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Cities and the Glasgow Climate Summit: Lessons from Copenhagen

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz

 

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(co-authored with Luise Noring)

In several weeks, the global community will gather in Glasgow for COP 26, the 26th United Nations Climate Change conference. There is no doubt that the “Conference of the Parties” will discuss in detail the role of cities in driving down carbon emissions as well as adapting to the disruptive effects of climate change. We urge the Summit to go one step further and make urban governance a critical element of transformational change.

A strong focus on cities and urban governance is critical for multiple reasons. Most cities around the world actually exacerbate carbon emissions due to the dirty sources of their energy, the excessive level of dependence on automobiles for intra-city mobility and the low energy efficiency of their buildings. They also, increasingly, bear the brunt of climate change, due to the consequences that extreme weather has for urban populations (e.g., flooding, droughts, and heat waves hit vulnerable populations and disadvantaged neighborhoods the hardest) and urban infrastructure (e.g., the flooding of public transit systems, the collapse of highways, roads and other infrastructures, the contamination of scarce drinking water and the surface overflow of sewer systems).

At the same time, many cities are on the vanguard of problem solving, having executed commitments to reduce carbon emissions radically over the next several decades. Yet moving from paper commitments to real action and delivery will not just happen. Governance matters. Cities desperately need strong institutions that have the capital, capacity and community standing to deliver climate solutions and leverage the full public powers and private and civic resources that cities possess. Such institutions enable cities to use expert knowledge and sophisticated mechanisms to translate policy into action, drive creative financing and enable effective implementation.

To that end, we recommend that cities across the world move quickly to adopt lessons from Copenhagen[i]. The choice of Copenhagen is not surprising; the city has emerged as the world’s poster child for climate solutions. In 2012, the city released the 2025 Climate Plan proposing that Copenhagen become the first carbon neutral capital city in the world. Copenhagen’s plan is an intricate mix of concrete goals and initiatives that aim to drive change through four areas: energy consumption, energy production, green mobility, and city administration.

Copenhagen’s success is not accidental. We have written before about how Copenhagen and the national government have pursued a series of policy, product and process innovations (see, Scaling Copenhagen: How Cities Can Drive Climate Solutions — The New Localism). On one level, the city (in close concert with the national government) is pursuing policy innovations around governmental investments, regulations and commitments. For example, the city has established the following energy production targets for 2025:

  • District heating in Copenhagen is carbon neutral;
  • Electricity production is based on wind and sustainable biomass and exceeds total electricity consumption in the city;
  • Plastic waste from households and businesses is separated; and
  • The bio-gasification of organic waste is scaled.

On another level, Copenhagen is either inventing or deploying product innovations that enable the deployment of concrete design, technological as well as financial advances. Using architectural and land use norms to build sheltered and secure bike lanes or technology to monitor the energy use of buildings or accelerate traffic flow and reduce congestion are all examples of product solutions. At the same time, financing these and other actions are advanced by financial products (e.g., green bonds) and financial mechanisms (e.g., value capture) that can be standardized.

A Continuum of Good Governance

We believe the real secret to Copenhagen’s success is process innovation; it’s ability to create a series of public and public/private institutions with the capacity and capital to drive solutions at scale. We believe four institutional models help explain the Copenhagen model.

First, Copenhagen has a strong local government. Denmark has a highly decentralized governmental system, enabling municipalities to operate as strong partners with the national government. The Northern Europeans, in general, are devolutionists, using the nation state to provide a platform for market expansion, environmental sustainability and social cohesion but allowing municipalities enormous latitude to innovate and align national direction to local realities. According to a 2009 OECD review, local governments in Denmark account for over 60 percent of government spending, the highest level among OECD peers. Copenhagen’s ambition to be the first major global city to generate zero carbon emissions is thus enabled by a strong fiscal foundation.

The power of Copenhagen’s government (and Danish municipal governments in general) helps attract a talented work force. As we wrote in 2016 (Why Copenhagen works (brookings.edu)), “[T]he public sector is robust in terms of its knowledge and decision-making capacity, and it is fed by a steady supply of highly educated public servants across technical, environmental, social, and business fields. A tuition-free public education system bolsters this supply.”

Second, the Copenhagen municipal government operates within a system that aggregates political power across municipal jurisdictions and gives local officials the ability to shape national policy in ways that reflect municipal realities. Local Government Demark (“KL”) sits at the core of that system.

KL is a cooperative that is owned and governed by all Danish municipalities. The municipalities pay a fee for their membership. It is through the universal membership and representation of all Danish municipalities emblematic of an “all for one and one of all” approach that KL is able to leverage political and fiscal power vis-à-vis national government, trade unions, and other key societal stakeholders. By spanning across party-politics, KL can focus on the actual substance of decision making rather than the partisan color of politics. In short, KL is able to keep its eyes on the ball. Its political mandate stems from all different political parties represented across all city governments.

KL plays an instrumental role in enabling and informing the climate plans of Danish cities. The organization has published concrete plans and roadmaps for areas of domestic policy that affect climate change, including public transit, road traffic, energy and water. It provides guidance on how to finance and deliver distinct climate plans set by the national government and recommends changes in national law, where necessary. KL is effective because it applies the perspective of how to implement and finance climate plans within and across cities, recognizing that climate and its impacts are not confined within neatly set municipal boundaries.

This story of municipal collaboration plays out at the metropolitan scale. The cleansing of the Copenhagen harbor, which has largely resulted from major investments in a new sewer system, has been an important driver of the urban revitalization of Copenhagen. The city and seven surrounding municipalities co-created the Greater Copenhagen Utility (HOFOR) in 2012, which is responsible for building, maintaining and operating the wastewater system, district heating and cooling, and gas supply for the city and metro region. Just over a decade ago, it would have been inconceivable to swim in the Copenhagen harbor, as the water was highly polluted. Today, swimming in Copenhagen’s harbor has become a symbol of Copenhagen’s green agenda and the high quality of life for city residents.

Third, Copenhagen and the national government have created public-private institutions that can both create value through smart and sustainable revitalization and then capture value for large-scale public benefit and impact. The most relevant for this discussion is City & Port, a public asset corporation that has been delegated the power to dispose of publicly owned lands and buildings in ways that spur large-scale urban transformation, particularly around Copenhagen’s historic harbors and downtown, and use the revenue from such regeneration to fund infrastructure, affordable housing and other societal benefits. The most recent development of City & Port is an ambitious rising sea level protection of Copenhagen City, which doubles as an island peninsular. The land sales of the island finance the entire sea level protection. Other recent developments count an underwater tunnel for diversion of transitory traffic of Copenhagen.

City & Port is a hybrid organization, publicly owned and privately managed. City & Port uses land value capture to leverage the value of public assets through re-zoning and infrastructure investments. City & Port operates under a national statutory mandate to maximize revenue to fund large-scale urban regeneration along the harbors and Ørestad district and use the resulting value generated to finance city-wide infrastructure, most notably the city’s new subway system. This mandate shelters City & Port from political interference by obliging City & Port to always choose the investment proposition that yields the most revenue. The revenue yield is used to service the debt on a new city-wide metro system. In this way, City & Port has a holistic approach to regenerating the entire city that came about at a crucial moment in the city’s history. (For more on City & Port, see, The Copenhagen City and Port Development Corporation: A model for regenerating cities (brookings.edu)).

Finally, Copenhagen’s climate plan has benefitted from the active participation and investment of public pension funds. Danish pension funds are large, privately owned and managed; they make up some of the largest pension funds in the EU with the top two Danish pension funds counting among the twenty largest in Europe. For the most part, Danish pension funds operate as cooperatives that represent their members, the pensioners. They operate in a highly uniformly regulated market. Payment contributions are sheltered from politicians and public spending, which has enabled a fiscally solid and stable pension system to evolve. With a strong funding base, Danish pension funds are able to take the long view. They aim at a 3-4% return on investment on 80% of their invested assets and 5-6% on the remaining 20%. The large size of Danish pension funds makes them powerful players in the global market, leading the green climate transition both within Denmark and abroad.

Lessons from Copenhagen

The Copenhagen story yields seven critical governance and finance lessons for local, national and global policymakers.

City governance must focus on how to implement policies rather than what policies to implement


City leaders tend to focus on the “what” instead of the “how”. It simply has more political appeal to explain what will be done rather than how it will be done. We believe that making the right decision (i.e., the “what”) only gets you half way to success. The other half depends on how you execute and deliver (i.e., the “how”). City leaders routinely announce policy agendas but often overlook the critical importance of the institutions and stakeholders driving the climate transition.

City governance must make room for the growth of new large-scale institutions


Setting a policy agenda that shifts from a solely economic to a climate economic focus requires cities to undergo an institutional overhaul. Yet, city leaders often resist change since they are woven into the complex fabric of stakeholders, agencies, authorities and checks and balances. But change of the magnitude we are faced with requires an altered mindset, and new or consolidated institutions (e.g., City & Port) that have expanded powers, capacity and capital. In most cities, we actually need fewer rather than more institutions.

City governance must create institutions with holistic focus


The institutions presented above were not born out of a narrow climate change perspective, as they fulfill multiple purposes. In fact, the power and impact of these institutions stem from their broad economic, societal and environmental objectives. If these institutions only fulfilled, for example, narrow environmental purposes, we doubt that they would be as successful as they are, because economic, societal and environmental outcomes are inextricably linked and should not be viewed in isolation.

City governance must have access to financial sophistication


The design and financing of climate solutions is complex, comprised of multiple investment sectors as diverse as renewable energies (e.g., on- and off-shore wind, solar farms), the transportation and building sectors (e.g., energy efficiency, transit-oriented development), water and waste management and resilient development. Each of these investment sectors advance the common goals of mitigating (or adapting to) the impact of climate change. Yet each differs in how it is governed, regulated, owned and operated. And, with regard to finance, each has a different mix of the source of capital (e.g., public, private and civic), the nature of the capital stack (debt, equity, subsidy, and concessionary) and the interplay of project risk, revenue and return expectations.

City governance should balance power across the public and private sectors


The global economy is dominated by large and powerful corporations and financial institutions. The creation of city institutions with power (e.g., municipal intermediaries, pension funds) enables cities to help set the investment agenda and shape our societies. We need to bolster the capacity, resources and demand of large societal institutional actors. Cooperatives offer a way for states, regions, counties, municipalities and pensioners to scale up their size to match that of large financial institutions. In fact, cooperatives erase the power imbalance between small localized askers and big globalized givers. Through universal membership, these institutions become powerful societal heavyweights that national governments and multi-national corporations must reckon with.

City governance links different levels of government and sectors of society


When there is no stable and solid institution acting as the connective tissue between national government and municipalities and large institutional investors, such as pension funds and insurance companies, there is a disconnect between what goes on in national government and what is in fact implemented on the ground. Politicians are left free to set unfunded climate goals without anyone holding them accountable. Cooperative institutions fill the gap between fake politics and real policy execution on the ground. The Danish pension funds, in particular, are so large that few governments will ignore them. Cooperatives also provide solid and substantial affordable and social housing for almost 20% of Danes, while one of the nine largest dairy companies in the world is a cooperative owned by local farmers. Both in Denmark and Sweden, the municipal loan finance institutions are cooperatives owned by the municipalities themselves. These are societal supertankers that shape and define Northern European societies.

City governance links and leverages different institutional actions within cities


The institutional models described in this chapter have intricate relationships with each other. City & Port, for example, has attracted major pension fund investment for its regeneration activities. Two pension funds, Nordea Liv & Pension and PenSam, have invested almost $430 million USD (2.7 billion DKR) in the South Harbor of Copenhagen, where they are financing 1,350 new affordable and social rental apartments. Such developments enable City & Port to comply with the mandate to build 30% affordable and social housing in the areas of the former harbor. Both developments also advance sustainable objectives, since each have novel rainwater collection to avoid flooding, natural vegetation to expand biodiversity, and are largely car-free to encourage street-level community activities and advance human health.

What’s Next

The Copenhagen example shows the continuum of good governance that make transformational solutions and creative financing possible. Copenhagen’s municipal government is strong, with skilled individuals able to design and deliver ambitious plans. The city benefits by being part of Local Government Denmark, which enables all cities to aggregate their political power and negotiate with national government on an equal footing. The city also is part owner (with the national government) of City & Port, a publicly owned and privately managed corporation that has been able to drive over 50% of the development of the core of the city for the past decade and use the revenues generated by land sales and leases to finance the construction of a 21st century subway system for the entire city. Finally, the city benefits from strong public and private pension funds that have the wherewithal to co-invest in projects that promote sustainability while providing adequate financial returns.

The adaptation of these models to cities and countries across the world is a necessary part of climate action. Our next essay will describe what this might mean for US cities, given the potential for large scale federal investments in climate solutions over the next decade. To repeat, governance matters!

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[i] A longer version of this essay appears in The Climate City, a soon to be released book edited by Martin Powell and published by Wiley-Blackwell.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. 

Luise Noring is an Assistant Professor at the Copenhagen Business School.