Funding low carbon cities: mapping the risks and opportunities
Introduction to Working Paper 113
There are compelling reasons for local authorities – and especially cities – to be interested in the low carbon agenda.
From an environmental perspective, it is estimated that approximately 70 per cent of the UK’s economy-wide emissions are under the influence of UK local authorities.
Furthermore, recent research on the economics of low carbon cities has shown that, at commercial costs of capital, cost-effective and cost-neutral investments in energy demand reduction could deliver a 40 per cent reduction in greenhouse gas emissions from cities by 2020, as well as wider benefits such as enhanced competitiveness, increased employment and reductions in fuel poverty.
To take one example, this research has shown that for the Leeds City Region, there is a commercially attractive case for £4.9 billion of investment in low-carbon options. If made, these investments would reduce the city-region’s energy bill £1.2 billion a year, would pay for themselves on commercial terms (at 8 per cent interest rates) within 4 years, whilst creating 4,500 jobs in the low carbon goods and services sector and cutting the city-region’s carbon emissions by 36 per cent.
Despite these compelling arguments, these investments have not yet been made at the scale required to deliver these benefits. One of the key reasons relates to the level of capital investment required; for example, a city region such as Leeds would require investments in the billions of pounds. This scale of investment dwarfs the amounts of investment that are being proposed in flagship government initiatives in the UK such as the Green Deal.
The objective of this Working Paper is to provide a contemporary account of how UK local authorities might approach the question of how to ensure the funding of retrofits and investments in low-carbon options, with a particular focus on the major obstacles that need to be overcome and the key financial and non-financial risks that need to be managed.
This research is based on a review of the academic and applied literature on financing low-carbon cities to identify the models that have been proposed for structuring and securing major scale investments into UK city scale retrofits (with a particular focus on the four key sectors of domestic and non-domestic buildings, industry and transport), and the major barriers that need to be overcome to enable these investments to be made at the scale required.
It is also based on the results of a series of interviews with key stakeholders (including local authorities, investors, central government and private companies) and on the results of a an expert workshop – How Can Cities and Regions Finance their Transition to a Low Carbon Economy? – convened by the Centre for Low Carbon Futures (CLCF) and the Centre for Climate Change Economics and Policy (CCCEP) in London in May 2012. The workshop attendees included local authorities, central government, institutional investors and private companies.