Municipal Green Bonds: The Path to Financing Municipal Climate Action

In addition to being an existential threat to cities and the people who live in them, climate change is also proving wildly expensive to address.

Exactly how much it will cost to transition off of fossil fuels, and to finance the infrastructure changes that will be needed to cope with expected warming, is a matter of raging debate. By 2100, the costs will be exorbitant. Recent estimates range from 10.5 percent[1] of GDP to over 20 percent.[2] Another report suggests that we need a carbon tax of $210 per tonne by 2030 to meet the Paris targets.[3]

With these costs, it’s hard to imagine a society that is financially solvent and able to provide the services required to keep people safe, supported, and fed.

What’s also clear is that addressing climate change now – prior to 2030 – although wildly expensive, is still significantly less expensive than kicking those costs down the line.

Sir Nicholas Stern’s famous ‘Review’, which is still the touchstone source for the economics of climate change, estimates that around 2 percent of GDP per annum is likely enough to finance the changes that need to be made.

But that still leaves the question of where the money is meant to come from. The private sector? Charities? Cash-strapped governments? In terms of the public sector, there is little support for raising taxes on average citizens and the gap between climate-related infrastructure costs and the tax base is only growing.

In the case of Victoria, revenues from property taxes and refunds from the provincial carbon tax (which all cities in B.C. receive if they demonstrate concrete climate action) aren’t close to enough to pay for ambitious actions associated with the climate emergency declared by the city.

To be sure, the city of Victoria has a bold and inspiring Climate Leadership Plan. It calls for an 80% reduction in GHG emissions and a city that runs entirely on renewables by 2050.

But it also shows that the city is not on pace to meet its targets – emissions have dropped only by 7.4 percent since 2007 – and the ambitious plans to expedite reductions will come at a cost. The city has created a Climate Action Reserve Fund, which currently sits at under $500,000. The goal is to bump that figure to $1,025,000 in the 2020 budget, but more revenue is clearly needed.

Municipal green bonds are an excellent option for the city to consider moving forward. They are “asset-linked bonds” in which proceeds from the bonds are legally bound to green projects and backed by a municipality’s entire balance sheet. The municipal green bond market is currently in the billions and has proven an effective policy mechanism for channeling much-needed revenues into city coffers. Moreover, the modest interest rates and returns on investment mean that cities generally don’t dig themselves into unmanageable debt.

50 percent of Victoria’s emissions come from buildings and 40 percent come from transportation. It will take money to upgrade buildings, build low-carbon public transit, and get citizens off natural gas and oil for home-heating.

Bonds also hold great promise to fund the management and restoration of natural assets such as forests, foreshores, and wetlands, which leading municipalities are starting to embrace as vital “green infrastructure.” Adaptation, resilience, and natural assets remain a small part of green bond disbursements in Canada, but other jurisdictions are showing leadership. The Netherlands, for instance, recently issued a $6.8 billion green bond, one of the largest such issues to date. The bond will fund, amongst other things, natural infrastructure projects to help attenuate flooding. The relevance to Canadian communities is clear: only weeks ago, an independent report to the Ontario government highlighted the need to conserve, restore, and create green infrastructure to reduce runoff and mitigate the impacts of flooding

Municipal green bonds would combine nicely with the Climate Action Reserve Fund, the carbon tax, and other provincial and federal funds to finance the substantive climate action that Victoria so desperately needs.

Dr. Jeremy L. Caradonna
Environmental Studies
University of Victoria