Financing urban low-carbon transition: The catalytic role of a city-level special fund in shanghai

https://doi.org/10.1016/j.jclepro.2020.124514Get rights and content

Highlights

  • Understanding spillover effects of direct funding may encourage more investment.

  • A linkage analysis is performed to visualize institutional formation processes.

  • Urban direct funding has catalytic effects on institutions and local capacity building.

  • Fund implementation fills an implementation gap between policy intentions and outcomes.

  • Wide funding support enables a pool of sustainability experiments for policy learning.

Abstract

Financing mitigation actions in cities is critical to achieving 1.5 °C emissions pathways. Direct funding, such as grants and subsidies, is a feasible financial instrument to enable local authorities to conduct climate mitigation projects. Current literature has largely focused on the cost-effectiveness of direct-funding instruments on carbon reduction, but little on how these instruments influence other aspects of the urban low-carbon transition. A comprehensive understanding of the role of direct funding in low-carbon transition is important, as this new understanding may potentially encourage more direct investments by cities into their low-carbon initiatives. Here we examine the direct and flow-on effects of a city-level direct-funding scheme on urban low-carbon initiatives, taking Shanghai as a case study. Our findings show that the direct results of Shanghai’s fund scheme include carbon reduction outcomes and a variety of policy outputs, such as a range of subsidy policies, data reporting systems, and demonstration projects. More importantly, over the 11 years of its implementation, the fund has become a catalyst for a series of institutional changes – by enabling and enhancing cooperation across numerous government departments in Shanghai. In addition, the funding scheme created avenues for the engagement of business stakeholders and raising public awareness on low-carbon and sustainability issues, through subsidizing technology adoption and low-carbon-themed campaigns. Collectively, these processes have improved the city’s capacity for achieving low-carbon transition. Our study shows that a well-designed, city-level direct-funding scheme can fill the “implementation” gap between the policy intentions (i.e., the low-carbon initiatives and implementation framework) and the policy outcomes (e.g., carbon reduction and the institutional formation in the transition). Such a scheme may also nurture and enable a pool of policy experiments and innovations for effective policy learning, identification of successful experiments, and upscaling. With these broader catalytic effects, a city-level direct fund could be a justifiable and attractive option in managing low-carbon transition.

Introduction

Low-carbon transitions in cities are critical to ensuring a climate-safe future (Bai et al., 2018b; Bazaz et al., 2018; Broto and Bulkeley, 2013; Mi et al., 2019), but how to finance low-carbon transition cost-effectively is a primary challenge faced by local authorities (Colenbrander et al., 2018; Stern, 2007). Against this backdrop, some frontrunner cities are actively practicing a variety of approaches with commonly used policy instruments, as well as experimenting with innovative financial mechanisms (Bodnar et al., 2018; Environment, 2018; Irvine and Bai, 2019).

Some frontrunner cities have demonstrated their willingness and competence in financing urban low-carbon transition (C40 and Arup, 2015; Deng-Beck and van Staden, 2015; Environment, 2018). For example, more than 50% of reported urban climate actions within C40, the carbonn® Climate Registry, and the Organisation for Economic Co-operation and Development (OECD) were funded by the city budget or their savings (C40 and Arup, 2015; Deng-Beck and van Staden, 2015; OECD, 2018). In terms of investing in energy efficiency and renewable energy technologies, some cities move even faster than their national governments, driven by the energy-consumption growth due to urbanization (REN21, 2017). Yet, on a global scale, cities’ financial competence for mitigation as a whole is inadequate, especially in developing regions (Barnard, 2015; Homsy, 2016; McLean and Borén, 2015). Thus, to mobilize more financial resources, a stronger justification for direct investment into urban low-carbon transition is required (Coalition for Urban Transitions, 2019; Gouldson et al., 2018).

Public funding can be vital for urban low-carbon transition, as it can be used as financial leverage to encourage private sector investment or to reduce the upfront cost for new technology adopters, often in the form of subsidies (Fuller et al., 2009; Roy et al., 2013; Zhan and de Jong, 2018). Subsidization is considered a feasible option for promoting climate action because subsidy providers do not seek a financial return on investment (Price et al., 2008). In this sense, there will be less difficulty for relevant stakeholders to accept and implement. In practice, subsidies and grants are the second most commonly used mechanism among C40 cities (C40 and Arup, 2015). There is a compelling economic case for stakeholders in cities to make an investment at scale into cost-effective low-carbon measures (Gouldson et al., 2015). However, in reality, a higher upfront investment in carbon-efficient measures than in conventional alternatives (Schmidt, 2014) may become a barrier for adoption. In the short term, subsidies by governments can remove this price barrier to encourage the initial uptakes.

In practice, subsidies have been applied in various urban sectors to facilitate the adoption of new technologies, to encourage private sector investment, or to reduce the upfront cost for adopters (Fuller et al., 2009; Roy et al., 2013; Zhan and de Jong, 2018). Examples include improving energy efficiency in buildings (Di Pilla et al., 2016; Hou et al., 2016; Krarti, 2015; Lihtmaa et al., 2018), promoting electric vehicles in the transport sector (Masiero et al., 2016; Thorne and Hughes, 2019), and encouraging rooftop solar photovoltaic (PV) installation in households and businesses (Asano and Aoshima, 2017; Frey and Mojtahedi, 2018; Fuller et al., 2009; Mah et al., 2018; Rodrigues et al., 2017), etc. Moreover, subsidies can be flexibly designed in diverse ways to fit different circumstances and policy needs. There are many examples of this, including rebates, municipal green bonds, revolving green funds, energy efficiency mortgages, and tax abatement (C40 and Arup, 2015; Thorne and Hughes, 2019; Van der Heijden, 2017).

Subsidies as policy instruments are not without limits. The subsidy scheme may attract criticism for its market-distortion effect (Burniaux and Chateau, 2014; Owen, 2004). For example, global fossil-fuel subsidies remain large, amounting to 6.5% of global GDP in 2015 (Coady et al., 2017), which in itself creates obstacles for renewables deployment and energy-efficiency improvement (Assmann et al., 2006; REN21, 2017). In addition, subsidies can be expensive; thus, they are often constrained by the limits of governments’ financial and administrative budgets (de Groot et al., 2001; Houde and Aldy, 2014; Price et al., 2008; Rosenow and Galvin, 2013), and also might be challenged by opportunity costs in terms of how to optimize the allocation of limited public budget.

More importantly, the price barrier is not the only obstacle to enable low-carbon actions in cities. Studies (Colenbrander et al., 2017; Gouldson et al., 2015) indicate that building local capacity, enhancing provision of information, and developing favorable institutional and policy environments are essential to enable the long-term low-carbon transition. This is because even if there is a possibility of allocating an extra budget for subsidizing urban mitigation actions, cities might face difficulties in their institutional capacity to design and implement the subsidy scheme in order to achieve desirable outcomes. In some cities, for example, there might be a lack of coordination power across key urban elements to stimulate and facilitate the transformative change, which may be caused by path dependency and lock-in in institutional behavior (Bai et al., 2016). The nature of urban low-carbon transition as an inter-sectoral, multi-level, and multi-actor process (Runhaar et al., 2018; Webb et al., 2018) calls for a re-assemblage of institutions at a city level to tackle the inherent temporal, spatial, and institutional mismatches in urban low-carbon governance (Bai, 2007; Bulkeley and Luque-Ayala, 2017; Dowling et al., 2014). In this regard, the design and implementation of subsidies in low-carbon transition require institutional collaboration, and thus also have the potential to change the status quo. However, there are few insights in the existing literature on the interlinks between city-level subsidies and institutional collaboration. Most existing literature focuses on the cost-effectiveness of subsidy policies and the direct carbon-reduction result, without taking into account the more comprehensive, flow-on effects of such policy measure (Dowling et al., 2014; Kalkuhl et al., 2013; Sarkar and Singh, 2010).

Moreover, from the urban sustainability transition perspective, cities’ low-carbon transition requires changes in many urban sectors in a systematic matter (Bai et al., 2016), which require many trial and error. Low-carbon innovations can be tested through urban sustainability experiments (Bai et al., 2010; Berkhout et al., 2010). Policy interventions and financial support play an enabling role in initiating and adopting these low-carbon experiments (Peng and Bai, 2018), but it remains unclear how city-level financial mechanisms can stimulate and nurture such experiments.

To fill the gaps, this paper examines the direct and indirect impacts of a city-level direct-funding scheme, taking Shanghai’s special fund aiming at energy conservation and emissions reduction as a case study. We focus on the design, implementation, effectiveness, and direct and flow-on impacts of a city-level funding scheme to achieve their low-carbon policy targets. The following section presents a literature review on the role of direct-funding instruments in urban climate mitigation. Section 3 presents the methodology for case analysis. Section 4 analyzes the fund design, size, distribution, and implementation. Section 5 evaluates the outcomes of the special fund, in terms of direct carbon reduction, spillover effects on institutions, and on enabling sustainability experiments for the transition. In Section 6, we discuss the implications and limitations of the direct-funding scheme illustrated by the Shanghai case, grounded in the relevant literature. Section 7 presents our conclusions.

Section snippets

Literature review: the role of direct-funding instruments in urban climate mitigation

To enable the transition towards sustainability, subsidization is a widely used policy instrument for enabling energy efficiency and deployment of renewables (Assmann et al., 2006; The World Bank, 2010; Owen, 2006), with the benefit of emissions control (Dowling et al., 2014; Fischer and Newell, 2008; Kalkuhl et al., 2013; Menanteau et al., 2003; Sarkar and Singh, 2010; Tanaka, 2011). Subsidies for energy efficiency improvement are one of the most widespread fiscal incentives applied in

Research methodology

We investigated the Shanghai special fund for energy conservation and emission reduction in a comprehensive way, including the design elements (e.g., policy goals and principles, and the scope and distribution), three implementation stages, and the direct and indirect outcomes. Data were collected through two-month fieldwork in Shanghai, including interviewing government officials and collecting policy documents, which was supplemented by deskwork, including online search. Detailed information

Case study: the design and implementation of the Shanghai special fund

4.1 The fund design, size, and distribution.

The Shanghai special fund for energy conservation and emission reduction was enacted in 2008, providing financial support to urban sustainability projects and capacity building activities (Peng and Bai, 2015 (Peng and Bai, 2018),). This financial mechanism plays multiple roles in Shanghai’s low-carbon transition. Specifically, this policy scheme widely covers 12 policy domains, as shown in Fig. 1, which may enable the city’s transitions in a

Direct policy results

Two types of direct policy results can be identified, including carbon reduction outcomes and a series of capacity building initiatives. Based on government-released data, we estimate carbon reduction in eight policy domains from 2011 to 2015, where 85% of the total fund is spent, as shown in Table 1. The carbon reduction of this scheme is equivalent to 1.6% of Shanghai’s energy-based carbon emissions1 during the same period. The share of 1.6% may only represent a fraction of an aggregated

Discussion: the catalytic role of the special fund in urban sustainability transition

Shanghai’s experience shows that, to some degree, the city-level direct-funding mechanism can play a role in reducing emissions by subsidizing mitigation actions. This finding echoes the prevailing discussion in the literature, in terms of the emission reduction effect of the subsidy instrument (Dowling et al., 2014; Fischer and Newell, 2008; Kalkuhl et al., 2013; Menanteau et al., 2003; Sarkar and Singh, 2010; Tanaka, 2011).

Shanghai’s case also indicates that direct funding can play an

Conclusion

The impacts of direct-funding instruments on social, economic, and institutional dimensions for urban sustainability are not well established in the literature. This paper examines the influence of subsidy instruments on urban sustainability transition from a systems perspective, taking Shanghai as a case study. We examine Shanghai’s special fund for energy conservation and emission reduction, looking at the policy design and implementation, and its direct and flow-on effects on the city’s

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgement

Yuan Peng’s study is supported by the Australian Government Research Training Program (AGRTP) Stipend Scholarship. We thank the anonymous reviewers for their constructive and insightful comments, and Wentao Ye and Dr. Xuezhi Zeng for their help with making the figures in this paper.

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