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Priority 3: Fund and finance sustainable urban infrastructure

Part of the publication Climate Emergency, Urban Opportunity

Laying a strong foundation


Eliminate subsidies for fossil fuels by 2025, if not sooner. Subsidies mask the true costs of coal, oil and gas, and undermine the case for investment in energy efficiency and renewable energy. They eat up fiscal space and are regressive, mainly benefiting middle- and high-income households. There are better ways of supporting low-income households than by subsidising fuels, such as providing cash transfers or funding efficiency measures. Yet, as of 2017, the OECD and BRIICS countries allocated at least US$41.6 billion to subsidise the consumption of fossil fuels in urban areas (see Figure 14) – and the value of these subsidies is likely to rise as urban populations and economies grow. By eliminating fossil fuel subsidies, national governments can systematically favour cleaner fuels and free up fiscal space to support pro-poor, low-carbon development. More accurate fossil fuel pricing in 2015 would have lowered global CO2 emissions by 28%, reduced deaths from fossil fuel air pollution by 46%, and raised government revenues by 3.8% of global GDP. Indonesia has recently demonstrated how fossil fuel subsidy reform can yield rapid returns, as the national government was able to increase public spending on health, education and other popular issues (see Box 10).


Establish a carbon price of US$40–80/tCO2-e by 2020 and US$50–100/tCO2-e by 2030. Market prices for high-carbon goods and services fail to reflect carbon’s true social, economic and environmental costs – particularly where depressed by fossil fuel subsidies (see Priority 3.1). In 2015, fossil fuel energy was underpriced by US$5.3 trillion, or 6.5% of global GDP. Cities, as hotspots of transport emissions, polluting industries, and climate risk, suffer disproportionately from this market failure. Carbon pricing could improve local air quality and systematically incentivise compact, connected, clean cities, while enabling the market to determine the most efficient way to reduce emissions. A study of 70 cities worldwide found that a switch from low to high fuel taxes significantly reduces car ownership and increases urban density by over 40%. The Carbon Pricing Leadership Coalition recommends a price of at least US$40 per tonne of CO2 from 2020, rising to US$50 from 2030, to achieve the Paris Agreement, with higher-income countries adopting even higher carbon prices. Revenues from these taxes should be redistributed to low-income and other marginalised groups at risk of being left behind by the zero-carbon urban transition (see Priority 6.3). As of 2018, 45 countries are putting a price on carbon, including emerging economies such as Chile, China, Colombia, Mexico and South Africa.

Seizing the opportunity


Strengthen land and property tax collection to at least 1% of either national GDP or total national property value. In many countries, land and property tax collection is stymied by limited capacity, unclear ownership, and challenges in

Property-related taxes accounted for over 10% of total tax revenue in South Korea

assessing the value of land. In much of Africa, for instance, land and property tax collection is often worth less than 0.5% of GDP. In other countries, land and property are taxed in ways that incentivise sprawl or punish low-income households. However, land and property taxes can be the bulwark of municipal finance, giving local governments more fiscal space to deliver core services and act on climate change. If well designed, a land or property tax can also incentivise more intensive use of urban land, promoting higher densities. One option is to introduce a simple tax based on basic features such as occupancy, plot size, location or floor area (for an individually owned apartment in a multi-unit building). Another option is to establish a comprehensive land and property registry, as Rwanda has done (see Box 8), which can help identify prospective taxpayers while improving tenure security for residents of informal settlements (see Priority 6.1). In South Korea, progressive property taxes have been used since the 1970s to redistribute the benefits of rising land values more equitably and finance public services (see Box 2). In 2016, property-related taxes accounted for over 10% of total tax revenue in South Korea.


Work with city governments to establish integrated spatial and infrastructure plans that can underpin a pipeline of climate-safe, bankable projects. Trillions of dollars will be invested in urban infrastructure to 2030. To arrest increasing inequality and avoid climate catastrophe, these investments must be compatible with a 1.5°C trajectory with net-zero greenhouse gas emissions and greater resilience to climate impacts. Few local governments have the capacity to develop and implement detailed land use and infrastructure plans, particularly taking into account new climate constraints. National governments can support city governments to develop integrated land use, housing and transport plans that specify the desired infrastructure investments in electricity distribution, mass transit, sanitation and water supply. These plans should accommodate anticipated population growth (see Priority 6.6). Clear capital investment plans can then form the basis for a coherent financing strategy based on projected tax receipts, land value increases and other revenues. These bundles of core infrastructure investments can anchor the growth of compact, connected and clean cities, creating the basis for agglomeration economies and virtuous cycles of development. They can also enhance the creditworthiness of municipal governments by building and demonstrating their ability to design, implement and manage projects. At the UN Secretary-General’s Climate Summit, a number of national governments will collectively commit to support 2,000 cities to strengthen their project preparation capabilities, create 1,000 bankable, climate-smart urban projects and link 1,000 such projects to finance by 2030.

Raising the ambition


Scale land-based financing instruments to fund sustainable urban infrastructure. Public infrastructure, zoning changes and other interventions can significantly increase urban land values – but the economic returns are often captured entirely by a handful of private individuals or firms. Prudent use of land-based financing instruments such as betterment levies and transferable development rights can ensure that public funds are used primarily for public benefit by enabling national and local governments to capture some of the increase in real estate values. Land-based financing instruments benefit from effective spatial and infrastructure planning (see Priority 3.4), since they generate more revenue if the area is accessible and intensively used. National governments can both deploy land-based financing instruments directly, and create policies to enable state and city governments to deploy them in fiscally and environmentally sustainable ways. Land value capture instruments have been successfully deployed from Tokyo in Japan, to Hyderabad in India, to Córdoba in Argentina. The Hong Kong Mass Transit Railway (MTR) Corporation alone raises up to US$1.5 billion annually via their LVC model.


Shift national transport budgets from building roads to supporting public and active transport. Urban land is expensive and in demand. Streets make up the majority of public space, and their design fundamentally shapes a city’s identity, appearance and connectivity. Some road-related spending is necessary to maintain existing networks, to serve (electric) public transport, emergency vehicles and cyclists, and to fill gaps in road networks within and among cities. In cities, this spending should support slow, safe and shared streets rather than fast, wide roads. Intra-city and inter-city rail and high-capacity bus systems should all be attractive long-term investments to promote compact cities and cut emissions from freight and aviation. This is why two thirds of transport experts recommend shifting road budgets towards funding public transport, sidewalks and cycle lanes. This could be achieved by reallocating capital expenditure or by adopting road pricing (which may require national legislation) to internalise the costs of driving and generate revenue to make alternative modes of travel more affordable, efficient and pleasant. A new analysis by the Overseas Development Institute for this report focused on eight geographically and economically diverse countries and found that all spend far more on roads than on rail infrastructure. Australia, China, Mexico and Tanzania spent roughly US$3 on roads for every US$1 spent on rail. Spending on roads was even more dominant in Ethiopia and Canada, consuming 94% and 86% of their inland transport budgets, respectively. Ethiopia is already seeking to re-balance its spending, with a new Light Rail Transit project within Addis Ababa and a new railway connecting the capital to Djibouti. Meanwhile, India was found to have the most balanced portfolio, with 55% of all inland transport investment being directed to roads while 45% was spent on railways (see Figure 17). For fast-growing cities, shifting national transport budgets to support public and active transport projects could “lock in” more efficient use of urban land; for more established cities, it could accelerate densification. For all countries, improving rail networks among cities could do much to reduce the emissions from both personal travel and freight transport.

Figure 17. The share of total inland transport investment allocated to roads and rail, 2014-2016 average.

Source: Overseas Development Institute for the Coalition for Urban Transitions. For the full methodology, see Annex 12.