and has a far weaker supply chain and financial infrastructure supporting it. So far, financing had been done by energy companies on balance sheets; but some of the offshore wind projects require capital investment bigger than the market capacity of the biggest utilities.57 Also, project finance has become harder to get as banks no longer lend the volumes of debt they used to. Similarly to China, Europe also has to deal with the high(er) risks associated with low carbon solutions and limited public finance. Decarbonisation of its energy sector, for example, is shifting investment from lower capex, better understood assets with higher running costs to investment with higher capex, less well-tested assets with lower running costs. The aggregate investment costs mask a non -trivial large-scale shift in investor preferences from wellunderstood high carbon industrial sectors, business models and technologies to less mature and more policy -dependent low carbon ones. This is needed at a time when the financial markets are recovering from financial and economic crises. Even without the financial crisis, Europe would be facing a low carbon investment challenge given the huge investment needed to decarbonise its economy. To meet these challenges, a few European governments and institutions have made the decisions to refocus public finance to climate. This is because – as in China – private sector finance will not flow to the right investments without direct public 55

This draws from Amal-Lee Amir, Sgin Wei Ng, and Holmes, I. 2014. China´s Low <C>arbon Finance and Investment Pathway. Third Generation Environmentalism (E3G) Policy Paper. London. http://r.search.yahoo.com/_ylt=AwrSbmGuKA5WOFIAbl4zCQx.;_ylu=X3oDMTE0M2wwZGEzBGNvbG8DZ3ExBH BvcwMxBHZ0aWQDVUlERUMwMV8xBHNlYwNzcg-/RV=2/RE=1443797295/RO=10/RU=http%3a%2f%2fwww.e3g.org%2fdocs%2fEnglish_Report_WEB.pdf/RK=0/R S=dnbyOWS5s4p8rtoXhvgrwIC2uT8Municipal Finance – EC Link Woking Papers - Draft Version 1.5

finance interventions and regulatory/market reforms to reduce risk. In the UK, the government has set up the Green Investment Bank (GIB) to address the market failure and enable investments in the green sector – its priority sectors are offshore wind, waste, domestic and non-domestic energy efficiency. It currently has £3.8 billion under management and its current leverage ratio is 1:3.59 Similarly, the European Investment Bank is also focusing on leveraging private sector investment in low carbon/green sectors, through starting to screen energy projects for climate impacts – introducing an emissions performance standard of 550gCO2/kWh in 2013 – and streamlining lending to energy efficiency and renewable energy projects.60 In addition to meeting climate targets, public finance can also provide resilience to boom and bust investment cycles that will otherwise derail Europe’s decarbonisation pathway, as private finance is withdrawn in times of shortage. At the same time, Europe is undertaking financial reforms to address gaps exposed by the financial crisis and meet future challenges. This has inadvertently created unfavourable conditions for low carbon investment in Europe: capital requirements on banks have increased; Solvency II regulation risks reducing the ability of pension funds to invest in long dated illiquid assets; and public accounting rules for PPPs and guarantees are unclear.61 Furthermore, market liberalization rules can also have perverse impacts on low carbon investment: European State Aid rules aiming to avoid market distortions resulting from public finance interventions limit the role of the UK GIB and other public banks in some areas (e.g. guarantees), including their ability to blend different sources of public finance (e.g. grants, loans and guarantees). As in China, Europe needs to make sure that its financial reforms are aligned with its climate objectives. Specifically, it needs to create a long-term regulatory framework to provide certainty for the commercial sector – effectively ‘procuring’ energy and energy efficiency from the market: (i) Addressing market capacity limits – through introducing a bigger role for public banks to encourage investment at scale and creating financial regulation that is conducive to low carbon infrastructure investment; (ii) designing investment grade policy frameworks – the need for targets and for policies that are transparent, of suitable duration, avoid retroactive adjustment and are easy to comprehend; (iii) driving regulated asset base investment – accelerating the process by which regulators provide clarity on what is required from regulated investment as well as early clarity on who pays for innovation; (iv) tackling the aggregation challenge – ensuring policy-makers focus on ensuring both small and large scale infrastructure investment is adequately incentivized; (iv) scaling up support for development and deployment of innovation technologies – a renowned public investment effort to secure high quality European jobs and revenue flows for the future.

4.3.2 GMF in Europe GMF as an important part of overall green finance is currently at an early stage in its development but is considered as potentially playing a critical role in development of low carbon and climate resilient cities. Of particular importance is the power of municipalities to set fees and charges that incentivize green investment and penalizes behaviors that adversely impact the environment is seen as key to sustainable GMF. There are opportunities to create new own-source revenues. This is not to say that cities in the future can cover all their environmentally-related expenses, but experience has shown that creative designs for revenue enhancement can make a significant contribution. External finance from other levels of government, from multi-lateral organisations, and from the private sector will still be needed. This is accepted worldwide as can be seen in the development of the new Green Climate fund, and other sources of climate. Municipalities should benefit from this development especially in the area of adaptation projects, which are given priority.. Given that the private sector needs to play an enormously important role in

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financing green infrastructure, the alignment of national and local planning and support for private sector involvement will become more important. 56 To make more informed decisions about the level of decarburization effort needed, some countries have set up multi-stakeholder platforms at the national level that allow consolidated and integrated discussions and decision making, incorporating the multi-dimension elements of climate change. For example, the French government set up the ‘Grenelle de l'environnement ’ in 2007, which is an open cross-party debate in France that brings together representatives of national and local government and organizations (industry, labour, professional associations, non-governmental organizations) on an equal footing, with the goal of arriving at a unified position on a specific theme, and then drawing up a plan of action of concrete measures to tackle the environmental issue, which can include climate change. Through this process, the government managed to adopt targets and measures to promote energy efficiency and renewable energy. However, a plan to introduce a carbon tax has not yet materialized. A similar process also takes place in the UK through the electricity market reform debate and the new GIB, where dialogue around how to finance the investment needs of a ‘greener’ economy in the UK are playing out. Lessons Learnt from projects Lessons learnt are of course based on the context of individual experience resulting from the projects undertaken. Below the most common success factors are summarized on an aggregated level: 1. 2.

Political support and coordination at a local and at the higher government levels A long and thorough planning period/alignment with long-term national and municipal plans 3. Transparent financial intergovernmental support (if any)/reliability of relevant laws 4. Use established national institutions through which to operate (related to finance, administration and organization) 5. Involvement of public/civil society at an early stage to bring up acceptable ideas and better business cases (not the “you” but the “we” counts) 6. Start at an early stage to retain internal knowledge base/ reduction of costs for external consultancies 7. Mix of skills (political-technical-financial level) important in the early stages of project design and throughout the process (e.g. to formulate tender documents) 8. Preparation costs of projects/ design of financing schemes will decrease over time 9. Keep design and objectives of GMF transparent, simple and well documented 10. Review demand situation carefully, start create a project pipeline at an early stage and review it frequently, consider that the user base will change over time 11. Ensure a rigorous project prioritization process is conducted across sectors and includes funding considerations. 12. Provide project development technical and financing support for green projects. 56

This recently created website will become an information source for promotion of green finance: http://www.citynvest.eu/. CITYnvest focuses on supporting and replicating successful innovative financing models. As CITYnvest we:  We analyse and compare innovative financing models and develop guidance materials on financing for energy efficiency renovations of public buildings.  We help to introduce innovative financing models for energy efficiency in three pilot regions in Belgium (Liège), Bulgaria (Rhodope) and Spain (Murcia).  We conduct a large scale capacity building programme. Through a series of workshops we will train more than 650 local authorities and 300 other stakeholders in 10 focus countries.  We monitor investments that have been triggered in the framework of CITYnvest, collect and analyze data from local authorities in pilot regions and determine key success factors.  We promote innovative financing models and share our experience and knowledge through a set of guides, toolkits and training materials for local authorities and other stakeholders.

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13. Provide catalyst funds to ‘’crowd in’’ the private sector.

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5 PERSPECTIVES FROM CHINA57 5.1 Policy analysis and sector overview 5.1.1 Policy Analysis China’s financial sector is experiencing rapid changes and innovation, with many new instruments of green financing emerging in the recent years. The sector is regulated by the following legal instruments:     

1998. Securities Law (Latest Revision in 2013) 2003. Banking industry supervision and regulation law (Latest Revision in 2006) 1995. Commercial Banking Law (Latest Revision in 2015) 1995. People’s bank of China, Insurance Law (Latest Revision in 2015) 1995. Budget Law (Latest Revision in 2014)  State Council. 2013. Guidance on the Promotion of Urban Infrastructure Construction  State Council, 2014.Instruction on Encouraging Social Investment of Financing Mechanism in Key Areas  MoF. 2015. Notice on Supporting the Construction of Sponge City Pilots.  State Council. 2015. Guidance on Renovation of Shantytowns and Dilapidated Houses in Urban and Rural Areas and Construction of Supporting Infrastructure.  NDRC. 2015. The Guideline for Issuing Green Bond.  The Supreme People’s Court. 2016. Opinions on Giving Full Play to The Function of Trial and Safeguarding Services to Promote The Building Ecological Civilization and Green Development.  State Council. 2015. The Guidance to Encourage Social Investment and to Innovate Financing Mechanism and Investment on Key Areas, The Key Areas of Investment and financing mechanism contains public services, resources and environment, ecological construction, infrastructure.  MoF. 2016. The Notice to Comprehensively Promote Resources Taxation Reform.  PBoC, NDRC, MoF, MEP, CBRC, CSRC and the CIRC jointly issued the overall plan for the construction of five green financial reform and innovation pilot areas. The 13th Five Year Plan (FYP) has been most explicit about the development of eco-cities. While no specific mention was made about municipal financing, it is assumed that green municipal financing will become a requirement if the above targets are to be achieved. Other pronouncements have pointed at the need for a national green development fund and green bonds. Policy Direction from the 13th Five-Year Plan. The Government´s pronouncement of the Five Year Plan objectives has stated three key objectives: Increased efficiency of energy resources development and utilization; effective control total aggregate of energy and water consumption, construction land, and carbon emissions. The total emissions of major pollutants shall be reduced significantly. City development shall be in accordance with the carrying capacity of resources and the cultural context. Green planning, design and construction standards shall be applied. Support reduced emission standards, and implement demonstration projects of ¨nearzero¨carbon emission.

This section draws extensively from: Asseline, F. 2010. Green Infrastructure Finance in China: Foundations for Low-carbon Growth. MBA thesis. School of Economics and Management, Tsinghua University. Beijing. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

Table 2: “Green” development Sector planning in “The 13th Five-Year Plan” period ISSUE BODY

DATE ISSUANCE

STATE COUNCIL

2014-3

National Urbanization 2014-2020

NATIONAL DEVELOPMENT REGULATORY COMMISSION (NDRC)

2016-1

Internet+ Green Eco Resource and three years action environment plan dynamic monitoring, environmental protection, waste recycling

NDRC

2016-2

The guideline in Circular economy in accelerating circular agriculture and economy in green development agriculture

2016-2

Action plan on Urban Sponge city, green adaptation city planning

NDRC AND OTHER 2016-3 RELATED 10 MINISTRIES

Guideline in green Green consumption, consumption concept on green life, green product, financing support

NDRC, NATIONAL 2016-4 ENERGY ADMINISTRATION

Action plan on energy technology reform and innovation 20162030

To Promote clean coal utilization, nuclear energy, renewable energy, energy storage, power grids

MINISTRY OF 2016-6 TRANSPORTATION

The 13th five year plan on energy conservation and environmental protection in the field of transportation

Green transport system construction, transportation, energy conservation, pollution prevention and control

MINISTRY FINANCE

The 13th five year plan on new energy vehicle infrastructure incentives"

Subsidies for the construction of new energy vehicles charging infrastructure, new energy vehicle production and consumer matching concessions

MINISTRY OF AGRICULTURE MINISTRY FORESTRY NDRC

OF TITLE

RELATED CONTENT New Green city planning, Plan green building

MOHURD

OF 2016-6

MINISTRY OF 2016-7 ENVIRONMENTAL PROTECTION

The 13th five year Promote plan on strategic Environmental environmental

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the and

Impact Assessment impact assessment Reform and planning the role Implementation Plan of constraint and guide the implementation of inventory-based management and accountability mechanisms MINISTRY OF 2016-7 INDUSTRY AND INFORMATION TECHNOLOGY OF THE PEOPLE’S REPUBLIC OF CHINA

Industrial Green The development of development plan green manufacturing 2016-2020 and recycling economy, energy conservation, pollution reduction and development of cleaner production

MINISTRY OF 2016-7 SCIENCE AND TECHNOLOGY

The 13th five year plan on National science and technology innovation

Including the "Innovation 2025" in China to support clean energy technology innovation program

LOCAL HURD IN n.a PART OF THE PROVINCES

The 13th five year plan on green building and energy efficiency in buildings

Green building, building energy efficiency, energy efficiency standards and certification

STATE COUNCIL

The 13th five year Green financial plan on financial products and industry management system innovation, green assessment and certification standards and management regulations

2016-11

Source: Yao Zhuo, EC-LINK, condensed according to the official website of the issuing body.

While no specific mention was made about municipal financing, it is assumed that green municipal financing will become a requirement if the above targets are to be achieved since the central government is recognizing that there is a need for China to change its high-pollution and energy-intensive growth model and transition towards a green and sustainable economy. During the 19th CPC national congress, President Xi jinping has clearly promoted the green development in his speech. “We will step up efforts to establish a legal and policy framework that promotes green production and consumption, and promote a sound economic structure that facilitates green, low-carbon, and circular development. We will create a market-based system for green technology innovation, develop green finance, and spur the development of energy-saving and environmental protection industries as well as clean production and clean

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energy industries.” And green finance has been greatly promoted as the important means for the green development in China.58 Financing Sustainable Development Such mechanisms will be needed to support China’s efforts to meet its commitments under the United Nations’ 2030 Agenda for Sustainable Development and the Paris Climate Agreement. These international agreements represent the most ambitious multilateral goals ever set. These goals require an unprecedented mobilization of both public and private finance – some US$90 trillion over the next 15 years. Momentum is growing in China to align the financial system with sustainable development. Despite this positive momentum, progress remains inadequate, with an accelerating decline in all major ecosystems, and growing economic inequality and social challenges.Five steps are proposed to embed financing for sustainable development at the heart of tomorrow’s global financial system and deliver the much-needed transformation.  National financial market reform and development plans to embrace consideration of the Sustainable Development Goals and Paris climate commitments, and vice versa.  Financial technology mobilized to support the accelerated alignment of the financial system with sustainable development, particularly for developing countries.  Public finance to undergo a disciplined analysis and, as required, redeployment to align to the Sustainable Development Goals and Paris climate commitments.  Investing in awareness-raising and building key capabilities, so that the financial community can effectively implement new approaches and plans.  Development of common methods, tools and standards to enable sustainable development priorities to be measured and incorporated into financial practice59. ¨The challenge of beginning to de-couple emissions growth from economic growth is an extremely challenging one for both China and the rest of the world. This de-coupling was only achieved by developed countries in the last decade, if at all. While China has quickly increased its renewable energy use and is now the world largest generator of renewable energy and a world leading equipment supplier in this growing sector, its continued use of fossil energy and water still remain highly inefficient by global standards.¨60 Since the 12th Five Year Plan, China has started to pursue its own specific policies and goals to spur low carbon development. Since then, China´s economy has entered into a new gear, a ¨new normal¨, directed at low carbon growth, and has embarked on creating the financial and regulatory frameworks that are required if it wants to scale-up what promises to become the largest green sector economy in the world. To achieve this will require large scale investment by both the pulic and private sectors. Achieving such investment will entail a very large role for Chinese local governments. In turn, China is thus dependent, if it is to achieve these investments, on robust local government financing and funding arrangements. The current situation of local government financing and funding is reviewed in the following section.

5.1.2

Municipal finance and current state of play in China

Municipal Finance is about the revenue and expenditure decisions of municipal governments. It covers the sources of revenue that are used by municipal government-taxes (property, income, sales, and excise taxes), user fees, and intergovernmental transfers. It includes ways of financing infrastructure through ways of financing infrastructure through the use of operating revenues and borrowing as well as charges on developers and public-private partnerships. Municipal finance also address issues around expenditures at the local level and the 58

Source: http://www.chinadaily.com.cn/china/19thcpcnationalcongress/2017-11/04/content_34115212.htm

http://unepinquiry.org/publication/financing-sustainable-development/See more at: http://unepinquiry.org/publication/financing-sustainable-development/#sthash.s4vJYflL.dpuf 60

Asseline, F. 2010. Green Infrastructure Finance in China: Foundations for Low-carbon Growth. MBA thesis. School of Economics and Management, Tsinghua University. Beijing. p. 1 Municipal Finance – EC Link Woking Papers - Draft Version 1.5

accountability for expenditure and revenue decisions, including the municipal budgetary process and financial management61. The urbanization witnessed an unprecedented development in China From 1982 to 2012, urbanization has witnessed a rapid development. At the end of 2012, the urbanization rate reached 53%. As can be seen from the figure below, urbanization China’s urbanisation rate has increased steadily over the last decade and a half. Figure 35: The urbanization rate in China from 2001-2015

Rural Urban

Source: National Statistics Bureau of China http://data.stats.gov.cn/swf.htm?m=turnto&id=432

Decentralization resulted in financing deficit on Municipal Finance Over the last 20 years, China like many other countries, has started to give more powers to local governments, decentralizing e.g. health, educational and infrastructure responsibilities to lower levels. However, worldwide revenues of municipalities have not kept pace with expenditure needs. Local governments rely on intergovernmental transfers while at the same time their own revenue source is not sufficient. The figure 33 shows that from year 2011 to 2014, municipal expenditure is far beyond their revenue. Conventional funding sources for cities depend on local taxes (property taxes and others) and user fees, without being able to fully tap more lucrative taxes such as e.g. income tax. Some cities have been allowed to issue bonds in the local capital market. But a very large share of local government revenue in China comes from land transaction taxes – see Figure … In order to provide sustainable long-term finance for municipalities, a change of the institutional and regulatory framework is needed. 61

Source: The Human Settlements Financing Tools and Best Practices Series: Guide to Municipal Finance, published by UN HABITAT in 2009 Municipal Finance – EC Link Woking Papers - Draft Version 1.5

The objective of this transformation must result in an increase in finance available to cities, preferably from their own sources in relation to the services offered. Figure 36: Local Government Expenditure and Revenue (2012-2015) Unit: 100 million RMB

Source: China Statistics Year Book (2013-2016) from National Bureau Statistics of China http://www.stats.gov.cn/tjsj/ndsj/

In 2015, with the acceleration of China's structural reform on the supply side, fixed asset investment, especially real estate investment growth fell sharply, slowing economic growth. lWith lack of market demand, the size of the national land transaction revenue fell. But, even though, In 2015 ,the land transaction fee exceeded 3365 billion RMB and the total general budget revenue reached 6926 billion RMB in China . Figure 37: Breakdown of Central Government General Budget Revenue(2015) Unit: 100 million RMB

Source; MoF: http://zhs.mof.gov.cn/zhengwuxinxi/zonghexinxi/201604/t20160401_1934261.html Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

According to the yearbook of Urban and Rural Construction Statistics, Ministry of Housing and Rural- Urban Development (MoHURD), 2015, almost half of the national investment in fixed assets for Urban Service Facilities comes from local government budget and domestic loans. Figure 38: National Fixed Assets Investment in Urban Service Facilities by Capital Source from Year 2011 to year 2015 Unit: 100 million RMB

National Fixed Assets Investment in Urban Service Facilities by Capital Source in Past Years Unit：100 million RMB Sources of Fund

Year

Completed The Investment Balance of of This Year The Previous Year

Subtotal

Financial Financial Allocation Allocation From Central From Local Government Government Budget Budget

Domestic Securities Loan

Foreign Self-Raised Investment Funds

Other Funds

2011

14158.1

648.9

13509.1

166.3

4555.6

3992.8

111.6

100.3

3478.6

1103.9

2012

15264.2

595.4

14668.9

171.1

4446.6

4366.7

26.8

150.8

3740.5

1766.4

2013

16121.9

987.5

15134.3

147.5

3573.2

4218.0

41.5

62.2

4714.1

2377.7

2014

16054.0

954.0

15100.0

102.2

4135.2

4383.1

96.0

42.0

4294.7

2046.7

2015

16570.7

1295.0

15275.8

202.1

4406.4

3986.3

189.1

46.6

4258.0

2187.3

Note:Since 2013, Completed Investment of This Year is changed to be The Total Funds Actually Available for The Reported Year.

Source: Year Book of Urban and Rural Construction Statistics, Ministry of Housing and Rural- Urban Development (MoHURD), 2015 http://www.mohurd.gov.cn/xytj/tjzljsxytjgb/index.html

The land financing for the local government is not sustainable, the local government should seek more alternative sources of funding for the rapid urbanization process in China. Growing importance of private sector contributing to municipal financing. Since the 1990s, China's economy has been developing rapidly and the people's living standard has been greatly improved, therefore, the demand for urban public facilities has been increasing. With the rapid development of urbanization, the investment for the urban infrastructure is rather huge. Only rely on public finances, it would be unable to meet the needs of sustainable Development. As early as December 2002, the Ministry of Construction (later rename as MoHURD) promulgated the "Opinions on Speeding up the Process of Marketization of Municipal Infrastructure Financing", indicating that the municipal Infrastructure market is open to attract private capital and foreign investment. The reform of the Chinese municipal infrastructure financing in last 20 years is mainly reflected in: 1) through the investment and financing system reform, the establishment of a wide range of different ownership structure, to encourage an increase the private capital investment in urban construction. 2) To break monopolies, with the introduction of market competition to improve the efficiency of urban construction and operation; 3) in accordance with the rules of market economy, re-determine the role of government on the construction of public infrastructure. The local government debt analysis and typical municipal financing instruments According to the National Audit Office of People’s Republic of China, "national audit of local government debt" (2013.12.30) statistics show that as of the June of 2013, China's local government debt balance to be RMB178,908.66 million. Local government bears the direct responsibility to repay 61% of the debt, the debt is mainly used for municipal construction, transportation, land purchasing and storage consolidation, science, education and affordable Municipal Finance – EC Link Woking Papers - Draft Version 1.5

housing, agriculture, forestry, water conservancy construction and other public infrastructure projects. Municipal government debt is the biggest among the three levels of local government. Debt owed by entities that are indirectly the responsibility of local government and therefor constitutes their contingent liability comprises the remaining 31%. Figure 39: The components of local government debt as of June, 2013 Unit: 100 million RMB

Source: "national audit of local government debt" (2013.12.30), The National Audit Office of Peopleâ&#x20AC;&#x2122;s Republic of China http://www.audit.gov.cn/n5/n25/c63642/content.html

Looking at the debt borrowing main bodies, among the debt balance at the end of 2012, the financing platform companies, local government departments and agencies accounted for 45.67% and 25.37% respectively, were still the main borrowing units. Debt balances of financing platform companies and other units saw large growth, these increased by 322.734 billion yuan and 129.572 billion yuan respectively, an increase on 2010 levels of22.50% and 32.42% respectively. Figure 40: Different level of local government debt distribution as of June, 2013 Unit: 100 million RMB

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Source: "national audit of local government debt" (2013.12.30), The National Audit Office of People’s Republic of China http://www.audit.gov.cn/n5/n25/c63642/content.html

The major source of debt funds at the end of 2012, were bank loans and bond issues, accounting for 78.07% and 12.06% respectively. By the end of 2012, bank loans were RMB153.396 billion yuan more than in 2010, but the proportion dropped by 5.60 percentage points. Over the same period, increases in bond issues and borrowing by other units and individuals were relatively large, at 62.32% and 125.26% respectively, compared with 2010. Among the bonds issued, the short-term financing bonds and medium-term notes was increased 113.40%. Figure 41: The Main Source of Local Government Debt as of June 2013 Unit: 100 million RMB

Source: "national audit of local government debt" report (2013.12.30), The National Audit Office of People’s Republic of China http://www.audit.gov.cn/n5/n25/c63642/content.html Municipal Finance – EC Link Woking Papers - Draft Version 1.5

100

The figure above shows that the bank loans are still occupy the large share of the local government debt; and bond issues are in still in the development stage. BT( including BOT and TOT) ‘s share is also developing which shows that local governments are diversifying their use of financing instruments. Table 3: The typical municipal financing instruments in China: Type

Municipal Bond

Local government

Regulator

MoF issue the bond behalf of Public welfare project: the local (affordable housing, rural government Ministry of Finance livelihood projects, post-disaster (MoF) reconstruction, health care, Local education, culture and other Governments undertakings) issue the bond by themselves

Bank loans

Toll roads, major projects, China Banking affordable housing projects and Regulatory specific projects under Commission (CBRC) construction

Enterprises bond

National Development Regulatory Commission(NDRC)

project related to Energy saving and emission reduction, ecological environmental protection, affordable housing, urban rail transit, reconstruction of major natural disaster areas, etc.

Trust

CBRC

N/A

financing Platform (Urban Development Investment Companies)

The usage of fund

In line with national industrial policy, give priority to support Debt financing People’s Bank of the affordable housing, public instruments China ( via NAFMII) rail transport construction those types of financing needs The issuer should be the listed China Securities company, and the use of funds Corporate bond Regulatory in line with national industrial Commission( CSRC) policy

Source: Yao Zhuo, EC-LINK, compilation according to “Practical Handbook of Municipal Bonds Financing”, published by China Finance Press in July, 2015

Figure 42: Bond Issued by MoF on behalf of the Municipal Government (2009-2013)

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101

Source: Yao Zhuo, EC-LINK, compilation according to “Practical Handbook of Municipal Bonds Financing”, published by China Finance Press in July, 2015

The funds raised by bonds issued by MoF on behalf of the municipal government are mainly used in the public welfare projects or infrastructure projects that could not attract private investment. Table 4: Bond Issued by Local Government Directly (2011-2013) unit: 100 million RMB PROVINCES

2011

2012

2013

SHANGHAI

112

GUANGDONG PROVINCE

121

ZHE PROVINCE

JIANG

118

SHEN PROVINCE

ZHEN

SHAN PROVINCE

DONG

n.a

112

JIANG SU PROVINCE

n.a

153

TOTAL

229

289

652

Source: Yao Zhuo, EC-LINK, compilation according to “Practical Handbook of Municipal Bonds Financing”, published by China Finance Press in July, 2015

On 31st of August, 2014, Standing Committee of National People’s Congress has passed the draft revision to the Budget Law, the draft revision has two important components:  

The government at provincial level are allowed to issue the bond directly for public infrastructure investment, the bond issued should have plan for funding and stable source of repayment. Information disclosure for the local government bond.

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5.1.3 Green Finance and Current State of Play in China China has become world leader in terms of green finance. The rapid economic growth achieved in the last decades has been reliant on coal-based energy consumption, road-based transportation and a carbon-intensive industrial structure. This has led to China now facing a vast number of environmental issues, including air, water, soil pollution and climate change. The World Bank estimates that the cost of environmental damages, which is still rising, and will reach 3% to 6% of China’s GDP. China’s government is recognizing that there is a need for China to change its high pollution and energy intensive growth model and transition towards a green and sustainable economy. An annual investment of at least RMB 2-4tn (US 320-640 bn) will be required to address green investment in China, of which 85% is expected to come from the private sector.62 Today, 40% of the world-wide issue of green financing instruments is done in China. The global green finance study group is co-chaired by China and the UK. In 2015, during preparations to the 13th Five-Year Plan (FYP), the government has issued an announcement63 that it supports the issue of green bonds. Green Infrastructure Finance in China: Foundations for Low-carbon Growth

Source: Powerpoint presentation of thesis: Asseline, F. 2010. Green Infrastructure Finance in China: Foundations for Low-carbon Growth. MBA thesis. School of Economics and Management, Tsinghua University. Beijing.

As China wants to depart from its existing economic development model that created the basis for three decades of rapid expansion, it needs to shift into a new gear. ¨Accelerating the pace of green development under the new normal will not only require the adoption of a new mindset – that green development represents a major transformation of the national growth model and limitless future potentials …[through] realization of green philosophies, strategies and policies… Against this new economic climate, actively developing green finance is an inevitable choice for China. The Chinese leader ship has expressed a strong public commitment to building an ´ecological civilization´, a stable and prosperous country that

http://finance.china.com.cn/money/bank/yhyw/20160317/3631992.shtml “The suggestions on 13th of FYP ” which has published in 3th of November, 2015 announced support for green finance and suggest to establish green development fund 63

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103

operates within the limits imposed by natural resources, ecosystems, and planetary boundaries.¨64 Interestingly, no other major country has made such a strong commitment to a green transition as yet, through many economies, including the USA, are now considering similar development options as new commitments for dealing with climate change are being made in preparation for the Paris meeting at the end of 2015. Such changes will require a shift to green industries, green infrastructure development and eco-cities. In the case of China the question does not seem to be whether China can afford to make such a switch, but rather whether or not viable institutional arrangements to make these investments can be developed. The rules which are governing finance, to a large extent determine through incentives and disincentives the behavior of investors and public actors. If green investment is rewarded, this change will come faster. If they continue to reward brown investment, they will be just an obstacle to a transition to the green economy. The greening of finance will become more important for China. It will need to happen through green credit, green securities, and green insurance. Despite many policy directives that support such change, some constraints still need to be overcome to set incentives and disincentives right. Short-term focus on low hanging fruits needs to be re-oriented towards green development projects, even if higher upfront investment and slower returns are implied. Both central and local governments, the government and private sector will need to agree on these green development paths. Entering the Green Development Path ¨In the world of international finance there is a growing amount of action to support green finance. The following consensus has emerged: 1.

Better information is crucial for embedding sustainability considerations in risk assessment and investment decisions, with many initiatives focused on transparency, metrics, indexes, incentives, reporting and governance, notably in banking and stock markets.

Systems, competencies and culture of financial institutions need to reflect environmental and social responsibilities in ways that inform decision making. This calls for increased action by financial institutions, as well as by central banks and regulators, to require enhanced and demonstrable environmental risk management across not only the banking community but also pension funds and insurance companies, as well as public investment vehicles such as development banks and sovereign wealth funds.

Assets at risk of becoming ´stranded´due to high environmental costs need to be more effectively monitored, with suitable precautionary measures taken by both financial institutions and, potentially, central banks and financial regulators concerned with financial stability.

Greening debt markets through product innovation (such as green bonds), robust and unified standards, regulation and, potentially, tax incentives can significantly advance long-term, green investment flows and associated outcomes.

Monetary policies that have fundamental influences on the economy and society as a whole need to be designed to take greater account of environmental and broader sustainable development objectives.

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A systematic approach to developing green finance in China through policies targeted across these and other areas could both unlock domestic opportunities for green economic growth and catalyze related developments internationally.¨65 Figure 43: Green Finance Policy Development to promote energy pricing reforms

Source: PowerPoint presentation of thesis: Asseline, F. 2010. Green Infrastructure Finance in China: Foundations for Low-carbon Growth. MBA thesis. School of Economics and Management, Tsinghua University. Beijing.

¨The challenge to invest in the environment as a driver for economic growth is to be able to accurately measure the costs of abated pollution relative to a business as usual scenario, where the environmental externalities produced by a polluting infrastructure project are not taken into account. For developing countries this means leapfrogging to a new development model under which pollution is accounted for, which comes at a cost that not many can afford to pay. In Western developed countries only Denmark managed to grow its GDP at 2.3% per year (which was above the EU average) from 1990 to 2006, while reducing its carbon dioxide emissions by 14% over the same period. As a way to counterbalance the effects of the current global financial crisis a number of stimulus packages included public investments in green infrastructure, particularly in the areas of public transport, low-carbon energy production, smart electricity grids, and water and sanitation.¨66 The challenge to invest in the environment as a driver for economic growth is to be able to accurately measure the costs of abated pollution relative to a business as usual scenario, where the environmental externalities produced by a polluting infrastructure project are not taken into account. For developing countries this means leapfrogging to a new development model under which pollution is accounted for, which comes at a cost that not many can afford to pay. China’s stimulus package includes the largest green stimulus program of any country, accounting for almost 40% of the total $586 billion package. Figure 44: Internaitonal comparision of Green Investments as part of total stimulus packages

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Cited in: Asseline, F. 2010. Green Infrastructure Finance in China: Foundations for Low-carbon Growth. MBA thesis. School of Economics and Management, Tsinghua University. Beijing. p. 5.

Newly published “Guidelines on Establishing Green Financing System” On 31st August, 2016, The People's Bank of China, Ministry of Finance, National Development and Reform Commission, Ministry of Environmental Protection, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission jointly issued the "Guidelines on Establishing Green Financial System ". The Guidelines emphasizes that the main purpose of building a green financial system is to mobilize and motivate more social capital to invest in the green industry, while more effectively curbing polluting investment. Building a green financial system will not only help accelerate Chinese transition to green economy, but also help promote technology development in environmental protection, new energy and energy conservation, and at the same time, accelerate the development of new economic growth and enhance economic growth potential. The Guidelines provided a series of incentives to support and encourage green investment and financing, including measures to support green finance through such measures as relending, specialized guarantee mechanisms, green credit to support fiscal subsidy and the establishment of the National Green Development Fund. This guideline also gives the definition of green finance. It has been defined as support for environmental improvement, climate change and resource conservation and efficient use of economic activities, namely financial services for project investment and financing, project operation and risk management in such fields as environmental protection, energy saving, clean energy, green transportation and green building. Here the “green” standards and criteria means categories of qualifying green projects and assets. Current practice in China67: PBoC endorses specific categories for what is green. The catalogue, endorsed by PBoC, is the most comprehensive guideline for what is green in the Chinese green bond market. It covers climate change mitigation and adaptation projects, such as projects addressing air pollution, to be in with China’s environmental policy priorities. The Catalogue sets up six categories with 31 sub-categories of projects that are eligible for financing. NDRC’s guidelines also defines a list of projects eligible for green bond issuance. The main difference between the two sets of green definitions is that the catalogue endorsed by PBoC provides an exclusive list of what projects qualify for regulatory green bond approval,

PBoC requires issuers to refer to the China Green Bond Endorsed Project Catalogue, an official list of the types of green projects eligible for financing via green bonds. NDRC also issue the green bond guidelines which are largely in line with the catalogue of projects endorsed by PBoC. So via comparison of the two catalogue, we can figure out the definition of the green projects. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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while NDRC’s guidelines aim to highlight specific project types they are particularly encouraging to be financed by green corporate bonds68.

5.1.4

Green Municipal Finance in China

Green Finance stands for the responsibility of the financial sector in supporting the reduction of GHG emissions and creation of a climate resilient economy. It includes all parts of finance such as green banking, green stock markets, green financial ratings, green insurance companies and of course green municipal finance (GMF). GMF is crosscutting through a number of green finance topics such as green banking and financial instruments such as loans, but also when the issuance of green bonds is discussed. Financial instruments have an impact in ecological factors in the sense that what they finance should follow “green” standards and criteria. For GMF it is important to understand how financial instruments can stimulate growth and green behavior of citizens and enterprises. For the local government, GMF means that they will have to consider the environmental factors when using the various financing models for municipal infrastructure projects in the sectors of cleaning energy, green building, waste water management and green transportation. Moreover, GMF also means that the municipal infrastructure projects which qualify for the “green” project categories, they will have more financing instruments beside their traditionally means. Not only the urbanization process and the increasing impact of cities on the environment calls for action, but also the fact that the current financial base of most cities is insufficient. Green municipal finance (GMF) creates the opportunity to capture the need for an urgently required transformation process in municipal finance and link it to environmental necessities. It hooks on to governments’ overall climate and environmental policies linked to international climate targets and is part of the overall green finance family. The important players of GMF in China at central level, the close cooperation between different ministries will be much needed in near future: Table 5: the important players of GMF in China

REGULATOR

ROLE

RELEVANCE FOR GREEN FINANCIAL SYSTEM

CHINA BANKING REGULATORY COMMISSION (CBRC)

Bank credit guidelines and asset-backed securitisation issuance regulations are the mandates of the CBRC.

MINISTRY OF HOUSING AND RURAL URBAN DEVELOPMENT (MOHURD)

MoHURD has the mandate of policy design and guidance for the municipal public utilities like Urban water supply, gas, heating, sewage and waste disposal and so on for local government. The eco and low carbon city development is also one of the important goal of the MoHURD.



PEOPLE’S BANK OF CHINA (PBOC)

PBoC regulate market entry, bonds issuance and liquidity. The PBoC is in charge of open bond market operations and set a “bilateral trading” system. In the interbank bond market, PBoC also regulate the issuance, clearing and settlement of certain bonds (policy bank bonds



the securitization of Credit Asset by Financial Instructions in particular is relevant for green asset-backed securitisation issuance in China The CBRC is also responsible for the green credit guidelines, implemented in 2012, which are relevant for green bonds, particularly in terms of green standards69 Eco low carbon city development is in accordance with the green development The eco low carbon city development will need lots of green investment that MoHURD will work with other financing departments closely to guide the municipal government for their low carbon infrastructure financing. PBoC through the re-lending to support green finance development. The term "re-lending" here should be understood in a broad sense. It can be the central bank relend to commercial banks with lower interest, it can be to support commercial banks to buy green bonds or green

Road Map for China: Green Bond Guidelines for the next stage of Market, the first in the series of four 2016 discussion paper issued by the climate bonds initiatives and the International Institute for Sustainable Development on prospects for the Chinese Green Bond Market 69 CSRC General Office Document on Green Credit (2013) No. 185 中国银监会办公厅文件-银监办发（2013）185 号 Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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and PBoC bonds). Moreover, PBoC supervises the credit rating agencies for China’s bond market. PBoC also indirectly regulates medium-term and commercial paper issuance through National Association of Financial Market Institutional Investors (NAFMII)



MINISTRY OF FINANCE (MOF)

NATIONAL DEVELOPMENT AND REFORM COMMISSION (NDRC) NATIONAL ASSOCIATION OF FINANCIAL MARKET INSTITUTIONAL INVESTORS (NAFMII)

CHINA SECURITIES REGULATORY COMMISSION (CSRC)

MoF

examines the qualifications of bond underwriters, the securitization of credit assets, and bonds’ custodial arrangements across markets. Besides, MoF and State Taxation Administrations set rules about the tax exemption on interest revenue from government bonds. MoF sets government bond issuance levels, which are only constrained by the debt ceiling, set by the National People’s Congress annually. Up unitl 2014, MoF also issued bonds on behalf of local governments, however, this has changed since the pilots for municipalities to issue bond directly. The NDRC supervises the issuance of enterprise bonds. NDRC has moved to tighten the requirements for corporate bond issuance (unlisted companies, mostly SOEs)

NAFMII aims to propel the development of China OTC financial Market, which is composed of inter-bank bond market, inter-bank lending market, foreign exchange market, commercial paper market and gold market. The membership of the NAFMII includes policy banks, commercial banks, credit cooperation bank, insurance companies, securities companies, fund management companies, trust and investment companies, finance companies affiliated with corporations, credit rating agencies ,accounting firms and companies in the non-financial sectors, currently they has about 2000 members. NAFMII regulates the issuance of medium term notes and commercial paper. NAFMII operates under the authority and delegated power from the PBoC. CSRC has the mandate to regulate the exchange bond market, where mainly listed companies issue bonds (corporate bonds), CSRC also regulates the issuance of stocks and any other securities issued by listed companies. Besides, CSRC also regulate the exchange, securities registration and settlement organizations, as well as rating agencies and legal services

  



  

 



credit asset-backed securities, and it can also be mortgage supplementary loans. Keep track and assessment on the incentive and regulatory policies with timely adjustment and improvement. Strengthen the construction of financial information infrastructure, promote the sharing of information and statistical data, establish and improve the relevant analysis and early warning mechanism, and strengthen the supervision and evaluation of the use of green financial funds.70 Improve green financial-related regulatory mechanisms to effectively guard against financial risks. Green-asset backed securitization Preferential tax policies for green bonds fiscal subsidy to the green project by MoF

NDRC has the mandate to promote agendas for sustainable development and ecological improvement in bond markets Disclosure relevant for evaluation green credentials of green bonds Issue the green enterprises bonds guidelines NAFMI has issued in 2015 a practical handbook on municipal bond financing. This handbook signals that an appraisal of bonds needs to be undertaken, and that standards need to become measurable and comparable. European experiences of green projects may be the most advanced available at the moment; there is no global standardization of greenness yet. NAFMI plans to roll out its own tools in the near future. Currently, in early 2016, it has issued about 200 million RMB in green financing. NAFMI is aware of the need to align its green products with the PBoC guidelines.

CSRC is responsible for the green IPO developments CSRC can drive green bond integration with reforms on foreign investor quotas and rules and procedures around corporate issuance. For stock market： prioritizing the support to the financing and refinancing for listed companies with green business The CSRC also emphasized

On 1st of September, 2016,Xinhua News Agency interviewed Mr. Chen Yulu- the vice governor of PBoC. http://www.gov.cn/zhengce/2016-09/01/content_5104124.htm Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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offered by law firms specialized in securities issuance. The CSRC regulates the foreign investor’s quotas alongside the state Administration of Foreign Exchange (SAFE). The CSRC sets the overall quotas for the QFII and R-QFII programs, and regulates which investor entities will be licensed to access these quotas. For the licensed entities, SAFE determines the individual investment quotas under the programs.

CHINA INSURANCE REGULATORY COMMISSION (CIRC)

CIRC will promote the development of chemical industry, metal smelting and other six industries of environmental pollution liability insurance risk assessment standards, and gradually improve the environmental pollution liability insurance technical specification system.



environmental standards during the listing review For bond Market: the CSRC will support the regulators to develop uniform, clear and authoritative norms and standards, such as the definition of green bonds, the use of funds, information disclosure requirements, project screening. For the investment: CSRC will improve the green stock index system, develop a series of index and characteristic index, at the same time encourage the domestic asset management institutions to develop various forms of green stock and bond index investment products71 To develop green insurance

Source: Yao Zhuo, EC-LINK, condensed on the book “Growing a Green Bonds Market in China”- key recommendations for policy makers in the context of China’s changing financial landscape published by Climate Bonds Initiative and iisd, Spring, 2015

Chinese central government is gradually realizing that the green development is an important issue, and the green investment for building eco-low carbon city is crucial to promote the green development in China. According to Ma Jun, the chief economist of PBoC: an annual investment of at least RMB 2-4tn (US 320-640 bn) will be required to address green investment in China, of which 85% is expected to come from the private sector72. The above mentioned important players are striving to build a comprehensive green financing system to find a sustainable financing solution to get fund not only from public sector but also from private sector.

On 1st of September, 2016 ,Xin Hua News Agency interviewed Mr. Ma Xianfeng, Vice president of China securities financial research academy of CSRC, http://www.gov.cn/zhengce/2016-09/02/content_5104877.htm 72 http://finance.china.com.cn/money/bank/yhyw/20160317/3631992.shtml Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Figure 45: Typical Sectors coverd by GMF

Green Municipal Finance(Sector)

Municipal Finance

Green /low carbon/clean public transport

Green buildings

Clean energy

Water supply/waster water

Drainage and flood control

Solid waste management

Green Finance

Source: Yao Zhuo, EC-LINK

Green/low carbon/ Clean Public Transport:       

Railway transportation Urban rail transit Public urban and rural transportation Waterway transportation Clean fuel New energy automobile Internet application on transportation

Green Buildings: 

Technology improvement for energy saving and emission reduction in the buildings

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Clean Energy:       

Wind power generation Solar Photovoltaic (PV) power generation Smart grid and energy internet Distributed energy resource Solar thermal application Hydropower generation Other new energy application

Water supply/ Waste water:  

Water saving and unconventional water use Recycling, processing and utilisation of water

Drainage and flood control: 

Environmental restoration project

Solid waste management:     

Redevelopment and integrated utilisation of tailings and associated mine by-products Recycling and utilisation of industrial solid waste Recycling, processing and utilisation of renewable resources Remanufacturing of electromechanical products Recycling and utilisation of biomass resources

Source: Yao Zhuo, EC-LINK

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5.2 Good Practices - Illustrations The prospects for green venture capital and private equity financing in China. Green asset financing is defined as all funds invested in green generation projects, whether from internal company balance sheets, debt finance or equity finance. The category excludes refinancing and short-term construction loans, and asset financing typically is associated with the installation of clean energy equipment and generating capacity. In 2009 China led the way in asset financing with investments of $29.8 billion, which represented 86 percent of its total green energy financing.73 Public market financing in the green sector includes all money invested in the equity of publicly traded companies developing renewable energy technology and clean power generation. Public market finance is typically associated with the scale-up phase, when companies are raising capital in public stock markets to finance product manufacturing and roll-out. Strong IPO activity occurred in China in the last 10 years to finance growth in manufacturing capacity. The successful IPO of the Chinese solar company Suntech generated investors‘ interest and many more solar IPOs have followed with no sign of a weakening pipeline. Green venture capital (VC) or private equity (PE) includes all the money invested by venture capital funds in the equity of companies developing renewable energy technology. In general, venture capital is invested at the innovation stage, when companies are proving the market potential of goods and services. Venture capital and private equity financing are closely linked with technology innovation and development. In China the VC/PE space is very crowded with many funds chasing few deals, competitive advantage does not last long because other companies will quickly enter the market and lower the potential returns. In the power generation market, a private company will quickly get squeezed by SOEs and see returns approach zero. Despite this backdrop, current activity seems to indicate that opportunities will continue to flourish. The Chinese Cleantech market regularly makes headline announcements on VC investment in the electric vehicles market or in the solar market. Tool MF 2 Figure 46: Prospects for Green Venture Capital and Private Euqity Financing

Municipal Environmental Exchanges. Three environmental exchanges have been set-up as pilot schemes in China in order to explore on a pilot basis the feasibility of emissions trading. The Pew Charitable Trust. 2010. Who‘s Winning the Clean Energy Race? Growth, Competition and Opportunity in the World‘s Largest Economies, G-20 Clean Energy Factbook, Washington D.C. 73

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One was set-up in Beijing, one in Shanghai, and one in Tianjin. In August 2008 the China Beijing Equity Exchange (CBEEX) was founded by the China National Offshore Oil Corporation, the China Guodian Corporation, and the China Everbright Investment management. The exchange was set-up with the approval of the Beijing Government and it recently released its first standard for a voluntary greenhouse gas offset. The standard (named Panda Standard version 1) was developed with Europe‘s largest carbon credits exchange, Blue Next, and aims to provide transparency and credibility in the nascent Chinese domestic voluntary carbon market. The Beijing municipal government has named Dongcheng district a low-carbon economic zone and calls for the further development of the CBEEX, notably under a technical assistance initiative funded by the Asian Development Bank.74 Tool MF 2 Subsidies for environmental performance. ¨The central government allocated more than 158.6 billion yuan ($25.4 billion) in 2013, up from 2.3 billion yuan in 2001, to cover eight major areas such as forests, grasslands, rivers and seas… Eco-compensation seeks to compensate suppliers for resource consumption or pollution in the ecosystem, and to punish polluters through methods like fiscal transfer payments, direct government allocations, and environmental taxes and fees… Eco-compensation has promoted environmental protection in recent years, he said. More than 6.1 billion yuan has gone to forests in 2013, as China has witnessed a forestation increase of 2.49 million hectares, and the amount of land with water and soil erosion was reduced by 57,000 square kilometers. ´Eco-compensation has fueled the growth of environmental industries and improved people's livelihoods in some regions´… The lack of systemic policies poses some risks for future development. And the compensation standards are low, making the incentive for people to protect the environment less effective ¨75 Tool MF 2 Innovative green pricing mechanism: Shanghai Green Electricity Scheme. In 2006 the World Bank supported the creation of an Energy Conservation Center in the city of Shanghai and looked at the possibility of developing a green electricity scheme there. The scheme was named ―Jade Electricity‖ by the Shanghai municipal government and allowed consumers to purchase, on a voluntary basis, part or all of their electricity from renewable energy sources. Participating customers paid a premium on their electric bills to cover the incremental cost of the additional renewable energy thus contributing to making the city‘s electricity portfolio more sustainable and to reducing local air pollution. The program initially supported only wind and photovoltaic energy as renewable-based sources. In close cooperation with the Shanghai Municipal Government, the Word Bank supported the preparation of a municipal decree and implementation plan to give texture to a legal framework to develop a market for green electricity. In Shanghai, electricity prices are set by user type, time of day, and season. Shanghai authorities have the mandate to adjust prices in order to influence demand and the Shanghai Municipal Electric Power Company (SMEPC) is in charge of the centralized power dispatching in Shanghai. At its launch in 2005 the project enlisted 14 large electricity-consuming companies to commit to buying a total of 6.54 GWh of renewable electricity annually. With this critical initial demand level ensured, the scheme was subsequently able to attract additional customers including businesses of various sizes and residential households. Generally, green electricity products are designed with two main categories of target consumers in mind: households and non-residential consumers. Non-residential consumers include commercial, industrial, educational and Government consumers. Some companies target residential consumers, while others focus on a specific segment of the non-residential consumer market, such as colleges and universities or large industrial users with high credit ratings. Customizing renewable electricity products to meet the needs of large, non- residential consumers Asian Development Bank. 2010. Peoples‘ Republic of China: Study on Beijing Green Finance Development Strategy, Technical Assistance Report, ADB, September 2010, Manila. 75 Payouts are key move in going green, China Daily, 2015-06-27, http://www.chinadaily.com.cn/m/guizhou/201506/27/content_21119250.htm 74

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encourages the development of renewable electricity products that meet the needs of both the renewable electricity vendor and the purchaser. This ´tailoring‘ of green electricity products is not practical for small residential sales but in Shanghai the World Bank decided to include households as target consumers in order to test buy-in of the Chinese individual consumer in such a product. Positive participation in the scheme would signal potential to replicate the scheme in other Chinese cities. Transparency is an important aspect of any green electricity plan. This means that consumers must not only receive the information required to make an informed decision to buy green electricity, but that they must at least be annually assured of the content in their product. To achieve this, frameworks often specify which information on the green electricity product needs to be provided to the consumers. This includes pricing methodology. The price of a green electricity product includes the cost of delivering the product, along with a profit margin. The cost of delivering electricity comprises the cost of generation, transmission, distribution, sales and marketing. Assuming that the cost of transmission and distribution of renewable and conventional electricity are the same (this is usually a reasonably fair assumption to make), the difference in the cost of delivering conventional and renewable electricity is the difference in generation or ´fuel cost‘and the cost of selling and marketing. This difference is referred to the incremental cost of renewable electricity. The cost of delivering a green electricity product that comprises some share or amount of renewable electricity and conventional electricity can be calculated in two different ways: (i) The cost of transmission and distribution, and the fuel, sales and marketing cost of conventional electricity for the full delivered amount plus the incremental cost of the renewable energy share or amount (incremental cost pricing); or (ii) the cost of transmission and distribution for the full amount plus the fuel, sales and marketing cost of the conventional share or amount plus the fuel, sales and marketing cost of the renewable electricity share or amount (fuel cost pricing). The drawback of the first pricing mechanism is that if the incremental cost of renewable electricity is not readjusted at regular intervals, the consumers will pay too much for their green electricity during periods when the cost of conventional electricity increases, and will pay too little with decreasing costs in conventional electricity. In particular, consumers buying a 100 percent renewable electricity product would feel wronged if the price of electricity increased along with increases in the fuel costs for conventional electricity. Therefore in Shanghai the World Bank recommended an incremental cost pricing method with reassessment of the incremental cost at regular intervals. In terms of product offered to consumers Jade Electricity is a so-called delivered electricity-based product that is offered in blocks of 100 percent renewable electricity. Consumers will, in general, purchase two products: they buy a predetermined amount or blocks of green electricity (Jade Electricity), and the balance of their consumption is ordinary electricity. The product is a delivered electricity-based product because the product is associated with delivering the physical electricity. Consumers buy Jade Electricity from the same vendor from whom they buy their normal electricity. For a percentage of electricity consumption-type products, the incremental cost of renewable electricity would be averaged over the total electricity consumption. For a block-type product, the incremental cost per kWh of renewable electricity needs to be provided. In other words the pricing mechanism we adopted for Jade Electricity is that of the existing tariff plus a changing premium that is calculated on an annual basis. The premium of Jade Electricity (in Yuan per kWh) is the total annual incremental cost divided by total annual renewable electricity production. The incremental cost is in general different for each production facility. It is calculated as the difference between the average grid-connected cost of renewable electricity and the cost of electricity, excluding transmission and distribution, for the whole municipality. The price of Jade Electricity is subject to approval by Shanghai Municipal Government pricing authorities. It is important to note that the purchase of Jade Electricity will not affect the current end-users‘ tariffs. When the World Bank launched the scheme in 2005, the approved premium for Jade Electricity was 0.53 Yuan per kWh. This made Jade Electricity about twice as expensive as ordinary electricity. While the premium to be paid may seem high in value, renewable electricity represents only a small part of total electricity consumption; hence the Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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impact on the customer electricity bill remains very limited. Shanghai annual electricity consumption will soon surpass 100 TWh per year to be compared with the current green electricity consumption of 6.54 GWh per year (less than 0.01%). The scheme nonetheless absorbs the entire renewable electricity resources available to the Shanghai Municipality (wind and solar photovoltaic). The Shanghai scheme has now spread to other Chinese provinces. Renewable energy generation is growing exponentially nationwide in China, supported by feed-in tariffs for selected grid-connected renewable energy technologies, ambitious national political and technological targets, and localization requirements to develop local manufacturing capability. Grid reform supporting the introduction of smart grids with better dispatch capacity for electricity generated by renewable energy sources (intermittent generation in the case of wind energy) will help develop markets and encourage the development of green electricity schemes at national level. In 2006 the Chinese national renewable energy law introduced a mandatory market share (MMS) mechanism by which provincial utilities are required by law to buy a certain share of their electricity (10-15% in the case of Shanghai) from renewable energy sources. This opens new ground for the future generalization in China of green electricity pricing schemes. Tool MF 2 Green finance to develop low-carbon cities - The Urban Development Investment Companies. China‘s urban transformation in the last few decades has been unprecedented. At the core of this transformation is China‘s ability to invest in urban infrastructure ahead of demand. In future years, the challenge will be to invest in green infrastructure, and in many respects already, China is anticipating demand for low-carbon cities. Since the early 1990s the Urban Development Investment Corporations (UDICs) have played a key role in helping the local governments build high quality infrastructure at an unprecedented pace. The UDIC model offers the local governments a corporate structure under the Company Law of the Peoples‘Republic of China to marketize the financing, construction and operation of municipal infrastructure. While the local governments have utilized the UDICs to build the municipal infrastructure over the last 10-15 years, the financial position of the UDICs appears to have steadily declined over the same period. The financial crisis has further elevated the importance of an appropriate mechanisms for managing UDIC borrowing since local governments are expected to heavily utilize the UDICs to mobilize the necessary resources they will need to make their contributions towards the 4 trillion RMB economic stimulus package announced by the Government of China. There has been much debate about the bank loans to UDICs, widely regarded as one of the financing risks to the Chinese economy. UDICs resemble the special purpose vehicles developed in the United Stated or in Western Europe; they have played an important role in stimulating the Chinese economy and helping it recover from the global financial crisis. The Shanghai Construction Investment Development Corporation (Shanghai Chengtou) has initiated an innovative green financing scheme by proposing to on-lend bank loans to finance green projects. This initiative, for which the World Bank has provided technical assistance, has not yet received municipal clearances and has proven difficult to structure. This would appear to represent a key avenue to explore for future green municipal financing. Tool MF 2 Shanghai Pudong Development Bank Lending for Green Building. The Asian Development Bank (ADB) has been providing CNY300 million in partial credit guarantees to Shanghai Pudong Development Bank (SPD Bank) to support private-sector financing of energy-efficient buildings across the People’s Republic of China (PRC). SPD Bank is the first Chinese partner in a program set up by ADB to encourage financial institutions to lend to companies seeking to retrofit old buildings so that they use less energy or to construct socalled green buildings which are designed, constructed, and maintained to optimize energy and water efficiency over the buildings’ lifespan. Retrofitting buildings typically leads to energy savings of 20%-40%. Under the CNY800 million Energy Efficiency Multi-project Financing Program, ADB is partnering with Johnson Controls, a private sector energy management Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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company listed on the New York Stock Exchange. Johnson Controls identifies buildings with energy savings potential while ADB shares the project credit risks with the financial institutions. The PRC government is keen to reduce the greenhouse gases that have accompanied the country’s rapid rise in energy consumption in recent years. Given the PRC’s rapid urbanization, improving the energy efficiency of buildings will help significantly in cutting the gases that contribute to climate change. However, companies have found it hard to access the finance to do that given they can offer little collateral to back their loans, while banks themselves have little experience in project finance for energy-efficiency projects. “By sharing credit risk with our partner bank under this program, we aim to ease the financing bottleneck and expand critical private sector investment in energy-saving green buildings in industry, commercial, and also social infrastructure, such as sectors schools and hospitals in the People’s Republic of China,” said Hisaka Kimura, Senior Investment Specialist in ADB’s Private Sector Operations Department. “Doing that will have a long-lasting and cumulative effect on the PRC’s bid to slash greenhouse gas emissions.” SPD Bank, listed on the Shanghai Stock Exchange, was the first domestic bank in the PRC to offer a full range of green credit solutions to companies. “SPD Bank has declared that it will build itself into the first low-carbon bank in the PRC, guided by an innovation-driven strategy,” said Liu Xinyi, Executive Vice President of the bank. Recognizing the huge potential of green construction in the PRC, SPD Bank is supporting cooperation with ADB to boost the development of green buildings using innovative finance.” As a responsible corporate citizen, we will try our best to contribute to the sustainable development of our society,” Mr. Liu said. Michael Harris, Vice President and Managing Director, Global Energy Solutions of Johnson Controls Building Efficiency Asia said: “The PRC’s 12th Five-Year Plan’s Energy Saving and Emission Reduction Plan makes energy saving and emissions reduction the focus of development in the construction, industry, and transportation sectors. We are pleased to work with ADB and SPD Bank to work toward a lowcarbon economy, contributing our expertise in the operation of energy efficient, sustainable buildings.” 76 Tool MF 2 The Beijing Green Finance Development Strategy. The Beijing municipal government has an ambitious strategy to position Beijing as an international financial center for green finance. The Beijing municipal government proposed the development of a Beijing pilot carbon finance district which will be a hub for carbon finance and green finance transactions in China. The pilot carbon finance district is to be located in Beijing‘s Dongcheng district, which has been designated a low- carbon economic zone. The Beijing municipal government plan also calls for the expansion of the China Beijing Environment Exchange (CBEEX) into a major exchange for carbon finance products. The creation of the pilot district and a major exchange will promote the growth of environmental finance business. Increased financial transactions and innovations, in turn, will finance activities that will lead to reduced greenhouse gas emissions. The Asian Development (ADB) has been assisting the Beijing municipal government in achieving its emissions reduction target through the development of carbon finance. The study developed a road map for the establishment of the carbon finance center in Beijing and policy recommendations to relevant government agencies, such as the National Development and Reform Commission, China Banking Regulatory Commission, China Securities Regulatory Commission, People‘s Bank of China, and the Ministry of Finance.77 Tool MF 2

ADB Press Release. Manila. 16 May 2011, cited in Lindfield, M. Steinberg, F. (eds.) 2012. Green Cities. Urban Development Series. Asian Development Bank. Manila. http://www.adb.org/publications/green-cities 77 Asian Development Bank. 2010. People´ s Republic of China: Study on Beijing Green Finance Development Strategy. Technical Assistance Report. ADB. Manila. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Figure 47: Greening of the Economy to Increase Growth

Source: Bapna, M. 2016. Golden opportunity to embrace green growth. China Daily. 17 March 2016. http://www.chinadaily.com.cn/opinion/2016-03/16/content_23887655.htm

5.3 Policies and Standards 5.3.1 Green financial policies and regulations During the years 2007 and 2008 China‘s Ministry of Environmental Protection (MEP) has initiated a series of green finance policies ushering-in a new way of addressing environmental degradation in China. Credit restrictions placed on environmentally adverse investments were introduced via the Green Credit policy of July 2007 regulating bank lending. Since then there has been sizeable progress in the development of green finance in China, including the creation of regulations, internal bank compliance mechanisms, and the introduction of initial public reporting requirements.78 The green finance policies launched in 2007 were part of a wider architecture of innovative environmental principles embodied in the 11th Five-Year Plan. These principles were designed to include environmental impacts in the finance sectors, to control pollution from specific high-risk industries, to curve energy consumption and to promote clean technologies. A set of broad principles were coined to express these reforms. The ―three simultaneities (三同时)― policy referred to the need to integrate the potential adverse environmental impacts of a project from its inception stage, instead of having to deal with consequences after the project is implemented. This environmental due diligence or safeguards has been requested by development Banks for the development of all their investment projects worldwide, and has been integrated in the policies of the MEP in China. Also, the MEP coined the term ―liang gao (两高)― an expression now widely used in China to refer to a group of 14 particularly polluting and energy intensive industries. This group includes notably thermal power, steel and iron production, cement, aluminum, coal extraction etc. A third guiding principle which received wide resonance in nation wider was issued by the National Development and Reform Commission (NDRC) and is known as ―Support the Larger, Restrict the Smaller‖ – a policy introducing a practice of shutting down small thermal generation production units when and where larger units are installed. Larger plants are more energy efficient and their electricity is distributed to consumption centers via substations, thus preserving populations from living close to smaller generation units. To reinforce these Chan, M. and Matisoff, A. 2008. The Green Evolution, Environmental Policies and Practice in China‘s Banking Sector. Friends of the Earth. November 2008, Washington D.C. 78

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messages politically, China‘s former State Environmental Protection Agency (SEPA) was elevated to full cabinet ministry status in March 2008, and became the Ministry of Environmental Protection (MEP). The new set of green policies issued by the MEP were first applied to Chinese banks, under what is known as the green credit policy. Tool MF 2 The green credits policy regulating bank lending. The Ministry of Environmental Protection (MEP), the China Banking Regulatory Commission (CBRC) and the People‘s Bank of China (the Chinese Central Bank) jointly issued the ―green credit‖ policy in July 2004. By signing an agreement to establish a corporate credit database, they established a ―credit blacklist‖ of companies that did not meet environmental standards established by the MEP. Companies on the black list were barred from loans due to their high energy consumption and related pollution, or due to the environmental risks that they pause. Companies on the black list could be removed from it provided they established to have remedied their environmental violations. The MEP is the institution in charge of establishing the list of companies on the black list and of communicating it to the Central Bank for inclusion on a corporate credit database. The CBRC would then include the listed companies in its compliance and monitoring systems. The CBRC reinforced the green credits policy by issuing two specific instructions on assessing environmental risks in loan applications. The first instruction was issued in July 2007 and entitled Announcement on Prevention and Control of Credit Risks for High Polluting Industries, and the second one, Instructing Opinion on Saving Energy and Reducing Emissions, was issued in November 2007. These instructions encouraged lending institutions to broaden the scope of application of the green credits policy by classifying all projects based on their environmental impacts. This entailed notably limiting lending to the ―liang gao― industries by declining loans or also retracting loans previously extended to polluting corporations. In practice however, the implementation of the green credits policy turned out to have limited effectiveness only. Only minimal amounts compared to the overall size of infrastructure lending were denied access to credit, and only a few companies among the ones black listed were actually denied loans (12 companies out of 38 listed in 20 provinces). 79 Reasons for this shortfall were numerous, first among which the inadequate information collection about polluting corporations at local levels. There is a conflict of interest between the implementation of the green credits policy at national level ensured by the MEP, and its translation in practice at local level where provincial and municipal governments rely on local corporations for their tax base. As a result, companies that ended up blacklisted were so as a result of a subjective rather than an objective process. Because the implementation of the green credit policy relied on local environmental departments, it did not apply to Chinese overseas investments, another important shortfall of the policy. The green credits policy is currently being revised in order to improve its implementation mechanisms at local level via improved training and capacity building and more accurate and objective information exchange. The policy will need to be complemented by a wider array of green finance regulations. Tool MF 2 The CBRC has also issued the "Guiding Opinions on Energy Conservation and Emission Reduction Credit", "Green Credit Guidelines" and "Guideline on Energy Efficiency Credit" to stipulate the policies, management methods, as well as appraisal and evaluation of energy efficiency projects and environmental protection schemes. In 2013, the CBRC issued the "Green Credit Statistics System" which publishes the corporate credit situation of banking institutions, including an assessment of their capacity to service energy-saving and environmental protection projects and service loans, the quality of green credit assets, and the annual capacity to finance energy-efficiency projects through green credit. In the "Guidelines for the Performance Supervision and Assessment of Banking Institutions", CBRC has established parameters for corporate social responsibility.

Tam, M. 2008. China‘s Banks Should Open Up to the World About Green Issues, Green Investments, Vol. II. Greenpeace. p.7, Beijing 79

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Major Chinese Bank says new green policies have consequences for its lending decisions Industrial and Commercial Bank of China (ICBC), the largest bank in the world by total assets, presented the results of what it calls an ‘environmental stress test’ of risks within its lending book for some of its most energy intensive clients.The research has serious consequences for high polluting companies that include some of the bank’s clients. China’s 13th Five-Year Plan, unveiled last week, contains stronger environmental measures than ever before. New national targets include reducing energy intensity (energy consumed per unit of GDP) by 15%, reducing carbon intensity by 18% compared to 2015 and limits on particulate matter emissions from factories. In this context, the bank modelled the impact of possible new Chinese environmental protection policies on the financial performance of its thermal power and cement-producing customers The results reveal the possibility of marked deteriorations in the creditworthiness of some firms over the next two to five years. In particular, for small to medium sized companies in this sector. This has triggered a review of ICBC’s appetite to lend to certain companies and focused its thinking on how it can finance solutions that help clients to mitigate these risks by reducing their environmental impact. Source: Voysey, A. 2016. Major Chinese bank says new green policies have consequences for its lending decisions – new report. https://www.chinadialogue.net/blog/8767-Major-Chinese-bank-says-new-green-policieshave-consequences-for-its-lending-decisions-newreport/en?utm_source=Chinadialogue+Update&utm_campaign=4557faa8eaA_B_TEST_dam_rhino&utm_medium=email&utm_term=0_5db8c84b96-4557faa8ea-46656729

The green insurance policy regulating insurance companies. In February 2008 the MEP and the China Insurance Regulatory Commission (CIRC) issued the green insurance policy. This policy places an obligation on all industries that have significant pollution risks to undertake insurance. Industries targeted by the policy were those with the handling or disposal of high-risk chemicals and dangerous waste products. Over 80% of China‘s large-scale heavy chemicals projects are located near dense urban centers or near environmentally protected areas. This is an important reform that is scheduled to receive nationwide application in 2015. Tool MF 2 There are mainly two kinds of green insurance in the world: The first modality is environmental liability insurance. The United States has formulated a complete liability insurance system for environmental pollution, which mainly includes two aspects: Clarifying the liability of the insured for environmental damage that is legally assumed by the insured due to pollution of water, land or air; and clarifying the liability insurance of management of own land. In addition, the United States imposes a compulsory insurance system on liability for damages that may result from the disposing of toxic substances and waste. Germany's environmental liability insurance system went ahead and has now constructed such standard insurance contracts as “the General Clause of Environmental Liability Insurance”, “the General Clause of Basic Environmental Insurance Liability” and “the General Clause of Environmental Damage Insurance”. These contracts provide reasonable stipulations on the subject of insurance, the risks to be insured, the insurance accidents, the liabilities after the contract, and the series of damages, and could scientifically solve the insurability of environmental responsibilities. The second kind of insurance is climate insurance. Japan's climate insurance can be traced back as early as 1923, when ‘a small insurance law was published. The Japanese government enacted its "Law on Agricultural Insurance" in 1938, and gradually tried to establish the agricultural insurance system. The United States formulated "flood control contract" by the federal government and the specific local government, then local governments formulated the Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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“Waterlogging Management Act” according to the “flood control contract” to reduce “Special flood disaster area”. Munich Re, the world's largest reinsurer, launched the “Munich Climate Insurance Action Plan” to develop a solution to the huge losses caused by extreme weather events, especially in developing countries through the development of micro-insurance Business in developing countries. The United Nations World Food Program announced to start up a $ 28 million adaptation fund to set up "climate risk insurance" for poor farmers to help them secure their crops and their livelihood in Cancun in 2010. China's green insurance started late. The State Council issued "Several Opinions on the Reform and Development of the Insurance Industry" in June 2006, clearly pointing out that it is necessary to vigorously develop environmental liability insurance. The former State Environmental Protection Administration and CIRC jointly issued “the Opinions on Carrying out Environmental Liability Insurance” in 2007, stipulating that liability insurance for environmental pollution is based on the reparation liberty of damages caused by companies to a third party in pollution accidents, and calling for the gradual establishment and improvement of environmental pollution liability insurance system. The China Insurance Regulatory Commission (CIRC) issued “the Circular on Doing Well in the Insurance Industry to Deal with Some Events Related to Extreme Weather and Climate Events Caused by Global Warming” in June 2007, requiring all insurance companies and insurance regulatory bureaus to give full play to the economic compensation for insurance, financial facilities and Social management capabilities to improve the ability to deal with extreme weather and climate events. Former State Environmental Protection Administration and China Insurance Regulatory Commission promulgated “the Guiding Opinions on Environmental Liability Insurance” in February 2008, formally establishing a roadmap for the "green insurance" system. The MEP and the CIRC jointly issued “the Guidance on Piloting Compulsory Liability Insurance for Environmental Pollution” in January 2013, prescribing the range of the pilot industries and requiring local environmental protection departments and insurance regulatory authorities to promote pilot projects to achieve tangible results. The "Environmental Protection Law" revised in April 2014 added in article 52 that the "state encourages and insures environmental pollution liability insurance". The green securities policy regulating China’s capital markets. The green securities policy was issued by the MEP and the China Securities Regulatory Commission (CSRC) in February 2008. The policy is designed to block polluting corporations to raise capital on the stock exchange by forcing them to disclose more information about their environmental record.80 This policy was reinforced by the introduction in June 2008 of a Green Initial Public Offering or ―Green IPO‖ policy document, requiring companies from 13 sectors that fall within the ―Liang Gao‖ framework to undergo an environmental review conducted by MEP prior to initiating an IPO or obtaining refinancing from banks. Under the Green IPO procedure, in addition to its own internal evaluation, the MEP initiates a ten-day pre- IPO period during which external consultations are held to gather public‘s opinions about the IPO applicant. A number of IPO requests, half of the initial 38 that had been screened, were rejected. The added pressure of civil society and non-governmental environmental organizations in the screening process seems an effective tool to make information public and the screening process more objective. Tool MF 2

Reuters. 2008. China Orders Listed Firms to be Greener, Environmental News Network, 25 February 2008

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Current developments in the Chinese banking sector supporting green finance development. The China Banking Regulatory Commission (CBRC) complemented the core three green finance policies described in the previous section by issuing a directive on strengthening the corporate social responsibility (CSR) of financial institutions. This directive or ―opinion on Strengthening Banking Financial Institutions Corporate Responsibility‖ introduces a number of social safeguards to protect clients of financial institutions but also environmental due diligence to ―protect and improve the natural ecological environment. In addition, the CBRC has issued a much needed special instruction to protect Small and Medium-Sized Enterprises (SMEs) from falling victims to too harsh bank lending policies. SMEfriendly flexible policies are essential in order for this innovative branch to not be unduly penalized by regulations and their administration, which places a disproportionate burden on them when compared to big State groups and their interests. The overall policy framework supporting green finance remains frail and piecemeal, and again this backdrop a number of Chinese banks have taken their own individual steps at promoting green finance and green financial products. The China Export-Import Bank signed a memorandum with the World Bank Group‘s International Finance Corporation (IFC) in May 2007 to jointly support environmentally and socially sustainable Chinese investments in emerging markets. This helps correct one of the major shortfalls of the green credits policy, which is not applicable overseas. The memorandum signed with the IFC is of particular relevance for Chinese investments realized in African and Southeast Asian markets. The Bank of China applies the restriction on lending to liang gao industries, and it has reinforced it by improving the monitoring and recovering of loans that might have been issued to clients on the black list. In 2007 the Bank of China sponsored green projects proposed by SMEs in China for a total value of RMB 50 billion.81 The Industrial and Commercial Bank of China (ICBC) has enhanced the green finance policies with its own set of regulations and monitoring mechanisms. In particular, it has introduced a ―one-ballot veto‖ procedure when appraising loans for liang gao listed clients. Under this procedure the borrower‘s environmental performance is the first decisive factor. The ICBC also has developed an Environmental Information Labeling System that applies to all its potential clients, not just those listed on the liang gao. This system serves as a credit management mechanism to identify the potential environmental credit risk of clients. 82 The China Development Bank (CDB) discloses its environmental policy in its annual Corporate Social Responsibility reports. The CDB requires Environmental Impact Assessments (EIAs) to be completed at the time of loan appraisal, and the EIAs must be completed by independent evaluators. According to the MEP, the CDB has increased its investments in environmentally-friendly projects by 35% annually over the course of the past three years.83 Overall, among the Chinese banks that have adopted green financing standards, most have focused on the implementation of the green credit policy and on the related liang gao framework. Apart from the ICBC and its Environmental Information Labeling System, most banks have not broadened the normative framework significantly. New products and credit lines were developed via cooperating with international development lending institutions such as the International Finance Corporation (IFC) and the World Bank. Funds provided by the International Bank for Reconstruction and Development (IBRD) can be on-lent from the Chinese Ministry of Finance to commercial banks, as has been done under the World Bank sponsored Energy Efficiency Financing project. Under this project structuring an operations‘ manual reviewed by the World Bank outlines environmental and social due diligence conditions Chan, M. and Matisoff, A. 2008. The Green Evolution, Environmental Policies and Practice in China‘s Banking Sector. Friends of the Earth. Washington D.C., p.39. 82 Cogan, D. 2008. Corporate Governance and Climate Change: The Banking Sector. CERES, The Risk Metrics Group. New York. p. 5. 83 Chan, M. and Matisoff, A. 2008. The Green Evolution, Environmental Policies and Practice in China‘s Banking Sector. Friends of the Earth. Washington D.C., p. 45. 81

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for the funds to be released via commercial lending. Similarly the IFC has developed a program for lending to private sector operators via financial intermediaries in China, and the dispositions of the operations‘ manual need to apply to the transactions, thus providing long-term capacity building on green finance to commercial banks in China. Green tax policies in China. A system of green taxes that would tax more heavily electricity, cement, transportation, and metal smelting is currently being evaluated by industry experts and economists from Tsinghua and Harvard Universities.84 Such a taxation system would induce a shift in the economy towards less-polluting activities and increase the share of the ―green GDP‖ of the Chinese economy thus off- setting impacts on the overall GDP growth. Experts are also considering imposing green taxes on fossil fuels such as coal, oil, and gas, in proportion to their respective environmental costs. This tax would be similar to a carbon tax; it would be applied with more weight on coal, than on gas, which is less carbon intensive. Here also GDP losses will be compensated by gains in the costs otherwise imposed on the environment and peoples‘ health; the tax will also encourage a shift of capital investments towards cleaner and alternative energy production sources for transportation and heat and power generation. A fuel tax is relatively easy to implement but would place a heavy burden on the more fragile segments of society. Taxing sulfur dioxide or other particulate matter is more complex, similar to carbon trading SO2 trading is being pioneered in some Chinese provinces to off-set environmental costs. Tool MF 2 Developing green trade policies. China is currently building what will soon become the greatest and most advanced market in the world for green technologies. It has the fasted growing park of installed renewable energy generation capacity, has invested heavily in green and clean tech from electric vehicles to clean fuels to nuclear energy. China also has a monopoly on rare earth metals that are key ingredients in the manufacturing of high tech products notably magnets for wind turbines or solar powered equipment. A trade argument has been brooding with the USA and Japan on potential export restrictions by China of these rare earth metals in order to protect its internal market. The argument is also made in the US that China‘s subsidies to green industries leads to growing trade deficits in clean energy products. The arguments made might or might not hold, but they certainly are an indication of the growing might of the Chinese inner market for green tech, and of its exportation potential too. On January 1st 2010, the world‘s largest free trade area (FTA) came into effect with China and the ten countries of the Association of Southeast Asian Nations (ASEAN) signing an agreement covering almost 1.9 billion people. This is the third largest such FTA world-wide, after the European Union (EU), and the North American Free Trade Agreement (NAFTA). This agreement with China complements trade areas ASEAN has already established with Australia and with New Zealand. In China the agreement has been praised as a landmark breakthrough bound to lead to easier access to markets in South East Asia, notably for raw materials imports and exports of manufactured goods with the potential to replace dwindling demand from the United States and Europe. On ASEAN side the six original members, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand, will lower the average tariff on Chinese goods from 12.8 percent to 0.6 percent and see the agreement as an opportunity for increased exports and regional integration. By 2015, the policy of zero-tariff rate for 90 percent of Chinese goods is expected to extend to the four new ASEAN members, Cambodia, Laos, Myanmar and Vietnam. Trade intensity with China is high for all emerging East Asian economies, and today they all stand to benefit from China‘s dynamic growth. Growth in the region‘s exports was also to be fueled by the increased demand from China‘s major trading partners. China started to work on implementing a massive stimulus program in light of a rapid deterioration of the world economy. The stimulus focused on developing infrastructure and 84

Cao, J., Ho, M. and Jorgenson, D. 2009. The Local and Global Benefits of Green Tax Policies in China, Symposium: China‘s Environment, May 14, 2010, Harvard University, Boston, MA. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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within this sector, it put most of the public resources affected to the program toward financing green technologies such as renewable energy and electric vehicles. The package has become fully effective and as a consequence China‘s domestic strength has become an important determinant in the recovery of several neighboring countries exporting to China, notably South Korea and Singapore. China‘s exports and imports are now above pre-crisis levels, and China has just overtaken Germany as the world‘s largest exporter. China has now a bigger automobile market than the US and with efforts currently underway, this market is paused to become the biggest green vehicle market in the world within the next decade. The regional and international integration of China‘s green tech market will play an essential role for the future effectiveness of green finance as a global catalyst for green growth, and there is growing consensus on the importance of green finance for future green growth. Tool MF 2 Adopting international standards: the Equator Principles. A number of Chinese banks have come under international pressure to adopt the Equator Principles on project finance for their activities notably on the African continent. The equator principles define a framework for a financial industry benchmark to determine, assess, and manage social and environmental risk in project financing. Project financing is a method of funding in which the lender looks primarily to the revenues generated by a single project both as the source of repayment and as security for the exposure. Even though project finance is not very common in China, the Equator Principles are well known and widely referred to also for domestic transactions. The China Exim bank has adapted their contents to its own operational needs abroad, and some segments of the domestic industry have called for a method of adapting the Principles to the Chinese context. Raise the profile of medium-sized banks. Medium-sized banks such as the China Merchants Bank or the Bank of Shanghai have proven to be effective vehicles to test innovative green finance policies. Because they are more flexible to adapt to new regulations, because they have, for some, participated in on-lending schemes developed by the World Bank or the IFC, and also perhaps because it helps raise their profile to come across as innovators in the green finance sector. Any new legislative framework in China would need to include specific measures to account for the dynamism of medium-sized banks, and include innovative pilot schemes designed for them to implement first. Tool MF 2

5.3.2 Definitions and standards for “green” Till now, there are three kind of guidelines which have a clear identification as what is “green” in Chinese financial industry. They are guidelines on green credit (issued by CBRC), green bond (issued by PBoC) and green enterprises bond (issued by NDRC). To understand those green project will help municipal government to get the hint from the central government that which projects are supported by the financial sector to get fund either from the bank or the bond market. CBRC- green credit guidelines Specific definitions for green credit were issued in 2013 with the notice for green credit Statistical Report from the CBRC, in response to the lacking of clear, operable definitions around what is green at the level of granularity required by the banks under the initial 2012 Green Credit Guidelines. The initial Guidelines only provided high-level suggestion around what investment areas could be considered green: “banking institutions shall promote green credit from a strategic height, increase the support to green, low-carbon and recycling economy” (…) “including environmental and social issues related to energy consumption, pollution, land, health, safety, resettlement of people, ecological protection, climate change, etc” (CBRC 2012). The Green Credit Reporting Instruction document (CBRC 2013) elaborates on this and recognizes green agriculture, industrial energy-saving, solar, hydro and wind power projects Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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and green retrofitting of buildings, amongst others, as asset categories that could be considered green. PBoC- green bond guidelines Green bond, as an economical investment instrument with high mobility and low risk, can effectively enhance the financing availability for green projects, especially those with medium and long term, lower financing cost, and provide investors with a new channel to engage in green investment. Defining criteria and category for green bond projects and establishing endorsed project catalogue is a fundamental work to push forward the sustainable development of the green bond market, and an essential reference for green bond issuance approval and registration, third party assurance, green bond rating and related environmental disclosure. On 22nd of December, 2015, PBoC has announced the NO.39 guidelines on green bond, which marked the official launch of Green bond market in China. The No.39 guidelines also attached an official list of the types of green projects eligible for financing via green bonds. The catalogue, endorsed by PBoC, is the most comprehensive guideline for what is green in the Chinese green bond market lately. Appendix 1 provides an overview of the catalogue endorsed by PBoC NDRC- green enterprises bond guidelines NDRC also defines a list of projects eligible for green bond issuance, which are eligible for green enterprises bond issuance, which are largely in line with the Catalogue of projects endorsed by PBoC. Table 6: An Overview of Green Definitions Endorsed by PBoC and NDRC PBoC: China Green Bond Endorsed Project Catalogue

NDRC Green Guidelines

Categories

Areas

Sub-categories

Energy saving

Pollution prevention control

and

Resources conservation and recycling

   

Industrial energy saving Sustainable buildings Energy management centre Urban and rural infrastructure construction with energy-saving efficiency



  

Pollution prevention and control Environmental restoration project Clean utilisation of coal



Water saving and unconventional water use Redevelopment and integrated utilization of tailings and associated mine by-products Recycling processing and utilization of renewable resource Remanufacturing of electromechanical products Recycling and utilisation of biomass resources Railway transportation Urban rail transit Public urban and rural transportation

 

Circular economy Water saving and unconventional water use



Green urbanization – transport

   

Clean transportation

Bond

  

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Technology improvement for energy saving and emission reduction Green urbanizationenergy saving and environmental protection industry Pollution prevention and control

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    Clean energy

      

Ecological protection and climate changes adaptions

   

Waterway transportation Clean fuel New energy automobile Internet application on transportation Wind power generation Solar photovoltaic (PV) power generation Smart grid and energy internet Distributed energy resource Solar thermal application Hydropower generation Other new energy application Natural ecological protection and protective development of tourism resource Ecological agriculture, husbandry and fishery Forestry development Emergency prevention and control of disaster

 

   

Clean and efficient use of energy New energyhydropower, wind, nuclear, solar, bioenergy, geothermal, shallow geothermal energy, marine and air energy Ecological agriculture and forestry Ecological civilisation demonstration projects Low-carbon industry projects Low-carbon demonstration projects

Resources: Roadmap for China: Green Bond Guidelines for the Next Stage of Market Growth

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5.4 Tools to Increase the Municipal Revenue 5.4.1.1 Property Tax While most Chinese cities have financed a large part of their recent developments through land sales, and transfers of national subsidies, the future may hold many innovations through tax reforms. Property taxes will become indispensable new avenues for municipal finance. The People's Bank of China, China's Banking Regulatory Commission, the State Administrati on of Taxation, the Ministry of Land and Resources, the Ministry of Finance and the Ministry of Public Security have been in discussions about when and how to impose a property tax. According to some participants, all the parties agree that local governments are suffering from a lack of revenue and that the central government has no option but to work out a method of providing them with a stable source of fiscal income. Property tax along with consumption tax, recourse taxes, environmental tax, personal income tax and the change from business tax to value-added tax will be the focus of the reform. The piloting of a property tax in select cities and provinces in recent years-though the tax was never actually implemented, only trialed on a mock payment basis- was considered by many as solution and that revenue from such a tax could serve as a major sources of revenue for local government. But there are various obstacles hindering the implementation of such a property tax, including legal obstacles and disagreements over how to design and calculate the tax. As a new tax item, it needs to be approved by the National People’s Congress, a lengthy process, before it can be issued85. 5.4.1.2 Fiscal Subsidy to Green Project Fiscal subsidy, also known as loan interest discount, in order to support the development of specific sector, the government subsidize the interest of a certain percentage (part or all) for the specific projects in a certain period of time.



The fiscal subsidy has the leverage function. For example, if the loan interest rate of a financial institution is 10%, a project needs 1 billion yuan and the project itself can only bear an annual interest rate of 5%, if according to the market practice, the project cannot obtain commercial bank loan funds. However, if the fiscal interest subsidy policy is adopted, the 5% of interest is bearing by fiscal subsidy, so the bank is willing to lend to the project because of the interest rate of 10%, the project can obtain the loan without increasing the interest expense. Thus, the fiscal payment of only 50 million yuan subsidy can be used to bring up a project amount to 1 billion yuan , leverage up to 20 times, effectively supported the project.



Fiscal subsidy has the incentive effect. Fiscal discount is a government investment behavior, but also a fiscal incentives to the green project. As a means of indirect government investment, it does not paly decisive role in resource allocation in the market, but it mobilizes and direct social capital in to the sector that comply with the national's ultimate goal of promoting green development.



Fiscal subsidy have the advantage of reducing the risk. Unlike fiscal direct investment, which may result in inefficiency or a greater risk of financial loss, fiscal subsidy use a small amount of capital to start project running with the investment from enterprises,

http://europe.chinadaily.com.cn/business/2014-11/03/content_18859677.htm

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commercial banks and social capital. Besides, project investors and commercial banks are concerned with investment efficiency and make effort to control the risk. Based on the above considerations, the Ministry of Finance is using the tools of fiscal subsidy into the field of urban infrastructure project, technology innovation project, energy efficiency building project and environmental protection projects. There are four categories of interest-related fiscal subsidy policy provisions related to green projects, a) the "Interim Measures for the Administration of fiscal subsidy for Central Government Funds", which are formulated by the Ministry of Finance, in order to strengthen the management of fiscal subsidy funds and improve the efficiency of the use of interestbearing funds and the establishment of internal restraint mechanisms; b) the "Management of Discounted Loans for Technology Renovation Projects ", which clearly includes energy saving, pollution reduction, and promote environmental protection projects; c) the "Interim Measures for fiscal subsidy to renewable energy-saving building materials " , it is targeted to renewable energy-saving building materials enterprises; d), "fiscal subsidy to infrastructure for state-level economic and technological development zone", the subsidy is especially targeted to the projects related to waste water management, solid waste management and energy saving. 5.4.1.3 Green Municipal Bond

There are two key goals of the reform of the local debt markets in China. One is the re-financing of existing local government debts. The other is introducing more structured finance features in municipal debt such as revenue bonds, referred to as project-income bonds, and asset securitizations. 86 A new scheme was introduced in 2014 that allows ten wealthy localities in China— Shanghai, Zhejiang, Guangdong province, Shenzhen, Jiangsu, Shandong province, Beijing, Jiangxi, Ningxia, and Qingdao—to issue bonds directly (hereafter called “new scheme”). Previously, bonds had been issued by the Ministry of Finance (MoF) only, on behalf of provinces (mostly 3-to- 5-year bonds). Under the ¨new scheme¨bonds can be issued directly by city governments and provinces (also 3- to-5 year bonds). Since 2011, four local governments (Guangdong, Shanghai, Shenzhen, and Zhejiang) have been allowed to issue their own bonds and two more provinces (Jiangsu and Shandong) were expected to enter the bond market in 2013. The market entry and volume of bond issuance has been carefully controlled by the MoF, and that has increased in 2013 to RMB 70 billion, up from RMB 28.9 billion in 2012. Since 2014 (stage 3), a new scheme is in place which allows issue of bonds directly by local government, and local government are responsible to repay the principals and interest rate:

86Sean

Kidney, Beate Sonerud, Climate Bonds Initiative, Padraig Oliver, Climate Policy Initiative, Spring, 2015 Growing a green bonds market in China Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Table 7: Three Development Stage of Municipal Bond in China Stages Stage 1 (2009 to 2010) Stage 2 (2011-2013)

Issuance body MoF behalf of the local government Local government

Repayment responsibility MoF

Stage 3 (2014 to )

Local government

MoF

Term mostly 3- to 5year bonds mostly 3- to 5year bonds, also 7-year bonds

Volume

Pilot local governments

Increase in 2013 to RMB 70 billon , up from RMB 28.9 billion in 2012

2011: Guangdong, Shanghai, Shenzhen, and Zhejiang 2013: Jiangsu and Shandong Mostly 5- to 109.2 billion 2014: 7- to 10-year RMB Shanghai, bonds Zhejiang, Guangdong, Shenzhen, Jiangsu, Shandong, Beijing, Jiangxi, Ningxia, Qingdao

Source: Yao Zhuo, EC-LINK

The main features of the ¨new scheme¨are its information disclosure and transparency, which will greatly affect the confidence of the investors. Local bonds will need to be covered by credit rating, though data assessment of local governments´financial health and proper banking appraisal procedure will still require clarification. Clarification will also be required about the neutrality and independency of the credit rating agencies. The governance of the local government will need to be more transparent, and balance sheets of local governments be made accessible. Other concerns are the (central government) guarantees in case of defaults of local government payments. These concerns give enough reason for Ministry of Finance (MoF) to control and oversee closely the market entry and volume of bond issue. Local governments will not have autonomy to enter the bond market or be able to decide on the volume of the bond issuance. As since 2015, the local financing from sale of suburban land has been restricted, municipal bonds may become an alternative from of financing for many cities and municipalities, as a substitute for land-based revenues. The volume of the “new scheme” will be limited during the ongoing trial phase. According to the State Council, in 2014, the local fiscal balance was 400 billion RMB. Therefore, the total volume of local government bonds has been set as 400 billion RMB. Up to 109.2 billion RMB will be issued by the ten pilot localities, among which, Shanghai is 12.6 billion RMB, Zhejiang is 13.7 billion RMB, Guangdong is 14.8 billion RMB, Shenzhen is 4.2 billion RMB, Jiangsu is 17.4 billion RMB, Shandong is 13.7 billion RMB, Beijing is 10.5 billion RMB, Qingdao is 2.5 billion RMB, Jiangxi is 14.3 Billion RMB, and Ningxia is 5.5 billion RMB. The rest of 290.8 billion RMB will be issued by MoF on behalf of the local government. The ¨new scheme¨has clear parameters for the types of the bond, scale and volume, issuance processing, pricing as well as trading facility. Thus, the 10 pilot localities have flexibility. The total volume of the new scheme is not comparable to the volume of the local debt, therefore, the municipal bond under the new scheme could not become the main trading product in bond market. Another key question is the requirement to revise the current Budget Law. Since the local government cannot issue the bonds directly under the current Budget Law, it requires special approval by the State Council. If the municipal bond market is to be further developed, the current budget law will become the major barrier in terms of the legal environment. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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In addition to allowing municipal bonds pilots, the State Council has also issued Guidelines to strengthen local Government Debt Management. The ballooning local government debt in China and lack of transparency around debt levels is increasingly a concern for policy makers. Meanwhile, China is encouraging the green development in cities: the state council of China has also published policy for green urbanization. The increasing policy momentum for green urbanization presents an opportunity for green bond issuance to finance this shift. Green bond issuance for green urban infrastructure investment can come directly from municipalities and cities, as the “new” municipal bond scheme above introduced. The overall bond market for local governments bonds is expected to grow rapidly. The growth of significant market for local government bonds indicates a specific green local government bond market sector could be of substantial scale. City affiliated entities, such as utilities and urban transport companies, are also potential major green bond issuers in China. Major reforms in local government financing, facilitating the use of green bonds, can be tailored to green performance standards, for example:  

Allowing a top-up on the quota for green bonds, ensuring local government debt is raised with green development plans or infrastructure; or Mandate a proportion of financing through green bonds, ensuring local government debt is raised with green development at the forefront of capital expenditure.87

5.4.1.4 Green Fund Since 2010, China has vigorously promoted the establishment of a green fund and established a number of policies as incentives. In 2010, the State Council successively promulgated the “Opinions on Policies and Measures for Investment and Financing Supporting the Development of Circular Economy”, “Guiding Opinions of the State Council on Fostering Strategic Emerging Industries” and in 2011 the “Opinions on Strengthening Key Work of Environmental Protection” and other documents that clearly support the development of green industry funds. The emerging strategic industries mentioned in the policies include energysaving and environmental friendly industries, new energy industries and new energy automobile. Under the 12th Five-Year Plan, the NDRC announced “The Plan for EnergySaving and Environmental Protection Industry Development" (16 June 2012). The plan proposes to broaden the channels of investment and to set up an energy-saving and environmental protection investment fund. Since then, in December 2015, the Ministry of Finance promulgated “The Guiding Opinions on Supporting Governmental Investment Funds with Financial Funds to Support the Development of the Industry”, requiring government investment funds to support industries with strong externalities to support small and mediumsized enterprises. On 22 August 2016, the General Office of the CPC Central Committee and the General Office of the State Council issued the "Implementation Plan of National Ecological Civilization Experimental Zone (Fujian)", explicitly proposing support to “all kinds of green development funds and implementing market-oriented operation". Subsequently, on 31 August 2016, the PBC and other seven ministries and commissions issued “The Guiding Opinions on Building a Green Financial System (hereinafter referred to as Guiding Opinions)” which is the first comprehensive government-directed green finance policy framework in the world, and gives the top design of the development of green finance. The fourth part of the states that a green development fund should be set up, and social capital should be mobilized through the government and social capital cooperation (a public-private partnership [PPP] model). The Guiding Opinion stipulates:

Sean Kidney, Beate Sonerud, Climate Bonds Initiative, Padraig Oliver, Climate Policy Initiative, Spring, 2015 Growing a green bonds market in China Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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(i)

(ii)

(iii)

(iv)

Support to the establishment of various types of green development funds and marketoriented operation. The central government has integrated the existing special funds for energy saving and environmental friendly projects to establish the national green development fund to invest in green industries, which reflect the government's guidance and policy signals on green investment. Specifically, with regard to direct financial input, Ministry of Finance mainly provides direct financial support to green industries and has set up a number of special funds in the field of energy conservation and environmental protection such as "subsidies for energy conservation and emission reduction" and "special funds for the development of renewable energy" A number of tax incentives have also been formulated to guide or constrain policies. According to the final accounts of general public budget expenditures in 2015, the expenditure on energy conservation and environmental protection at the central level in 2015 was 40.041 billion yuan, an increase of 16% over the previous year. In 2015, the expenditure on environmental protection was 480.3 billion yuan, an increase of 26% over 2014.In the aspect of green finance development, the central government mainly provides directional support to the end-use of funds to improve the efficiency of capital utilization. For example, interest subsidy loans and forestry loans to oil product quality upgrading projects, etc. The government encourages qualified local governments and social capital to jointly launch a regional green development fund to support the development of local green industries. Support social capital and international capital to establish various types of private green investment funds. The government-funded green development fund should make investment management in a market-based manner on the premise of ensuring the implementation of the national green development strategy and policies. Local governments can modify income and cost risk sharing rules by liberalizing market access, modifying pricing rules of public services, implementing franchising models, implementing taxation and land policies, and supporting projects funded by the Green Development Fund. Support the introduction of the PPP model in green industries and encourage bundling of energy-saving and emission-reduction projects, environmental friendly projects and other green projects with various related high-yielding projects to establish a green feecharging mechanism of public goods. Promote the improvement of laws and regulations which related to PPP of green projects, and encourage all localities to introduce more operational implementation details based on summarizing the existing experience of PPP projects. All kinds of green development funds are encouraged to support projects that operate in PPP mode.88

In recent years, with national policiesâ&#x20AC;&#x2122; vigorous support, a large number of green funds came into being. By the end of 2016, a total of 265 green funds have been set up in the country and registered with the China Federation of Foundation Industries. Of these, 59 are sponsored by local governments and local financing companies with a share of 22%.89 Among the 265 green funds registered in the China Association of Foundry Industry by the end of 2016, 159 were equity investment funds, accounting for 60% of the total; 33 were venture capital funds; 28 were securities investment funds; and 45 were other types of funds.

5.4.1.5 Green PPP

http://gongwen.cnrencai.com/yijian/92291.html Some 21 funds have been established in 2012 or before; 22 funds were established in 2013; 21 funds in 2014; 80 funds are established in 2015; and 121 funds are established in 2016, which shows a clear upward trend. 89

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Green public-private partnerships (PPP) refers to the model where government and social capital cooperate to develop green industries. In recent years, China's green PPP has developed rapidly. The State Council released in November 2014 the “Guiding Opinions on Encouraging Social Investment by Innovating Investment and Financing Mechanisms in Key Fields of Focal Points” and proposed to innovate eco-environmental investments. Based on this directive, the NDRC issued in December 2014 the “Guiding Opinions on Cooperation in Government and Social Capital” which pointed out that PPP can be implemented in projects such as sewage and garbage disposal, water conservancy, resources, environment and ecological protection. Since then, PPP-related policies have been making rapid progress, and environmental friendly projects have become mainstream PPP investments. (1) The Ministry of Finance successively issued the “Notice on Printing and Distributing Operational Guidelines for the Cooperation Pattern between Government and Social Capital (Trial Implementation)”, and “Circular on Regulating the Contractual Management of Cooperation between Government and Social Capital” and “Notice on Printing and Distributing the Interim Measures for the Open Management of Information Disclosure by the Government and Social Capital Cooperation (PPP) Comprehensive Information Platform”, and the PPP operation standard has been gradually formed; (2) PPP mode is encouraged to adopt in environment projects by the State Department in “Guiding Opinions on Promoting Sponge City Construction” and “Notice on Issuing Action Plan of Soil Pollution Prevention and Control”; (3) The NDRC and the China Securities Regulatory Commission jointly issued in December 2016 the "Notice on Promoting the Work Related to Assets Securitization of Government and Social Capital Cooperation (PPP) Projects in the Traditional Infrastructure Sector" which has contributed to attract social capital and improve the efficiency of capital utilization. On 31st August, 2016, The People's Bank of China, Ministry of Finance, National Development and Reform Commission, Ministry of On 31st August, 2016, The People's Bank of China, Ministry of Finance, National Development and Reform Commission, Ministry of Environmental Protection, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission jointly issued the "Guidelines on Building Green Financial System ". The section four of the guideline has point out the support for the green PPP model: “Support the introduction of PPP model in the green industry, to encourage energy conservation and carbon reduction, environmental protection and other green projects with a variety of high-yield items tied to the establishment of public goods nature of the green service charging mechanism. To promote the improvement of green projects related laws and regulations of PPP, to encourage localities in the summary of existing PPP project experience, based on the introduction of more operational details of the implementation. Various types of green development funds are encouraged to support projects that operate in PPP mode.” PPPs are particularly suited for infrastructure projects and public services that fall under government responsibility and are manageable as marked-based operations. A variety of projects including waste treatment facilities, water reticulation and conservation, rail and urban transit networks maybe suitable. Transparent regulations governing infrastructure investment are essential for providing a stable framework for PPPs. However, the sheer scale of PPPs the government envisage rolling out to finance infrastructure is massive. In December 2015, NDRC announced a list of 2,125 projects to be funded and constructed through public private partnerships(PPP) with a total value of RMB 3.5 trillion (USD 531.9 billion). It is an indicator of the size of opportunity if green PPPs were to be adopted on a widespread basis. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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In the past public-private partnerships (PPP) were the most prominent form of leveraging private sector finance. 90 A PPP is a partnership between the public and the private sector in which the private party provides a public service and assumes substantial financial, technical and operational risk. The government or in this case the municipalities contribute often by providing the asset, the land or sometimes become equity partners. The benefit of such arrangements which often take place e.g. in municipal water or energy projects that the public sector does not need to make any financial investments and that the public service is provided with the efficiency of the private sector. Common risks are the quality and quantity of services the private sector produces and the payment for the services the private sector is providing which is often higher than the tariffs or fees the infrastructure project is producing. Conventional PPPs are based on concession contracts such as BOTs (build-operate-transfer) or BOOTs (built-own-operate-transfer) and other forms determining the role of the private sector. As opposed to traditional public sector procurement, where the private sector simply executes as per public sector orders, in PPPs the private sector bids for a certain project and the role they play at different stages (design, construction, completion, operation etc.). For this the private sector receives a fee over the lifetime of the contract. As mentioned above conventional PPPs rely on concession contracts where the private sector bears the demand risk. Therefore the interest of the concessionaire is to meet the demand and even outperform it. The more the concessionaire produces, the higher the revenues will be. Subsequently the conventional PPP contracts do not set the right incentives for environmentally conscious behavior. PPPs are worldwide used and the general experience is positive, if the pitfalls such as high transaction costs, length and inflexibility of contractual structure and the complexity of the project structure are managed well. To green PPPs the objectives must change. A good example is for example to include energy efficiency obligations (EEOs) for utilities are set qualitative targets such as the amount of water that need to be reused. The PPP arrangement as such remains, but the objectives are formulated in a way that internalizes externalities. EEO is part of the so-called demand side management, whereby energy companies and utilities are obliged to fund measures that lead to energy or carbon reductions. A penalty will be levied on the company if energy savings targets are not met. In other words, utilities are made to make their clients save energy. For example energy companies give or finance advice to their customers how to save energy and install the relevant measures. These actions are measurable and can be verified. Subsidies may be provided initially for each kW/h saved. The results of such actions are quantified in energy saving accreditations back to the Energy Company or so called White Certificates. They state how much energy has been saved and can also be produced by third parties such as energy service companies and other firms like insulation companies. In some countries these certificates can be traded, helping the energy company to meet the targets. White Certificates can be issued for electricity savings, gas savings and other fuel source savings depending on government objectives. Some forms of EEOs are also called on-bill finance because the utility takes the (high) upfront costs and the customer is repaying the investment with the energy bill. To sustain EEOs, energy companies can be supported by local governments through subsidies to incentives the clients. Subsidies can range from 0-100% contingent for example on the necessity to cushion off social adverse effects. The customer has to pay at least a part of the EE investment to assure their continued interest in the measure and their active contribution to save energy. The results of EEOs have been promising, as can be seen in energy costs saved. An innovative form of PPPs is energy performance contracting (EPC). Specialized companies, so called energy service companies (ESCOs) enter into a contract with the local community to undertake energy upgrades that are funded from saved costs. The contracts may cover energy efficiency upgrades and the switch to renewable energy. The idea behind both is that either the saved operation costs or the sale of the newly produced 90 For

the discussion on PPPs see also OECD 2012, Financing green urban infrastructure. http://www.oecd.org/gov/regional-policy/WP_Financing_Green_Urban_Infrastructure.pdf Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

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renewable energy will finance the investment costs. The ESCO will only get paid once the energy savings is achieved. There are different contractual models - guaranteed savings and shared savings – which reflect the level of risk allocation between the two contracting parties.

5.4.1.6 Green Bond Recently, China has evolved to become the largest green bond market in the world. In December of 2015, the Green Finance Committee of the China Finance Association released the "Catalogue of Projects Supported by Green Bonds ". It defines and classifies green bonds in China, providing an important reference for green bond approval and registration, third-party green bond evaluation, green bond rating and relevant information disclosure. In the same year, the People's Bank of China released the "Notice on Issues of Issuing Green Financial Bonds in the Inter-bank Bond Market", and the NDRC issued the "Guideline on the Issuance of Green Bonds", respectively determining the requirements for issuing of green financial bonds and green corporate bonds. In 2016, the Shanghai Stock Exchange and the Shenzhen Stock Exchange successively issued the Notice on Piloting Green Corporate Bonds and the Notice on Piloting Green Bond Business, which clearly stipulated that green corporate bonds were issued in accordance with "Corporate Bond Management Measures" and relevant rules, raising funds for corporate bonds which support green industries.91 In 2016, thirty five new Chinese green bond issuers entered the market. Two of the largest issuers are Shanghai Pudong Development Bank and Industrial Bank, accounting for 43% of Chinese green bonds issuance, and they also became the largest green debt issuers globally. After Shanghai Pudong Development Bank and Industrial Bank separately issued the first batch of green financial bonds all were over-subscribed. Various financial institutions and enterprises participated in the project. Since then, the Chinese green bond market has shown a more rapid growth. The annual issuance volume reached 200 billion RMB, accounting for nearly 40% of the global green bond issuance volume, making it the world's largest green bond issuance market. The regulatory framework for green bonds in China: 

23rd of September 2015, The State Council has issued the “Overall guidelines on ecocivilization reform” which stated the goal to establish a green financing system. The People’s Bank of China (PBoC) and the National Development and Reform Commission (NDRC) were tasked to undertake research on green bonds issued either by banks or corporations.



22nd of December 2015, PBoC announced the Guidelines No. 39 on green bonds which marked the official launch of green bond market in China. The No.39 guidelines presented a list of projects in six sectors: energy saving, pollution prevention, resource conservation and recycling, green transport, clean energy, ecological protection and adaptation to climate change.



Early 2016, the National Association of Financing Market Institutional Investors (NAFMII) has published the “guidelines for non- financial companies for issuing green debt financing instruments”.



March 2016, NDRC and the Shanghai Stock Exchange circulated guidelines for issuing of green bonds and for pilot projects.

Among them, there is the "Catalogue of Projects Supported by Green Bonds (2015 Edition)", and the National Association of Financial Market Institutional Investors’ "Non-Financial Enterprise Green Debt Financing Tools Business Guidelines" and supporting forms, requiring enterprises disclosure of specific information of green projects in the registration documents clearly to issue green debt financing instruments, and encouraging thirdparty certification bodies to evaluate green debt financing instruments issued by enterprises. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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

On 31st August, 2016, The People's Bank of China, Ministry of Finance, National Development and Reform Commission, Ministry of Environmental Protection, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission jointly issued the "Guidelines on Building Green Financial System ".

Milestones for China’s green bond market: 

In 2014, CGN wind energy limited has issued the first “carbon bond”, which has been considered as the first deal of the green bond.



In July 2015, the Xin Jiang Jinfeng Scientific Technology Ltd. has issued green bonds, denominated in US dollars.



In September 2015, CLP Hong Kong has issued green corporate bonds in India via its Indian subsidiaries.



In October 2015, Agricultural Development Bank of Chinas issued the green bonds in dual currency at the London stock exchange.



In January 2016, the Industrial and Commercial Bank of China (ICBC) and the Shanghai Pudong Development Bank obtained approval from PBoC to issue the green bonds (focusing on green industries) for a value below 50 billion RMB.



On 27th Jan 2016, the Shanghai Pudong Development Bank has issued green bonds amounting to 20 billion RMB with a 3-year-term, and an interest rate of 2.95%.



On 28th of Jan, 2016, Industrial Bank has issued green bond amount to 200 billion with 3-year-term, and the interest rate reach to 2.95



On 7th April 2016, China Wind Power Group investment company whose leading underwriter is the China Development Bank (CDB), has issued medium-term notes for 200 million RMB in the inter-bank market which marks the first green bond issued by non-financial companies. The term of the product is 3 years, and the interest rate is expected to reach 6.2 %

Main Actors in the green bond sector: People’s Bank of China (PBoC). In December 2015, PBoC has issued the first green bond policy and guidelines.92 More or less at the same time, the National Development and Reform Commission (NDRC) has issued its guidelines for enterprise bonds. It is expected that China will have the biggest green fund in the world, with some 50 billion RMB. According to the PBOC this green fund of 50 billion RMB should at least grow ten times during the 13 th FYP. The composition of this first Green Fund represents an interesting mixture of public and private funds. However, many investors and the public at large still want to know what responsible green investment means. Currently, for many investors, the use of green bonds is merely a matter of advertising or publicly showing their interest in green development, more of a publicrelations exercise than thorough engagement in green development. Green Finance Committee, China Society for Finance and Banking (GFC). At the international level, the Green Finance Committee will publish green financing guidelines after the next annual meeting. However, the green finance is still very small. The green finance sector will need to address various obstacles: (i) the benefits (additionality) of green finance, (ii) the mismatch of maturities, (iii) lack of information, (iv) lack of capacity of green finance operators, and (v) definition of adequate green projects – the “greenness” of projects. National Association of Financing Market Institutional Investors (NAFMI). NAFMI was established on September 3, 2007, under the approval of the state council of China, NAFMII 92

The No.39 guidelines announced by PBoC_ http://www.pbc.gov.cn/tiaofasi/144941/144959/2993398/index.html Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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aims to propel the development of China OTC financial Market, which is composed of interbank bond market, inter-bank lending market, foreign exchange market, commercial paper market and gold market. The membership of the NAFMII includes policy banks, commercial banks, credit cooperation bank, insurance companies, securities companies, fund management companies, trust and investment companies, finance companies affiliated with corporations, credit rating agencies ,accounting firms and companies in the non-financial sectors, currently they has about 2000 members. NAFMI has issued in 2015 a practical handbook on municipal bond financing.93 This handbook signals that an appraisal of bonds needs to be undertaken, and that standards need to become measurable and comparable. The handbook makes it evident that safety guidelines need to be established. European experiences of green projects may be the most advanced available at the moment; there is no global standardization of greenness yet. NAFMI plans to roll out its own tools in the near future. Currently, in early 2016, it has issued about 200 million RMB in green financing. NAFMI is aware of the need to align its green products the PBoC guidelines. The Industrial and Commercial Bank of China (ICBC). ICBC through its Urban Finance Research Institute, has pioneered the creation of an environmental stress testing methodology. 94 This will have important repercussions for reduction of credit risks of commercial banks. It will quantify environmental risks and contribute to credit rating. Recently, ICBC also has issued its first green bonds, applying the PBoC guidelines.

“Practical Handbook of municipal bonds financing” published by China Finance Press in July, 2015 Cited from Ph.D Yihong, deputy head of Urban Finance Research Institute of ICBC

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Step-by-step guide to issue green bond in China China is seen as a leader in driving growth in the labelled green bond market. Shanghai Pudong Development Bank, Industrial Bank Co. and Bank of Qingdao have issued labelled green bonds totalling $ 7.5bn in 2016, making China the largest country of issuance in 2016 so far95. According to the data from WIND, till the 22nd of November, 2016, total number of the green bond issuance reached to 42, account for 40% of the total global green bond market. 96 The issuance of Green bond is mainly to solve the problem of maturity mismatch. Traditionally, the maturity of bank credit is short, but the project in the sectors like speed train, waste water management, clean energy are medium and long-term projects, if they only get a 2-year loan, they will need to continue to refinance. Therefore, the establishment of green bond market will support the companies directly access to long-term financing to reduce the risk of refinancing. The green bond market is quite promising for GMF, however, green bond is quite new to municipal government, one of the pressing issue for them is to the procedures as how to issue a green bond in China.

95 96

Green Bonds-State of Market, 2016 21st century economic report: http://www.21jingji.com/

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Figure 48: Step by Step Guide to Issue Green Bond

Source: Yao Zhuo, EC-LINK, http://www.climatebonds.net/china

condensed

according

climate

bonds

initiative-China

report.

There are two typical green bond in China, one is the green financial bond and the other is the green enterprise bond. The following are the two cases to illustrate these two type of green bond. Case 21: Industrial Bank issues green financial bonds Project introduction: The green bonds issued by Industrial Bank are the first one to be labelled green financial bonds since the official issue of Chinese green bonds standards by the end of 2015. This is a milestone in the development of Chinese green bonds. Issuer

Industrial Bank Co., Ltd.

Issue Time

January 28, 2016, July 14, 2016, November 15, 2016

Circulation

10 billion RMB, 20 billion RMB, 20 billion RMB

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Currency

RMB

Credit Rating

the main AAA, debt AAA

Rating Agencies

Shanghai New Century Credit Rating Investment Services Limited liability company

Nature of Debt

Financial debt

the Term

3 years,3 years，5 years

Coupon rate

2.95%，3.2%，3.4%

Underwriters

Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank

Green Certification Body

Climate and Energy Center of Central University of Finance and Economics

Market Place

Interbank

Investment of Fund raising

Environmental Protection, Energy Saving, Clean Energy and Clean Traffic Lights to Support Environmental Improvement, Green Project to Address Climate Change

Lessons learnt 



For banks, the issuance of green financial bonds can promote innovation in green finance business, provide sources of funding for the issuance of green project loans, upgrade the credit allocation ability of green projects in the medium and long term, and promote the adjustment of credit structure. Issuing overseas can also attract the attention of international investors and further enhance its influence in the international capital market. The emergence of green bonds labeled is a sign that the green finance market continues to mature and regulate. In order to make the "green" attribute of bonds more credible and persuasive, it is a common international practice to hire a third-party professional certification body to issue a green certification of the use of raised funds, namely a "Second Opinion". In the second opinion, the investment direction of green bonds has been described in detail, which can enhance the transparency of green bond information disclosure and attract more investors. Currently, over 60% of green bonds have been internationally certified before issuance.

Case 22: Beijing Automobile Co., Ltd issues green enterprises bonds

Project introduction The bond is the first green corporate bond in the domestic market and the domestic corporate bond issued by the first H-share listed company. The green bond has been Realized the green bond from the institutional framework to the product launch and the new green financing channel has been expanded. It has the important significance in the construction of Chinese green finance system.

Issuer

Beijing Automobile Co., Ltd.

Issue Time

April 22, 2016

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Circulation

2.5 billion RMB

Currency

RMB

Credit Rating

The main AAA, debt AAA

Rating Agencies

Dagong International Credit Rating Corporation

Nature of Debt

Corporate Debt

the Term

7 years, install the issuer to adjust the coupon rate options or investors to sell back options at the end of the fifth year

Coupon rate

Fixed rate. The coupon interest rate for the first five years of the bond's life is Shibor benchmark interest rate plus the basic spread

Underwriters

HaiTong Securities, Industrial and Commercial Bank of China

Green Certification Body

Null

Investment of Fund raising

1.5 billion for the Beijing Automotive Zhuzhou base technological transformation and expansion project, mainly for technological innovation, expand production capacity, 1 billion for the replenishment of working capital

Lessons learnt 

The NDRC stipulates that "allowing enterprises to use up to 50% of the funds raised by bonds for the repayment of bank loans and replenishment of working capital" .This provides a policy dividend for the issuance of green bonds to improve the financing structure. This stipulation in the early stages of green market can play a role in stimulating the issuance of green bonds and activating the market. In 2016, China issued 27 green corporate bonds, corporate bonds and medium-term notes totally in an amount of 40.5 billion RMB. This part of the enterprise is actually the subject of green project construction. In the first year of green bonds, Chinese enterprises can actively participate in the issuance of green bonds and made remarkable achievements in the development. On the one hand, it shows that Chinese enterprises recognize and support green finance. On the other hand, it also proves that green bonds have unique product charm. Enterprises issue green bonds, also face the issue of high costs, strict disclosure requirements and other issues .In order to raise the enthusiasm of enterprises to issue green bonds, the state-owned and local policy-making organs may consider introducing some measures such as discount and guarantee to reduce the financing cost of green bonds.



Two of important financing tools of green bond related GMF, one is Green Asset Based Securitization (ABS), and the other is Green Municipal Bond. While the latter has been discussed, the following will be focus on introducing Green ABS. Green Asset Based Securitization (ABS) There are two kinds of green asset-backed securities (ABS): 



ABS where the cash flows which are backing the issuance of the bond arise from green assets, and the proceeds raised from investors for the issuance of the bond are allocated to green assets, this type of green ABS is suitable for new green asset classes such as renewable energy ABS where the cash flows which are backing the issuance of the bond arise from nongreen assets (or a mix of green and non-green assets) but the proceeds raised from

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the investors from the issuance of the bonds are allocated to green assets. This type of green ABS is suitable for use within existing classes that are already being securities. On 2nd of July, 2016, China Securities Regulatory Commission (CSRC) has published an article on its official website, titled “Practice green development concept, and set clear regulatory requirements”, two important messages are send out, the first one: CSRC will further promote green bond issuance pilot, moreover, green bond index will be released at the right time, green asset securitization will be promoted according to relevant requirements. And the second one: project cash flow in the fields of renewable energy power generation, energy-saving and emission reduction technological transformation, energy clean utilization, new energy vehicles and supporting facilities construction, green building energy-saving building, etc., which comes from the national policy of financial subsidies (including price subsidies) can be included in the asset securitization of the underlying assets. Before CSRC issued a document, based on green credit asset-backed securities have begun to enter the market. On January 5, 2016, Industrial Bank successfully secured a total of 2.6457 billion yuan of green credit asset-backed securities, and received 2.5 times subscription, it is the first green credit asset-backed securities.

5.4.2.4 Carbon Finance Carbon finance as green finance. Carbon finance is one of the largest components of green finance and developing this instrument will have a major impact on the reduction of carbon emissions. However, worldwide the carbon market remains fragmented and is held hostage to stalled international negotiations on climate change. The Kyoto Protocol developed under the United Nations Framework Convention on Climate Change (UNFCCC) has provided an initial framework for the development of a market driven by compliance. The instruments proposed were effective in lowering the cost of reducing greenhouse gas emissions through trading, and they sent a strong signal encouraging less carbon- intensive lifestyles and investment decisions. Industrialized countries signatory to the Kyoto Protocol committed to countryspecific emission reductions targets through domestic actions (carbon tax, carbon trading, standards or subsidies), trading allowances, or the purchase of emission reductions notably via the Clean Development Mechanism (CDM) in developing countries, or via Joint Implementation in economies in transition. There also exists a smaller voluntary market for emission trading for those entities (companies, individuals or local governments) who voluntarily decide to reduce their carbon footprint. A strong, liquid and global carbon market has the potential to deliver significant benefits on the way to low-carbon development. For this to happen however the market needs to strengthen long-term price signals and reduce its volatility, and market mechanisms need to be improved to gain in efficiency and scale. Climate negotiations will tell whether the regime can be reformed at the global level. Tool MF 2 Carbon Finance in China The year of 2016 is the third year of the pilots in carbon market. Currently, there are seven piloting cities/provinces, which are: Beijing, shanghai, Guangdong, Shenzhen, Tianjing, Hubei and Chongqing. With the deepening of the carbon market pilot work, especially the unified national carbon market approaching, China's carbon finance has gradually equipped with the basis for large-scale development. There are three main types of carbon trading in China. The first is the Clean Development Mechanism (CDM), the second the China Emission Trading Network (CCER), and the third are allowance-based transactions: Clean Development Mechanism - CDM. Project-based transactions are based on the Clean Development Mechanism. In 2011, the NDRC pronounced the “Measures for the Operation Management of Clean Development Mechanism Projects” and made it clear that the Clean Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Development Mechanism is the mechanism for developed country parties to carry out project cooperation with developing country parties in meeting their greenhouse gas emission reduction obligations. Through project cooperation, the ultimate goal of the United Nations Framework Convention on Climate Change can be promoted and developing country’s sustainable development can be assisted and developed country parties can meet their commitment to quantify and limit their GHG emissions. China Emission Trading Network - CCER. In 2012, the NDRC announced the Interim Measures for the Management of Voluntary Emission Reduction GHGs, explaining the voluntary emission reduction project management, emissions trading and voluntary emission reduction auditing and certification management. After the emission reductions of voluntary emission reduction projects are recorded, they shall be registered in the national register and be traded in the filing institutions. The "Interim Measures for the Management of Emissions Trading" promulgated in 2014 have pointed out that the initial trading products of the emission trading system (ETS) were the emission allowances and the national CCERs. Allowance-based transactions. Under this arrangement, in October 2011, the "Notice of the General Office of the National Development and Reform Commission on Pilot Emissions Trading" created a pilot carbon emission trading scheme in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong and Shenzhen; From 2013 to 2014, the NDRC issued two sets of guidelines on greenhouse gas emission accounting and reporting for 14 trades and industries in a row, effectively cooperating with the Pilot Emissions Trading Experiment. In December 2014, in order to promote the establishment of a national trading market for carbon emissions, The NDRC promulgated the Interim Measures for the Management of Emissions Trading Rights and made arrangements in five aspects: quota management, emissions trading, verification and quota settlement, supervision and legal responsibilities. In January 2016, "Notice of the General Office of the State Development and Reform Commission on Earnestly Enhancing the Key Work of Starting the Emission Trading Market in China" pointed out that the goal is to ensure that in 2017 to start the national carbon emissions trading, the implementation of carbon trading system. China's current carbon financial products and services can be divided into three categories:   

carbon trading, including carbon emissions quota spot, and the derived futures, futures, swaps, etc., the main function of carbon trading is to provide the tool of hedging and risk-mitigation: Carbon finance, including carbon bonds, carbon credits, collateral loans, carbon repurchases, carbon quota trusteeship, etc. The purpose of the carbon finance is to revitalize carbon assets Carbon asset management, with carbon assets trusteeship, carbon trusts and carbon funds as the main form to help the enterprises to optimize carbon assets development and management

China's carbon trading market and carbon reduction targets The 13th Five-Year Plan for National Economic and Social Development announced on March 17, 2016 the construction of a unified national market for carbon emissions trading. The target is to implement a management system of carbon emission reporting, verification, certification and quota management of key units. During the 13th FYP period, the intensity of carbon emissions in Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Shandong and Guangdong shall be decreased by 20.5% and 19.5%. In Fujian, Jiangxi, Henan, Hubei, Chongqing and Sichuan. Shanxi, Liaoning,Jilin, Anhui, Hunan, Guizhou, Yunnan and Shaanxi the decrease shall be 18%; Inner Mongolia, Heilongjiang, Guangxi, Gansu and Ningxia shall experience a decrease of 17%; and Hainan, Tibet, Qinghai and Xinjiang by 12% respectively.

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The Clean Development Mechanism in China. The CDM is a project-based mechanism defined by the Kyoto Protocol under the United Nations Framework Convention on Climate Change (UNFCCC) to achieve emission reduction targets in a cost-effective way. Under the CDM developed country parties to the Koto Protocol cooperate with developing parties in trading Certified Emission Reductions (CERs). Under a CDM project, a developed country party acquires CERs generated by the project that is implemented in a developing country party. Emission reductions from CDM projects must be real, measurable, and long-term, and they must be additional to any that would occur in the absence of the certified project activity. China is party to both the UNFCCC and the Kyoto Protocol. Over the past five years China has developed the most dynamic CDM market in the world. China is the leading country in the world in terms of registered CDM projects (3,924 in 201597, or 55.9% of all CDM projects in Asia98). It is also the world champion in terms of volume of annual certified emission reduction (CER) certificates traded. 99 The Government of China appointed several key administrative institutions to be in charge of supervising the CDM market. The National Leading Group on Climate Change (NLGCC) is responsible for formulating CDM policies and defining standards. It also coordinates the National CDM Board—the location of the Designated National Authority. The National CDM Board reviews and approves CDM projects, and supervises CDM implementation. CDM Centers were created and located throughout the country, and a National CDM Fund further contributes to the country‘s effective CDM institutional framework. CDM projects approved by the Designated National Authority have included projects supporting renewable energy, energy efficiency, and methane recovery and use. Each of these sectors is essential to support low carbon growth via providing energy security, supporting employment creation, reducing pollution and encouraging technology transfer. As stipulated in its 11th Five-Year Plan China has extended the range of its CDM interventions beyond the industrial processes that formed the larger share of initial deals; and increasingly, CDM transactions have served technology transfer in the energy sector. With payments received from CDM revenues via taxation on CERs traded, China has established a CDM Fund which will be soon operational. The CDM Fund will be in a position to select and fund its own transactions in China and has reached almost 1 billion US$ in capitalization by 2010. Moving forward, the future of the CDM in China seems to be in encouraging more technology development notably by engaging in cooperation with the Ministry of Commerce and its investment promotion strategies in terms of green technology penetration in China. The green technologies licensed in China are themselves not always widely available in the more remote provinces, and the CDM Fund could play a key role in disseminating homegrown high tech solutions in the more isolated provinces. Such a generalized domestic dissemination could result in massive emissions reductions while strengthening domestic consumption and economic growth. CDM resources could also be leveraged to co-finance government projects, policies, or programs in key green sector areas. This could be developed by systematically defining opportunities for CDM funding in large infrastructure projects, by cooperating with provincial energy conservation centers in the validation of projects, and by designing a national enterprise CDM program to reward enterprises that exceed energy-saving targets. Developing further market mechanisms to accelerate emission reduction and carbon trading would leverage these initial successes. China has already started developing domestic pilots for innovative domestic emission trading by setting up the Environmental Exchanges in Shanghai and in Beijing. 5.4.2.5Other market oriented Financing tools

http://cdmpipeline.org/cdm-projects-region.htm http://cdmpipeline.org/cdm-projects-region.htm 99 World Bank. 2010. Clean Development Mechanism in China: Five Years of Experience (2004-09), World Bank, Washington D.C. 98

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Private Equity (PE) Investments in green sector Private equity investments in the green sector China. China is seeing the emergence of tools for risk assessment for PE investments. Five key areas of risk are addressed that private equity investors attempt to quantify, manage and where possible, mitigate: market risk, execution risk, technology risk, political risk, and due diligence risk. PE investment in China is a process in which an entrepreneur gives up sole proprietorship over the risks in his business. It‘s a new concept for most in China. But, the results are almost always positive. In this context VC ventures have not just brought capital to China but also new management practices. Public-Private ventures to reduce risk of private equity investments in China. The Asian Development Bank (ADB) proposed to invest in Asian clean energy private equity funds in March 2008, the recommendation was to evaluate proposed equity investments in five clean energy–focused private equity funds: the Asia Clean Energy Fund (up to $20 million), the China Clean Energy Capital (up to $20 million), the China Environment Fund III (up to $20 million), the GEF South Asia Clean Energy Fund (up to $20 million), and the MAP Clean Energy Fund (up to $20 million). The private equity funds invested by the ADB will in turn invest equity in clean energy projects and companies. Over the last decade, private equity funds have proliferated across Asia, particularly in bigger markets like in China and India. Clean energy funds have emerged as a distinct niche in the private equity industry. While these clean energy funds appeared small, their intention was to try the concepts with real life proposals. The International Finance Corporation private equity investments in China. The International Finance Corporation (IFC) has been working in China to stimulate the private sector to improve both energy and water efficiency, especially in heavy industry, to continue to implement renewable energy in the coal-dominated power sector, but also to explore new sectors such as cleantech, water, buildings and transport. The proposed investments are a combination of long-term loan (e.g, renewable energy), equity (e.g., cleantech) and guarantee (e.g., risk sharing facility) and carefully structured and implemented in consideration of IFC‘s headroom. In addition to a team investing in mature companies in clean tech sectors, IFC has a dedicated group focused on making early stage equity investments as small as $5 million directly into clean tech companies. The Clean Tech Venture group is seeking companies that provide innovative solutions to local problems based on proven technologies, from waste gas capture for the petrochemical or coal industries, to high temperature condensed steam recycling for the pulp and paper or chemical industries. Clean Tech Venture‘s major focus has been on energy and water efficiency, and wastewater technologies. The group has committed an $8 million investment in Shuoren, an energy management company (―EMC‖), which provide energy audits to steel companies, applies its energy saving blast furnace technology at no upfront cost and generate profit from a split of the energy savings. Since then, IFC Hs been evaluating a $5 million early stage equity investment in Sinen, which was spun out of Tsinghua University and increases process water recovery – which also saves energy – in a range of heavy industries. Municipal development Fund This type of financing model is represented by the World Bank and other international development agencies to support the infrastructure construction financing plan of municipal government. Under such programs, international development agencies, such as the World Bank, provide grants based on the performance of local governments, and local governments are able to obtain expected financial support for infrastructure development, in accordance with standardized and transparent practices such as fiscal discipline, financial reporting, and financial management systems. The China Energy Efficiency Financing Project. Low-carbon development projects frequently require additional financial support to become financially and economically Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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attractive. Climate financing instruments help to make these mitigation activities feasible. But even so, their reach, in isolation, remains insufficient to translate many of the expensive, largely pre-commercial low-carbon technologies from the drawing board into reality. In China, the World Bank has worked with the Government to design projects that blend these different instruments in order to create financing leverage. The China energy efficiency financing project is an example of such blended projects. Financial institutions tend to regard energy efficiency investments as being relatively small in size, with high risks and higher transaction costs. As a result, energy efficiency has frequently been relegated to the realm of social responsibility as opposed to a profitable business line. With support from the GEF, the European Commission, and a World Bank loan, the China Energy Conservation Project created the first three Energy Service Companies (ESCOs) in China in 1998. These three energy service companies, in Beijing, Shandong and Liaoning, successfully pioneered the energy service company business model, adapting it to Chinese conditions. The Energy Efficiency Financing project was launched in 2007 as an on-lending operation. The World Bank extended a 200 million US$ loan to the Ministry of Finance of China, which was then going to be on-lent via commercial banks party to the project to large industrial enterprises and ESCOs in order to finance energy efficiency investments. A GEF grant was provided to increase the local financial institutionsâ&#x20AC;&#x2DC;confidence in jump-starting energyefficiency financing through learning by doing. The GEF funding (US$14 million) has been used to assist the participating banks in preparing a project pipeline and building their capacity.100 In the process of developing an energy efficiency project pipeline under the Energy Efficiency Financing project, a World Bank carbon finance deal was reached with the Baotou Iron and Steel Company. This project, with a total investment of US$67 million, has contracted to sell 900,000 tons of CO2 valued at approximately $12 m (â&#x201A;Ź 8.5 m). The carbon revenues have raised the financial internal rate of return of this project from 11.5%, which was considered financially unattractive, to over 14.3%, which was considered attractive. This project remains the largest energy efficiency lending operation of the World Bank in China today and it has contributed to building capacity of participating Chinese commercial banks in developing operations manual for extending loans to the more risky energy efficiency sector. NanChang Urban Rail Nachang (population 3.3 million), capital city of Jiangxi Province, has quickly urbanized leading to rapid motorization (auto vehicle ownership exceeded 470,000 by the end of 2011). The consequences are long commuting time, traffic congestion and air pollution. In order to provide an effective urban mass rapid transit system of appropriate quality along the line 2 corridor from Zhan Qian Nan Dadao Station to Xin Jia An station, World Bank helped Nachang Municipal government for this project financing, the total amount reached to US $ 250 million . The project finances construction and equipment for urban rail Line 2 (24 Km and 21 stations), as well as technical assistance to improve ridership levels, increase land value around stations, and improve financial management for the Nanchang Urban Rail Company. The project will directly benefit about 506, 00 people providing for efficient accessibility to their homes, jobs and urban services in terms of speed, safely and commuting quality. Project Revenue Notes (PRN) The PRN refers to the debt financing instruments issued by non-financial enterprises, the main source of repayment are coming from the cash flow generated by the project operations. PRNs are especially targeted to urban construction project. PRN has the following three characteristics:

100

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Firstly, the main issuer is the company who are running the specific project, which will reduce the risk of the local government or the enterprises in urban construction. PRN system is designed to isolate the project with municipal government or the urban construction enterprises, local government cannot directly involved in the construction, operation and repayment of related projects. In order to guarantee this isolation system, the sponsor or the parent company shall set up an independently project operation company as the main body of the PRN issuance. The raised funds shall be closed and operated by the project company, and be only used for project construction and operation Secondly, the main sources of debt service are coming from the income of the project, the local government does not directly bear the debt liability. PRN is mainly based on the income from projects operations as the credit basis, and the cash flow generated by the project is the main repayment source of bills. In general, the cash refunding of the municipal projects is characterized as continuous and stable, which can provide long-term and reliable guarantee for the repayment of the raised funds. The income refer to the sales of affordable housing, property development or rental income, income from toll fee of the road and bridge. In addition, the independent operation of such projects means that local governments are not directly involved in the financing, construction and operation of the projects, and do not bear the direct repayment obligations of PRNs nor guarantees. Although the government usually reduces the project cost through tax incentives and interest subsidy to reflect the public welfare of municipal projects, it is a feature of the project itself and should not be used as a guarantee for local governments to pay their debts directly. Thirdly, the term can cover the entire project investment cycle, including the project construction phase and operating stage which generate the income. Fourthly, the design of the transaction structure affects the risk of repayment To protect the interests of both issuers and investors, PRN will usually set the structural design for repayment period, amortization, early redemption, fund collection, collateral pledge, credit enhancement and other trading terms. The transaction structure design arrangements for the repayment of PRN will provide different credit commitments, and ultimately affect the credit risk of PRN. The purpose of launching PRN is to prevent the systemic crisis caused by traditional local financing platform. In the long term, the role of urban investment debt financing will be gradually weakened, and PRN will be a replacement to the urban investment debt financing, which will be an effective solution for urbanization in China.

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5.5 Monitoring and Evaluating Green Finance 5.5.1

Indicators

The limitations of the green credits policy. Policy is very potent because it applies nationally. But the drawback of much of the green development policy is that it is very much centered on the MEP as the implementation vehicle. As a result Chinese banks have not developed their own information monitoring and intelligence systems as has occurred with international banks. Banks abroad have developed their own client/project screening practices by industry sector and gradually these have emerged as best practices across branches internationally for the banking industry as a whole. China‘s bank do not benefit from this system yet and this will no doubt represent a draw back when new green finance product lines emerge internationally and Chinese banks might not be ready to benefit from them. Tool MF 2 Table 8: Proposed Municipal Finance KPIs 101 Indicator Category

Indicators: indicative values

Access to finance

National support __ (¥ bn) – as % of total investments. Own revenues __ (¥ bn) – as % of total investments.

Green finance (special fund; green bonds) [1]

__ (¥ bn) – as % of total investments [1]

Current achievements / Time frame for accomplishment

Sources: [1] MoHURD. 2015 and 2016 versions. Appraisal Standards for Green Eco-City/District Planning (draft). Beijing [Unofficial Translation].

5.5.2 Evaluation Methodology Currently, the development of GMF in China is still in its initial stage. In order to sustain and well manage the GMF, municipal government, regulatory departments as well as the market should work together to establish a proper evaluation system.

101

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Figure 49: Proposed Evaluation Methodology for GMF

Source: Yao Zhuo, Steinberg Florian Matthias, EC-LINK

5.5.3

“Green” V.S “Non Green”

The guiding principle for evaluation system for GMF is to keep a balance among economic, social and environmental benefits. The following proposed evaluation system includes two important components. One is to verify the projects applying for fund is “green” or “non-green” during the project life circle, the other is to assess the risk of the project in terms of three dimensions, which are financial, economic and environmental factors. Robust implementation if the GMF in the market will require a verification and enforcement system. In developing a verification system for GMF, China can learn from the previous efforts where they have developed green assurance and verification systems. The verification systems under the Green Credit Guidelines, pilot local emissions trading scheme the National Energy Savings scheme, the green bond initiative and eco low carbon principle proposed by Chinese Society for Urban Studies (CSUS) are considered. Green Credit Guidelines The "green credit guidelines" issued by CBRC in 2012 is one of the most important financing initiatives to promote green development in China. The Guidelines address lending practices in the Chinese banking sector, including policy banks, commercial banks, rural cooperative banks and rural credit cooperatives. The purpose of the Guidelines is to guide all banking institutions to implement green loans from a strategic perspective to increase support for green, low carbon and circular economy, reduce environmental and social risks, and enhance environmental and social benefits. . The project to obtain financing requires a strong assessment process, the process defined by the bank to evaluate and manage for these loans, should be integrated into the important part of the project's green assessment process. When comes to verification, there is no explicit verification system in place for green credit. Banks simply report their statistics on green credit to the local CBRC, who then input it to Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Central CBRC, but this is a lack of verification. The experience with the green credit guidelines shows that verification rules and entities are important, as lack of verification has limited the implementation of the green credit guidelines in practice. Local Emission Trading Scheme The verification process varies slight by different pilots in local emission trading scheme. For all pilots, third-party verification is required, not optional. The Department of Climate Change of NDRC and local NDRC is the authority for the emissions trading scheme pilots, appoint independent third-party verifiers for the relevant region.102 This system of multiple verifier entities is similar to what have been adopted for verification in the green bonds market to date in Europe and the U.S. Here, the verification model that has been used to date is a range of independent, third party. The reporting content required varies by pilot, but the minimum proposed for a national emission trading schemes is total emissions, activity data and emission factors and sources. A web-based reporting system is used for all the pilots. Some of the emissions data could be useful for climate change mitigation focused green bond impact assessment, however, green bond reporting will generally be more comprehensive than what has been developed for the local emission trading schemes. Enforcement under the local emission trading schemes is reliant on the NCRC granting the local government powers to enforce compliance (IETA 2013). The penalties for noncompliance vary between the pilots, but they are typically monetary fines for failing to submit verified reports (PMR 20014). In Tianjian and Chongqing, an additional penalty is that the company will be disqualified for environmental preferential policies, such as subsidies and funds, for 3 years. (PRM 2014). National Energy Savings Scheme The energy savings scheme started in 2011 and now covers 17,000 enterprises. It is regulated by the NDRC, and verification is mandatory. The target setting, monitoring, verification and enforcement process is as follows:103 first, Energy Saving Authorities in the Local DRC set the energy saving target. Enterprises collect and report the statistics of energy consumption. Verification of the data is done at the local level, either directly by the Energy Saving Authorities or by the Authorities commissioning third-party verifiers that are approved by the MoF and the NDRC. There are then sanctions on those who fail to meet their target, imposed by the local DRC. If companies do not meet their annual target for energy savings, mandatory audits will be undertaken to determine the required retrofits to meet the target, which then must be implemented within a set timeframe. Weaknesses with this verification and enforcement system has however been identified. A report from the World Bank (2014) revealed the need to improve the current energy saving verification system by a range of measures.     

102 103

Establishing standardized operational guidelines for project-level energy saving monitoring and verification Establishing Standardized methodology for enterprise-level energy saving monitoring and verification Improving the rigor in energy saving monitoring and verification Improving the transparency and credibility of the accreditation process for thirdparty verifiers Improving the capacity building of third-party verifiers

Growing a green bonds market in China/IISD & Climate Bonds Initiative/Spring,2016 Growing a green bonds market in China/ IISD & Climate Bonds Initiative/Spring,2016

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Green bond initiative The official green definitions for projects qualifying for green bond issuance in China are broad and comprehensive. The catalogue, endorsed by PBoC, is the most comprehensive guideline for what is green in the Chinese green bond market. It covers climate change mitigation and adaptation projects, and broader environmental projects, such as projects addressing air pollution, to be in line with Chin’s environmental policy priorities. Aligning domestic categories of what is green with categories of qualifying green projects used in the international market would facilitate international market would facilitate international investors to more easily invest in Chinese green bonds, both in the domestic green bonds market and bonds issued in overseas market. China is seen as a leader in driving growth in the labelled green bond market. Shanghai Pudong Development Bank, Industrial Bank Co. and Bank of Qingdao have issued labelled green bonds totaling $ 7.5 bn in 2016, making China the largest country of issuance in 2016 so far. The total labelled issuance figure above is based on PBoC’s recently developed green bond guidelines. These aim to encourage issuers to arrange external reviews on the green credentials of bonds and to incentivize institutions and service providers to develop issuing capabilities. PBoC is also the regulator overseeing the interbank bond market, accounting for 93% of outstanding bonds in China.104 The implementation of third party certification against green bond standards is emerging. Approved verifiers under the international Climate Bonds Standard and Certification Scheme, such as KPMG, EY, DNV GL, Bureau Veritas and Trucost, can provide certification services in China against the climate bonds standard, as well as checking adherence to PBoC’s Guidelines. Eco-low carbon principle Chinese Society for Urban Studies (CSUS) is a national, non-profit and academic organization formed freely by urban researchers, scholars, practitioners, and by a wide range of governmental agencies in social, economic, cultural, environmental, planning, construction, and management fields, as well as by research and educational institutions and enterprises. It is a legally registered corporation and plays an important role in facilitating and advancing China's urban research programs. One of its goal is to help MoHURD to develop Eco-low carbon indicator system for urban development. The eco-low carbon indicator system is mostly focus on the city planning, but its concept is in consistence with “green” project initiated by the financial industry. Although those indicators do not have the directly relevance with the specific projects, but its methodology can be applied for develop the methodology for GMF. The main component of appraisal of eco low carbon district is the ranking for each one and set the KPIs for the each sector. The KPI includes criteria in 8 main categories, land use, eco-environment, green building, Resource & Carbon Emission, Green Transport, Informationalized Management, Industry & Economy, Social Culture. In each category there are controlled criteria and priority criteria. The full mark of each category is 100 points. To encourage the technical innovation and improvement, there is an extra category of Technology Innovation is added. In sum, the green credit and green bond guidelines have well-developed standards around green for the financial sector, however, the verification and enforcement system is currently less developed. For the local emissions trading schemes and National Energy Savings Scheme, the verification systems are more developed, while the implementation of the existing verification models must be improved as severe limitations with the systems in practice. For the GMF, the above effort and pilots can be considered as the basis to establishing its own filter as what is green and what is non-green, three steps should be considered. The first one 104

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is to verify the project is green or non-green when the project is starting, the second step is to monitor the project during the implementation period, and the third one is to appraisal after the project is completed. Roadmap for next stage of China’s green definitions for GMF Green credit guidelines and green bonds guidelines have establish well-structured sector for GMF, the next step is to set sector-specific criteria, meanwhile it should be noted the difference between China-specific criteria and evaluate whether these are in line the criteria they are used to fro the international market.

5.5.4

Risk management

Financial Assessment Financial Assessment is considered more from the angle of project itself, if the project is financially feasible and sustainable. The main technical issues that should be address in the financial assessment are included as follows: 

 



Identify the life cycle of investment for the project: According to the position of the project, the projected value of the project cash flow should be adapted to its affordable life circle, which means that it is long enough to withstand its economic life and long enough to withstand its potential in the medium / long term Impact caused by unexpected factors. This provides the basis for the whole life cycle assessment. Determine the total cost: refer to the total cost of investment (including land, buildings, licenses, patents, etc.) and operating costs (including personnel, raw materials, energy, etc.) Determine total revenue. The development project will benefit from real estate sales and property management. This revenue will be determined based on the forecasted value of the service provided and the relative price of the financial analysis operating income, excluding earnings related to value-added (VAT), and other indirect taxes only when levied on investors. In addition, it also includes other benefits (transfers from other sources, etc.) Determine year-end surplus value: Long-term liabilities and long-term assets (such as construction and machinery) have surplus value, while taking into account specific investments; Responding to inflation: In a project analysis process, a comparable price is usually applied, which means, inflation is adjusted for price, but the price is fixed for the base year. In addition, the current price may be more appropriate in the analysis of the flow of funds, but there is a nominal price to be effectively complied with each year; Financial sustainability: It should be demonstrated that the source of funds (including receipts and any type of cash transfer) during the project's investment period are in consistent with annual expenditure； Select the appropriate discount rate: The key concept is the opportunity cost of capital for the investment. In this regard, it is recommended that the discount rate be determined in accordance with the standards of the People's Bank of China and take reference to some benchmarks How to calculate the financial net present value (NPV) and the financial rate of return (FRR), and how to use it for the assessment. These two indicators will be used for the investment calculation

Usually, the loan officer and financial institutions use financial returns to determine future investment returns, which can also help to determine the co-financing rate of preferential loans for policy banks or green lending providers. Local governments should be aware of the net financial burden of the project at all times and should ensure that there is no risk of a project halting due to lack of cash, even in the context of co-financing. If the financial yield is very low, Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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or even negative, does not necessarily mean that the project does not meet the objectives of low-carbon eco\green development. The project who perform poorly financially, good economic benefits can help them receive financial support from policy banks or green credit.105 Economic Assessment Economic assessment can help assess the economic benefits of a project to a region or the country. Economic assessment is aimed at the whole society, rather than financial assessment, only for the project operators. Economic analysis summarizes the various benefits and social costs that are not considered in the financial analysis, based on financial analysis (investment effectiveness, regardless of source of funding). The three stages of the economic assessment are as follows: Phase 1: tax / subsidy and other transfers Phase 2: external factor correction Phase 3: convert the market price into accounting prices, which means the social cost and various benefits included. Once the key elements of economic analysis are in place, as with financial analysis, the first step is to choose the correct social discount rate for discounting and to calculate the economic internal rate of return on the investment.

105

Eco-Low Carbon Urban Planning Methodology (July, 2014)

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Environmental Factors Assessment Figure 50: Theoretical Framework for the Impact of Internalizing Environmental Cost on Risk Faced by Commercial Banks

Source: Impact of Environmental Factors on Credit Risk of Commercial Banks-Research and application by ICBC based on stress test http://www.greenfinance.org.cn/displaynews.php?id=483

As indicated by Figure 43, the first is credit risk. The tightening of environmental protection standards and climate change policies will impose certain constraints on the cash flows and the balance sheets of firms, potentially weakening their solvency and consequently increasing the credit risk faced by commercial banks. The second is the risk of joint liability. In a creditbased economy, a firm cannot survive without financial support. As more and more regulators nowadays impose a transfer of liability of environmental damages to financial institutions, banks are encouraged to put pressure on firms with poor environmental performance, thus limiting the development of polluting firms. The third is reputational risk. As environmental risk has gradually become a common risk faced by the global financial sector, poor environmental performance of bank’s borrowing customers will lead to questioning of the banks’ capabilities in environmental risk management in its leading books thus reducing the expected return of investors that are shareholders in commercial banks. Meanwhile, poor environmental performance of a bank’s borrowing customers might also affect the appetite of depositors to stay loyal to that bank. Credit risk, also known as default risk, refers to the risk of default for the reason that a borrower is unwilling or unable to perform its contractual conditions. In case of a default, the creditor or bank will inevitably bear a financial loss due to the failure of obtaining its expected earnings. For most commercial banks, loans constitute the largest and the most obvious source of credit risk, so the impact of environmental risk on commercial bank primarily manifests as credit risk. Stressing testing, as a forward-looking risk management tool to measure the potential losses caused by possible events, is an important approach to identify and evaluate the potential risk faced by financial institutions and the financial system.

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Figure 51: Flow Chart of Stress Test

Source: Yao Zhuo, EC-LINK, condensed according to the PPT presentation by Mrs. Yin Hong on Environmental Stress Testing on Commercial Banks’ Credit Risk on “Green Bonds and Green Finance in China” conference in Beijing, 7th of April, 2016

5.6 Cases from China The major challenge of the green Municipal finance in China is the gap between the green fund with the green municipal projects. Only after the careful design of the green municipal projects which is the public goods in nature can attract the private/social capital. Therefore, there are two ways, one is to increase the availability of green funds via proper green financial policy reform, and the second is to match the social/private capital with the green municipal projects via better designed green financial instruments. There are four kinds of cases to illustrate four types of solutions or design below to enlighten us as how to overcome this big challenge.

The first one: fully on Users pay When a green municipal projects that can be user-financed and have good benefits, can use various green financial tools, and the choice of the financing tools can be broad and flexible. Sewage treatment project for example, they recover the money mainly by sewage disposal fee, which is stable, therefore, a lot of green financial instruments can be used, such as green credit, green asset securitization, green municipal bond, green yield bonds, etc., these green financial instruments base on the stable future income. The local government will only play the role of administration. Case 23: Wanzhou Distirct of Chongqing: Yangliu Water Supply project Project Introduction: In Wanzhou Yangliu water supply project is part of ADB’s Chongqing Urban-Rural Infrastructure Development II Project. The project will have the following outputs: a new water treatment plant with 200,000 cubic meters/day capacity, a sludge treatment facility, Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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water-quality monitoring equipment, and other plant ancillary equipment. As an outcome, from 2012 to 2018, urban population in Wanzhou with safe potable water will increase to 99% from 96%. The project will strengthen the development potential of Wanzhou to become Chongqing’s second regional center by improving water supply service and drinking water quality. The district governments will be the implementing agency and take overall responsibility for implementing project. Total project cost is approximately $59.4 million. The government has requested a loan of $21.5 million (36% of the total cost) from ADB’s ordinary capital resources to help finance the project. The loan will have a 25-year term including a grace period of 6 years, an annual interest rate determined in accordance with ADB’s London interbank offered rate-based lending facility, a commitment charge of 0.15% per year, and such other terms and conditions set forth in the draft loan and project agreements. The Wanzhou district government will finance the remaining $37.97 (64% of the total cost) million. Funding Sources: According to ADB’s report, the financial viability analysis of the revenue-generating Wanzhou Yangliu water supply project indicates that the cost of capital of 3.7%. Water tariffs are expected to increase by 10.0% every 5 years, which is considered conservatively compared with historical tariff revisions in Wanzhou. The analysis concluded that low-income urban households will be able to afford the projected tariff increases—the share of income expended on water and wastewater will be about 2.6% of a poor household’s monthly income. Source: Asian Development Bank. https://de.search.yahoo.com/search?p=Chongqing+Urban%E2%80%93Rural+Infrastructure+Dev elopment+Demonstration+II+Project&fr=ush-mailn Relevance of the cases: for this project, all the repayments of funds come from the sewage treatment fees paid by residents.This case shows that in China, municipal projects in some cities are already completely user-payable and do not require public financial support. In this case, a variety of green financial instruments are available to use, we only need to choose the lowest cost and most convenient green financing tools.

Source: Chongqing Local News, August 6th, 2017 http://cq.bendibao.com/wei/201786/208680.shtm

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The second one: Increase profits by extending the industrial chain Some project has the market returns, but the market returns are not high and are no more than the market average yields, in this case, the government need to provide a certain subsidy, however, fiscal subsidy is limited and its sustainability is hard to guarantee, so we need to increase project income by the extension of industry chain. The charging service station of new energy vehicle, for example, typically need to takes 10 to 15 years to recover the cost, so we must take the PPP mode, the government grants franchise, and gugrantee that there will be no other charging service stations of new energy vehicle in its service area within 15 yearsâ&#x20AC;&#x2122; period of cost recovery. In addition, because the new energy cars need 1.5to 2 hours to charge, in order to increase the returns, many new energy charging stations also sale local ecological products, offer catering services, recreation and leisure services, which not only provide convenience for consumers, but also replace the fiscal subsidies by extending the industrial chain, thus reduce the uncertainty of returns, and increase financing opportunities. Case 24: Chongqing: Tongxing Waste incineration project Project Introduction: Chongqing Tongxing waste incineration project is the first city public infrastructure project which uses the project financing model of BOT in China. The SPV company, Chongqing Tongxing Waste to Energy Co.Ltd was established to construct a waste incineration power plant with the daily garbage disposal capacity of 1200 tons. On March 28th, 2005, Tongxing waste incineration power plant formally put into operation. The total cost of the project was 315 million yuan. The registered capital of the project company was 101 million yuan (35 million yuan from China National Environmental Protection Group, 25 million from Sanfeng Environment, 15 million from Beijing Paul Investment Group and 15 million from Yuanda Group). The project company got 100 million yuan (31.7%) from national debt funds. And it also got a loan of 203 million yuan (64.4%) from China construction bank Chongqing branch. Funding Sources: Chongqing municipal government pay garbage disposal fees (69.9 yuan/ton) to franchise company on a quarterly basis. The project company also signed the power purchase agreement with Chongqing Electric Power Company. Under the item of the agreement, Chongqing Electric Power Corp buy power at the grid purchase price (0.365 yuan/ kilowatt hour). And for every kilowatt hour of power, the government pay a subsidy of 0.25 yuan. Souce: Yanli Wang. An application study of BOT model to urban life garbage disposal field [D]. Dongbei University of Finance and Economics, 2013.

Relevance of the cases: The source of funding for this project consists of three parts: first, waste disposal fees; second, income from the sale of electricity; third, financial subsidies to new energy sources. If only have waste disposal fees, the benefit return cannot afford the repayment. In order to increase incomes, some garbage disposal projects also adopt a circular economy model to process some rubbish into building materials.

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Source: http://www.cseg.cn/html/qxzgs/ljfdc/13/08/48.html

The third one: Government undertake part of investment to increase project benefit return Some green municipal projects will need huge investment, it will be quite difficult to attract green finance because of the funding is quite limited.. In this case, municipal government can divide the project into two parts. Government undertakes the investment in part A and makes social capital to undertake the investment in part B, which can reduce the cost of social capital and increase their benefit return, so as to attract various green financial funds. For example, in biomass projects, local government can undertake investments in collection and transportation of kitchen waste while allowing social capital to undertake the construction and operation of investments that convert the waste into biomass. In this way, the cost of social capital is greatly reduced, thus this green municipal project can get benefit return above the market average level. Case 25: Beijing Subway line 4 project Project Introduction: Beijing metro line 4 began to construct in August 2010, and was officially open on September 28th, 2009. The project has a total investment about 15.3 billion yuan, and it is composed of two comparatively independent parts, i. e. part A and part B. Part A is the civil works, including tunnelling, demolition, laying tracks, etc. The cost of part A is 10.7 billion yuan (about 70% of the total cost), of which is paid by the government. Part B adopts PPP model to provide electromechanical facilities, of which the cost is 4.6 billion yuan. The SPV company, Beijing MTR Corporation Limited is mainly responsible for part B. The company is also the franchise of the whole project, which is responsible for the operation and maintenance of the project, and the concession period is 30 years. The registered capital of the SPV company is 1.5 billion yuan, of which 49% is from social investment while 51% is from government investment. The remaining 3 billion yuan required by part B is provided by project financing from commercial banks. Municipal Finance â&#x20AC;&#x201C; EC Link Woking Papers - Draft Version 1.5

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Funding Sources: Beijing MTR Corporation Limited recoups the investment by passenger fares and commercial advertising revenues. Subway fares are the core of operating income in the metro project and pricing power of line 4 project is grasped by the government. Beijing adopted a policy of the unity of the 2 yuan subway fares before, and since December 28th, 2014, the subway fares were charged by mileage. As the passenger fares before were too low to cover the operating cost, the government had to provide subsidies to the project to make up the gap between actual price levels and government pricing, which increased the governments' financial burden. After the reform of subway fares, the burden of the government has been greatly mitigated. The government collects rent from the franchise company for the asset of part A, and adjust the rent according to the passenger flows. Source: Mingyi Lu. Case Study on Applications of PPP Financing Method in Rail Transportation Sector[D], China University of Geosciences (Beijing),2014. Qianru Yang. Analysis on Influencing Factor about Decision-Making on Concession Term of PPP Beijing Subway[A]. International society for informatization and engineering. Proceedings of 2016 2nd International Conference on Economy, Management and Education Technology(ICEMET 2016)[C]. International society for informatization and engineering, 2016:5.

Souce: Mingyi Lu. Case Study on Applications of PPP Financing Method in Rail Transportation Sector[D], China University of Geosciences (Beijing),2014.

Relevance of the cases: Beijing Metro Line 4 project, it was designed as AB two parts. Part A is civil works such as land acquisition and house demolition, cave structure and orbital construction,This part of the project is difficult to design a profit, so investment is undertake by government. This part of the investment is about 10.7 billion yuan, for pure public financial support. However, vehicles, signals, automatic fare collection systems and other equipment that related to operation, the investment is about 4.6 billion yuan, this part

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of the investment can produce stable earnings, so it is designed as a PPP project to attract green finance capital.

The forth one: Designing project benefit returns through government leasing and government procurement There are also some green municipal projects that don't have any income, they can still introduce social capital by the government lease. It has following benefits for the governments: first, the governments don’t have to invest for the green municipal project all at once, they can use 10 years or 20 years’ amortization. Second, it can reduce the total amount of investment, and social capital can reduce costs through market-based management and design. Third, it can improve operational efficiency. For example, urban green parks basically have no income, because they are not allowed to collect tickets, or to build a lot of amusement facilities, in order to guarantee the ecological and environmental benefits. But through government leasing, the government can provide the social capital that is in charge of the financing, construction and operation, with meager profit that is a little more than the market average. Although meager profit, but because the financing amount of municipal finance projects is rather large, so the total revenue is relatively large, therefore they have necessary conditions for choosing from green credit, green assets securitization, green bond, green fund and other green financial instruments. Case 26: Nanning, Guangxi Province: Nakaohe Watershed management project Project Introduction: Nanning Nakaohe watershed management project adopted PPP mode. The project is composed of 7 subprojects, including riverway regulation, waste interception, water quality purification, ecological restoration, etc. In 2015, a project company was jointly established by the contributor representative of the municipal government, Nanning Jianning Water (Group) Co. Ltd, and the social capital, Beijing Drainage Group Co. Ltd. The total cost of the project in first two years was 1.19 billion yuan. The registered capital of the project company is 0.2 billion yuan. The rest of the funds are raised by the social capital, and bank loans are the main source of it. As of June 16th, 2016, the project company had borrowed 0.24 billion yuan from China Construction Bank Guangxi Branch, with the benchmark interest lowered by 10%. Funding Sources: Nanning municipal government pay for the performance of the project quarterly. The government has established a set of performance evaluation indicator system, and hired qualified third-party institutions to monitor and evaluate the project monthly. In addition, the government pays basin service fee annually as subsidy. Source: Financial Times. Starting from the change of Nakaohe, China Construction Bank centralized resources to promote supply-side reform, June 16th, 2016. http://www.ccb.com/cn/ccbtoday/mediav3/20160616_1466066503.html China Finance. Nakaohe: a practice sample of PPP projects, May 4th, 2017. http://www.cfen.com.cn/cjxw/ppp/201705/t20170504_2593718.html

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Source: China environmental protection online, April 26th, 2017. http://www.hbzhan.com/news/Detail/116868.html

Relevance of the cases: The total investment of this project reached 1.19 billion yuan,, there are great difficulties if public financial one-time pay of the cost , because Nanning is not a very wealthy city.However, river pollution control must take immediate action, or residents' health will be affected.Therefore, Nanning City take leasing and government procurement model. Government and social investors signed a 10-year agreement. social capital invest to build all the infrastructure needed for pollution control in the basin,Nanning Municipal Government leased these facilities through government procurement during the ten-year contract period, they pay for the performance of the project quarterly. Most crucially, the government pays for the operational performance of these facilities, paying for the public services provided by these facilities,therefore, the standard of lease payment is strictly in accordance with the changes in the watershed water quality standards brought by the operation of these facilities. The government has established a set of performance evaluation indicator system, and hired qualified third-party institutions to monitor and evaluate the project monthly.

To sum up, for the green city project, whether currently has a stable income, or a portion of the stable income, or no income, can be designed by the green financial technology.

5.7 Outlook 5.7.1 Context and Future Needs The transition to a low-carbon economy in China will require huge investments, but these investments will provide benefits in the form a more energy efficient and a more energy secure society. Chinaâ&#x20AC;&#x2DC;s transition to a low-carbon economy is an integral part of the modernization of China and the leapfrogging from a pre-industrial age to a post-industrial society.

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The challenge is clear: the foundations for green growth will lie primarily in the development of low-carbon cities, cities that combine integrated solutions for their energy provision, the development of transportation networks, for waste recycling, for energy efficient buildings. The financing requirements will be enormous and municipalities in China will require new financial instruments to respond to the challenge. 1 Trillion USD Investment Needed in Five Years to Build Low-Carbon Cities in China. A new research report series Green Finance for Low-Carbon Cities, authored by the Paulson Institute, Energy Foundation China and the Chinese Renewable Energy Industries Association, estimates that 6.6 trillion RMB ($1 trillion) will be required over the next five years to build low-carbon cities in China. This includes investments in efficient buildings, low-carbon transportation and clean energy in Chinese cities. “China has set an ambitious goal of peaking national carbon emissions around 2030, wisely recognizing that economic growth and fighting climate change go hand in hand,” said Michael R. Bloomberg, U.N. Secretary-General’s Special Envoy for Cities and Climate Change, Founder of Bloomberg L.P. and Bloomberg Philanthropies. “That leadership helped make the Paris climate agreement possible – and now, China is looking for creative ways to finance the low-carbon infrastructure needed to reach its climate goals.” “Finance is at the heart of the economy, and green urban development in China cannot happen without support from green finance,” said Ma Jun, Chief Economist, Research Bureau of People’s Bank of China, who chairs the Green Finance Committee, China Society for Banking and Finance. “Greening of buildings, transportation and energy will be crucial as these sectors are the main sources of urban emissions.” Green Building. According to the Buildings report, authored by the Paulson Institute, during the 13th Five-Year-Plan period, China will need to invest RMB 1.65 trillion ($254 billion) to support the construction of greener buildings and the large-scale retrofits of existing houses and commercial buildings. “The government has made a strong commitment to promote building efficiency through improved building codes and public subsidies, and we have seen mounting interest from the private sector to provide capital investment to these projects as well,” explained Dr. Kevin Mo, Managing Director at the Paulson Institute, who wrote the report. “We are working on innovative green financing mechanisms, and a government guarantee program for green buildings backed up by a third-party rating system would deliver enormous potential for economic growth in this area of sustainable buildings.” Green Transport. The 13th Five-Year-Plan has laid out ambitious development goals for green transportation in Chinese cities, requiring a total of 4.45 trillion RMB ($684.9 billion) to invest in the infrastructure for urban rail, bus, electric vehicles, bike and urban roads. “One challenge for financing urban transportation projects is the heavy reliance on local government debt for both the capital investments and the operations, which exposes cities to high credit risks,” said Dr. Wang Zhigao, City Program Director at Energy Foundation China, who led the Transportation study. Dr. Wang suggested that “financing models such as public-privatepartnership (PPP) can help diversify sources of funding and secure more investments for lowcarbon transportation projects.” Clean Energy. “Support for the growth of distributed solar PV is the most important way for cities to help decarbonize the energy sector,” added Peng Peng, Policy Research Director at the Chinese Renewable Energy Industries Association (CREIA). The Energy report, written by CREIA and other partners, estimates that 500 billion RMB ($77 billion) is needed to fulfil the development goal by 2020. “Besides distributed solar PV, we also encourage cities to explore ways to purchase green electricity from other cities, to expand the market demand for clean energy and to help cities achieve their low-carbon goals.” “Ultimately, this initiative creates a platform for leading sustainability experts and financial sector practitioners to come together, and propose ambitious but practical recommendations to unlock green investments for Chinese cities. We believe that the public and private sectors can collaborate and contribute to China’s green financing opportunity in meaningful ways,” said Antha N. Williams, who directs the Environment Program at Bloomberg Philanthropies. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Source: http://www.bloomberg.org/press/releases/1-trillion-usd-investment-needed-five-years-build-low-carboncities-china/

Figure 52: Investment demand estimate for key sectors in the 13th Five Year Plan (20162020)

Source: Bloomberg Philantropies et al. 2016. Green Finance for Low-Carbon Cities. p.12 http://www.bbhub.io/dotorg/sites/2/2016/06/Green-Finance-for-Low-Carbon-Cities.pdf

5.7.2 Green Finance Framework and Institutions For green municipal financing to work in China, there is a consensus on the need for a system which provides low carbon subsidies, procures low carbon products which have undergone certification, and preferential credit mechanisms for green investments. The development of tailored financing modes supportive to green investments shall broaden financing options, these should include government awards for extending financial support to green investments through debt promotion in infrastructure and land-based investments. Government should explore the greening potential of financing vehicles like PPP and BOTs. Additionally, special funds and diversified instruments are needed for guarantees to secure private capital investments. For guarantee purposes, assistance through land allocation, licensing, and green certification shall be provided to ensure low-carbon design and low-carbon operations.106 The International Institute for Sustainable Development, Beijing has developed a framework for action which covers the legal framework, coordination mechanism, policy support, information sharing, and the green of existing policy banks.

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Green Finance: Framework for Action A. Establish and strengthen legal frameworks – including environmental laws and law enforcement that contribute to the demand for green finance. B. Improve coordination and information sharing between environmental, financial and industrial regulators and with third-party institutions C. Develop comprehensive policy support for green finance 1. Align monetary policy with sustainable development goads 2. Continue to strengthen green credit policies in banking 3. provide incentives to grow the market for green securities, including green bonds 4. expand the scope of green insurance and strengthen environmental liability insurance regulations. 5. use fiscal incentives to accelerate the development of green finance markets. D. Foster the development of information infrastructure with information on environmental costs and a green credit rating system. E. Green the policy banks as leaders in establishing markets and best practices for commercial banks. Source: Zhang Chenghui, Zadek, S., Chen Ning, Halle, M. 2015. Greening China´s Financing System – Synthesis Report. International Institute for Sustainable Development, Beijing. http://www.iisd.org/sites/default/files/publications/greening-chinas-financial-system-synthesis-report.pdf

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Green bank in China Discussions have taken place over whether China needs a specific national green bank, tentatively named the ‘’China Ecological Development Bank’’, which would only provide financial services for green industry. This green bank could, over time, also be a prominent issuer of green bonds, taking advantage of its government-backed credit rating. The establishment of this green bank is still in its formative stages: it was one of the recommendations included in the policy proposals from green finance task force of the PBoC and the UNEP Inquiry in April, 2015. The proposals explicitly open up the opportunity for future green bond issuance to capitalize the prospective green bank.107 China is also considering establishing local green banks as a part of its plan to develop local green financial systems, building on the efforts of some local commercial banks in China that have already developed green financial products and services.108 These local green banks would also be potential green bond issuers. Local green bank branches, of which the development is also within the local green financial system development framework, can also help develop local green bond market. Similar to the Science and Technology Bank Branches set up by local banks, who provide financial services specially for science and technology companies, local green bank branch could also be established to provide financial services for green industry only. These branches could raise capital through green bond issuance, which help develop the local green bond market. Green banks or the greening of policy banks. However, if the existing Chinese policy banks can be greened, the question of whether or not there needs to be a specialized green investment bank, potentially becomes less pressing. In Europe there are existing banking institutions that have similar functions, for instance the Credit Agricole in France, that supply credit to the French agricultural industry, or the European Investment Bank in Luxemburg, which raises funds on the capital market andprovides loans and other blendedproducts to support EU projects. Spain and Germany also have such institutions (Instituto de Credito Oficial and KfW Banken gruppe, respectively) which are state-owned and support a range of investments in sectors including environmental protection and energy efficiency. Some in the UK have proposed to convert the Royal Bank of Scotland (RBS) into a green infrastructure bank. In the UK, the government has set up the Green Investment Bank (GIB) to address the market failure and enable investments in the green sector – its priority sectors are offshore wind, waste, domestic and non-domestic energy efficiency. Green banking windows in existing institutions can provide multiple opportunities for the government to deliver low carbon investment by: (i) acting as a mechanism to ensure that government guaranteed funds are effectively earmarked for green infrastructure (hypothecated) without a change in policy on the non-hypothecation of central government funds; (ii) holding and disbursing the debt capital raised from the issue of green bonds; (iii) allowing government to direct investment of this capital through strict investment criteria (i.e. specify which assets can be funded through green infrastructure bank governance systems); (iv) acting as loan guarantor on behalf of the government through allocation of a statutory government guarantee or green infrastructure bank guarantee scheme; (v) facilitating a transparent communication of government policy and reporting on levels of success; and (vi) facilitating, financing and syndicating a delivery of low carbon investment programmes such as a national energy efficiency scheme.

Peoples’ bank of China/United Nations Environment Programme (2015), Establishing China’s Green Financial System, Available from: http://www.unep.org 108 These include the Bank of Nanjing, Bank of Qingdao, Bank of Beijing and Rural Commercial Banks, etc. 107

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Carbon Efficient Financial Index. ¨China has launched its first carbon efficient financial index in September 2015. In a bid to direct capital towards its burgeoning low-carbon industry. The SSE 180 Carbon Efficient Index, launched by The Shanghai Stock Exchange (SSE) and China Securities Index, will identify low-carbon companies with financial performance that matches or exceeds their peers. The index is expected to support investors to reduce their environmental risk exposure while improving profits and growing the green and low-carbon economy. Simulations by the financial market suggest the new index's carbon intensity is almost 85 per cent less than that of the benchmark SSE 180 Index, while returns from the carbon efficient index have been 18 percentage points higher since July 2013. The index was created with help from environmental consultancy Trucost, which assessed the carbon intensity of all companies in the benchmark index by analysing the environmental performance of more than 50,000 stock exchange listed companies and their supply chains.¨The new index is expected to help accelerate the country's green economy. ´In today's China where green growth is the new norm, green indexes such as the SSE 180 carbon efficient index will provide the market with a great tool for green financial innovation, guiding more capital and more resources towards low carbon and green companies and industries, which will in turn accelerate the green growth economy.´... Chinese industry leaders, government officials and academics are expecting the nation to launch its carbon price at 39 yuan ($6.12) in 2017, the year the new emissions trading scheme (ETS) is anticipated to be introduced. The survey conducted by non-profit group China Carbon Forum asked 304 respondents how they believed the carbon dioxide permits would be rolled out. All groups said that they expected the government to increase the cost of the permits over time, with the price estimated to increase to 59 yuan ($9.28) in 2020 and 70 yuan ($10.98) in 2025, while 82 per cent said that they thought the new scheme would impact on investment decisions. The predicted cost would mean that the market price would be below current EU price of €8 ($8.92) but above the Regional Greenhouse Gas Initiative (RGGI) levels of $6.¨109

Green Finance Pilots will start soon "The 13th five year plan on financial industry "will be introduced as the end of this year, in which the development of green finance will be an important part of the financial system. In order to better implement the overall deployment of green development in financial industry, the central bank is to promote green finance pilot projects. Chen Yulu, the vice governor of the People's Bank of China, said at the China Green Finance Forum on April 23,2016 that the first batch of pilot areas will start in 2017, including Zhejiang, Guangdong, Xinjiang and Guizhou. The pilot provinces will focus on green financial management system innovation, supporting preferential policies. Including green credit, re-loans, as well as green bonds subsidy, tax relief, and local green development fund policies. Green finance pilots, marking the systematic exploration of China's green financial system, officially rolled out. This ambitious green finance package, which highlights remaining uncertainties, and provides recommendations for success, has been reviewed by the New Climate Economy’s working paper on the “The Knowns and Unknowns of China’s Green Finance”. It suggests that China build the demand for green investment through penalties and market mechanisms, develop a comprehensive tracking system to assess efficacy of interventions, ensure that financing

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models meet the specific requirements for sustainable infrastructure, and build quality green infrastructure that displaces older, less-efficient infrastructure.110 Green Bond Giant Awakened by Countries Spending to Save Climate ¨Governments spending to avert climate change have stirred a green bond giant inside the global sovereign debt pool worth trillions of dollars. Nine nations in 2017 are expected to issue securities that help them meet climate pledges, according to Climate Bond Initiative Chief Executive Officer Sean Kidney. Government infrastructure projects supporting renewable energy, clean transportation and sustainable agriculture are among the sectors countries could finance with green bonds, which until recently have been the domain of private companies and multilateral development banks. “It’ll be a political decision about communicating commitment to COP21 by being very public about how you’re funding, as well as doing what you say you were going to do,” according to Jonathan Weinberger, global head of capital markets engineering at Societe Generale SA. “What drives this is the broad program to call attention to the importance of the topic and the work that’s being done.” Weeks after Poland sold the first sovereign green bonds, France is roadshowing its version, which officials expect will be at least 2.5 billion euros ($2.7 billion) in size. Nigeria is expected to be third in line, with a domestic green bond in naira planned for March. Like green bonds issued by companies, securities sold by governments confer a steady stream of payments over a fixed period of time to investors. Governments are expected to grab a 10 percent share of green bonds tendered this year, in a market predicted to grow about a third to $123 billion, according to Bloomberg New Energy Finance. The sovereign share could expand rapidly if more countries start tapping debt markets with their climate commitments in mind, according to HSBC Holdings Plc. “This has always been the role of governments in terms of infrastructure, they’ve been doing it for 160 years,” said the Climate Bond Initiative’s Kidney by phone from Beijing. “Now we have to switch it to green. This is going to be a big year for green sovereigns without a doubt.” … Investors are looking much more closely at environmental sustainability when they consider where to park their capital, according to Alex Struc, a London-based portfolio manager at PIMCO Europe Ltd. “It’s massively tied to COP21,” he said referring to the December 2015 Paris agreement. “It provided a framework for private capital to marry up with a formal sovereign commitment. We’re definitely seeing increased client demand for products that can demonstrate impact or contribute to positive social change.” … Green bonds could be a way to future-proof environmental policies and plans, according to Kidney. Cash raised must be allocated to projects that meet predetermined requirements and solidify climate pledges, although the green bond market has previously seen some controversy when corporations have used the funds for ventures that environmentalists have not considered green enough. … Chinese President Xi Jinping on Tuesday … said that China’s green investments are already “paying off.” Chinese companies sold the most green bonds last year, totaling $33.6 billion, according to HSBC. The central government in Beijing is also said to be considering an issue. “We know that China’s been looking at it,” Kidney said “If they do something, it’ll be very big.” Source: Green Bond Giant Awakened by Countries Spending to Save Climate. 20 January 2017. http://www.factorco2.com/en/green-bond-giant-awakened-by-countries-spending-to-save-climate/new/921

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In June 2017, “the central government decided to set up five pilot zones nationwide… Financial institutions will further enhance their shoring-up for environmental protection projects and industrial upgrading with favourable policies on interest payments and loans. The pilot zones will be set up in Zhejiang, Jiangxi, Guangdong, Guizhou provinces and the Xinjiang Uygur autonomous region… Systematic innovation for green finance will increase the financial sector's support to improve ecology and boost the efficient utilization of resources. The … pilot zones are also an important way to continue China's commitment to the Paris climate accord… [T]he government will support financial institutions to set up green finance departments and welcome foreign capital to participate in green investments. The development of "green credit" will be encouraged to take the environmental credentials of companies into account. The country will start pilot markets for trading rights of resources such as water and energy. The central government will provide support in fiscal, tax and land policies for green industries and projects, while a risk prevention mechanism will be established. Green finance was … first officially defined in a guideline co-released by the National Development and Reform Commission and another six ministries… By definition, it means financial services that help increase investment and financing, project operations and risk management in fields such as environmental protection, energy conservation, clean energy, green transport and buildings.”111

5.7.3

Institutional Development Needs

The great challenge of green municipal financing in China currently is the gradually increasing green fund supply is not matched by green investment opportunities. Many green municipal projects cannot be accepted by the ‘green’ financing institutions, due to flaws and deficiencies in design. Green municipal projects need to be designed more carefully, with more diligence to fulfil green banking criteria. Generally speaking, green municipal projects that can recover their costs can use green financial tools, and the choice of the financing tools (green credit, green asset securitization, green revenue bonds, etc.) can be broad and flexible. The key principle will be that green financial instruments are based on the premise of stable income. However, some projects whose return is not high, will require subsidies by the government, to ensure long term cost recovery. Such projects like electric vehicle charging stations or certain leisure services, will require a long-term view. There are also some green municipal projects that do not have any income, like public parks. In order to broaden the development of green municipal finance, the government is suggested to 1) introduce policies to price ecological resources or increase the prices of ecological resources; 2) promote green finance technology, such as increase training and capacity building for the greening of municipal projects. The objective would be to understand the differences between green municipal projects versus conventional projects, and understand the concept of resource mobilisation for green investments through a Green Investment Resources Plan (GRIP) ( Tool MF 1), and a systematic approach to deciding on the most appropriate financing structure for the city’s green investments in the context of the investment plans of the city, utility or service unit, and the context of the available funding. The later could be through a Green Investment Financing Plan (GIFP) ( Tool MF 2) Compared to international best practice, China does not have all the institutional elements required for GMF fully in place. However, almost are nascent and the actual green financial instruments are relatively sophisticated. China does not have a mature public bond system to 111

Hu Yongqi. 2017. Green finance to help reduce pollution, boost industrial upgrading China Daily. 20 June 2017. http://www.chinadaily.com.cn/china/2017-06/20/content_29808230.htm

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finance public infrastructure projects, and as a result China‘s provincial and municipal governments must rely on tax income or transfers from the central government to fund the expansion of municipalities. While environmental asset exchanges have been established in Beijing, Shanghai and Tianjin, there is no cap-and-trade currently in place to facilitate trading on those markets. This leaves a market gap that the CDM Fund of China could help correct by creating incentives for domestic trading and rewarding companies that are seeking domestic opportunities to monetize their emission reductions. Domestic commercial banks in their implementation of the green credit policy are too focused on large scale projects and to not provide sufficient financing to small and medium size enterprises in the green sector. This has created challenges for medium-size renewable energy technology developers for instance, and for most energy service companies. New regulations are needed to hedge the perceived risk of investing in green tech via private equity or venture capital vehicles. China‘s domestic venture capital and private equity markets have been growing rapidly in recent years, but they are still at an early stage of development and not yet fully efficient at mobilizing green capital. China has been successful at mobilizing the Clean Development Mechanism to attract foreign financing in low carbon projects but the overall amount of transactions involved remains small compared to the global market opportunity. Lack of any viable successor to the Kyoto Protocol renders prospects for further CDM deals uncertain until its own markets function. To upscale green technologies such as wind and biomass fired power generation, China will eventually require a greater diversity in financing instruments and international support. International multilateral and bilateral funds have helped develop a commercial market for green sector technologies in China, such as renewable energy and energy efficiency, but investment needs remain enormous. In the coming decade green investment needs will be primarily in the power generation sector, in carbon and capture storage technologies, and in green transportation supported by electric vehicles. As experience from the World Bank has shown, a combination of blended financing instruments to support low-carbon project development seem to offer the best response to hedging project risks in the short to medium term. International funds can play an important role in guaranteeing private capital for small-scale activities, and for financing early stage technologies. The financial solutions to leverage existing instruments to support low-carbon growth must also be defined at the regional level. Asian economies all suffer from large financing gaps for infrastructure development, yet they all have important savings and trade surpluses. At present these savings are often invested in safe, low yielding securities such as US treasury bonds. In order to attract these savings into investments in domestic green sectors, there is a need to develop indigenous financial markets, particularly strong a strong bond market, in addition to innovative green financial instruments.112 In summary, coordinated mechanisms to leverage private sector finance, in particular such mechanisms as the use of blended finance from EU targeted grant funds and loan funding from the EIB discussed in Section 4, are needed. Given the scale of the infrastructure needs, and the fact that all infrastructure should be ‘’green’’ in order to achieve environmental targets and improve the quality of life for people, significantly increased funding will be required. However, given the difficulties likely in relation to land transfer income as a source of existing funding, and the limited capacity of existing taxation schemes to compensate for any reduction, serious consideration should be given to GMF funding models set out in Section 4, particularly those based on the use of geographicallytargeted taxation which funds infrastructure providing tangible benefits for the residents of that location. Such funding mechnaisms constitute a ‘’Green Bonus’’ and are based on allowing increased intensity of development for (and around) green projects – the profits from which are shared with the local government in a ‘’win-win’’ arrangement.

Bhattacharya, B. 2010. Financing Asia‘s Infrastructure: Modes of Development and Integration of Asian Financial Markets, Asian Development Bank Institute, No. 229. Manila. 112

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6 VALUE ADDED and CROSS CUTTING THEMES Value added

Cross-cutting themes

Has made clear distinction between financing and funding activities relating to green investment and the linkage between these two functions – particularly in the context of deteriorating local government finances.

Need to address sustainable funding of local governments, particularly in relation to their capacity to fund/ catalyse green investments designed to implement climate policies – the use of a ‘’Green Bonus’’ system should be considered..

Such arrangements should consider the impact of potential funding and financing Has emphasised that, in the context of city models relating to incentives for green climate plans, city planning systems need to investment/ ecologically appropriate include consideration of the investment behaviour. implications of national climate policy and of consequent financing/ funding implications. Has set out the requirements of a system of Need to establish an ‘’ecosystem’’ of interinstitutions that are needed to support such relating institutions to produce a pipeline of investment, in particular: vialble green investments in cities, that ensures;  Grant challenge funds;  Project development systems  Project development facilities; generate and effectively structure such projects;  Knowledge networks – at both the  Financing models are appropriate to political and technical levels; the type of project, in particular they  Large scale financing institutions with will be different for adaptation and capacity to ‘’crowd in’’ the private mitigation projects; sector; and  Financing models are designed to maximise the leverage of private  Well-structured implementing entities sector investment in green utilising a wide range of financing and infrastructure; and funding models and having flexibility in structuring projects.  Capacity and coordination among existing and proposed knowledge platforms is strengthened. Has designed two practical tools to assist local governments to plan financing and funding activities for investments in general and green investments in particular.

Need to test, refine and then institutionalise such tools as standard approaches to local government funding and financing of investments in general and of green investments in particular.

7 AVAILABLE RESOURCES AND TOOLS RECOMMENDED READING

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Zhang Chenghui, Zadek, S., Chen Ning, Halle, M. 2015. Greening China´s Financing System – Synthesis Report. International Institute for Sustainable Development, Beijing. http://www.iisd.org/sites/default/files/publications/greening-chinas-financial-system-synthesisreport.pdf Zadek, S. and Zhang Chenghui. 2014. Greening China´s Financing System – An Initial Exploration. International Institute for Sustainable Development, Beijing. http://www.iisd.org/pdf/2014/greening_china_financial_system_en.pdf Lindfield, M., Latay, V., Docta, V.M. Financing Sustainable Cities. in: Lindfield, M. and Steinberg, F. (eds.). 2012. Green Cities. Manila: Asian Development Bank. Urban Development Series. Manila. pp. 296-372. http://www.adb.org/publications/green-cities McKinsey Global Institute. 2009. Preparing for China´s Urban Billion. McKinsey. http://www.mckinsey.com/insights/urbanization/preparing_for_urban_billion_in_china World Bank. 2010. Eco2 Cities. Washington. http://www.worldbank.org/eco2 Brandt, N. (2014), “Greening the Property Tax”, OECD Working Papers on Fiscal Federalism, No. 17, OECD Publishing. http://dx.doi.org/10.1787/5jz5pzw9mwzn-en EU 2013, European Innovation Partnership on Smart Cities and Communities Strategic Implementation Plan http://ec.europa.eu/eip/smartcities/files/sip_final_en.pdf European Council for Energy Efficient Economy (ECEEE): Energy Efficiency obligations – the EU experience, 2012 http://www.eceee.org/policy-areas/EE-directive/energy-efficiencyobligations ICLEI, 2010, Cities in a post-2012 climate policy framework Bonn http://ccsl.iccip.net/cities_in_a_post_2012_policy_framework.pdf KPMG, 2014, Gearing up for green bonds http://www.kpmg.com/global/en/issuesandinsights/articlespublications/sustainableinsight/pages/gearing-up-for-green-bonds.aspx Lindfield, M., Latay, V., Docta, V.M. Financing Sustainable Cities. in: Lindfield, M. and Steinberg, F. (eds.). 2012. Green Cities. Manila: Asian Development Bank. Urban Development Series. Manila. pp. 296-372. http://www.adb.org/publications/green-cities Medda, Francesca Romana, Modelewska, Marta, Land Value Capture as a funding source for urban investments, the Warsaw metro system, ERNST & YOUNG: Better Government Program 2009-10, London, http://www.ucl.ac.uk/qaser/pdf/publications/ernst_young Merk, O., Saussier, S., Staropoli, C., Slack, E., Kim, J-H (2012), ―Financing Green Urban Infrastructure‖, OECD Regional Development Working Papers 2012/10, OECD Publishing Paris; policy/WP_Financing_Green_Urban_Infrastructure.pdf

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McKinsey Report 2009: Pathways to a low-Carbon economy, version 2 of the global greenhouse gas abatement cost curve http://nortonsafe.search.ask.com/web?q=%3A+Pathways+to+a+lowCarbon+economy%2C+version+2+of+the+global+greenhouse+gas+abatement+cost+curve& o=apn10506&prt=cr The Grantham Research Institute on Climate Change and the Environment of the London School of Economics and Political Science, 2014: The 2015 Global Climate Legislation Study http://www.lse.ac.uk/GranthamInstitute/wpcontent/uploads/2015/05/Global_climate_legislation_study_20151.pdf UNEP 2012: Cities and Carbon Finance: A feasibility study on an urban CDM http://www.unep.org/urban_environment/PDFs/UNEP_UrbanCDMreport.pdf Climate Bonds Initiative, International Institute for Sustainable Development, iisd : Growing a green bonds market in China: key recommendations for policy makers in the context of Chinaâ&#x20AC;&#x2122;s changing financial landscape issued in spring, 2015 Climate Bonds Initiative, The Report 'Bonds & Climate Change - The State of the Market in 2015 http://www.climatebonds.net/resources/publications/bonds-climate-change-2015 Scaling up Green Bond Markets for Sustainable Development offers detailed action plans and best-practice examples on how to scale green bond markets. This Public Sector Guide is the result of a partnership between the Climate Bonds Initiative and the UNEP Inquiry into the Design of a Sustainable Financial System. The Guide includes an annex from the World Bank Group as an additional resource for policymakers in emerging economies to assist them in foundational bond market development. http://www.climatebonds.net/resources/publications/scaling-green-bond-markets-sustainabledevelopment How to issue a green muni ---bonds the Green Muni Bonds Playbook http://www.climatebonds.net/get-involved/green-city-bond-campaign/US 2014 Bonds and Climate Change Report http://www.climatebonds.net/resources 2013 Bonds and Climate Change Report http://www.climatebonds.net/resources 2012 Bonds and Climate Change Report http://www.climatebonds.net/resources

7.1 Policy http://www.covenantofmayors.eu/index_en.html

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The Covenant of Mayors is the mainstream European movement involving local and regional authorities, voluntarily committing to increasing energy efficiency and use of renewable energy sources on their territories. By their commitment, Covenant signatories aim to meet and exceed the European Union 20% CO2 reduction objective by 2020. http://ec.europa.eu/clima/policies/package/index_en.htm The climate and energy package is a set of binding legislation which aims to ensure the European Union meets its ambitious climate and energy targets for 2020. It is part of Europe 2020 target headlines, which is the EU's growth strategy for the coming decade. In a changing world, the EU should become a smart, sustainable and inclusive economy. These three mutually reinforcing priorities should help the EU and the Member States deliver high levels of employment, productivity and social cohesion. Concretely, the Union has set five ambitious objectives - on employment, innovation, education, social inclusion and climate/energy - to be reached by 2020. Each Member State has adopted its own national targets in each of these areas. Concrete actions at EU and national levels underpin the strategy.

7.2 Finance http://www.eumayors.eu/How-to-finance-sustainable-energy.html reference guide, webinare, best practise http://www.eib.org/products/blending/jessica/index.htm Integrated, sustainable urban-renewal projects are supported through JESSICA (Joint European Support for Sustainable Investment in City Areas). A range of sophisticated financial tools are used by the EIB (European Investment Bank) including equity investments, loans and guarantees, offering new opportunities for the use of EU Structural Funds. http://www.eib.org/products/blending/pf4ee/index.htm Private Finance for Energy Efficiency (PF4EE) instrument is a joint agreement between the EIB and the European Commission which aims to address the limited access to adequate and affordable commercial financing for energy efficiency investments by EIB. http://www.eib.org/products/blending/ncff/index.htm The Natural Capital Financing Facility (NCFF) is a financial instrument that combines EIB financing and European Commission funding under the LIFE Programme, the EUâ&#x20AC;&#x2122;s funding instrument for the environment and climate action. The NCFF will provide financial support to projects in order to generate revenue or save costs. In doing so, the Facility aims to prove to the market and to potential investors the attractiveness of biodiversity and climate adaptation operations in order to promote sustainable investments from the private sector.

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http://www.eib.org/products/advising/elena/index.htm Many EU towns and regions lack the necessary technical expertise and organisational capacity to implement large energy efficiency and renewables projects. The benefits of cutting energy use and pollution are clear, but the challenge is to guarantee value for money and timeliness, as well as securing extra funding. ELENA covers up to 90% of the technical support cost needed to prepare, implement and finance the investment programme. http://www.eib.org/attachments/efs/eibpapers/eibpapers_2010_v15_n01_en.pdf EIB Papers Public and private financing of infrastructure; Volume 15 • No1 • 2010 Evolution and economics of private infrastructure finance; http://ec.europa.eu/economy_finance/publications/country_focus/2014/index_en.htm Information on overall EU public finance

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7.3 Adaption http://www.eib.org/infocentre/events/all/climate-adaptation-in-european-cities.htm http://climate-adapt.eea.europa.eu/cities European Climate Adaption Forum the European Climate Adaptation Platform (ClimateADAPT) aims to support Europe in adapting to climate change. It is an initiative of the European Commission and helps users to access and share information on:  Expected climate change in Europe  Current and future vulnerability of regions and sectors  National and transnational adaptation strategies  Adaptation case studies and potential adaptation options  Tools that support adaptation planning  Subsection on regions and cities: Cities This section provides access to information about climate challenges and adaptation options for cities, which, although not strictly "regions", are particularly vulnerable to climate change and share many challenges. The section provides information on strategies and actions that have been developed or are currently under development. http://climateadapt.eea.europa.eu/cities Various Examples http://climate-adapt.eea.europa.eu/data-anddownloads?searchtext=urban&searchtypes=ACTION

http://climate-adapt.eea.europa.eu/viewaceitem?aceitem_id=6013 Urban adaptation to climate change in Europe – indicators and maps The recently published EEA report 'Urban adaptation to climate change in Europe' includes several indicators and thematic maps such as on heat waves, flooding, social sensitivity and factors of adaptive capacity. These maps are now also made available on the interactive Eye on Earth information service. In this form, the maps allow users to explore data from up to 500 cities in Europe and get a quick impression of some of the adaptation challenges in Europe’s cities. Furthermore, users can combine the different maps from the report choose to incorporate datasets made available by other organisations or individuals through Eye on Earth. http://climate-adapt.eea.europa.eu/viewaceitem?aceitem_id=7511 EU Strategy on adaptation to climate change (2013) The European Commission adopted the EU adaptation strategy in April 2013. Complementing the activities of Member States, the strategy supports action by promoting greater coordination and information-sharing between Member States, and by ensuring that adaptation considerations are addressed in all relevant EU policies. The EU’s role can be particularly appropriate when climate change impacts transcend borders of individual states - such as with river basins - and when impacts vary considerably across regions. The role of the EU can be especially useful to enhance solidarity among Member States and ensure that disadvantaged regions and those most affected by climate change are capable of taking the necessary measures to adapt.

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http://climate-adapt.eea.europa.eu/tools/urban-ast/step-0-0 The Urban Adaptation Support Tool complements the support and guidance on urban adaptation that is provided by EU Member States at the national level and is of special importance for urban areas in those countries, where national level tools and support are currently lacking or under development. The Urban Adaptation Support Tool is dynamic and constantly evolving, based on users' needs and feedback. It has been created through a stakeholder consultation process and aims to develop further in line with user needs. Therefore your comments and suggestions are important and very welcome. You can leave us your feedback by following the comments and suggestions link on each page of the tool.

7.4 Individual Topics http://www.iclei-europe.org/topics/sustainable-procurement/?no_cache=1 Procurement Sustainable procurement means making sure that the products and services an organization buys achieve value for money and generate benefits not only for the organization, but also for the environment, society and the economy. Sustainable procurement is also used by both public and private sector organizations to ensure that their purchasing reflects broader goals linked to resource efficiency, climate change, social responsibility and economic resilience, for example. http://climate-adapt.eea.europa.eu/viewaceitem?aceitem_id=3249 EUROSTAT Urban audit The Urban Audit provides European urban statistics for cities across 27 European countries. It contains almost 300 statistical indicators presenting information on matters such as socioeconomic and demographic data wich can provide indications regarding the adaptive capacity of cities. After a pilot in 1999, the first full-scale European Urban Audit took place in 2003 for the then 15 countries of the European Union. In 2004, the project was extended to the 10 new Member States plus Bulgaria, Romania and Turkey (25 EU countries). These were followed by 2006/07, 2009 and 2011 data collections. The scope has broadened to 329 variables for up to 323 European Union cities and 47 cities in Norway, Switzerland, Turkey and Croatia. http://www.iclei.org/resources/publications.html Local governments for sustainability ICLEI serves as an information clearinghouse on local sustainable development by producing annual newsletters, regional updates on activities, case studies, training guides and fact sheets. We also provide a variety of policy and practice manuals on topics ranging from financing energy efficiency projects to solid waste management to the use of municipal economic instruments to increase environmental performance.

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http://www.lincolninst.edu/subcenters/fiscally-standardized-cities/ Fiscal database The Fiscally Standardized Cities (FiSC) database makes it possible to compare local government finances for 112 of the largest U.S. cities across more than 120 categories of revenues, expenditures, debt, and assets. The FiSC estimates are critical for making meaningful fiscal comparisons at the city level, because the delivery of public services is organized in very different ways in different cities. The FiSC database accounts for these differences across cities in government structure, making it possible to compare many aspects of local government finances for the nationâ&#x20AC;&#x2122;s largest cities. The FiSC database can be used for many purposes. It can be used to compare property tax revenues in two cities, rank all cities by their school spending, investigate changes in public sector salaries over time, or see which cities are most reliant on state aid to fund their budgets. http://ec.europa.eu/clima/policies/ets/index_en.htm EU-Emission Trading Ssystem (ETS) The EU emissions trading system (EU ETS) is a cornerstone of the European Union's policy to combat climate change and its key tool for reducing industrial greenhouse gas emissions cost-effectively. The first - and still by far the biggest - international system for trading greenhouse gas emission allowances, the EU ETS covers more than 11,000 power stations and industrial plants in 31 countries, as well as airlines. http://ec.europa.eu/competition/state_aid/studies_reports/archive/report_bank_en.html Competition Report of the European Commission to the Council of Ministers: Services of general economic interest in the banking sector

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8 ANNEXES 8.1 Annex 1: Tool MF 1 –

GREEN INVESTMENT RESOURCES PLAN113 What is a GIRP? A green investment resources plan (GIRP) analyses past revenue performance and demonstrates which financial resources are needed in the coming three years and how the city, utility or service unit will generate this amount. This means that a clear strategy should be presented, detailing from which sources urban administrations can generate their own revenues to cover their expenses. The particular focus of this tool is on greening of investments. All capital investments in a city should be ‘’green’’ in that all should be assessed for their potential to include low carbon or pollution abating elements in design (see other Tools contained in Position Papers) and should be resilient against the impact of climate and other risks. The responsibilities and timelines for the implementation of a GIRP should also be clearly defined. All main revenue sources include taxes, service charges and fees should be included in the analysis. At the same time, when preparing GIRPs, city administrations should pay attention to expenditure requirements, financial balance at hand and revenue enhancement options. This approach will help city administrations to identify the resource gap for green investments. The definition of planned expenditure needs (what do I need to spend) when set against investment plans, sets a precise target for the revenue amount to be generated. Structure of the Tool The tool is structured by the main steps in the preparation of a GIRP:  



  

Step One sets out key issues relating to the policy and legal framework which need to be considered before beginning detailed planning. Step Two studies past revenue performance and emphasises past difficulties. The trend analysis gives important inputs for further planning and is the basis for the coming gap analysis. Step Three critically examines past expenditures. The aim of revenue enhancement is to cover the cost of essential services for citizens. Therefore, revenue generation and expenditure are directly linked. Step Four provides recommendations on areas for improvement of revenue administration. Based on the previous step, lessons learnt that need to be transformed into strategies should be developed. Step Five presents a way to allocate costs among city services. Step Six offers an assessment of potential additional means increasing municipal revenue. Step Seven critically analyses the space for financing to cover running and future costs.

Why is revenue enhancement important? The capacity for city administrations to supply urban services and undertake the necessary green infrastructure development is naturally constrained by limited financial resources. Insufficient revenue generation is most commonly the result of a combination of factors, including:

113

This tool is substantially based on the framework, adapted for Chinese conditions, provided by the GIZ Revenue Enhancement Planning methodology used in Ethiopia. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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1. Tax base: The tax base for important sources, such as the property tax and the business tax, is artificially small. This is because the city administrations and municipalities have not been updating their records and informal businesses and properties are not included in the base. 2. Tax coverage: Determined taxes, charges and fees are partly out of date, with no relation to current incomes and costs. A significant amount of economic activities are currently left untaxed. 3. Tax assessment: In the local tax administrations, tax assessment is one of the most problematic areas. This is even worse for lower income groups as they do not maintain books of accounts to demonstrate their exact performance. 4. Collection efficiency: Collection rates are poor in many city administrations and municipalities and they vary significantly from year to year. In fact, tax collection is still low relative to its tax base. As a result, the default rates and cumulative arrears are significant. The problem appears mostly in the case of land lease, trade and service taxes. 5. Payment procedure: Payment procedures are slow and inconvenient for taxpayers. 6. Enforcement mechanisms: Enforcement mechanisms are almost non-existent and the procedural legal basis to support enforcement is deficient. This further encourages defaults and adversely affects efforts to settle arrears. 7. Weak human resources: The above problems in the system of tax administration are worsened by the weak human resource capacity of revenue staff and poor incentives for enhancing performance. Combined with pressure on some traditional forms of financing (for example land transfer taxes), the massive accumulation of new infrastructure requirements and the substantial need of resources to maintain, renovate and replace older, deteriorating equipment has compounded the above-mentioned problems. This calls for generating more revenue from own and external sources such as grants, intergovernmental transfers, revenue sharing and borrowing. The major objective is to maintain a steady increase in own (municipal) revenue that is at least equal to increased inflation and population growth rates. This approach would help to offset the decline in purchasing power with inflation. How is the GIRP linked to strategic objectives? [review China process] All cities in China have development plans, consisting of strategic development objectives and structure plans. Guided by City Climate Plans, city development plans imply a set of investments that are implemented by city line-offices, city agencies and companies. In their yearly plans, the line offices submit a budget proposal including a recurrent budget (e.g. salaries) and investment proposals in order to fulfil strategic objectives (e.g. building a school). These proposals and other capital projects, such as the rehabilitation of assets, constitute the capital investment plan â&#x20AC;&#x201C; which as discussed above should incorporate green aspects in all investments. We thus term it the Green Investment Plan. To implement this plan, additional revenue is always needed. Revenue is also needed for the maintenance requirements and costs, which are then consolidated in the maintenance budget. However, not all wishes from the GIP can be fulfilled. In order to match available resources with investment needs, the city will prioritise capital investments proposals by sector as a basis for determining financing priorities (see Tool 2 Green Investment Financing Plan) which sets out the financing for priority investments.

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Cities’ Low Carbon

/Climate Plans

National & Provincial Policies

Cities’ 5 Yr Dev Plans

Green Investment Plans Green Investment Revenue

Revenue Plan

Green Investment Financing Plan (Tool 2)

Capital Investments

Both capital investments and maintenance expenditures require financial resources, which are to be generated by the Revenue Authority as planned in the GIRP. Therefore, at the beginning of each calculation the amount of available revenues should be indicated. By subtracting the recurrent expenditures the city administration can calculate its operating surplus, i.e., own resources available for capital investments. In China, some external resources are available from the national government or by donors add to this and are available for the CIP.

Recurrent Revenues

Recurrent Expenditure

minus

= Operating Surplus

plus Other Resources

= Green Investment Resources

STEP1: Considerations before GIRP drafting Each city administration must bear in mind that their GIRP should be in line with the requirements of the federal and regional constitutions and not contradict the framework of national laws when it devises its own local financial improvement policies. City administrations need to consult the following set of policies and government reform programs:    

Fiscal Policy Tax and Investment Policies Urban Development Policy Other Institutional Strengthening Needs

Further, they need to gather and integrate regional and local frameworks. In order to prepare the GIRP, a task force has to be set up, comprising of a pool of experts from different relevant disciplines. Fiscal Policy Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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   

Mobilisation of own revenue is a necessity but can also obstruct economic growth if citizens are over-taxed; Management of own revenue and expenditure of a local government should contribute to a fair distribution of income and wealth between citizens; GIRPs should not negatively affect the stability of the local economy, employment and inflation. These plans should not impair the allocation of local resources; City administrations are required to follow sound financial principles that strengthen fiscal responsibility, ensure sustainability of resources and spending, apply limits to local expenditure and create meaningful relations between local policy and expenditure patterns. Value for money should be produced through transparency and accountability.

Tax and Investment Policies 



GIRPs should be in line with the national and provincial investment and tax policies, which provide incentives to smallholder farmers, domestic entrepreneurs and direct foreign investors, stimulating in turn economic growth and prosperity; The private sector should be strongly supported by transparent and accountable services rendered with regard to delivery and pricing.

Urban Development Policy 



City administrations should use different methods for the full recovery of land development costs such as: o an appreciation tax for increases in land values; o full cost recovery charges for the capital costs of services provided to developers and land holders; and o public acquisition and development of land. City administrations should apply charges and fees (cost sharing principle) reasonably well on occupants of new areas or redeveloped areas for the provision and installation of utilities such as electricity, supply of water, drainage, sanitations, refuse collections, schools, clinics and amenities such as parks and sport grounds; • Cities should have a reliable inventory of their land; Cities should update the value of their land.

Other Institutional Strengthening Needs  

 

Cities should have an Expenditure Management and Control system which cities should consider; City administrations should harmonise and implement the expenditure management and control mechanism, which contains the reform of accounting, budgeting, procurement, auditing, and internal control principles in the preparation of the financial improvement plans; City administrations should formulate and introduce performance appraisals and incentive systems in relation to the objectives of the GIRPs; City administrations should put systems in place to take care of the quality of local services including the establishment of complaint handling mechanisms and the participation of citizens in urban affairs; City administrations should select and train suitable staff to manage these plans and their objectives; City administrations should include the GIAP context in a chapter of their code of conduct to prevent potential corruption.

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The first exercise for developing a revenue plan is analysing past revenue performance. To do so, a list of all revenue items should be produced and their past performance assessed. This includes: (a) Tax revenues from municipal services, (b) municipal rent revenues and investment incomes, (c) municipal service charges, (d) revenues of sales of goods and services and (e) other capital receipts. The trend analysis provides important inputs for further planning. It is also the basis for the subsequent gap analysis. Performance changes registered within a time span of three years are averaged out. In assessing past performance the following factors are taken into consideration: Appropriateness of valuation and assessment, timely billing, collection efficiency and enforcement mechanisms. The city’s administration collection efficiency is reviewed using two indicators: Actual efficiency and billing efficiency respectively. The key indicator used for measuring the performance is per capita revenue collection. The table below sets out the key tasks. Tasks

Details

 2.1 List all revenue items

 Identify all municipal revenue items and list them • Tax revenues from municipal services • Municipal rent revenues and investment incomes • Municipal service charges • Revenues sales of goods and services • Other capital receipts

 2.1 Assess past performance of revenue titles

 Perform collection efficiency analysis  Calculate the average performance of the last 3 years of the revenue items  Compare the per capita revenue collection of the city with other cities

 2.3 Identify main difficulties in past revenue performance

 List main problems encountered  Perform risk analysis  Rank the problems according to their impact on the revenue performance

STEP 3: Examination of expenditure management Enhancing the well-being of citizens via the provision of public services is the most important responsibility of cities. Hence, an assessment of the potential revenue sources is made on the basis of public services identified as essential. City administrations are also required to align their revenue plan with the existing National and Provincial Governments’ guidelines on Expenditure Management and Control??? and its cardinal principles of efficiency, effectiveness and economy. This includes eliminating unnecessary recurrent expenditures or costs. Put differently, city administrations are told to strive towards attaining the twin goals of providing quality urban services and customer satisfaction by maximising the sustainable flow of their stream of income and bolstering up their investment into municipal services. As an integral component of expenditure management a prudent and participatory budget planning regime geared towards indicating clearly the revenue and expenditure layouts is required. Measurable performance indicators need to be developed and implemented accordingly. Further, an estimate of cash flow broken down on a quarterly basis is being proposed. The table below sets out a checklist of key tasks for this step. Tasks  3.1 Align Expenditure

Details with

Management and Control Reform Programme

      

Follow the principles of Efficiency, Effectiveness and Economy Analyse value for money Develop mid-term fiscal planning Prepare strategic plan for 3-5 years Involve the public when preparing strategic plans Implement cost-centre budgeting (see also Step 5) Avoid misuse of public funds

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    3.2 Budgeting process

Get annual audit reports within 6 months after the end of every fiscal year Consider the goals and objectives established in the GTP Review expenditures thoroughly if financial balance is negative

 Ensure public participation

• • •

Use the participation manual of MUDC Mobilise public participation in forms of cash, labour and skill

Seek active community participation in the preparation of 3 years strategic plan  Use ‘top-down’ and ‘bottom-up’-processes for budgeting.  3.3 Assess expenditures of cities

      

Clearly distinguish capital and operating expenditures List and analyse items of recurrent and capital expenditures of last three years Assess sources of finance for each type of expenditure Compare the planned expenditures against the actual performance Calculate the per capita expenditure of the past 3 years and compare data with another, similar city Identify the controllable and uncontrollable costs of the city If costs overrun, try to balance budget by reducing unnecessary expenditures

STEP 4: Strategies to increase revenue enhancement efficiency In step 4 problems related to the efficiency of revenue administration are identified. Plausible strategies to increase revenue administration efficiency need to be examined:    

Initially the amount of revenue generated from each financial source (tax, charge or user fee) needs to be calculated. Utilising the equation made up of the five tax item components, the potential revenue yield can be estimated. Key areas of revenue administration such as tax base, tax rate, tax coverage, tax valuation and tax collection have to be examined regarding potential improvements. Further, elements impacting on the revenue yield such as payment procedures, enforcement mechanisms, human resources and tax administration capacities have to be assessed.

The table below sets out a checklist of key tasks for this step.

Tasks

Details





Calculate: Tax Revenue = Tax Base x Tax Coverage Ratio x Valuation Ratio x Tax Ratio x Collection Ratio



Hold tax base and tax rate constant and calculate potential increase of tax revenue through improving tax coverage, tax valuation and tax collection

Estimate potential revenue yields through improved administration

 4.1 Broaden tax base

 Examine the option of broadening the tax base

• More of a concern for macro-economic planners • Increasing tax base needs to be directly related to economic growth measures and proeconomic development strategies  4.2 coverage

Increase

tax

 

Start to collect relevant information on tax coverage

Use ‘Standard Integrated Government Tax Administration System’ (SIGTAS)  To improve revenue administration efficiency

• • • • • •

Setup better communication between agencies Train inspection teams Give rewards for loyal customers Consolidate database with other tax agencies Use Tax Identification Number (TIN) List the registered tax, user charge and fee payers

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• Analyse the collected data of potential taxpayers • Perform continuous inspections • Compare the status of coverage for each tax item  4.3 Consider tax rate and ratio

 

Monitor the appropriateness of tax rates Assess tariffs and rates of all services at least once in two years and contact the regional BUDC to request revision of a tariff whenever necessary

• Assessment of tariffs and rates must consider the economic situation • Conduct a survey to measure taxpayer capacity  4.4 Valuate and assess tax

 4.5 Maximise collection ratio

 4.6 Evaluate payment procedure



4.7 Implement appropriate enforcement mechanism

4.8 Develop resources capacities

human and

   

Establish mechanisms for assessing taxpayers

       

Summarise recent tax arrears, evaluate arrears using annex 1, table 7 on CD

   

Shorten payment procedures

   

Clearly communicate the enforceable legal codes

 

Produce timely data on defaulters and take appropriate legal actions

Compare any economic unit with its market value continually Create a clear procedure and encouragement for self-assessment Implement tax education programmes

Observe large, medium and small size businesses that have trouble paying taxes Identify basic reasons for non-compliance Create strong and continuous tax awareness campaign Abolish small and inefficient taxes Evaluate both uniform and timely cases of arrears Compile accurate information Allocate sufficient resources for revenue collection

Encourage self-assessment Establish different means of payment Organise payment schedule

Create a clear and uniform appeal process Conduct regular information forums for tax payers Distribute explanatory materials on the benefit of tax compliance and consequences of noncompliance; Additionally use other media (e.g. Radio, TV) to create awareness

Review fines

 

Equip the revenue staff appropriately with knowledge and material Allocate reasonable annual budget to enable offices to perform their task  Fill existing

vacancies

 

Introduce staffing plan and produce terms of reference for each employee Revise staffing plan when necessary

STEP 5: Determining the true cost of service provision – allocating costs Cities have no cost accounting system that operates on its own and correctly reflects the full costs of services and products. Hence, cities are institutionally handicapped to competently price their services and products. In due recognition of this deficit, city administrations should set up a functional cost accounting system. When putting this system in place, the first step is to set up cost centres for clearly defined municipal services. The costing department of each utility/ unit captures all costs, calculates them and allocate these to cost centres. To that effect, cities are advised to employ a cost centre approach whenever preparing their annual budgets. After having created cost centres, the costs of the services these cost centres provide have to be calculated. The table below sets out a checklist of key tasks for this step.

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Tasks

Details



 Create cost centres

5.1 Create cost centre for services

• Clearly assign responsibilities to officials • Analyse the city administration’s organisational structure and work processes for mapping the cities financial resources

• Include all major service centres in cost centres • Put unclassified cost services as auxiliary combined into one cost centre  Create line cost centres at least for the following services

• Environmental protection and regulatory services • Infrastructure services • Auxiliary services  5.2 Calculate the cost of services

   

Select services to be costed Define service or product and quantity provided Define nature of unit for calculation of unit cost Capture all costs and calculate costs for municipal services by summarising

• Direct cost of particular service • Indirect cost to provide this service



Calculate annual service charge according to the following formula:

• Annual service charge = Annual total cost divided by the number of customers • Annual service charge at 80% cost recovery = Annual cost – 20% annual costs divided by the number of customers

STEP 6: Analysis of other means of increasing revenue After having improved revenue administration (Step 4) and calculated the costs of services (Step 5), tax rates, user charges and fees may be adjusted under careful consideration of their impact on citizens. Additionally, new revenue sources should be identified. Public-Private Partnerships (PPPs) may help to reduce costs by outsourcing public services to competitive and cheaper private actors. Private actors can cross-subsidise some municipal projects that in return generate revenue through taxes, charges and user fees. To continue raising revenue from taxpayers, resources mobilised must be transparent and be seen to contribute towards the delivery of services required by taxpayers. A prioritisation of capital investment projects will be needed based on the Capital Investment Plan???. Revenue collection and investment in projects have to be interlinked directly. The table below sets out a checklist of key tasks for this step.

Tasks

Details

 6.1 Increase tax rate and  Evaluate tax rates, user charges and fee rate adjustments adjust user charges and • Consider socio-economic dynamics of the city fees • Raise institutional capacity of finance and revenue departments

• • • •

Balance tariffs with their cost of service delivery

• •

Identify the reason for the increment of the tax base of a certain item

•

Give reasons for the changes

Consider inflation Involve the public in the tax adjustment process

Make sure that the increase in tax or tariff is in support of the local development strategy and translates into additional and improved services  Review own ability to effectively raise revenue level Clearly show which tax or tariff is planned to be increased (which, when,

how)

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•

Describe the actual situation of revenue and expenditure (cost centre

approach)

•

Describe the outcome of inaction

 6.2 Introduce new taxes, user  Identify potential new taxes, user charges and fees charges and fees • Give attention to items that have high yields  6.3 Consider Public-Private Partnerships

 6.4 Choose the right option

 

Evaluate the pros and cons of PPP



Differentiate services to be provided by the government alone and services to be left for private sector involvement



Relentlessly analyse risk factor and conduct feasibility study

Carefully analyse which services can be effectively delivered to the public in this mode (e.g. waste disposal, cemeteries, …)

 Explore all options available to properly justify charges for services

STEP 7: Estimating the funding base for financing investment Only after having analysed all ‘internal’ possibilities of revenue enhancement as well as potential cooperations with the private sector, city administrations should turn to external funds for delivering services and products to the citizens. Loans or credit finance are regarded as a natural sources of capital financing. To utilise those sources credit-worthiness is vital. Further, good governance principles such as accountability and transparency need to be applied. A thorough assessment must take place prior to the decision to borrow. Debt management must be taken into account before an arrangement with a financial institution is made. Hence, city administrations are advised to:  

limit their borrowing to capital expenses, large and costly projects as well as income earning investments, explore sources and methods of borrowing, • assess their borrowing capacity, and • consider the debt management afterwards.

A checklist for Step 7 is set out below. Tasks

Details

 7.1 Understand the purpose and extent of borrowing



Borrowing should be restricted to:

• Long-term loans for capital expenses • Large and costly projects which have long term utility • Investment which is expected to earn income



Urban authorities should not borrow at any rate, especially not to cover:

• Short-term cash-flow deficit • Deficit in the annual operating budget  7.2 Sources and methods of  Potential sources: (a) city administrations credit enhancement facility, (b) sinking fund investment bond, (c) intermediary lending institutions, (d) city administration bond market, (e) borrowing city administration borrowing subsidisation grant  Since the borrowing process is long, get approval

• •

At city level: city cabinet and city council

At regional level: Board, BoFED, regional government council and regional council • At federal level: MoFED  7.3 Assess borrowing capacity

 

Only borrow to the limit you can service your debt Answer the following questions critically

• Does the investment financed by a loan actually lead to economic growth? • How long does the expected economic growth take to materialise? • Does such economic growth increase the specific revenue, which the borrowing authority does or can exploit?

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 7.4 Consider management

debt

    

No long-term debt for current expenses Retire short-term debt within 12 months Limit yourself to the maximum per capita loan Limit long-time borrowing to capital investment Fix your annual debt service so it will not exceed the limited percentage of the total operating revenues

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8.2 Annex 2: Tool MF 2 –

GREEN INVESTMENT FINANCING PLAN What is a GIFP? A green investment financing plan (GIFP) provides a systematic approach to deciding on the most appropriate financing structure for the city’s green investments. In the context of the investment plans of the city, utility or service unit, and the context of the available finding (Tool 1) and the local capital markets,114 the tool will generate a financing plan for the investment pipeline. This will provide the basis of a clear strategy to be carried out by the finance unit of the entity concerned. The responsibilities for its implementation should also be clearly defined. Some financing sources will require specific legal structures and these both need to be costed into the project and to be established in a timely fashion. The main revenue sources for funding, potentially including taxes, service charges and fees, need to be assured (‘’ringfenced’’115 in the case of PPPs) so as to repay financing over time. Structure of the Tool The tool is structured by the main steps required to prepare a GIFP: 



Step One sets out the key information that needs to be assembled by the unit coordinating the GIFP, in particular: the estimated project costs, broken down by major component; the sectoral priority of the project (derived from a structured project prioritisation exercise);116 documents potential financing sources and funding context (see Tool 1 GIRP) including the flow of grant finance linked to particular types of project types. Step Two is a structured analysis of all projects and their main components to determine which projects and/or components could recover their costs from user charges or other means and could thus be implemented/ financed by the private sector. Step Three classifies and prioritises projects by investment size into those that are a) small and urgent and thus must use current revenue, and b) those that are large or that are small but less urgent and can be ‘’bundled’’ into larger investment packages these will need to be at least partially financed. Step Four is a ‘’market sounding’’ relating to a) the likelihood of attracting private investors and/or finance to those projects identified for private sector implementation117 and b) the cost and timing of potential private and public financing (international – including all costs – and national) of non-private investments. Step Five plots needed financing for prioritised projects (net of small urgent projects) and potential tied external grants, among projects according to their economic IRR and urgency as determined by the GAM approach in Step 3 over the investment period (including phasing of projects/ components). Step Six allocates recurrent revenue surplus (net of small urgent projects) and potential tied external grants, among projects according to their economic IRR and urgency using a GAM approach – the GIFP.

The capital markets provide finance (equity and debt) for periods of over one year – all largescale projects will need access to such finance. 115 That is, legally separated or guaranteed stream of revenue tied to a particular project or programme. 116 Potentially a Tool 3 similar to CDIA’s City Investment Programming and Prioritisation Tool. 117 If there is no interest, or if the likely charges are deemed unacceptable, then the project(s) revert to public sector implementation and the process reverts to Step 2. 114

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

Step Seven describes the process of establishing the legal and other structures required to implement the plan – and for monitoring the performance of financing, evaluating its effectiveness and reallocating resources as circumstances change (on a quarterly basis).

Why is planning for financing important? The capacity for city administrations to supply urban services and undertake the necessary green infrastructure development is naturally constrained by limited financial resources and the level of development of the local capital market. Ineffective performance relating to financing is most commonly the result of a combination of factors, including: 8. Revenue base and yield: Given the capacity of a city or entity to repay financing is constrained by its net income, this issue is the basis of financing and is addressed in Tool 1 – the Green Investment Resource Plan. Of particular importance in respect of PPPs are caps on user charges. 9. Procurement Process Efficiency: Over-detailed and lengthy procurement processes that can be ‘’second-guessed’’ by oversight agencies add to time and costs and thus to financing costs. 10. Restrictions on borrowing etc: Although prudential standards are essential, artificially restricting access to capital markets stifles both city investments and the development of the capital markets. 11. Efficiency and access to local capital market: Access complex, lengthy and then very short term. Some instruments eg bonds, have high transactions costs for small amounts. Institutions restricted in the types of investments they can finance. 12. Transparency and contract execution failures: Undertaking financing in a noncompetitive manner potentially increases the cost of financing – thus reducing the amount of financing that can be undertaken. Experiences of non-transparency in procurement and/or abrogating contracts also increases the cost of finance as financiers and private investors increase their risk premium. 13. Weak human resources: The above problems in the finance system are worsened by the weak human resource capacity of financial planning staff and poor incentives for enhancing performance. Building the capacity for a transparent finance planning process provides the opportunity to maximise the effectiveness of financing (in terms of cost and timing) and to minimise the negative implications of some of the above contextual failings. The massive accumulation of new infrastructure requirements and the substantial need of resources to maintain, renovate and replace older, deteriorating equipment has compounded the urgency of this process. The major objective is to maintain a steady increase in the sustainable financing available to the city or entity, enabling investments to keep pace with population growth rates and the expectations of citizens for a better quality environment. How is the GIFP linked to strategic objectives? All capital investments in a city should be ‘’green’’ in that all should be assessed for their potential to include low carbon or pollution abating elements in design (see other Tools contained in Position Papers) and should be resilient against the impact of climate and other risks. Guided by City Climate Plans, city development plans imply sets of investments which require financing. Cities in China have many different agencies and other entities that engage in investment. But the financial impact of investment financing costs, and associated operating and maintenance costs implications needs to be consolidated into city financing plans so that such plans will be sustainable. This is the role of Tool 1. Tool 1 and this tool can also be used y a sub-set of the city government – a utility or a urban development investment company for example.

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Prioritised sectoral Plans

Funding Context (Tool 1)

Private sector potential? Market sounding Green Investment Revenue Financing Plan

Implementation structures

Capital Investments

STEP 1: Information base for GIFP drafting Step One sets out the key information that needs to be assembled by the unit coordinating the GIFP, in particular: the estimated project costs, broken down by major component; the sectoral priority of the project (derived from a structured project prioritisation exercise);118 documents potential financing sources and funding context (see Tool 1 GIRP) including the flow of grant finance linked to particular types of project types. Format for costs Project

Component

Cost ($m)

Sector priority

Narrative Description

A B etc Financing potentials Undertake analysis of the national capital market and potential international financing potentials.

118

Potentially a Tool 3 similar to CDIAâ&#x20AC;&#x2122;s City Investment Programming and Prioritisation Tool.

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The figure below shows the breadth of options.

Format for documenting funding potentials Funding source

Year 1

etc

Net Local Revenue (may need to be subdivided if not fungible across capital costs) Grant Type 1 Grant Type 2 etc

Format for financing sources (include LG funding at opportunity cost) Financing Source

Maximum Yield

Processing Interest Time rate

Transactions Comments cost (MRV (safeguards etc) etc)

X Y etc

STEP2: Private sector potential Step Two is a structured analysis of all projects and their main components to determine which projects and/or components could recover their costs from user charges or other means and could thus be implemented/ financed by the private sector.

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Format for Private Sector Analysis Project

Components

Potential for full cost recovery (describe issues) Strong

Some

Cost ($m)

None

A B etc

STEP 3: Project triage Step Three classifies and prioritises projects by investment size into those that are a) small and urgent and thus must use current revenue, and b) those that are large or that are small but less urgent and can be ‘’bundled’’ into larger investment packages. Step 3A: bundle small, non-urgent projects according to technical feasibility within sectors. Step 3B: conduct a cross-sectoral Goals Achievement Exercise (CDIA CIIPP-based) of all large projects. Appendix: Description of GAM methodology

STEP 4: Market sounding Step Four is a ‘’market sounding’’ relating to a) the likelihood of attracting private investors and/or finance to those projects identified for private sector implementation119 and b) the cost and timing of potential private and public financing (international – including all costs – and national) of non-private investments. Appendix: Market sounding from VFM guidelines

STEP 5: Investment timeline Step Five plots needed financing for prioritised projects (net of small urgent projects) and potential tied external grants, among projects according to their economic IRR and urgency as determined by the GAM approach in Step 3 over the investment period (including phasing of projects/ components) against financing/ funding limits as determined in Step 1. Capital Expenditure

< borrowing limit < split up into projects/ components

Year

etc

STEP 6: Financing vs Investment timeline Step Six allocates recurrent revenue surplus (net of small urgent projects) and potential tied external grants, among projects according to their economic IRR and urgency using a GAM approach from Step 3 versus the available, lowest-cost financing set out in Step 1 and confirmed, in respect of the private sector, in Step 4 – the GIFP. 119

If there is no interest, or if the likely charges are deemed unacceptable, then the project(s) revert to public sector implementation and the process reverts to Step 2. Municipal Finance – EC Link Woking Papers - Draft Version 1.5

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Capital Expenditure

< borrowing limit < split up into projects/ components

< split up into financing sources Financing Source Year

etc

Decision rule: 1. Apply cheapest applicable120 funding first Subject to: 2. Aligning timing of availability with scheduled121 start of project(s)122 3. Aligning tenor of financing repayment with lifespan of project123 or likely time to exit/ refinance in relation to PPPs.124 One financing source (such as Green bonds) can cover more than one project. In this case, reporting systems required of financiers need to be considered in the design of management systems for each project.

STEP 7: Implementation structure Step Seven is the process of establishing the legal and other structures required to implement the plan – and for monitoring the performance of financing, evaluating its effectiveness and reallocating resources as circumstances change (on a quarterly basis). A Decision Tree helps select institution type and financing vehicle (if any) The key questions are:      

What is the nature of the ‘’enterprise’’ or service? Does implementation of the investment program involve multiple projects or is it focused on one investment type? Is it geographically focused on one area of the city (eg a public transport corridor) > Development Corp; or is it metro wide (eg usually water supplies) > Metro Utility? Is the investment (or sub-investment) cost recoverable? Does the LG have the mandate to use private sector equity/ finance? > PPP or not Need for SPV? etc

120

Obviously a grant given for water supply cannot be used on a bus station The schedule should include realistic estimates of time for land acquisition, design and documentatiob, and approvals. 122 If the project is urgent then MDB/ GCF finance – which takes a minimum of one year to process and approve – is unlikely to be used unless there is an existing financing facility with unused capacity for which the project is eligible 123 This is not binding – projects can be, and usually are, financed with tenors shorter than the project life, but the cost will usually be higher the shorter the tenor, and if the financing is structured so as to ‘’roll over’’ the principle there is significant refinancing risk that should be taken into account. 124 The refinancing risk, if it applies to the local government, should be factored in to likely cost of finance. 121

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The process is set out in the diagram below.

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