15 Mar, 2018

Four ways that Ontario municipalities could finance climate change projects

New paper from the Institute on Municipal Finance and Governance explores the potential and drawbacks of green bonds, environmental impact bonds, catastrophe bonds, and green banks for Ontario municipalities

Toronto, March 15, 2018 – Cities bear a disproportionate share of the economic and social costs of extreme weather and climate change because of their population and building densities. Yet, under the current funding model, Canadian municipalities do not have the resources they need to pay for climate change related projects. What options exist for municipalities to bridge this funding gap?

A new paper released today by the Institute on Municipal Finance and Governance (IMFG) looks at climate finance, which taps private sources of capital to invest in projects intended to decrease carbon emissions and to make cities more resilient to the impacts of climate change. The paper’s author, Gustavo Carvalho, argues that the potential for climate financing is huge in terms of paying for long-term climate change projects requiring large upfront investments.

The paper analyzes four climate financing tools and evaluates their pros, cons, and feasibility for Ontario municipalities:

  • Green bonds are the low-hanging fruit in climate finance, as they do not require changes to current Ontario borrowing regulations to become immediately available to Ontario municipalities. Green bonds are debentures, the proceeds of which are earmarked for projects with an environmental benefit.
  • Environmental impact bonds allow governments to pay for performance-based policy interventions while transferring performance risk onto private investors. They could be issued under current Ontario regulations, but their cost could negate government savings, and they may give investors too much influence over the policy interventions being funded.
  • Catastrophe bonds transfer risk to capital markets when insurance policies do not cover the risks associated with catastrophic events. They could become an important instrument to help municipalities become more financially resilient to the effects of climate change, but their legality in Ontario is not clear.
  • Green banks are financial institutions that specialize in the provision of financing for projects with environmental benefits. They can provide crucial services in support of local climate financing, but are better left to the provincial or federal governments.

Read the paper

About the author

Gustavo Carvalho was the 2016–2017 Post-Doctoral Fellow at the Institute on Municipal Finance and Governance. He has a PhD in Political Science from the University of Toronto and a law degree from the Federal University of Rio de Janeiro. Prior to moving to Canada, Dr. Carvalho worked as a corporate lawyer in a Brazilian hedge fund.

About the Institute on Municipal Finance and Governance (IMFG)

The Institute on Municipal Finance and Governance is a research hub and think tank that focuses on the fiscal and governance challenges facing large cities and city-regions. It is located within the University of Toronto’s Munk School of Global Affairs.

For more information please contact:

Selena Zhang | Manager, Programs and Research
Institute on Municipal Finance and Governance, University of Toronto
selena.zhang@utoronto.ca | 416-978-5117