Reimagining funding for European cities’ transition to net-zero

Achieving carbon neutrality is a key goal for cities across Europe, but they are confronted with a significant challenge: securing the vast funding needed to bring climate projects to life. Navigating a complex web of financial constraints, regulatory barriers, and practical difficulties all contribute to slowing down progress, making cities rethink how to fund their projects in order to deliver large-scale initiatives. These obstacles make the path to sustainability complex and demanding, but provide an excellent opportunity to develop innovative solutions and collaborative efforts. 

Addressing the funding challenge for Europe’s net-zero transition 

Securing climate funding often starts with a tough reality: transformative projects demand substantial upfront investment. Consider a city aiming to retrofit hundreds of ageing buildings for better energy efficiency. The initial costs are high, and, while the long-term financial returns are significant, they take years to materialise. It becomes even more complex when specific requirements and unpredictable regulations come up, deterring investors who are seeking for safe and quick gains. 

Cities often face the challenge of piecing together funding from various sources like public budgets, grants, and private investments to support large-scale projects. This scattered approach can lead to gaps in funding – add to that the maze of regulations and red tape, and the result is delayed projects and increased costs. In this environment, finding a way to link these different funding sources and navigate regulatory obstacles is key to accelerating climate action.  

“All in all, it often comes to the money questions like, ‘how do we fund our climate work?’” says Elena Ojala, the environmental director of the city of Lahti, Finland. “And there we also need private investors, and we need to find out how we can make it all happen and have all the things financed that we have planned.” 

The need for innovative financing mechanisms 

The complexity and high costs associated with ambitious climate projects require more than conventional financial approaches. They will require financial mechanisms that can adapt to shifting needs, support emerging technologies and scale up rapidly. 

Launched by the European Commission in June 2024, the Climate City Capital Hub supports the cities aiming engaged in the EU Mission on Climate-Neutral and Smart Cities through the NetZeroCities programme. The Hub offers expert advice and support to make climate projects ‘investment ready’. With 33 cities already participating and €114.1 billion set aside for climate actions, the Hub is already helping cities navigate financial complexities and tap into innovative funding sources like crowdfunding and sustainability-linked bonds. 

Bridging gaps in Bristol: the power of public-private partnerships 

Public-private partnerships (PPPs) are proving to be a powerful tool in addressing climate challenges. These collaborations blend the financial resources and innovation of private companies with the public sector’s ability to manage and execute large-scale projects. A good example of how this looks in practise is Bristol’s Net Zero Investment Co-Innovation Lab, supported by NetZeroCities. 

Confronted with the dual challenges of decarbonising and managing tight public budgets, Bristol is stepping up to bridge gaps between communities, financial actors, and climate projects. The lab is central to this mission, aiming to develop between three and six new investment funds while identifying new investor streams and investable projects.  A key component of the lab’s strategy is its community investment scheme, which allows individuals to contribute as little as £5 to climate projects and thus involve them in the transition. 

Bristol’s City Leap project, a public-private partnership with Ameresco UK and Vattenfall UK is set to invest €1 billion over the first six years and more over a 20-year horizon. The initiative is another example that the potential of combining diverse funding sources to drive substantial progress. 

Financing retrofit in Budapest: tackling ownership and funding challenges 

In Budapest, old buildings contribute to 60% of the city’s emissions. With a large portion of Hungarian homes located within Budapest, this is a crucial issue to tackle. And it comes at a cost.

Budapest is leveraging the NetZeroCities Pilot Cities Programme for grant funding and has established a dedicated Climate Agency to oversee home renovations, tasked with managing the financial and technical aspects of upgrading buildings. Budapest will also map building types and ownership to inform targeted financing strategies. By clustering properties in this way, Budapest wants to simplify the retrofitting process and collaborate with banks to create efficient financing models. The Climate Agency, operating independently of local government constraints, is designed to act effectively, driving progress without political or administrative delays. 

“By categorising buildings and households into clusters with similar characteristics, we create a significant saving potential and a more attractive market for banks and financial institutions. We’ll then collaborate with these financial actors to develop tailored schemes for retrofitting these clusters,” says Ada Ámon, Head of Department for Climate and Environmental Affairs in Budapest. 

How European cities’ financial strategies are opening doors for climate project funding 

Across Europe, cities are finding creative ways to overcome the financial difficulties of their carbon neutrality targets. Bologna is working on new financial tools to support energy-efficient upgrades and renewable energy projects. In Spain, cities like Madrid, Valencia, Zaragoza, Vitoria, and Valladolid are pushing for dedicated funds to help them reach net zero by 2030. All of these cities’ effort to explore new funding sources and forge strong partnerships to address their climate goals are paving the way for future climate initiatives,
 

This article is part of EIT Climate-KIC’s #LiveableCities Campaign, where we explore the pathways to a climate neutral, just, and more beautiful future. By 2030, our goal is to help transform over 400 cities into thriving, climate-resilient communities. This campaign captures the stories and lessons of ambitious cities in Europe and around the world. We want to show a vision of what’s possible when cities and stakeholders come together to tackle the climate crisis.