11.08.2021

Climate action needs to stay on the agenda

Solar plant

PV system in the FELICITY project for the energy rehabilitation of schools in Porto Alegre. Photo: GIZ©Samuel Maciel

Since early 2020, the Covid-19 pandemic has remained a global challenge to this day, with far-reaching consequences for society and the economy. This has also impacted investment in climate action – whether for climate change mitigation or adaptation to the impacts of climate change – at both a national and local level.

Right at the outset of the coronavirus outbreak, local communities in partner countries for the International Climate Initiative (IKI) programme ‘Financing Energy for Low-Carbon Investment - Cities Advisory Facility’ (FELICITY) had no choice but to concentrate the scant personnel resources available to them on tackling the immediate problems posed by the pandemic. Safeguarding the health of their citizens was the top priority. At the same time, many communities suffered serious staff shortages due to illness, and limited options for work and communications beyond providing council services and keeping municipal utilities running. This situation also impacted the provisioning of community programmes, commitments and projects, including engagement for climate action, which was overshadowed by more pressing concerns.

Communities facing financial difficulties due to Covid-19

Yet even the general environment for sustainable and climate-compatible municipal investment has worsened due to the pandemic: council budgets are shrinking while revenues are falling, leading to greater overall debt.

The World Bank and UN organisations estimate that local authorities could lose 15 to 25 percent of their income in 2021. Reasons given include loss of tourism and exports, as well as a decline in the sums of money wired back from overseas by relatives of local families working abroad. This, say the experts, is compounded by a general economic downturn, together with a significantly larger number of citizens in many regions who are now dependent on financial support from the state. Public companies such as water utilities or transport services have also faced financial problems due to the difficulties of operating during the pandemic as well as a loss of earnings.

There is a real risk that the cuts now needed in council budgets will be made at the expense of public infrastructure and much-needed investment. Viewed in the context of the major investment in climate-friendly local infrastructure needed in FELICITY partner countries, this would be a bitter blow indeed. To a point, national governments can act to provide relief here. In Brazil, for example, city administrations have received financial aid in order to compensate for shortfalls and ensure the provision of healthcare or create a degree of flexibility in council budgeting. At the onset of the crisis, the Ecuadorian development bank BDE provided help to local governments in the form of emergency aid programmes and repayment holidays.

Changing priorities in partner countries

Serious additional financial burdens and bottlenecks have also been experienced at a national level, however. In Mexico, the government held fast to the austerity plan it had adopted in 2019 even despite the coronavirus pandemic. Key national actors for climate finance, such as the finance and environment ministries as well as the state development bank Banobras, have all been directly affected by staff reductions and budget cuts.

The pandemic also worked to refocus national priorities on the economy. In October 2020, an economic stimulus package was agreed for Mexico, with major funding being allocated to a total of 39 investment projects. Few of these projects could be said to be ‘green’, however. In light of the above, the inclusion of the FELICITY-funded waste management project in Naucalpan in the national investment programme is a real success.

In Indonesia, the government has also responded to the pandemic by emphasising a return to economic growth. The national economic rebuilding programme focuses its efforts on relaxing laws relating to labour and investment, yet promises little in relation to climate issues.

In Ecuador, a worsening of government debt due to the pandemic and loans from the International Monetary Fund (IMF) has been accompanied by cuts to the state budget as well as tax hikes. Since mid-year 2021, the BDE has been focusing more on a ‘green recovery’ and has worked closely with FELICITY in this capacity. Considering the contribution they make to public health, the supported sewerage projects remain especially relevant for Ecuador, even during the pandemic. However, the precarious state of local government liquidity again makes financing challenging.

Some local currencies have also experienced significant devaluation as a result of the pandemic. With the peso slumping in Mexico and the real dipping in Brazil, financing from international banks has now become less attractive. Municipalities are therefore looking for financing models that will not involve taking on more debt. A lot of faith is being placed in the role of the private sector here.

Two post-Covid challenges

The examples given point to two major challenges. First, climate-compatible projects must not drop off the political agenda but must continue to be given top priority. Furthermore, climate projects often have positive effects on economic development. One project supported by FELICITY, which addresses energy efficiency and solar energy at schools and facilities in socially disadvantaged areas in Porto Alegre (Brazil), for example, has the potential to create 60 to 70 new jobs. In developing and emerging countries, focusing efforts on a green recovery also offers major potential for bringing together sustainable infrastructure solutions, social cohesion and jobs in the green economy.

Second, external finance is needed in order to provide the necessary level of investment. The huge and unexpected volume of public expenditure that is nonetheless essential for a ‘sustainable reboot’ will significantly worsen local government debt in the Global South. Urban infrastructure projects in developing countries are therefore even more heavily dependent on external finance. Alongside low-cost financing from development banks, private sector involvement is now becoming more relevant. Demand is also increasing for improved local expertise, experience and know-how in relation to accessing and deploying green financial instruments. Capacity building in these areas is now an urgent priority.

To close on a positive note, however, the pandemic has indeed significantly raised awareness and appreciation worldwide for the essential role played by municipalities and local government not only in tackling the coronavirus pandemic but also in efforts to combat climate change.