OECD Regional Outlook 2021

4. Selected policy avenues

Abstract

Climate change is a global challenge requiring local, inclusive, early action. Subnational governments need to play a key role. Multi-level governance and finance should identify the steps to take by all government levels. Transfers between subnational governments need to be linked to climate policy goals. Integrating scientific advice improves success. Cities can adopt policies that reach net-zero emissions and improve urban living. Metropolitan regions contribute more than 60% of production-based greenhouse gas (GHG) emissions. Urban policies should co‑ordinate sectoral policies, such as transport and housing, to reach net-zero emissions. Cities hold large potentials for modular technologies to integrate renewables, heat pumps or green infrastructure. Circular economy initiatives can make consumption more consistent with net-zero emissions.

Rewarding ecosystem benefits boosts emission reductions and rural development. Participation in profits and decision-making makes renewable projects more attractive. Ageing, lower education levels and less diversified economic activity put rural regions with carbon-intensive industry at bigger risk and per capita emissions are often higher than in metropolitan regions. In regions at risk of losing employment in emission-intensive economic activity, building consensus early among local stakeholders from education, innovative business, regional and local governments is key to make best use of local assets.

Integrating subnational governments in climate policy governance and financing

Subnational governments are central for the net-zero greenhouse-gas-emission transition by 2050. As highlighted in paper “Financing climate objectives in cities and regions to deliver sustainable and inclusive growth” (OECD, 2019[1]), in 2000‑16, subnational governments were responsible for 55% of public spending and 64% of public investment in sectors having a direct impact on climate change and other environmental issues. Yet, subnational climate-related spending and investment represented, on average, only around 1.3% and 0.4% of gross domestic product (GDP) respectively in that same period (OECD, 2019[1]).

Cities and regions provide critical emission reduction opportunities, as they often have jurisdiction over key sectors for climate action. They are also motivated to act because many of the well-being gains of the net-zero-emission transition, such as improved health outcomes, accrue locally (Chapter 3). As Chapter 3 has also shown, regions differ enormously in terms of activities generating emissions and potential socio-economic impacts and, therefore, in the actions needed to move to net-zero emissions. Since local governments are in close contact with citizens and local businesses, local governments are generally in a better position to influence behaviour by implementing emission-reduction policies based on their knowledge of local conditions and capabilities.

Subnational governments will not be able to manage the net-zero transition on their own. Reaching national net-zero emission targets requires co‑ordinated action across regions and a massive upscaling of subnational climate finance. Ensuring effective multi-level governance systems are needed to optimise regional and local policy, programming and investment contributions. This becomes even more urgent after the COVID-19 pandemic, which has further weakened subnational spending abilities.

One important policy avenue to manage the net-zero transition will be creating incentives for subnational governments to focus spending and investment on the net-zero transition. These incentives can be broadly understood as combining different types of financial transfers from national to subnational governments, such as grants, subsidies, contracts, etc. with specific objectives towards reaching the net-zero transition. One example of such an incentive is conditionalities. Several countries have introduced environmental conditionalities in the allocation of their grants and subsidies for infrastructure projects to make sure that the project is consistent with the objective of the net-zero transition. Sound multi-level governance of climate policy means managing interactions and financial flows at and among different levels of government – from the global and supra-national level to the national, regional and local levels. The first part of this section highlights governance challenges associated with co-ordinating and financing the net‑zero transition and presents a range of instruments to overcome these. The second part of the section explores how subnational governments can scale up and deploy different climate finance instruments.

Subnational governments need to be integrated into climate policy governance

A successful net-zero transition requires multi-level governance systems that are “fit for purpose” and can support integrated or synchronised government actions across policy sectors and actors, in order to:

• Help different levels of government navigate the complex and dispersed processes that generate net-zero transitions.

• Ensure coherence across policy sectors, build an appropriate scale for intervention and optimise climate finance initiatives.

• Maximise well-being gains while minimising the trade-offs associated with climate policy implementation.

Several factors can make or break subnational climate governance:

• The political and legal context: The extent to which subnational governments govern climate action depends on and is affected by the national and international political and legal contexts. Results of a survey conducted by the European Environment Agency (EEA) show that cities identify national laws, standards and regulations, the distribution of state powers and actions, and national-level policy objectives as drivers of sustainability transitions. Despite the increasing number of regional and local climate initiatives, current efforts to tackle climate change at the subnational level remain poorly recognised and not well integrated into national policy frameworks. Approximately one out of four countries that recently submitted nationally determined contributions1 (NDCs) do not consider subnational governments in their effort to reduce national emissions and adapt to the impact of climate change (Hsu et al., 2018[2]; Matsumoto et al., 2019[3]).

• The degree of autonomy and decentralisation: In two-thirds of OECD countries, the economic importance of subnational governments has increased between 1995 and 2016, measured as a spending share of GDP and total public spending. Decentralisation may expand citizen participation by bringing government closer to citizens and by better targeting public service provision to local needs. This can also help meet regionally and locally identified climate priorities. Yet, a lack of administrative, technical or strategic capacities, limited resources or limited clarity in the assignment of responsibilities can be barriers to effective local action and can result in poorly co-ordinated investments. Decentralisation can result in geographical fragmentation and poorly co‑ordinated investment. To avoid and overcome these barriers, the OECD report Making Decentralisation Work: A Handbook for Policy-Makers offers guidance on designing and implementing effective decentralisation systems to optimise the associated potential advantages, such as greater accountability and more efficient, better targeted public service delivery (OECD, 2019[4]).

• Access to finance for climate action: The extent to which subnational governments have access to funding and can optimise its use for climate-related investment and spending is a key factor in climate governance. Subnational governments need more financial support from the international community and national governments, just as they need more incentives to apply their own revenues towards the net-zero transition. Multi-level governance mechanisms are essential for planning and co‑ordinating the net-zero transition.

Applying a place-based approach to the net-zero transition requires ongoing and productive dialogue among different levels of government. This can embed climate change action in regional development policy across diverse sectors and activities, such as energy, urban planning and sustainable land use. It also demands a seamless flow of information and resources. The transition comes with unintended consequences and trade-offs among social, economic and environmental sustainability outcomes. Managing these calls for continuously identifying and evaluating the risks and opportunities associated with transitions. Foresight exercises and backcasting policy actions from them can be useful techniques. They help policymakers develop timelines for technology and investment decisions. Progress towards the goal of net-zero emissions in 2050 should be measured by setting clear and realistic short- and medium-term targets, bearing in mind the economically useful life of assets and the availability of zero-emission consistent alternatives. Such targets include, for example, sustaining the current growth rate of renewables and increasing the annual refurbishment rates of existing buildings to close to 5%, so all buildings are refurbished consistent with net-zero emissions before 2050.

Successful climate policy governance relies on multi-level governance systems that can identify and broker an agreement on long-term strategic goals to set coherent policy priorities at different government levels. It also relies on monitoring and evaluation systems that first allow governments to identify whether they are reaching their aims and do so in a cost-effective way, taking into account well-being impacts and, second, serve as an accountability mechanism to stakeholders and citizens. While climate-related objectives, strategies and policies may be set at the international and national levels, implementation by subnational governments can generate action that is more appropriate to local characteristics. Regions can also play an important role as a co‑ordinator of climate action undertaken at the local level. A periodic review helps policymakers adjust and enable policy learning. Scientific advisory bodies can help regions and cities to define and monitor a range of short-term sectoral benchmarks and their contribution to the long-term objective of net-zero emissions. Integrating an autonomous scientific advice body in political decision-making at the central government level has made a substantial difference in reducing emissions cost-effectively, as the United Kingdom (UK) has shown (Box 4.1). This includes a single advisory body involved in setting medium-term and long-term objectives, the evaluation of policies ex ante and ex post against objectives, as well as the approval of policies and objectives by parliament. The central role of place-based policies argues in favour of extending this approach to regional and urban climate action. The climate challenge and the COVID-19 crisis have common characteristics. Countries can therefore learn from the multi-level governance arrangements in the course of the COVID-19 crisis. For example, associations of regional and local governments are playing an important role to support vertical co‑ordination during the pandemic (Chapter 2).

Box 4.1. Integration of scientific advisory bodies

National and regional scientific bodies provide independent advice to governments on setting and meeting greenhouse gas (GHG) emission targets. They also help subnational governments understand whether current decisions, especially on infrastructure investment, are compatible with carbon budgets and the emission reduction trajectories of long-term plans. This creates the necessary link between scientific knowledge, national long-term targets and the decision-making process. Many countries have introduced such bodies. Given the strong case for place-based climate action, regional policymakers should incorporate scientific advisory bodies as knowledge and evidence channels within the multi-level governance system supporting the transitions.

The UK Climate Change Committee

In the UK, parliament sets legally binding five-year emission-reduction budgets and the government is required to propose policies to meet them. The Climate Change Committee evaluates and monitors the government’s policies ex ante and ex post and makes concrete recommendations for these five-year budgets. The government is legally obligated to respond to the committee’s annual reports. Reporting to parliament also occurs annually and all views are made public, stimulating public debate and engagement with a science-based policy programme. The Climate Change Committee comprises 8 experts on climate change, science, economics, behavioural science and business administration, with the additional support of a secretariat of approximately 30 professionals and an annual budget. The committee is also the only scientific advisory body in the UK that gives a single voice to climate advice.

The UK’s experience underscores how the advice that is integrated into decision-making can help achieve lasting emission reductions that are sustained by broad consensus, although it has not yet included subnational government levels. Emission reduction in the UK is greater than in other large OECD economies, and emissions have fallen considerably since the introduction of the UK Climate Change Act in 2008 (Figure 4.1). Emissions in electricity generation fell by 58% since 2012, as the share of coal in electricity generation dropped from around 40% to less than 8% in 2017 without negative impacts on supply or costs (Newbery, Reiner and Ritz, 2018[5]).

Figure 4.1. Reductions in greenhouse gas emissions in selected major economies

Source: OECD ENV Database

Co-ordination and integration across sectors and among levels of government

Governing net-zero emissions require horizontal and vertical policy co-ordination. Policymakers should actively seek to identify and correct existing policy misalignments. This can mean moving from a patchwork of individual policies designed and pursued in a sectoral manner to developing an integrated policy approach. Policy coherence and co‑ordination towards the objective of net-zero emissions also helps create the necessary links between sectors. For instance, reaching net-zero consistent mobility requires changes in land use and spatial planning.

Several countries are developing governance platforms to co‑ordinate transport and land use development policies among national, regional and local governments with the objective of climate-neutral transport. The Norwegian Urban Growth Agreement and the Swedish Urban Environmental Agreements are both examples (Westskog et al., 2020[6]). Finally, dialogue among levels of government supports strong climate governance. Platforms for knowledge sharing among local and regional governments provide an opportunity to empower local actors. Networks such as the Covenant of Mayors for Climate and Energy and the ICLEI Green Climate Cities Programme help identify and share best practices internationally.

In addition to effective co-ordination as discussed above, subnational governments will also benefit from additional financial resources to effectively redirect their expenditure towards climate-neutral assets and scale up investment. The OECD Council adopted a Recommendation on Effective Public Investment Across Levels of Government (OECD, 2014[7]), which is organised around three pillars (Box 4.2).

Box 4.2. OECD Principles on Effective Public Investment Across Levels of Government

Across the OECD, subnational governments are responsible for about two-thirds of direct public investment. Well-managed public investment can be growth-enhancing and contribute to higher levels of productivity growth. Poor investment choices, on the contrary, may not only waste public resources but also hamper future growth. In 2014, the OECD Council adopted the Recommendation on Effective Public Investment Across Levels of Government. The principles set out in the recommendation are meant to help governments assess the strengths and weaknesses of their public investment capacity and set priorities for improvement. The 12 recommendations are grouped into 3 pillars representing multi-level governance challenges to public investment:

Figure 4.2. The 12 Principles on Effective Public Investment Across Levels of Government

Source: OECD (n.d.[8]), Effective Public Investment Toolkit, http://www.oecd.org/effective-public-investment-toolkit/.

Incorporating non-state actors into multi-level governance for climate policy

The effective governance of complex sustainability issues relies on new forms of collaboration with actors from government, science, business and civil society (Ehnert et al., 2018[9]). A broad actor set can help strengthen the participation of civil society and local communities in climate governance and advocate for partnerships with subnational and national governments on local climate action. They can also provide policy and technical advice to local governments.

Making the most of contractual instruments to deliver on climate objectives

Formal instruments such as intergovernmental “contracts” or agreements can help foster harnessing place-based action for reaching national and international climate objectives. Several examples of “deal-making” or contractual arrangements are found in OECD countries: France, especially, has a long tradition of State-Region Planning Contracts but also Australia (city and regional deals), Italy and the Netherlands (City deals) (Box 4.3).

Box 4.3. Making the most of multi-level governance tools to reach net-zero emissions by 2050

A number of countries have designed intergovernmental agreements linked to promoting and achieving climate objectives.

• In France, the State-Region Planning Contracts launched in 1984 have played a critical role in shaping autonomous policymaking among regions. The 6^th generation of contracts (2015-20) includes transport, the environment and energy transition. The contracts provide regions with 8.5% of their budget. Co-funding varies across regions and according to the priorities.

• In Italy, the Italian Pacts for the South (2016) support economic growth, employment and environmental sustainability goals in the southern regions. They define priorities, actions for implementation and responsibilities of parties.

• In the Netherlands, the Climate Adaptation City Deal was signed in 2016 between the Ministry of Infrastructure and the Environment, three regional water authorities, five cities (Dordrecht, Gouda, Rotterdam, The Hague and Zwolle) and other partners (research centres and companies). The aim is to create a learning environment for climate adaptation at the urban level for the next four years.

Source: OECD (2018[10]), Rethinking Regional Development Policy-making, https://dx.doi.org/10.1787/9789264293014-en.

Financing instruments for the transition to net-zero emissions

Subnational governments are major spenders and investors in the transition to net-zero emissions and particularly in the infrastructure that will be required to meet the ambitions of the Paris Agreement. However, the COVID-19 pandemic is placing significant pressure on subnational government finance. Shrinking revenues could lead the subnational government to restrict their expenditure to mandatory and the most pressing areas, including staff costs, debt obligations, social benefits and services and support to the most vulnerable population and businesses. This may come at the expense of environmental and climate-related operating and capital expenditure. To preserve fiscal capacity for investment, all potential internal and external financing sources need to be mobilised to cover green investment needs. Subnational governments should make full use of their traditional budget instruments to reach the net-zero emission target by 2050. There are different sources of subnational government revenue that could be designed to foster and help finance the net-zero transition. These include grants and subsidies, as well as own-source revenues such as subnational taxes, user charges and fees, and income from assets, which tend to be under the direct control of subnational governments (although often constrained).

The following sections address the following four challenges:

1. How to make the most of grants and subsidies to deliver on climate objectives.

2. How to develop and optimise taxation, user charges and other revenues to support climate objectives.

3. How to make use of external finance mechanisms and attract private investors for subnational climate-related projects.

4. How to better align subnational government expenditure with net-zero emission objectives and direct subnational spending and investment towards climate priorities.

Making the most of grants and subsidies to deliver on climate objectives

In OECD countries, grants and subsidies to subnational governments represent around 37% of their revenue, around USD 3.5 trillion in 2018 (OECD, 2020[11]). Grants and subsidies may be unconditional (block grants) or earmarked to finance subnational government responsibilities in a wide range of sectors (education, social protection, health, environment, etc.), covering current or capital expenditure needs. They may be allocated by international organisations (including the European Union), national governments as well as state governments in federal countries. Through their grants and subsidies policies, international organisations, national and state governments are already influencing subnational spending and investment towards climate priorities. They can serve climate objectives in two ways:

• Environmental and climate considerations should be integrated into national transfer policies to subnational governments, including for general and earmarked grants, to provide incentives and resources to contribute to the net-zero emissions target.

• Specific earmarked grants and subsidies could be additionally introduced to finance targeted policy instruments to reach the net-zero policy target.

Making the most of grants and subsidies to deliver on the objectives of the net-zero transition implies that these grants and subsidies need to be designed to provide incentives for subnational governments to deliver on the objective of the net-zero transition. There are several ways to do this. For example, governments could review their entire intergovernmental grant system through a climate lens. As stressed in the Chicago Proposal for Financing Sustainable Cities (OECD, 2012[12]), grants can be used to correct incentives for unsustainable behaviour and reward subnational governments that create environmental benefits through their policies. Climate objectives and indicators, as well as an assessment of climate change impacts, should be more systematically integrated into intergovernmental transfers. The national system of grants should also ensure cross-sectoral policy coherence (e.g. with the energy, agriculture, transportation and land use planning sectors) with climate objectives. How to best design the incentives for subnational governments to prioritise investments and expenditures that support the objective of the net-zero transition will depend on the type of region. For some regions, the transition might require specific objectives with regard to afforestation; for others the transition to renewable energy production and use or sustainable transport provision might be most feasible. Incentives for subnational governments need to be consistent with predictable provision to foster the net-zero transition, so local governments steer the transition and send the right signals locally, especially for investment decisions that need to be taken now.

When conditionalities are attached to grants, they are primarily used to align national and subnational spending priorities, to promote subnational spending in particular areas, to address fiduciary and accountability concerns and to promote minimum public service standards (OECD, 2018[10]). This mechanism, which can support environment- and climate-friendly practices and standards, may be further promoted in the context of the green recovery plans.

The European Union (EU) has considerably extended the use of conditionalities in its cohesion policy in the 2014‑20 period. These include ex ante conditionalities (general and thematic), macroeconomic conditionality and the link to country-specific recommendations (OECD, 2018[10]). Environmental conditionalities are now an integral part of many policy areas.

Some countries have also introduced environmental conditionalities in the allocation of their grants and subsidies for their infrastructure projects. In Canada for example, the Climate Lens programme is a requirement for projects seeking funding through the Investing in Canada Infrastructure Program, Disaster Mitigation and Adaptation Fund, and Smart Cities Challenge (see Box 4.4).

Box 4.4. The Climate Lens in Canada

The Climate Lens encourages consideration of climate impact and low-carbon options in the planning of infrastructure projects. Launched in June 2018, the Climate Lens was updated in September 2019 to clarify requirements and add a reference to additional external resources, such as the Canadian Centre for Climate Services. The Climate Lens has two components: the GHG mitigation assessment, which measures the anticipated GHG emission impact of an infrastructure project, and the climate change resilience assessment, which uses a risk management approach to anticipate, prevent and adapt to any climate change-related disruptions or impacts related to an infrastructure project. In 2019, 70 projects funded under the Investing in Canada Infrastructure Program were required to complete Climate Lens GHG mitigation assessments and 65 were required to complete climate change resilience assessments.

Source: Government of Canada (2020[13]).

The use of conditionalities is not without controversy. Some evidence suggests that the use of conditionalities has not always been effective in improving economic policies in recipient countries. There are different inefficiencies associated with the uptake of conditionalities (OECD, 2018[10]). Some particular issues are crucial for the effectiveness of conditionalities, which should be taken into consideration when designing and implementing a grant system using conditions (see Box 4.5).

Box 4.5. How to best use conditionalities?

Designers of conditionality-driven agreements need to have a clear understanding of the trade-offs and consequences of their design. This needs to take into account objectives, choice of instruments, degree of administrative burden and capacity of all parties to implement the agreement and realise the desired objectives. The lack of adequate capacities and skills may partially explain why conditionalities have not necessarily reached the expected outcomes. There is also a need to ensure ownership and legitimacy by establishing mutual accountability, especially to ensure that the application of conditionalities to different recipients is fair, consistent or even relevant. There is thus increasing pressure for transparency and accountability as well as programme evaluation and monitoring. The system should also be kept simple. An excessive amount of legislation and guidance or the proliferation of multiple conditions coupled with weak capacities may lead to inefficient or low use of funds by subnational governments. Simplicity also comes with the need for greater flexibility to adapt programmes to specific local circumstances and development needs.

Linking conditionalities to outcomes is ideal but is very difficult to put in practice. For example, the United States (US) applied this mechanism in environmental grant programmes and performance partnerships where outcome measures for pollution levels were negotiated with individual states. The government faced significant difficulties in negotiating the exact outcome(s) on which to link the conditionality because the states did not feel they had enough control over all of the contributing factors. Outcomes are often uncontrollable. The challenge is designing indicators that are objective, measurable, timely, meaningful, comprehensible, well documented and widely disseminated. For performance-based management to support greater accountability in the application and uptake of conditionalities, all parties must subscribe to human resource management frameworks that espouse results-based management and evaluation. In addition, having independent evaluation is important, i.e. undertaken by outside actors, as the incentive structures in donor institutions do not often support truly objective and independent evaluation.

Source: OECD (2018[10]), Rethinking Regional Development Policy-making, https://dx.doi.org/10.1787/9789264293014-en; Berkowitz, P., Á. Rubianes and J. Pieńkowski (2017[14]), “The European Union’s experiences with policy conditionalities”, Background paper prepared for the Seminar “Conditionalities for More Effective Public Investment” held 28 April 2017 at the OECD Headquarters, Paris.

Establishing and developing specific climate funds targeted at subnational governments

The international community and national/state governments could further develop specific or matching grants to support climate-related projects developed by regions and municipalities. The international community (multilateral banks such as the World Bank, as well as bilateral banks, the United Nations Development Programme [UNDP], the Global Environment Facility, etc.) has established a series of funds providing support from developed countries to developing countries. These funds are earmarked for environmental protection and climate action. While a large part of these funds provides loans, in 2018 around 20% were allocated as grants (OECD, 2020[15]). While subnational governments can benefit from these multilateral funds, in reality, there is limited access for regional and local governments. Few donors are permitted to work directly with subnational governments and most resources are channelled through international implementing entities and the national governments of recipient countries. Even when subnational governments are accredited as intermediaries, they often face capacity challenges. Subnational governments willing to benefit from these funds will have to negotiate access with their national government and ensure compatibility with bilateral agreements negotiated between the fund and the government (OECD, 2019[1]; Colenbrander, Lindfield and Lufkin, 2018[16]).

At the European level, in the context of the Green Deal and the post-COVID-19 recovery measures, there is a new impetus for climate action at the national and subnational levels. The European Green Deal, adopted by the European Commission (EC) in December 2019, aims to make the EU climate-neutral by 2050.

Some national and state governments have also established dedicated funds to finance subnational government projects (Canada, Germany, the state of Jalisco, Mexico, the state of California in the US, etc.) but much more could be done to really foster climate priorities at the subnational level (see Box 4.6).

Box 4.6. Multilateral, European and national/state climate funds

Multilateral climate funds

Multilateral climate funds play an important role in supporting developing countries to adopt low-emission, climate-resilient development trajectories through loans, guarantees, grants et equity investment. They also have a role in capacity building, research, piloting and demonstrating new approaches and technologies, and removing barriers to other climate finance flows (Climate Funds Update, 2020[17]). Among the most important in terms of the pledge are the Green Climate Fund (GCF), the Clean Technology Fund (CTF), the Amazon Fund, the Least Developed Countries Fund (LDCF) and the Global Climate Change Alliance (GCCA), the Pilot Program for Climate Resilience (PPCR) and the Adaptation Fund (Climate Funds Update, 2020[17]). There are several estimates concerning the global amount mobilised by multilateral climate funds, depending on the source. A recent OECD estimate from 2020 puts the public and private climate finance flows provided by developed countries to developing countries in the context of the United Nations (UN) Framework Convention on Climate Change (UNFCCC) at USD 78.9 billion in 2018. In 2018, 21% of all climate finance was for adaptation, 70% for mitigation and 9% were cross-cutting. Over 2016-18, Asia benefitted from the largest share (43%) of total climate finance, followed by Africa (25%) and the Americas (17%) (OECD, 2020[15]). The GCF and the Adaptation Fund have introduced a number of relatively new institutional features with the aim of channelling a larger share of climate finance to the local level. However, local government participation remains low (Colenbrander, Lindfield and Lufkin, 2018[16]).

• EU cohesion funds, the Green Deal and EU funds for climate action:

  • EU cohesion policy provides a key source of financing that member states have employed for environmental investments, in particular through the European Regional Development Fund (ERDF) and the Cohesion Fund (CF), which primarily finance infrastructure and physical investments. Going forward, a large part of the funding provided in 2021‑27 will have to contribute to achieving the Green Deal objectives. In addition to cohesion policy, the EU plans to finance the policies set out in the Green Deal through an investment plan, InvestEU, which forecasts at least EUR 1 trillion in investment, and the Just Transition Fund, which provides EUR 40 billion to support economic diversification and reconversion in regions and sectors that are most vulnerable to the transition towards the green economy.

• National and state climate funds supporting subnational climate-related projects:

  • In Canada, in 2019, the federal government announced CAD 1.01 billion in endowment funding for the Federation of Canadian Municipalities’ Green Municipal Fund, for 3 programmes: Sustainable Affordable Housing Innovation, Community EcoEfficiency Acceleration, and Low Carbon Cities Canada (LC3). These programmes support local actions to improve the energy efficiency of homes and community buildings and reduce GHG emissions. In summer 2019, seven LC3 Urban Climate Centres were announced in Canada’s seven largest urban environments: Calgary, Edmonton, Halifax, Hamilton, Montreal, Ottawa, Toronto and Vancouver (Environment and Climate Change Canada, 2020[18])

  • In Germany, the National Climate Initiative (NCI) is the main instrument to support subnational green finance across a range of sectors, such as transport, energy and sanitation services. However, the capacity of the fund is likely insufficient. In the 2008‑19 period, the NCI invested EUR 1.07 billion in over 32 450 projects domestically, which leveraged a total of EUR 3.5 billion in investment.

  • In Mexico, the state of Jalisco has created a framework to provide funds to municipalities as well as to associations of municipalities to implement climate protection projects. In addition, an environmental fund opens up further financing opportunities for climate change projects by municipalities. Funds are allocated via calls for proposals, where councils may apply based on their climate action plans (OECD, 2020[19]). Since 2015, the state of Jalisco adopted its Law for Action on Climate Change (LACC) that requests all municipalities to have a Municipal Climate Change Programme (Programa Municipal de Cambio Climático, PMCC).

Developing and optimising tax revenues, user charges/fees and other revenues to support climate objectives

Developing and optimising subnational government tax revenue instruments

In 2018, tax revenues (shared and own-source taxes) accounted for a large share of subnational government revenues on average in OECD countries (44%). However, as the share of tax in subnational revenues varies greatly from one country to another – from 3% in Estonia to 79% in Iceland – the potential of subnational tax systems to foster environmental and climate priorities also varies greatly across countries.

There are different ways to green subnational tax systems, including eliminating the anti-green bias of existing subnational taxes, using local taxes to foster green practices and developing subnational environmental taxes. This could also imply providing subnational governments with more taxing powers.

National and subnational governments should screen and audit their subnational tax systems to identify taxes, tax provisions and tax incentives that could favour non-environmentally friendly green and climate practices. A classic example is property tax on land and buildings. Depending on how they are designed, property taxes can encourage urban sprawl or by contrast, favour the development of urban cores and transport linkages. Reforming property taxation may therefore be a valuable tool to achieve more sustainable urban development patterns. For example, split rate property taxes, whereby higher tax rates are set on the value of land than on the value of buildings and other improvements, can promote denser development and give rise to more compact cities. Lower tax rates on the value of buildings and other improvements can encourage owners to build more intensively or renovate their properties to increase their value (OECD, 2018[20]). Tax incentives for the development of land on the outskirts of cities can be also eliminated to prevent the conversion of farmland and forests into urban land (OECD, 2018[20]).

Taxes that specifically target regional environmental impacts could be further developed at the subnational level. Many of them would also contribute to GHG emission reduction or climate adaptation. Environmental taxes include tax transport (cars sales/registration taxes, annual vehicle circulation taxes), pollution (including waste taxes and taxes on the use of pesticides and/or fertilisers) and taxes on water abstraction and resources extraction. Environmental taxes, which are already well developed at the subnational level in several OECD countries, offer a potential source of expanded revenue for subnational governments. Waste taxes, for example, can encourage emission reduction by encouraging circular economy practices, helping to reduce high demand-based emissions in high-income cities for example. Cost-reflective water chargers will be important in the context of climate adaptation, as many regions will face rising draught risk as well as increasing water demand in agriculture.

Subnational governments’ powers of taxation are limited, however. Reforming tax systems at a subnational level mostly depends on the decision of central or federal governments. While subnational governments have taxing power on their own-source tax system (ability to modify rates and bases), tax provisions are framed by national regulations and subnational tax power on rates and bases may be constrained and limited. National governments could allocate the full benefit (or a share) of certain national environmental taxes to subnational governments and also provide them with more flexibility and taxing power to implement a regional or local climate-friendly tax policy. This can be done through rates and bases but also by creating local ecotaxes. Some of these tax arrangements are linked to land value capture and further developed below.

Enhancing the potential of user charges and fees for climate objectives

User charges and fees can raise revenue that supports the transition. These include congestion charges, parking fees, high occupancy toll lanes, water and wastewater user fees, urban tolls or utility fees (water, waste and energy) (Merk et al., 2012[21]). Road user charges will need to replace fossil fuel taxes when fossil fuel vehicles are phased out, both to replace revenue streams from fossil fuel taxes as well as price negative externalities related to vehicle use such as congestion, accidents and noise. Moreover, road use charges that are time- and place-contingent can price externalities more efficiently, especially in urban areas, where external costs are much higher than typical fuel tax rates today (OECD/ITF, 2019[22]). However, road use charges in urban areas need to be embedded in an overall urban transport strategy as argued in the urban policy section below.

In London, Milan, Singapore and Stockholm, congestion charges have resulted in reduced carbon emissions. In the case of Milan and Singapore, this drop has been linked to the level of pollution emitted from vehicles (OECD, 2019[1]). Oslo, Norway, has become one of the world’s electric vehicle (EV) capitals. It has developed a series of proactive measures that encourage the development of EVs that include road tolls and municipal parking fees that only apply to fossil fuel vehicles (since the late 1990s). In the waste sector, Seoul, Korea, has developed and continuously improved a pay-as-you-throw system since the 1990s. General waste is charged on a volume-based fee (VBF) system for households, businesses and office buildings instead of a disposal bill based on building areas or property taxes. However, there are several limitations attached to the development of user charges and fees, including the legal ability of subnational governments to create and determine the level of such fees, in particular in areas considered as essential (e.g. energy sector), the capacity and willingness to pay of users and capacity management (OECD, 2019[1]).

Developing property income and land-based financing instruments

Local authorities can reclaim gains from investments or changes in land regulations, thereby generating revenue that can be used to close some of the funding gaps of the transition. This also includes funding infrastructure through land value capture, enabling communities to recover and reinvest land value increases resulting from public investment and other government actions (Lincoln Institute, 2018[23]). For example, local governments in Japan use land readjustment, a form of joint development, to finance infrastructure improvements. While these have not specifically funded green investments, many have funded passenger rail development, thereby reducing travel-related emissions compared to car travel. Land value capture instruments are useful in the context of zero-carbon transitions because they require substantial investment, for example in public transport, which raises real estate prices. Land value capture instruments can therefore serve to fund investment as well as limit rents from higher real estate prices.

Emissions trading systems (ETS)

Cap and trade is a policy mechanism to reduce GHG emissions. High polluting industries are required to pay when they exceed predetermined emission amounts. In order to emit over the prescribed amount, companies are forced to purchase emission allowances. While many ETS operate at the national level, some subnational governments operate their own (OECD, 2019[1]). For example, in the US, the Regional Greenhouse Gas Initiative (RGGI), launched in 2012 as a co‑operative effort among several US states (as of today 11 states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Virginia), was the first mandatory market-based programme to reduce GHG emissions from the power sector. Another example is the California Cap-and-Trade Program, which is the main source of funding for the state of California’s climate investments. At the city level, as part of a local law that sets emission intensity limits for most large buildings starting in 2024, the New York City government is required to study the feasibility of a citywide ETS for the buildings sector and release its findings by 2021 (World Bank, 2020[24]).

Globally, there are now 61 carbon pricing initiatives in place or scheduled for implementation, consisting of 31 ETS and 30 carbon taxes, covering 12 gigatons of carbon dioxide equivalent (GtCO2e) or about 22% of global GHG emissions (versus 20% in 2019). These initiatives cover 46 national and 32 subnational jurisdictions, the latter being mainly in North America (see Canada and the US above). Governments raised more than USD 45 billion from carbon pricing in 2019. Almost half of the revenues were dedicated to environmental or broader development projects and more than 40% went to the general budget (World Bank, 2020[24]).

Despite the increase of carbon prices in many jurisdictions, they remain substantially lower than necessary to be consistent with the Paris Agreement (World Bank, 2020[24]). In addition, carbon pricing comes with social limitations that need to be addressed. Some jurisdictions have delayed measures to strengthen their carbon pricing instruments and have extended compliance deadlines due to the restrictions (World Bank, 2020[24]). For efficiency adequate carbon pricing should be as uniform as possible, and therefore preferably be set at international or at least national, rather than subnational, level.

Making use of external finance mechanisms and attracting private investors for subnational climate-related projects

A number of potential instruments exist for mobilising external financing for the net-zero transition, including debt financing, subnational public-private partnerships (PPPs) and equity funds.

Developing debt financing for green and climate-related projects

Debt financing is used to complement self-financing and capital transfers to finance investment projects. This is especially true at the local level where borrowing is allowed only to finance capital expenditure. However, some subnational governments may face difficulties in borrowing because of strict prudential rules, among other constraints such as the lack of creditworthiness. Estimates suggest that around 20% of the largest 500 cities in developing countries are deemed creditworthy in international markets (OECD, 2019[1]). It may be even more difficult to borrow on capital markets (bond financing). In a large number of countries, subnational governments, or certain categories of subnational governments, are not allowed to issue bonds on capital markets. This said, even in countries where subnational governments are allowed to issue bonds, the practice is not widespread.

In Japan and North America, bond financing is widespread while loan financing is predominant in Europe, except at the state government level in federal countries (such as Germany, Spain and Switzerland). In Canada and the US, bonds represent more than 90% of the subnational government debt stock (OECD/UCLG, 2019[25]).

Borrowing frameworks could be adapted to allow borrowing for subnational government investments, especially if investments support the net-zero transition. National governments could also facilitate local government access to capital markets. National and/or regional governments could actively assist local governments by providing technical assistance for project appraisal and implementation, and assist local governments to explore joint borrowing across jurisdictions. They also help by setting up specialised agencies to pool local debt, thereby facilitating access to lower-cost capital finance for infrastructure investment such as in Nordic countries. In Sweden for example, the local government funding agency Kommuninvest makes use of the high creditworthiness of Swedish municipalities to help them raise capital through the issuance of bonds, which it places in Europe, Japan and other countries (OECD, 2020[26]).

Some promising debt instruments to mobilise private finance could be further promoted, in particular green and climate bonds. Targeted at financing environment-related investments, green and climate bonds must meet the eligibility criteria determined by the Green Bond Principles (GBP) or the Green Loan Principles (GLP). Despite rapid growth (USD 754 billion of cumulative issuance since inception in 2007, including USD 259 billion issued in 2019), green bonds still account for a small share of the global bond market. Subnational governments are increasingly active in the green bond market (USD 11.6 billion issues in 2019 by local governments vs. USD 3.7 billion in 2014) but there is significant room for scale-up. The share of subnational government accounted for only 4.4% of green bond issuance in 2019. In some countries (e.g. France, Japan, Sweden and the US), subnational governments are becoming significant issuers of green bonds or climate bonds, yet there is still significant scope for improved use of these instruments.

Scaling up the use of green bonds is especially difficult in countries where subnational governments are restricted from borrowing on capital markets. In addition, to establish an enabling environment for allowing and facilitating the subnational governments’ access to capital markets, governments could also develop guidelines, standards, reporting and certification practices to create the foundation for a green bond market. They could also provide technical assistance to develop bankable green projects and support for capacity building at the local level. Another way to support the development of a local green bond market is credit enhancement from governments/multilateral institutions, possible provision of tax incentives for an initial period to foster market development and the development of green banks and green funds (Climate Bonds Initiative, 2015[27]).

Mobilising public-private partnerships (PPPs) to foster climate objectives

PPPs may also be an interesting mechanism to support green growth projects at the subnational level. PPPs are a long-term contract between a private party and a government entity for providing a public asset or service, with some of the risk and management responsibility shifted to the private party. Although the average value of PPPs is generally higher at the national level, the number of PPPs may be greatest at the subnational level in some countries. For example, in Germany, subnational PPPs constitute approximately 80% of PPP investment. Green PPPs may offer added value. For example, in Slovenia, the city of Ljubljana developed two PPPs through energy performance contracting (PPP EPC). These are recognised as the most successful PPP EPC in the country and in the EU, and have been replicated by other Slovenian cities. These projects are based on the principle of EPC within which the majority of building stock (schools, cultural centres, sports and healthcare facilities, etc.), owned by the city is being deeply energy retrofitted and, where possible, renewable energy sources are being introduced. Consequently, their GHG emissions are being reduced. For the first project (EOL1), the 25 deeply retrofitted buildings received 51% of their funding from private partners, 40% from cohesion policy funds and 9% from the city (OECD, 2020[19]).

Subnational PPPs are however not without risks. Challenges emerge in areas such as financing and funding. Private borrowing costs might be higher than public ones, for example, raising the costs of the PPP project overall. PPPs require intergovernmental regulatory coherence, cross-jurisdictional co‑ordination, economies of scale and asymmetric information between the contracting parties, which may put local governments at a disadvantage. It also requires management capacity in subnational governments (OECD, 2019[1]).

Attracting private sector financing through equity funds

Private institutional investors, such as pension funds and insurance companies, have some USD 70 trillion in assets under management in OECD countries and could invest more in climate-neutral projects. Such actors are currently investing very little in climate-related projects at the subnational level. Yet, there are at least two barriers to overcome. These relate to inadequate international and national legal frameworks for private long-term investments and public-private co-investments rules, as well as the size of urban projects, which increases the cost for private investors. Successful experiences of mobilising institutional investor capital for climate-friendly investment projects do exist. In particular, investment can take place through specialised infrastructure equity funds, which may also involve other private investors, such as urban developers (OECD, 2019[1]).

Aligning subnational government expenditure with net-zero-emission objectives and direct subnational spending and investment towards climate priorities

Subnational governments can set climate targets and incorporate them into their spending policies and budget priorities. Greening expenditure applies to both current and capital expenditure. It is important to recall that, on average in the OECD, investment expenditure represents around 13% of subnational expenditure while current expenditure represents the remaining part. Therefore, a comprehensive review of the budget should be conducted for both current and capital expenditure (OECD, 2020[11]).

Several tools can be mobilised to direct spending and investment towards environmental and climate objectives. They include: i) providing climate-related financial support to firms and households; ii) integrating environmental benefits in costs analysis; iii) developing the use of green public procurement; and iv) developing subnational green budgeting.

Providing climate-related financial support to firms and households through dedicated regional and local climate funds

At a regional level, several states, provinces and regional governments operate their own dedicated green and climate funds. At the local level, some cities have also used their power to establish climate funds to finance sustainable and climate-friendly projects within their city. These funds are derived from different sources, including the proceeds from the sale of emission allowance and support projects in many areas: energy efficiency, renewable energy, affordable housing, public transportation, increased mobility options through transit, walking and biking, zero-emission vehicles, environmental restoration, water savings, more sustainable agriculture, recycling, etc. Support is provided in different ways, including direct investment in projects, subsidies, loans, credit enhancement solutions, guarantees, equity, etc. Creating such funds has three main advantages for subnational governments, in addition to supporting climate objectives. The first is giving a clear signal to citizens, businesses and investors regarding the region or city’s ongoing commitment to support projects that reduce emissions and increase resilience. Second, they can help de-risk finance from more conventional sources. Finally, by acting as a guarantor or an underwriter, climate funds can entice more private sector actors or other commercial lenders to invest in cities’ projects and allow the region or the city to invest and have a stake in their own projects (C40 Cities, 2016[28]).

Box 4.7. Regional and local climate funds targeted at firms and households

Many regions and cities, using different sources of revenues, have established climate funds directed to businesses, households and non-governmental organisations (NGOs) to support green and climate-related projects.

• In California, the Greenhouse Gas Reduction Fund (GGRF) is funded by the proceeds from the Cap-and-Trade Program (see above). The fund support programmes and projects that reduce GHG emissions in the state in application of the California Global Warming Solutions Act of 2006. As of 2020, more than USD 11 billion have been appropriated by the legislature to state agencies implementing GHG emission reduction programmes and projects. As of March 2020, cumulatively, USD 5.3 billion in projects have been implemented across the state, with 57% of those investments benefitting California’s priority populations, with more than 428 000 individual projects implemented (OECD, 2020[29]).

• In France, the city of Paris launched in 2018 the Paris Green Fund (Paris Fonds Vert) to support private innovation and small- and medium-sized enterprises (SMEs) in support of the ecological transition of Paris. The city of Paris allocated EUR 15 million into the fund initially, with a first target to reach EUR 200 million thanks to the involvement of private investors. The fund has three main functions: first, to serve as a growth equity fund aiming at financing companies that are already in a growth phase and/or at a more mature stage in their development; second, to serve as a green fund to invest in several sectors transport, energy, energy efficiency, waste management, buildings and digital innovation; and third, to serve as a territorial fund. All activities funded through the Paris Green Fund must demonstrate a positive impact on the ecological transition of the city of Paris. The territorial impact of the fund will be evaluated by an external body according to six main metrics: carbon impact (induced and avoided emissions); energy impact; impact on air quality; overall economic impact and just transition; resilience to the consequences of climate change; recycling and waste reduction (OECD, 2019[1]).

• In the Netherlands, the Amsterdam Climate Fund, established by the city in 2019, is intended to encourage residents, businesses and institutions to take significant measures to reduce carbon emissions, including disconnecting buildings from natural gas. In the case that projects do not pay for themselves (inevitable losses), initiators can apply for a contribution from the fund (City of Amsterdam, 2020[30]).

Developing green public procurement

Public procurement needs to be consistent with the net-zero emission transition. On average in the OECD, public procurement represents 12% of GDP and 29% of government expenditure; subnational government’s procurement represents more than half of this expenditure. In addition to greening public consumption and investment policies, green public procurement (GPP) can provide industry with incentives for developing environment-friendly products and services, particularly in markets where public purchasers represent a large share, such as construction or public transport. GPP covers: i) gross fixed capital formation; and ii) intermediate consumption, such as energy-efficiency light bulbs, recycled paper, etc. (OECD, 2015[31]; 2019[32]).

GPP is most effective when integrated into broad subnational emission-reduction strategies with concrete net-zero benchmarks. These benchmarks provide the framework for public procurement. In the pre‑procurement phase, subnational governments that engage in preliminary market consultation improve their understanding of existing technologies. During the procurement process, subnational governments can formulate minimum and binding requirements for the tender. Environmental certification (e.g. EU Ecolabel, Energy Star, etc.) and other performance specifications are useful and can be defined in multi-level governance arrangements. Additionally, ESG criteria should be defined and implemented in public procurement as in private finance. For example, the EU Taxonomy defines economic activities that contribute towards climate neutrality by 2050 and argues for more consistent reporting (EC, 2021[33]). Another example is the Glasgow Financial Alliance for Net Zero which brings together large firms across the financial sector to co‑ordinate short-term targets towards net-zero emissions by 2050 (UNCC, 2021[34]). Continuous monitoring and evaluation are key. This should be integrated into policy and regulation (EC, 2014[35]; OECD, 2015[31]). For instance, the Italian city of Rome has integrated a monitoring system into its green procurement tool (see Box 4.8).

Box 4.8. Green public procurement in Cities

• In 2006, Denmark’s Ministry of the Environment and Food, together with the three largest cities (Aarhus, Copenhagen and Odense) established the Danish Partnership for Green Public Procurement. Since then, this initiative has expanded to 12 municipalities, 2 regions and 1 water supply company, representing 13% of Denmark’s annual public procurement in Denmark (approximately EUR 5.5 billion) and 30% of the total procurement volume of Danish local governments. The partnership aims to develop joint, mandatory procurement objectives and criteria that have major positive impacts on the environment, ensuring a certain level of co‑ordination in GPP actions from the largest public sector procurers. These criteria can also function as a guide for municipalities where incorporating environmental requirements in the procurement process is less developed. Furthermore, the partnership also establishes working groups that share knowledge between the cities to solve joint procurement challenges and develop specific criteria within different product areas. Relevant materials are available on an online platform for easy peer learning. In addition, by sharing consistent sets of green criteria, the partnership makes it easier for the market to respond to sustainability demands from public purchases. Finally, the national government has developed a webpage, the Responsible Procurer, where procurers can find green criteria, based on EU GPP criteria and other national recommendations, ready to copy and paste into tender documents for a number of product areas and Total Cost of Ownership tools for selected product areas.

• In Frankfurt, Germany, new buildings must meet strict energy use standards. Several environmentally harmful materials are forbidden. Based on tenders, subnational governments analyse and evaluate the life cycle environmental impact and costing of the product.

• In 2009, the Italian Metropolitan City of Rome developed its first action plan for GPP with a manual monitoring system. The city reduced CO₂ emissions by 749 tonnes between 2011 and 2014. However, many procurement forms were incomplete or inaccurate. To improve data collection and reporting, in 2014, the city integrated GPP monitoring into its accounting system and, in 2016, launched a digital version. The new monitoring helps municipal staff to verify the completeness and quality of GPP tenders. The city has also set up a telephone help desk, an updated online library of laws and regulations regarding GPP, a support guide and training for staff across departments.

Source: Ministry of Environment and Food of Denmark (2020[36]), Sustainable Procurement, https://eng.mst.dk/sustainability/sustainable-consumption-and-production/sustainable-procurement/; City of Frankfurt (2014[37]), European Green Capital Award, https://www.frankfurt-greencity.de/de/vernetzt/auszeichnungen/european-green-capital-award/; EC (2016[38]), “Strategy and approach to SPP in the municipality of Copenhagen”, https://ec.europa.eu/environment/gpp/pdf/news_alert/Issue64_Case_Study_130_Copenhagen.pdf; C40 Cities (2019[39]), “Cities leading the way: Seven climate action plans to deliver on the Paris Agreement”.

Developing subnational green budgeting to align revenue and expenditure with zero emissions

Green budgeting can support subnational governments to better align their expenditures and revenues with climate objectives. It requires a systematic examination of existing and potential budget measures and policies, their interdependencies, externalities and joint benefits, and mainstreaming an environmentally informed approach to the national and subnational budgetary frameworks. It provides decision-makers with a clearer understanding of the environmental impacts of budgeting choices. Green budgeting can help regions and cities to identify spending that is inconsistent with the net-zero-emission transition and helps prioritise net-zero-consistent spending. This type of budgeting is still rare. Budgetary practices tend not to fulfil their potential to make revenues and spending consistent with national or regional climate objectives (OECD, 2020[40]; forthcoming[41]).

Four types of green budgeting exist and can be applied by subnational governments. First, monetary budgeting can be related to carbon budgeting. Carbon budgets identify the target carbon emissions. Based on their carbon budgets, subnational governments can develop short-term and long-term targets towards net-zero emissions (see section on subnational governments need to be integrated into climate policy governance). Second, environmental budgeting and reporting enable governments to track the emission impact associated with each budget line item, to align budget priorities with the carbon budget. Third, green accounting expresses environmental externalities in monetary terms, i.e. by attributing a price to carbon. It can also price other environmental impacts such as biodiversity, clean air, etc. Fourth, “common good” balance sheets aim at gathering the scores for performance indicators related to the environment but also to social justice, human dignity, solidarity and democratic governance. This adds complexity but provides a valuable opportunity to identify the multiple non-climate benefits climate action can bring and which often arise locally (EnergyCities, 2019[42]; OECD, 2020[43]).

Urban policies are central to climate change mitigation and regional development

Cities are hubs for high-productivity activity in close integration with surrounding low-density areas. On the path towards 2050, when many countries aim at reaching net-zero GHG emissions, cities will play a key role. More than half of the world population lives in metropolitan areas. They account for 70% of GDP and about two-thirds of energy demand. This will require different and more investment but could also lead to many positive impacts in urban areas. These can include business opportunities, health benefits from lower air and noise pollution, as well as productivity gains from lower air pollution, congestion and improved accessibility (Box 4.9). Taking advantage of zero-emission innovations in energy, mobility and buildings, cities can lower public service provision cost and provide healthier and more climate-resilient urban environments. Moving ahead early will provide competitive gains for cities, as well-being gains make cities more attractive to mobile workers and productivity gains attract knowledge-intensive business. Moreover, moving early will save costs from avoiding transition-inconsistent investment.

In cities, CO₂ emissions predominate. As highlighted in Chapter 3, reaching net-zero GHG emissions will imply reaching net-negative CO₂ emissions by 2050 and net-zero CO₂ emissions several years earlier. CO₂ emissions should reach zero particularly quickly in the electricity sector, where technology is readily available and cheap, to allow cost-efficient decarbonisation of energy end-use sectors, including passenger and light road freight transport.

Metropolitan regions may account for more than 60% of production-based GHG emissions in OECD countries. The contribution of metropolitan regions to emissions is particularly large in North America and OECD Asia (Figure 4.3). In Japan and Korea, populations are particularly concentrated in metropolitan areas. In North American metropolitan regions, per capita emissions are particularly high (Figure 4.4). Per capita emissions are lowest in European and South American metropolitan regions, mostly on account of transport. This highlights the importance of public transport in controlling emissions, with many European cities doing better (Chapter 3). In Australian and East Asian countries, electricity generation and industry also contribute substantially to emissions because of coal use. In these metropolitan regions, local well‑being gains from exiting coal are particularly likely to be large as air pollution would decline, saving a substantial number of premature deaths. Across all continents, OECD large metropolitan regions have lower per capita emissions than their smaller peers. Moving to net-zero emissions in an urban context requires an integrated approach to urban land use, housing and transport and is one of three pillars of climate action.

In some middle-income countries, the share of urban CO₂ emissions is much higher than in OECD countries. In China, India and Indonesia, urban centres contribute more than 40% to national CO₂ emissions, compared to 20% in most OECD countries (Crippa et al., forthcoming[44]). Between 2015-50, the world’s city populations are projected to grow from 48% in 2015 to 50%, mostly in middle-income countries as reported in Cities in the World (OECD/EC, 2020[45]). Urbanisation in these countries is a key driver of world energy demand and emissions growth, as workers migrate to cities with high or rising emissions to take up jobs in more energy-intensive industries, adopt more energy-consuming lifestyles and earn higher incomes. Zero-carbon-consistent urbanisation, with support from high-income countries, is a key challenge but also an opportunity. For example, zero-emission-consistent transport infrastructure can be developed at a lower cost than conventional infrastructure if integrated from the onset (OECD, 2017[46]). It also allows the decoupling of air pollution from economic production.

In high-income cities, consumption-based emissions are typically much higher than production and location-based emissions, as they consume many goods produced elsewhere (Box 4.9). Consumption-based emissions in cities may or may not be production-based in their country, depending on whether the goods and services consumed in the city are imported. In any case, cities have options to reduce consumption-based emissions such as reducing waste and encouraging the circular economy, some at particularly low cost, as described below. Policies to lower consumption-based emissions also offer the advantage that they do not result in displacement of production and emissions, especially if the emissions’ content of the consumed goods is easily established. Reducing consumption-based emissions can also contribute to a more equitable sharing of the carbon burden.

Figure 4.3. Metropolitan regions contribute the most to greenhouse gas emissions in North America and OECD Asia

Note: OECD countries, Bulgaria and Romania. GHG emissions excluding emissions from land use and land use change.

Source: OECD calculations based on EC (2020[47]), EDGAR - Emissions Database for Global Atmospheric Research, Joint Research Centre, European Commission.

Figure 4.4. Per capita emissions in metropolitan regions are particularly large in Australia, North America and OECD Asia

Note: OECD countries, Bulgaria and Romania. GHG emissions excluding emissions from land use and land use change.

Source: OECD calculations based on EC (2020[47]), EDGAR - Emissions Database for Global Atmospheric Research, Joint Research Centre, European Commission.

Box 4.9. Consumption-based greenhouse gas emissions in cities

Consumption-based emissions rise more strongly with city per capita income than production-based emissions (Sudmant et al., 2018[48]), reinforcing the case for monitoring consumption-based emissions. In Bristol, for example, the city’s consumption-based emissions are three times the production-based emissions, largely due to the impacts of food and drink. In other UK cities, they may be twice as high (Sudmant et al., 2018[48]). Cities in America and Europe produce consumption-based emissions thrice that of production-based emissions. A study on 10 European cities projected consumption-based emissions to increase by 35% by 2050. Across 79 C40 cities, consumption-based emissions were higher by 60% on average compared to emissions generated locally from production-based emissions (e.g. from economic production, transport or the heating of buildings) (C40 Cities, 2018[49]).

Taking into account consumption-based emissions provides additional opportunities for reducing emissions and supporting a more circular economy, for example by reducing consumption of goods that generate substantial emissions where they are produced. This can help accelerate the transition at a lower cost. City action to transform consumption habits can reduce these emissions at low cost (Millward-Hopkins et al., 2017[50]). In Bristol, investments of approximately GBP 3 billion in low-carbon infrastructure, such as buildings, could reduce production-based emissions by 25% in 2035. Eliminating the city’s current levels of food waste would reduce emissions by a similar amount but with little investment or other costs (Millward-Hopkins et al., 2017[50]). Policies that can tackle consumption-based emissions include product and procurement standards, city and infrastructure planning, and economic measures to incentivise product longevity and a sharing economy.

The commitments to address climate change varies strongly across cities. Some cities have taken strong leadership in GHG emission targets, aiming for net-zero emissions well before 2050. The city of Bristol, UK, has adopted a net-zero emissions target for 2030, including consumption-based emissions. But across 327 European cities, for example, reduction targets for 2050 range from a mere 3% to 100%, giving an average emission reduction of 47%, which acutely falls short of the EU target to reach net-zero GHG emissions overall by 2050 (Salvia et al., 2021[51]). Most cities with over 500 000 inhabitants have comprehensive standalone mitigation or adaptation plans. Where local climate change planning is required by national governments (Denmark, France, the Slovak Republic and the United Kingdom), cities have been nearly twice as likely to produce local mitigation plans (OECD, 2020[26]). Moreover, setting targets for emissions is not enough. For example, cities that do not host power plants and where energy use in buildings is electric may have low production-based emissions but will still need to contribute to energy efficiency targets and renewables deployment to contribute to national targets.

Effective metropolitan governance is critical for integrating climate policy

A key message from the UN New Urban Agenda (OECD/UN-Habitat, 2018[52]) is that urban CO₂ emissions and air pollution are best addressed at the metropolitan level. Tackling climate change while achieving the other Sustainable Development Goals (SDGs) requires urban governance, building competencies and technical capacities to redirect and unlock investment for sustainable infrastructure.

Urban areas sometimes extend across regions and hundreds of municipalities. The socio-economic flows, notably travel-to-work, exchanges and services provision, which need to be decarbonised, do not match administrative boundaries. For example, in the metropolitan area of Mexico City, Valle de México, two‑thirds of GHG emissions and 80% of particulate matter pollution come from outside the administrative borders of the city (OECD, 2015[53]) and more than 40% of residents commute across a municipal boundary to get to work or school and access services (OECD, 2015[53]). In the Hamburg Metropolitan Region, 350 000 out of 760 000 commuters enter the city on a daily basis (OECD, 2019[54]). The region brings together 20 districts and more than 1 100 municipalities from 4 federal states including the city of Hamburg itself (OECD, 2019[54]).

Metropolitan areas, therefore, need to be governed with respect to the delimitations of travel-to-work areas. Metropolitan governance for urban planning, transport and housing will allow the residents to benefit from public transport and housing co‑ordinated throughout commuting zones, while improving accessibility of jobs and services, reducing air pollution and congestion as well as eliminating GHG emissions. The benefits of such co‑ordination are large. Metropolitan areas without their own governance tend to have more emissions and air pollution as well as lower levels of productivity (OECD, 2015[55]). Metropolitan governance also results in denser and more contiguous residential development, which helps reduce emissions and higher satisfaction of residents with public transport. The experience of OECD countries offers lessons for metropolitan governance reforms (OECD, 2015[56]). They are complex processes, requiring political support, effective co-ordination and reliable funding (Box 4.10).

Box 4.10. Governance lessons from several metropolitan areas across the OECD

Motivate collaboration by identifying concrete metropolitan projects

Kick-starting initiatives around tangible projects can help rally forces. For example, in the Øresund metropolitan region in eastern Denmark and southern Sweden, the opening of a bridge between Copenhagen and Malmö in 2000 stimulated integration. Municipal and regional authorities form the Øresund Committee, its main cross-border governance body. The bridge has opened job opportunities for the benefit of both sides. In the Hamburg Metropolitan Region in Germany, improving environmental sustainability and harnessing the potential of renewable energy production reinforced metropolitan governance, as this requires co-operation among the different local-level actors in policy domains such as housing and transport (OECD, 2019[54]).

Build metropolitan ownership among local stakeholders

Metropolitan governance reform needs strong advocates. For example, in 2015, the Dutch national government undertook a series of institutional reforms that led to the creation of the metropolitan regions of Amsterdam and Rotterdam-The Hague (OECD, 2016[57]). In the US, the metropolitan land use and transport planning agency for the Chicago metropolitan area was the product of a two-year campaign initiated by a regional non-profit organisation representing the business community (OECD, 2012[58]). In the UK, the government gives metropolitan areas specific powers through the City Deals initiative. Under City Deals, local governments decide what needs to be done locally and set targets in areas such as jobs, affordable housing and emissions reduction. In Valle de México, the Environmental Commission for the Megalopolis co‑ordinates decision-making and provides a vision for air quality improvement across local governments. It promotes an integrated approach for diagnostics, analysis and actions (OECD, 2015[53]). Co-operation among municipalities works best on a voluntary basis with incentives from the top but also with a strategy to engage those who feel threatened, sometimes by giving compensation.

Tailor reliable sources of metropolitan financing

A key element for metropolitan areas is to secure an appropriate, reliable stream of funding to facilitate collaboration. They generally face problems related to disparities in revenue-raising potential, expenditure needs and investment capacity. Financial resources need to match the new governance structure’s responsibilities. Property tax is the main source of income of metropolitan areas as it provides stability to revenue. In Mexico, the national government contributes to the funding of infrastructure projects in metropolitan areas to complement local resources. Metropolitan areas and the municipalities in them apply together providing incentives to create metropolitan areas (OECD, 2015[53]).

Design incentives and compensation for metropolitan compromises

Effective metropolitan governance requires clear communication around the costs of maintaining business as usual and the long-term gains of reforms. Co-operation among municipalities tends to work best on a voluntary basis with incentives from the top, while also having a strategy for engaging those who feel threatened by the reform and leveraging their buy-in. Examples of such incentives are devolution and financial incentives. For instance, for the City Deals in the UK, the government gave a range of new powers to cities that committed to strengthening collaborative governance in their area.

Implement a long-term process of monitoring and evaluation

Metropolitan governance requires continuous improvement through strong, reliable instruments for monitoring and evaluation. In Toronto, Canada, for example, the city authorities set up mechanisms to gather feedback from citizens and other stakeholders on metropolitan issues on a regular basis. One such mechanisms is the Greater Toronto City Summit Alliance, which convenes members of the three levels of government with business, labour, academic and non-profit sectors every four years to drive collective action for example in transport, energy, socio-economic inclusion. In Perth, Australia, an independent expert panel conducts a metropolitan review to examine the city’s social, economic and environmental challenges and formulate reform proposals. Reforms may take the form of incremental experimentation through the implementation of pilot projects. In Sweden, governance reforms aimed at merging counties with a directly elected regional assembly and responsibility for regional development were first tested in two pilot regions (Västra Götaland around Gothenburg and Skåne around Malmö) with multi-annual evaluation before extending it to other counties.

Source: OECD (2015[56]), Governing the City, http://dx.doi.org/10.1787/9789264226500-en.

National urban policy frameworks are beginning to integrate climate policy

National urban policies (NUPs) can co‑ordinate sectoral policies relevant for the net-zero-emission transition in cities. A NUP is a government-led, coherent set of decisions to co-ordinate actors in order to promote more productive, inclusive and resilient urban development consistent with environmental goals (UN-Habitat, 2014[59]). A NUP must be accompanied by an effective institutional framework and governance that allow for co-ordination and collaboration with urban stakeholders (OECD/UN-Habitat, 2018[52]). NUPs can cover a wide range of national policies with a profound effect on urban development. They can help deliver climate change mitigation and adaptation responses and achieve cross-sectoral synergies. Land use zoning, for instance, impacts sectors such as transport, housing, energy, natural resources, water and waste. For example, national ministries have often pursued housing programmes without subnational governments and without co‑ordinating the housing programme with local transport (OECD, 2015[60]; Rode et al., 2017[61]). This often results in low-cost urban periphery construction, more car dependence, a higher carbon footprint and emissions from a land use change such as deforestation. This ultimately results in higher costs from connecting housing to infrastructure, aggravated by congestion (Moreno Monroy et al., 2020[62]) as recently illustrated in a case study of Ethiopia (OECD, forthcoming[63]). The location of housing developments at urban peripheries can also result in high home vacancy rates, as in Mexico (OECD, 2015[60]). National governments can improve local capacity to implement national development plans, consistent with climate objectives, and establish a central body responsible for cross-sectoral co‑ordination of key policy areas, such as in Colombia’s interagency commission (Rode et al., 2017[61]).

Among 65 countries that have participated in a survey of NUPs, including 22 OECD countries, most, but not all, have integrated climate action. According to preliminary survey findings (OECD/UN-Habitat, forthcoming[64]), 51 country NUPs addressed adaptation and mitigation, while 13 reported that their NUP did not address climate change at all. Some countries have identified related co-benefits in their NUPs (Figure 4.5). Half of the countries (26) identified “enhanced urban biodiversity and ecosystems” and “better protected lives and livelihoods from extreme weather”. These allow nature-based urban solutions to provide wider ecosystem services and protect against extreme heat or flooding. “Increased local energy production in cities” was a key objective for only 16 respondents. Only 14 national governments – 2 of which are from OECD member countries – regard economic competitiveness and job creation as a reason to integrate climate change into NUPs.

Where climate action is included in NUPs, the survey results do not allow us to assess whether they are consistent with national or Paris Agreement emission reduction objectives. To deploy sectoral policies consistent with net-zero GHG emissions in 2050 in housing, for example, national governments will have to integrate the refurbishment of the entire buildings stock. This is likely to require refurbishing around 5% of cities buildings per year. NUPs can also integrate scenario analysis to set benchmarks for urban renewable electricity generation, transport and the reduction of consumption-based emissions as discussed below.

Figure 4.5. Key objectives identified by national governments to mainstream climate action in their NUPs

Note: 52 respondents (22 OECD member countries) reported their NUP addressed climate change through mitigation, adaptation or both.

Source: OECD/UN-Habitat (forthcoming[64]), Global State of National Urban Policy: 2nd Edition, OECD Publishing, Paris/United Nations Human Settlement Programme, Nairobi.

Networks of cities and their metropolitan areas must also be supported, as highlighted in the report Managing Environmental and Energy Transitions for Regions and Cities (OECD, 2020[26]). They in turn can support the replication, scaling up and mainstreaming of successful experiments. Urban pilot projects to introduce novel transport systems that contribute to the net-zero-emission transition in a city, such as digital-based ride-sharing described below, can serve rapid diffusion and should also be integrated into NUPs.

There are two main ways to support more structured learning in and between cities:

• Intracity learning focuses on the exchange of information and knowledge between initiatives and actors within the boundaries of a particular city or region. Urban policymakers can promote knowledge exchange and collaboration (Bulkeley and Castán Broto, 2013[65]).

• Intercity learning focuses on the exchange of information and knowledge about practices, experiences and knowledge between cities via networks. City networks, such as C40 and Champion Mayors, can help spread urban innovation by transferring lessons across localities. Members of climate networks such as C40 cities adopt more ambitious climate targets and actions (Salvia et al., 2021[51]), although this may in part be because cities with relatively ambitious climate action may wish to showcase it through membership. C40 Cities have committed to zero location and production-based emissions by 2050 (C40 Cities, 2016[66]).

Knowledge about how successful experiments and innovation travels across contexts and how they are transferred is still limited but knowledge-sharing initiatives have an important role (Lee and Jung, 2018[67]). National city and municipality networks, such as the Dutch Klimaatverbond, Sweden’s Klimatkommunerna and Finland’s KINKU network, may play this role (Hakelberg, 2014[68]). These networks still generally appear to be financed by member cities themselves.

Preparing the “net-negative electric city” by 2050

Scenario analysis for 2050 net-zero GHG emission targets has called for reaching 100% renewable energy by 2030 (C40 Cities, 2016[66]). Half of the around 300 cities studied do not have renewable energy targets in their climate mitigation plans (Salvia et al., 2021[51]). Only a few cities have achieved 100% electrification of non-residential buildings. For residential and transport sectors, electrification is well below 50% (C40 Cities, 2016[66]). Yet 100% must be reached well before 2050. This suggests the need to ramp up the use of electricity in end-use energy demand, which need to be coupled with energy efficiency programmes to achieve “net-negative electric cities”. Net-negative electric cities sequester more carbon than they emit in total (Kennedy et al., 2018[69]), thereby achieving net-negative CO₂ emissions. They are developed by decarbonising electricity generation, electrifying most energy end-use (such as transport) and reducing energy consumption to reach net-negative emissions. Modular technologies such as rooftop solar or photovoltaic electricity (PV) panels, small-scale wind turbines, batteries and heat pumps allow the harnessing of renewable energy sources. These distributed energy systems may avoid costly and extensive electric transmission lines.

Conducive regulation at the national level is important. For example, in Spain, permitting shared electricity generation among neighbours increased the profitability of solar panels, thereby boosting uptake (López Prol and Steininger, 2020[70]). The C40 cities express concern that without national-level support for the electric grid renewables targets could be missed. Small-scale urban-distributed renewable electricity generation requires co‑ordination within the overall electricity system, for example, to avoid oversized batteries that raise the costs exponentially (Green and Newman, 2017[71]; Quoilina and Zucker, 2016[72]). Cities can initiate dialogue between regulators, utilities and “prosumers” (small-scale producers and consumers) for an optimal mix of scales and technologies to minimise costs. White Gum Valley in Western Australia demonstrates the supporting role played by local actors including the city (Hojckova et al., 2020[73]).

Emerging technologies such as blockchain-based energy services facilitating peer-to-peer (P2P) trading, such as those operational in Brooklyn, US, and White Gum Valley, Western Australia (Hojckova et al., 2020[73]), can boost distributed renewable energy deployment, adjusting electricity supply and demand to the intermittent nature of solar and wind. In fact, blockchain-based energy systems could be a cornerstone for a wholly decarbonised energy system (Ahl et al., 2020[74]). Cities can foster blockchain technology to meet their renewable energy and emission-reduction targets through P2P or peer-utility-peer trading. For example, where there are shared solar panels and batteries in multi-unit apartments under common property, trading can be done between those multi-unit apartments. Batteries and hydrogen storage will be critical for electric network stability under a 100% renewable energy system. These clusters of technologies need to be integrated to deliver a zero-carbon city (Newman, 2020[75]).

Bottlenecks in the electric distribution networks could be an emerging issue for electrification of end-use energy services as well as to accommodate a rising number of renewables prosumers. For example, the city of Bristol projects its electricity demand to increase by 50% by 2030 to electrify its heat and transport energy demand (City of Bristol, 2020[76]). These suggest the need to upgrade local distribution networks (Green and Newman, 2017[71]). Cities’ vertically integrated electric utilities may also face conflicting interests as upgrading the network will allow more prosumers to sell their excess electricity to the grid to the detriment of their own sales of utilities (Green and Newman, 2017[71]).

Electric heat pumps will be the major technology to be employed for heat in residential, commercial and some industrial uses while improving energy efficiency. These are available in a range of different technologies, which may require collective decisions. For example, heat pumps themselves can be provided for individual housing units or collectively. Where natural gas has been widely employed and infrastructure exists, hydrogen use could be an option (Climate Change Committee, 2019[77]). Biomass-based combined heat and power (CHP) plants can decarbonise both power and heat end-use demand without electrifying heat. Electricity generation with sustainably sourced biomass, combined with carbon capture and storage (BECCS) can generate net-negative emissions (Kennedy et al., 2018[69]), and could be of interest to cities where such power plants have access to eligible storage sites and CO₂ transport infrastructure. Coupling PV installation with desalination to produce energy and water contributes to alleviating water scarcity (Shannak and Alnory, 2019[78]). Local and regional governments and their citizens will need to get involved in these decisions as soon as possible for needed infrastructures to be laid out and industry capacity to produce it to be deployed at sufficient scale.

The biophilic design of the urban environment considers green spaces, hanging gardens and green roofs among others. These contribute to climate mitigation (Newman, 2020[75]) and can damp heat waves. Such heat waves will become common in many cities, which are still in temperate climates today. It can improve well-being in contemporary cities (Totaforti, 2020[79]). Urban land management that adopts arrangements observed in natural ecosystems, including for agricultural production (“permaculture”) in cities can reduce, albeit modestly, energy use in the food system while also strengthening resilience and well-being (Morel, Léger and Ferguson, 2019[80]). The plants and crops can also provide some carbon sequestration. Urban permaculture can contribute to reducing waste, eliminating emissions through circular economy practices, as described below (C40 Cities, 2016[66]).

Prioritising solar energy in cities

Prioritising photovoltaic electricity generation is indispensable to achieve climate targets with massive installation to be undertaken within a period of 10 years (Jäger-Waldau et al., 2020[81]). While potentials vary depending on sunshine and other geographic factors (see the online country notes to this Regional Outlook report), there are huge untapped potentials for cities. For example, in US cities, the share of suitable rooftops ranges from 15% in Washington to 55% in Chicago, 84% in San Bernardino and 85% in Riverside. But actual rooftop solar penetration ranges from 0.3% in Chicago, 7% in Riverside, 8% in San Bernardino and 12% in Washington (Reames, 2020[82]). This reinforces the need to legislate, for example new house construction to install solar panels. Such legislation can be at the city or regional level, as in California. Australia is the world leader in this domain. More than 2 million houses have rooftop solar panels with a combined capacity of 7 GW, contributing 62% of total PV capacity, although this may also reflect lagging policy support for large, utility-scale installations. Rooftop PV technology is continuing to expand (Say, Schill and John, 2020[83]).

Beyond electricity market regulation, which is mostly national, city governments can influence the uptake of solar panels by households.

• In the US city of Riverside, for example, socio-economic factors such as lack of Internet access and older housing stock were found to reduce solar panel adoption. Low-income reduces solar panel penetration in both Chicago and San Bernardino. Language barriers also reduced the adoption of solar panels in San Bernardino. This calls for cities to proactively engage with the communities. This is particularly important as subsidies for solar panels risk otherwise being regressive.

• Regulation of multi-apartment shared property matters. In Australia, residents in multi-unit apartments can install shared batteries and solar panels on the roof of a common property, which can be managed by owners’ corporations without the involvement of utilities (Roberts, Bruce and MacGill, 2017[84]). This shared system can reduce load variability, reduce costs compared to standalone systems, whilst providing 60% self-sufficiency to residents (Syed, Morrison and Darbyshire, 2020[85]).

• Cities can promote large-scale solar panels alongside other renewables outside city borders, as is the case of the city of Adelaide in South Australia in its pursuit of carbon neutrality by 2023 (City of Adelaide, 2019[86]).

• Cities can stimulate investment through incentive schemes. For example, in Adelaide, one Australian Dollar (AUD) of city-provided funding generated AUD 6.45 in investment in sustainable technologies such as light-emitting diodes, solar hot water systems and electric vehicle charging stations among others (City of Adelaide, 2019[86]).

Sustainable urban mobility

As highlighted in Managing Environmental and Energy Transitions for Regions and Cities (OECD, 2020[26]), transport emits around 23% of energy-related CO₂ emissions, mostly in road transport. Around half of passenger transport takes place in urban areas and urban transport accounts for about 40% of transport energy use (IEA, 2016[87]). It is the sector with the highest growth in GHG emissions (ITF, 2019[88]). Demand for transport may continue to grow, driven by urbanisation, population growth and rising incomes, especially in middle-income countries.

Transport accounts for much local air pollution, noise and accidents and uses up much precious urban space, especially from car parking, whilst generating congestion and delays (EEA, 2019[89]). Urban policy can seek synergies between emission reduction and reducing all these urban ills. For example, policies to reduce individual car use through improved local accessibility, transport-oriented development, public transport improvements and digital-based ride-sharing (see below) could harness these benefits more than solely relying on electric cars, while also reducing energy consumption.

The spatial distribution of population within a city or metropolitan area can have a strong influence on the cost of providing public transport

As shown in the Cities in the World report (OECD/EC, 2020[45]), there is a clear link between cities’ shape and the needed length of its public transport network to provide the same quality of service. Cities such as Hong Kong, China, or Mumbai, India, which have a very strong concentration of their population in the central part of the city, can provide public transport to 80% of its residents with a network of only 6 km per 100 000 inhabitants. Houston needs a 26-fold and Atlanta a 45-fold longer network than Hong Kong, China, to provide the same access. In practice, this usually means that a much lower share of the population has access to public transport in cities like Atlanta and Houston. Thus, as neighbourhood density falls, the total network costs increase. For example, reducing the density from 15 000 to 12 000 increases costs by 30%, while reducing it from 6 000 to 3 000 increases costs by 120%.

Across the globe, the conditions of providing public transport in metropolitan areas differ widely between world regions (Figure 4.6).

Figure 4.6. Simulated public transport network length in 37 metropolitan areas, 2015

Source: See Jacobs-Crisioni, C., L. Dijkstra and A. Kucas (2020[90]), “Does density foster efficient public transport? A network expansion simulation approach”, Manuscript submitted for publication. Work is based on the boundaries of Moreno-Monroy, A., M. Schiavina and P. Veneri (2020[91]), “Metropolitan areas in the world. Delineation and population trends”, https://doi.org/10.1016/j.jue.2020.103242.

Cities need to support urban mobility in several ways, including shared mobility, electric mobility and active mobility. The integration of walking, cycling, bus, e-rollers, subway and railway regimes into an intermodal transport system could also make a modal shift to public transport more attractive, as happened in London, where car use declined by 25%-35% between 1995 and 2015 (Cass and Faulconbridge, 2016[92]). Additionally, public transport systems need to be sufficiently accessible to offset a potential growth in inequality as a consequence of price-based instruments, such as carbon taxes or congestion charges (OECD, 2020[93]). Such policies can have negative distributional effects when individuals being taxed do not have alternative means of transport to turn to. Steps to meet connection and access needs with fewer vehicle kilometres will be particularly effective in reducing multiple negative impacts of road transport. Such an approach will also help lower energy demand, a key priority on the way to net-zero emissions (Chapter 3). A transition with radical systemic innovation in road transport is therefore necessary (Frantzeskaki et al., 2017[94]). Such a transition will require both technological and institutional changes.

The development of location-based connectivity and accessibility indicators for all residential areas helps to guide cost-effective decisions for housing development or improve accessibility and connectivity through walking, cycling and public transport use. It ensures that people are easily able to reach jobs or everyday public services with sustainable transport modes, such as walking, cycling or public transport. This can include, for example, steps to make pedestrian and cycling access to public transport hubs quicker and safer. Transport-oriented development requires integrated accessibility and connectivity for commercial and residential development (OECD, 2019[95]). Complementary policies, such as increased housing supply through the densification around transport links or dedicated affordable housing, are needed to ensure accessibility is improved for everyone (OECD, 2020[96]).

Shared mobility solutions

Digital-based ride-sharing can lower CO₂ emissions sharply and deliver large reductions of traffic, eliminating congestion, freeing expensive urban space while improving connectivity and accessibility, provided it replaces individual car use. It improves connectivity and accessibility especially for low-income households and households in suburban areas, which are often less well connected to public transport. In such ride-sharing models, individual private car rides and ideally all rides in an entire metropolitan area are replaced by rides in shared taxis or minibuses. These services are modelled to be available on demand, at the doorstep or at the next street corner. Supply and demand of on-demand services are co‑ordinated by a digital platform, which optimises routing (Box 4.11). Professional staff drive the vehicles.

Recent modelling for the daily mobility patterns of metropolitan area Dublin, Ireland, shows that the number of vehicles, traffic, CO₂ emissions and congestion would be reduced by up to 98%, 38%, 31%, and 37% respectively (ITF, 2018[97]). Broadly similar results have been obtained for other cities, such as Auckland, Helsinki, Lisbon and Lyon (ITF, 2020[98]). Ride-sharing is also low-cost. For Dublin, the cost of shared minibus services would be less than the price of a public transport ticket, yet would not need to be subsidised. Shared rides could substitute inefficient bus lines and provide feeder service to rail. Further benefits would include substantially lower pollution and freeing up space occupied by parked cars, for example, for active mobility. Emission reductions are larger if the shared vehicle fleet is electric.

Survey results suggest that 20% of car drivers would be willing to switch to shared rides in Dublin, although this share could be substantially higher if more information about the ride-sharing system (e.g. example about the lower cost of ride-sharing for users compared to using and operating private cars, for many, incentives to switch, such as lower prices for early adopters) are provided. If 20% of private car trips were replaced with shared modes, shared services could still be provided at a sufficiently low cost to ensure uptake. Emissions could fall by around 20% and congestion by 7%. Survey results for Lyon suggest that most citizens are willing to use shared modes.

Relying on on-demand ride-sharing also reduces the cost of electrifying transport. By reducing the number of vehicles and using them more intensively, ride-sharing would take advantage of the low operating costs of electric vehicles, while limiting electricity demand, material used for battery and car production and infrastructure needs. At the same time, more intensive vehicle use results in more frequent renewal and therefore quicker technology diffusion (ITF, 2018[97]; 2020[98]). Digital-based sharing models and multimodal transport systems require steps to regulate smart mobility and the role of data (Box 4.11).

Box 4.11. Regulating smart mobility and the role of data

Smart mobility can contribute to the net-zero emission transition by fostering ride-sharing, multimodal public transport combined with active mobility and shared micromobility. Each of these requires an adapted regulatory framework that enables innovation to further the net-zero-emission agenda without hindering equity, safety, flexibility or efficiency (ITF/OECD, 2020[99]). The regulatory framework should be transparent, agile and linked to over-arching public policy objectives. For example, the city of Paris re-assessed its shared micromobility based on a voluntary charter signed by e-scooter companies (ITF/OECD, 2020[99]).

Transport systems and their users generate an increasing amount of data, representing a source of improvement in transport system performance. City authorities may adopt frameworks that enable targeted data sharing that respect privacy, operational needs and commercial sensitivities, while guaranteeing cyber-resilience (ITF/OECD, 2020[99]), provided they serve policy objectives, such as accessibility, environmental outcomes, equity and safety. Finland’s National Transport Code (NTC) lays the groundwork for data sharing in support of Mobility as a Service (MaaS). The aim is to create an open and level playing field where operators can co‑ordinate their services and create new applications (Finnish Ministry of Transport and Communications, 2019[100]). In 2019, France approved the National Mobility Law (Loi d’orientation des mobilités 2019) that sets out requirements regarding data sharing in support of smart and sustainable mobility. These requirements concern public transport operators and all other providers of mobility services (Assemblée Nationale française, 2019[101]).

Source: ITF/OECD (2020[99]), Leveraging Digital Technology and Data for Human-centric Smart Cities: The Case of Smart Mobility, https://www.itf-oecd.org/sites/default/files/docs/data-human-centric-cities-mobility-g20.pdf.

Fostering active mobility

Cycling and walking are low-cost means of transport to users and taxpayers alike. To users, they provide the health benefits from regular exercise on daily trips they need to undertake anyway. To governments, infrastructure is cheap to build. Facilitating cycling and walking benefits low-income households. For example, cycle-hire facilities increased cycling substantially, in particular in low-income areas of London (Lovelace et al., 2020[102]). The reach of cycling as a means of transport can be extended to 20 kilometres with electric bicycles. Fostering active mobility should be seen as a complement to public transport. Low-cost options for cities to facilitate walking typically also facilitate public transport use.

City governments have redistributed street space to pedestrians and cyclists as part of their post-lockdown COVID-19 strategies (Kraus and Koch, 2020[103]). On average 11.5 kilometres of provisional pop-up bike lanes have been built per city in 106 European cities. Each kilometre may have increased cycling by 0.6%. The new infrastructure could generate USD 2.3 billion in health benefits per year. This suggests that every kilometre of cycle land produces annual health benefits of about USD 2 million, so the investment may often pay off in less than a year.

The application of a broad range of ethical fair allocation principles also argues in favour of moving street space from cars to pedestrians and cyclists on a larger scale (Creutzig et al., 2020[104]). For example, it would improve the safer, more autonomous use of streets for the least able, in particular children, the elderly and the disabled. Especially the allocation of curbside space to car parking appears difficult to justify on any fair allocation principle. In Berlin, for example, parked cars hold 22% of street space but only a 5% share of users (Figure 4.7). Cycling, on the other hand, uses less than 10% of space for 16% of users. A fairer allocation would reduce the space allocated to car parking by more than half while increasing the street space allocated to biking, walking and public transport. Some of the allocation mechanisms and principles considered include well-being, environmental efficacy, economic efficiency and intergenerational justice.

Road use charges need to complement the widespread uptake of electric vehicles

As highlighted in Managing Environmental and Energy Transitions for Regions and Cities (OECD, 2020[26]), electric vehicles (EVs) have great potential as a way for cities to reduce local air pollution and GHG emissions. However, they still contribute to congestion and air pollution due to particles released from tyres and braking. Therefore, a shift to EVs should be positioned within a wider plan for city journeys to be made by public transport, ride-sharing, bike or on foot. Some cities have announced specific goals for EVs (Table 4.1).

Little is known if and how local policies and strategies affect EV usage and its supporting infrastructure (Roelich et al., 2015[105]). One successful policy has been to invest in public charging infrastructure. The need for public charging varies based on housing stock, private charging availability and commuting patterns.

Figure 4.7. Fair street space allocation provides more space for biking, walking and public transport while significantly reducing the space for parking

Note: The arrows show the suggested direction of change from considering a range of ethical principles. Cones represent uncertainty values.

Source: Creutzig, F. et al. (2020[104]), “Fair street space allocation: Ethical principles and empirical insights”, http://dx.doi.org/10.1080/01441647.2020.1762795.

Table 4.1. Electric vehicle goals announced by selected major cities

City	Target
Amsterdam (NL)	Zero-emissions transport within the city by 2025
London (UK)	70 000 ultra-low-emission vehicles sold by 2020; 250 000 by 2025
Los Angeles (US)	10% of vehicle stock electric by 2025; 25% electric by 2035
New York City (US)	20% EV sales share by 2025
Oslo (NO)	Zero-emission transport within the city by 2030
Shenzen (CN)	120 000 new energy vehicles sold by 2020
Tianjin (CN)	30 000 new energy vehicles sold by 2020

Source: OECD (2020[26]), Managing Environmental and Energy Transitions for Regions and Cities, https://doi.org/10.1787/f0c6621f-en; Hall, D., H. Cui and N. Lutsey (2017[106]), “Electric vehicle capitals of the world: What markets are leading the transition to electric?”, http://www.theicct.org/EV-capitals-of-the-world (accessed on 22 May 2020).

Electric cars already have lower operating costs than cars with internal combustion engines and they are likely to become cheaper for most users within this decade, even including the purchase price. The diffusion of electric cars could therefore risk intensifying car use in cities, aggravating congestion. Automated driving adds to these risks, as it will reduce the opportunity cost of the time spent in the car. Fuel taxes have priced only a fraction of the full external costs in cities, where they are particularly high. In any case, fuel taxes disappear with net-zero-emission policies and EV use. Electrification of car use will need to come with the adoption of road use charges in order to replace fuel taxes also for revenue (Atkinson, 2019[107]). This will lower excess driving demand and shift mobility to other modes of transport (OECD/ITF, 2019[22]).

Cities will have an important role to play in setting road use charges. Introducing road use charges also offer the opportunity to price external costs more precisely, by varying them over time and place. Lessons from the London Congestion Charge show that attitudes change in favour of policies to reduce car demand after their successful introduction as the benefits of less car use materialise (Downing and Ballantyne, 2007[108]). Pricing of mobility will also be important when accessibility and connectivity improve, for example as a result of digital-based ride-sharing. Such improvements would lower the cost of mobility, raising the demand for it, including by encouraging urban sprawl.

Reducing emissions with circular economy policies

The adoption of a circular economy framework in 5 key areas for cities (steel, plastic, aluminium, cement and food) could achieve a reduction of a total of 9.3 billion tonnes of GHG in 2050 (Ellen MacArthur Foundation, 2019[109]). By 2060, total worldwide emissions are projected to reach 75 Gt CO₂-eq. without any further climate action. Materials extraction and processing, directly and indirectly, may contribute approximately 50 Gt CO₂-eq (OECD, 2019[110]). Emissions from solid waste management account for about 5% of these (Kaza et al., 2018[111]).

Economic activity and consumption in cities, especially high-income cities, are based on the use of these materials. In high-income countries, healthier diets would also reduce emission-intensive meat and dairy production. Regions and cities can invest in consumer education and awareness, create clear dietary guidelines and leverage public channels to deliver healthier products (e.g. school canteens). They can also opt for reused or reusable products and develop recycling streams, for example for electronics or office furniture. The Amsterdam Metropolitan Area, for example, has set a target of 50% circular procurement by 2025 (Amsterdam Smart City, 2017[112]).

Many strategies at the regional and local levels highlight the role of the circular economy to fight climate change (Figure 4.8). For example, London is pursuing circularity in order to make a substantial contribution to the mayor’s aspiration to become a zero-carbon city by 2050. The city of Joensuu, Finland, is planning circular economy actions within the ongoing climate programme that aims to transform Joensuu into a carbon-neutral city by 2025.

Figure 4.8. Drivers of the circular economy in surveyed cities and regions

Note: Results based on a sample of 51 respondents that indicated the drivers being “Very relevant” and “Relevant”.

Source: OECD (2020[113]), The Circular Economy in Cities and Regions: Synthesis Report, https://doi.org/10.1787/10ac6ae4-en.

Often the circular economy in cities and regions is seen as synonymous with recycling but it goes beyond. A circular urban economy is one where waste is prevented; goods are used for longer; the disposable model is replaced by a recovery one; a market for secondary raw materials is in place and secondary materials would satisfy a prominent percentage of the demand of materials for goods production. A circular waste system would develop and commercialise technology to identify, sort and deliver high-quality secondary material. Digitalisation and data management should connect products with waste handling and the design and production phase should take into account feedback from waste handling and extend the life of products and goods.

Many cities are putting in place initiatives to support product design, reuse and recycling. The city of Helsinki, Finland, launched in 2019, the Closed Plastic Circle to develop tendering processes that include criteria to promote plastic recycling (Smart Clean, 2019[114]). In the US, Austin is advancing towards zero waste through the Austin Resource Recovery Master Plan; San Francisco aims by 2030 to reduce municipal solid waste generation by 15% and reduce disposal to landfill and incineration by 50%. While recycling is projected to grow, the share of landfill in municipal waste treatment remains high in OECD countries. It decreased from 63% to 42% between 1995 and 2018 but still accounts for most of the waste management related emissions (OECD, 2019[115]).

Some sectors are key to cut carbon emissions in cities following a circular economy approach, such as the built environment. The building sector is responsible for about a third of all carbon emissions worldwide (World Green Building Council, 2017[116]; Ellen MacArthur Foundation, 2020[117]) (Box 4.12). The circular economy can contribute to reducing the sector’s CO₂ emissions by minimising material use and maximising reuse. Applying circular economy principles to the built environment would imply rethinking upstream and downstream processes. It also implies new forms of collaboration amongst designers, constructors, contractors, real estate investors, suppliers of low- and high-tech building materials and owners, while looking at the life cycle from construction to end of life. Key phases can be identified as planning, design, construction, operation and end of current life (Stronati and Berry, 2018[118]):

1. Planning in a circular way implies considering the entire lifecycle of the asset. Examples are modular approaches so that materials and buildings’ blocks can be easily dismantled and reused.

2. A proper design in the project phase takes into account the material choice, the consumption of water and energy in buildings to reduce consumption and minimise waste and allow reuse of buildings.

3. The choice of materials for the construction phase entails identifying more sustainable materials and minimising the variety of materials used. Material passports and material banks can foster reuse.

4. The operation phase concerns the use of energy and technologies for resource efficiency. The operation also includes data and innovative technologies as enablers to extending building life.

5. The end life of a building would create a new life for the waste material produced (Stronati and Berry, 2018[118]). In Groningen, Netherlands, a project using the disused sugar factory aims to create a “zero-waste” neighbourhood: De Loskade is projected to be a “removable” and “short-stay” neighbourhood. Temporary properties will be dismantled after the rental period that ends in 2030 and rebuilt in other areas. Extensive pilots and testing are taking place at De Loskade, for example gas-free installations and energy-efficient homes (Municipality of Groningen, 2019[119]; Van Wijnen, 2019[120]).

Box 4.12. The key role of cities and regions in low-carbon transition in buildings

While buildings account for nearly a third of energy-related GHG emissions globally, these percentages reach roughly 70% in cities like London, New York and Tokyo (Greater London Authority, 2018[121]; Bureau of Environment, 2018[122]; New York City Mayor’s Office of Sustainability, 2017[123]).

Energy efficiency improvements in buildings will generate numerous co-benefits, including job creation, health improvements and increased energy affordability, which can all contribute to a green and inclusive recovery from the COVID-19 crisis. Building works are particularly suitable for a rapid employment-intensive recovery.

• The potential for job creation is estimated to be from 8 to 27 working years per EUR 1 million spent on energy efficiency measures depending on a country’s economic context (IEA, 2014[124]). They include low- to medium-skilled jobs (OECD, 2013[125]).

• The health benefits reduced respiratory and cardiovascular conditions due to improved indoor air temperature, as well as improved mental health such as reduced depression. A Japanese survey found a significant reduction in blood pressure (MLIT, 2019[126]). Public health spending could be substantially lower (IEA, 2014[124]).

• Energy efficiency improvements of housing can also lead to increased energy affordability especially among low-income households, provided they do not bear the cost of the capital outlays when they arise initially. For example, the study on Cincinnati’s low-income weatherisation programme found that the average arrears of households joining the programme fell by more than 60% after energy efficiency improvements (IEA, 2014[124]).

Action needs to sharply accelerate to meet the net-zero domestic GHG emission targets. Virtually all existing buildings will need to be renovated in-depth to be consistent with net-zero emission. The rate of building energy renovations needs to increase considerably, from rates of 1%-2% of existing stock today to ideally 5% per year as soon as possible to meet net-zero-emission targets by 2050 (OECD, 2020[127]). his will also imply equipping them with energy-saving heating equipment. In the EU, buildings built before 1945 still account for 23% of all building stock and their average insulation level (of external walls) is more than 5 times lower than that of buildings built after 2010 (EC, n.d.[128]), which suggests they should be renovated first.

In order to avoid lock-in of inefficient building stock and costly future renovations, net-zero-emission standards should already apply to new buildings. In the EU, the Energy Performance of Buildings Directive requires all new buildings to be nearly zero-energy buildings from 31 December 2020 (EC, 2019[129]). However, implementation will depend on member countries.

Decarbonising the existing building stock requires a co‑ordinated approach across levels of government. In view of multiple market failures, including split incentives between owners and tenants, capital market imperfections and too-short-time horizons in investment decisions, compulsory energy standards to reach standards at set dates may be best suited (Deasley and Thornhill, 2017[130]). Such an approach would also allow governments to target financial support to those households and firms which need the most support. For cost-effectiveness, it will be important for renovation programmes to incorporate consistency with the net-zero emission objective from the outset.

Cities and regions have a unique ability to promote the decarbonisation of building stock through effective implementation, prioritisation and effective engagement of citizens and local businesses. This includes gathering information on renovation needs, taking advantage of public building procurement and certifying energy efficiency standards.

Applying circular economy principles to food production and consumption can contribute to reducing GHG emissions at a low cost. Cities are major food consumers. A total of 2.9 billion tonnes are annually destined to cities with 0.5 billion tonnes wasted (Ellen MacArthur Foundation, 2019[131]) Achieving a regenerative food system in cities will entail an annual reduction of GHG emissions by 4.3 billion tonnes of CO₂-equivalent and the generation of annual food benefits worth USD 2.7 trillion by 2050. By 2050, cities will consume 80% of food (FAO, 2020[132]). Circular food systems in cities and regions are based on strengthening synergies across the food value chain, from production to distribution, consumption and waste handling.

In a circular economy, food waste should be reduced as much as possible or transformed into usable products for agriculture. For example, the city of Groningen, Netherlands, launched Food Battle Groningen to raise awareness on reducing food waste. Local not-for-profit organisations are taking the lead by pushing the demand towards local food consumption, reducing food waste and promoting urban agriculture. The city of Toronto, Canada, has put in place the Urban Harvest programme to help reduce food waste and benefit the broader community by collecting surplus fruit and vegetables from residents’ backyards and redistributing them to local food banks and programmes. The city of Guelph aims to become Canada’s first technology-enabled circular food economy, reimagining an inclusive food-secure ecosystem that by 2025 increases access to affordable, nutritious food by 50%, where 50 new circular businesses and collaborations are created and circular economic revenues are increased by 50%. The programme aims to make the most of its distinctive characteristics (the presence of major agri-food industry players, agriculture research institutions and a developed household organic waste collection scheme) to: grow food regeneratively and locally when possible; minimise food waste; and design and market healthier food products (Government of Canada, 2020[133]).

The transition to a circular economy does not come without obstacles. Matching biological and technical cycles of cities and regions and the various ways in which resources can be repurposed and reused, from water to energy and mobility, is a complex task. From a business perspective, there is no efficient secondary market for most of the collected household waste. Still, virgin materials are less expensive than secondary products. Collaboration along a value chain can be best established at a regional and urban scale. Insufficient financial resources, inadequate regulatory frameworks, financial risks, cultural barriers and the lack of a holistic vision are amongst the major obstacles identified by more than one-third of the interviewed stakeholders in the OECD survey (2020[134]).

The circular economy can be implemented if proper governance conditions are in place. The OECD (2020[134]) identified three clusters corresponding to the complementary roles of cities and regions as promoters, facilitators and enablers of the circular economy:

1. Promoters: Cities and regions can promote the circular economy acting as a role model, providing clear information and establishing goals and targets, in particular through: defining who does what and leading by example (roles and responsibilities); developing a circular economy strategy with clear goals and actions (strategic vision); promoting a circular economy culture and enhancing trust (awareness and transparency).

2. Facilitators: Cities and regions can facilitate connections and dialogue and provide soft and hard infrastructure for new circular businesses, in particular through: implementing effective multi-level governance (co-ordination); fostering system thinking (policy coherence); facilitating collaboration amongst public, not-for-profit actors and businesses (stakeholder engagement) and adopting a functional approach (appropriate scale).

3. Enablers: Cities and regions create the enabling conditions for the transition to a circular economy to happen, e.g.: identify the regulatory instruments that need to be adapted to foster the transition to the circular economy (regulation); help mobilise financial resources and allocate them efficiently (financing); adapt human and technical resources to the challenges to be met (capacity building); support business development (innovation); and generate an information system and assess results (data and assessment).

Cities need to address specific adaptation challenges

Climate change poses unique challenges for adaptation in cities. Prolonged extreme temperature events will increase energy demand and exacerbate inequalities in access to cooling at work and in homes, especially in cities because of the heat island effect of built environments (IEA, 2016[87]). Urban areas are expected to experience major impacts on water availability and supply with potential changes in water quality and quantity, potentially resulting in fierce competition (OECD, 2016[135]).

Extreme precipitation and related storms, floods, torrents and landslides will increasingly damage critical urban infrastructure as well as private assets. One in 5 urban dwellers, representing 613 million people, is currently exposed to a 100-year flood and up to 6% of cities are at risk of being entirely flooded (OECD/EC, 2020[45]). By 2030, urban property damaged by riverine floods is estimated to increase threefold, from USD 157 billion to USD 535 billion annually (WRI, 2020[136]). The US, for example, may experience an additional USD 16 billion in annual flood damages to urban property by 2030 (WRI, 2020[136]). Sea level rise poses further risks, albeit arising with more delay: 14% of all urban dwellers (as well as 11% of dwellers of towns and semi-dense areas) live in low-lying coastal areas (OECD/EC, 2020[45]). Urban property damaged by coastal storm surge and sea level rise is estimated to increase tenfold by 2030, from USD 17 billion to USD 177 billion annually (WRI, 2020[136]). OECD modelling projections for a sea-level rise of 1.3 metres by 2100 indicate that without adequate adaptation measures coastal flooding may cause global annual damage costs up to USD 50 trillion – nearly 4% of global GDP – by the end of the century (OECD, 2019[137]).

The impacts of climate change vary widely across cities. Climate models have greatly improved in precision and scale, with spatial resolutions on the order of 100 km, yet this scope remains much too large for most cities (Shepherd and Sobel, 2020[138]). Climate modelling at lower resolutions may magnify uncertainties. To know the exact future impacts of climate change at local urban levels is unfeasible and can be a problematic expectation if policymakers defer action. Rather, policymakers should implement measures to reduce overall risk exposure – that is to say, by minimising vulnerability tied to social, economic, environmental and physical factors or processes, which can compound hazards, long-term stress (economic decline, natural resource degradation) and sudden disastrous shocks (drought, flood) (OECD, 2018[139]; Figueiredo, Honiden and Schumann, 2018[140]).

National and local policymakers can jointly undertake measures to reduce risk exposure and enhance the adaptability and resilience of cities. The OECD has developed a set of recommendations on urban resilience and disaster risk management. A vulnerability risk assessment (VRA) and, building on it, a local resilience action plan (LRAP) forms the basis of policy and financing priorities (Box 4.13). NUPs can be a good platform to foster a national-local relationship. They can provide a general implementation roadmap and unlock financing and capacity building. Preliminary survey results from the 2^nd edition of the Global State of National Urban Policy (OECD/UN-Habitat, forthcoming[64]) reveal that the 2 most common adaptation measures in NUPs are to “conduct a comprehensive VRA focusing on urban areas” (65% of respondents) and “adopt risk-sensitive land use policies” (62% of respondents).

Box 4.13. Key recommendations on urban resilience and disaster risk management

The OECD report Building Resilient Cities: An Assessment of Disaster Risk Management Policies in Southeast Asia (2018[139]) provides a general framework for assessing disaster risk management policies and resilience in cities as well policy recommendations for five cities in Southeast Asia: Bandung (Indonesia), Bangkok (Thailand), Cebu (Philippines), Hai Phong (Viet Nam) and Iskandar (Malaysia). City governments can conduct VRAs and LRAPs with a high degree of autonomy. They are also typically in charge of adopting risk-sensitive land use policies. Many measures to improve urban resilience are most effectively achieved when national and local governments work hand in hand.

The main recommendations in the report are the following:

1. Conduct a comprehensive VRA in each city in order to develop an LRAP. A VRA identifies and locates people, places and assets that are expected to be most exposed to natural hazards risks. Next, the vulnerability and adaptive capacity are estimated. VRAs and asset inventory practices form the basis of an LRAP, which should work as an interface with other urban policy.

2. Adopt risk-sensitive land use policies combining regulatory and fiscal instruments to guide urban development away from risk-prone areas.

3. Integrate disaster risk management policies and urban green growth policies, especially in the infrastructure sector, to generate “co-benefits”. Property taxes, fees, tariffs and land value capture mechanisms can provide funding, drawing on the benefits.

4. Develop disaster risk financing (DRF) mechanisms. Typically, ex ante disaster risk financing tools involve significant opportunity costs, especially in terms of investment potential.

5. Promote the use of information and communication technologies. Key tools include early warning systems, emergency services and other disaster response efforts in sectors such as transport, energy, water and solid waste.

6. Foster vertical and horizontal co-ordination. National governments have an important role in aligning national and subnational risk management policies and creating an enabling environment that allows local governments to act more effectively and efficiently. Establishing a dedicated agency on climate risk/adaptation can help to facilitate co-ordination among sectoral departments as well as vertical coherence across levels of government. Conducting in‑depth country reviews of urban risk management policies can also be useful to guide public action and decisions.

7. Engage with stakeholders to promote inclusiveness. Co-ordinated response mechanisms between civil society and local governments as well as public awareness campaigns targeting citizens who are at the greatest risk and financially vulnerable are critical to enhancing urban resilience. Local authorities can encourage the private sector, notably SMEs, to design business continuity and recovery plans to reduce economic disruption.

Source: OECD (2018[139]), Building Resilient Cities: An Assessment of Disaster Risk Management Policies in Southeast Asia, https://dx.doi.org/10.1787/9789264305397-en.

Improving the resilience of rural regions in the net-zero-emission transition

Rural regions are pivotal in the transition to a net-zero-emission economy and building resilience to climate change because of their natural endowments. Rural regions are home to around 30% of the OECD’s population and cover approximately 80% of its territory, containing the vast majority of the land, water and other natural resources. These lands are needed for food and renewable production from wind, water and biomass. They are also where we find natural beauty, biodiversity and ecosystem services that produce clean air, detoxify waste, clear water, sequester carbon and allow for recreation. Forests and wetlands, for instance, function as natural carbon sinks – trees and other vegetation sequester an amount equivalent to roughly one-third of global emissions (IPCC, 2019[141]). Wind, water, biomass and waste present in rural lands are used to create clean energy. These fundamental values to our well-being are increasingly recognised, as is the duty to protect them for current and future generations.

The specialisation of rural areas in resource-based industries makes them a contributor to climate change. Rural economies produce almost all of the food, energy, lumber, metals, minerals and other materials that make our way of life possible. Population growth and increased living standards have enlarged the demand for many of these materials. This has put strong pressures on extraction and production, often leading to increasing emission and depleting the earth’s ability to absorb CO₂. Agriculture and forestry, for instance, are responsible for around 25% of global GHG emissions when emissions from land use and land use change are included (OECD et al., 2015[142]). GHG emissions per capita in remote rural regions are particularly high (Chapter 3). The extraction and primary processing of metals, which largely happens in rural regions, further accounts for 26% of global CO₂ emissions (UNEP, 2019[143]). In the light of the growing demand for minerals and metals – the world consumption of raw materials is set to double by 2060 – the extractive industry is required to contribute to the mitigation of climate change and become more sustainable.

Many rural economies (e.g. agriculture, forestry, fisheries, mining and energy, etc.) are already suffering from the increased frequency and intensity of extreme weather events such as storms, floods, torrents and landslides. In many rural regions across the world, increasing heat waves will contribute to water scarcity, with risks to food production. As nature loses its capacity to provide important services, rural economies will suffer significant losses as they rely on the direct extraction of resources from forests, agricultural land and oceans or the provision of ecosystem services such as healthy soils, clean water, pollination and a stable climate (WEF/PwC, 2020[144]).

Rural communities often struggle to adapt and prepare for transformational challenges required to move to net-zero emissions. Over the past decades, the benefits of globalisation and technological change have not reached many rural places and regional inequalities have grown. Rural economies are experiencing increased competition from less developed counties. The shift to a service economy has largely benefitted cities and important infrastructure including broadband is missing. Population ageing, limited economic diversity and dependence on external markets and transport often accelerate their vulnerability. Consequently, many rural communities feel left behind and exposed to a range of challenges they have to deal with (OECD, 2020[19]). Rural regions and their workers specialised in economic activities which need to be phased out in the transition to net-zero emissions will need dedicated support.

While rural places are not without their challenges, they are also, unquestionably, places of opportunity that are key in delivering wider well-being to current and future generations. Rural policies have an important role to play in reaching net-zero GHG emission targets, while also generating benefits for rural communities. This can happen through more sustainable land management, higher valorisation of ecosystem services, making use of innovative production processes around agriculture, mining and renewable energies and new modes of transportation. At the same time, this requires a fundamental transformation to rural economies and societies. This section shows opportunities for rural development by making rural regions more resilient to climate change and in the net-zero-emission transition.

Rural regions come in different shapes and forms: policies need to reflect this diversity to be effective. In place of an urban-rural dichotomy, the Rural Well-being Policy Framework (OECD, 2020[19]) identifies three types of rural regions on a rural-urban continuum: i) rural inside functional urban areas (FUAs); ii) rural close to cities; and iii) remote rural. The framework identifies the interactions between the three types of rural places and cities, each with stark structural differences, and distinct challenges and opportunities. Understanding this diversity helps to shape policy responses for the transition to a net-zero-emission economy. Rural regions close to cities, for instance, can substitute carbon-intensive car use more easily than remote regions. Remote regions on the other hand have an advantage in providing renewable energy but are less economically diverse.

Land use is key in directly contributing and removing GHG emissions, mostly through agriculture and forestry

Current and predominant forms of land use in rural regions are a large direct contributor to GHG emissions as well as land and biodiversity degradation, notably through agriculture and forestry. Today, 70% of the global, ice-free land surface is affected by human use (IPCC, 2019[141]). The food system is responsible for around 30% of global GHG emissions. Of this total, 46% come from direct production (largely methane from enteric fermentation of ruminants), 36% from land use change (deforestation), 13% from post-production (processing, storage, transport, waste disposal) and 5% from pre-production (animal-feed production, energy use, fertiliser manufacture) (OECD, 2019[95]). In addition, agriculture also puts pressure on resources such as water, soil quality and other ecosystems and biodiversity. Many of these are linked to the intensification of farming practices to meet growing food demand (e.g. excessive use of fertilisers, pesticides and antibiotics, industrial livestock systems and unsustainable grazing, specialisation and uniformity of landscapes, and land conversion) (OECD, 2019[95]; Hardelin and Lankoski, 2018[145]). Today, around 25% of animal and plant species are threatened with extinction (IPBES, 2019[146]). The link between biodiversity loss and climate change is well documented. It is estimated that 5% of all species are threatened with extinction by 2 degrees Celsius (°C) of warming above pre-industrial levels, while the earth could lose a staggering 16% of its species if the average global temperature rise exceeds 4.3°C. This loss of diversity poses a serious risk to global food security by undermining the resilience of many agricultural systems to threats such as pests, pathogens and climate change (IPBES, 2019[146]). To address this, local efforts including knowledgeable local actors plays a key role.

Land use offers great potential to reduce emissions and increase the removal of GHG emission from the atmosphere. Agriculture and forestry have the potential to do this, including through afforestation, reforestation, bioenergy use with carbon capture, use and storage. Afforestation, reforestation and peatland restoration are near-term priorities if their potential is to be fully utilised for reaching net-zero GHG emission objectives by 2050. Countries will require net-negative CO₂ emissions in order to reach net-zero GHG emissions by 2050 with CO₂ emission falling lower in net-negative territory beyond 2050. Rural regions will be key for the potential for carbon dioxide withdrawal.

Decisions on land use are currently largely defined by short-term economic criteria, while wider environmental and social aspects are left aside (OECD, 2019[95]). In light of the ongoing climate crisis and the fundamental role land use plays in the net-zero emission agenda, there is a clear need to transform land use to a more sustainable model that works towards multiple well-being objectives. Yet, the potential for rural development from more sustainable land use still needs to be unlocked. There is a range of instruments policymakers can use to reduce emissions from land use, including standards and rules for land management, increasing investments in technologies and research, targeting environmental outcomes or production practices and payments for the provision of ecosystem services. This section discusses what rural places can do to manage the opportunities and challenges that follow from transitioning to more sustainable land use processes and what options arise for rural development in the process.

Current approaches

There is a range of policy instruments that aim to address climate change and ecosystem degradation on the land use side. The most common policies can be organised around the categories of regulatory approaches, i.e. rules and standards for land use planning, economic instruments (taxes, abatement payments and subsidies), information instruments (ecolabelling, green procurement) and other (knowledge transfer and research). Information instruments are particularly important to ensure a level playing field where goods are internationally tradeable and low-emission production entails higher market costs, for example because GHG emissions cannot be priced or where regions are progressing unevenly in their low-emission pathways. Overall, these policies and the change they entail does not happen in a vacuum but tend to play out and affect the local realities of people on the ground. Most importantly, they need to be economically viable to be able to be accepted and successfully implemented. Some offer important development opportunities for rural areas. Table 4.2 summarises the most common policy instruments and their considerations for rural development.

Table 4.2. Policy instruments to address climate change and ecosystem degradation in the agriculture and forestry sectors and considerations for rural development

Policy instruments	Regulatory approaches	Economic instruments	Information and voluntary instruments	Other
	Land use/special planning tools and requirements (e.g. environmental impact assessments [EIAs] and strategic environmental assessments [SEAs]).	Taxes (e.g. on carbon, and fertiliser use). Charges/fees. Subsidies to promote green technology.	Ecolabelling and certification (e.g. organic agriculture labelling schemes; sustainable forest/timber certification).	Trade measures, such as lowering tariffs on climate-friendly and/or biodiversity-friendly products, reduce export subsidies.
	Rules and standards for water, soil quality and land management. Standards and controls on the overuse of agrochemicals and fertilisers in production.	Reform of environmentally harmful subsidies (e.g. decouple farm support from commodity production levels and prices).	GPP (e.g. ensuring government procurement is from sustainable sources).	R&D, e.g. to decouple GHG emissions and food production, biomass energy carbon capture and storage.
	Restrictions or prohibitions on use such as moratoria on deforestation (e.g. as used successfully by Brazil to slow deforestation); protected areas.	Payment for ecosystem services and agri-environmental measures (e.g. retirement of degraded cropland or subsidisation of conservation-friendly production practices).	Voluntary approaches (e.g. negotiated agreements between businesses and government for nature protection or voluntary offset schemes).	Inclusive national planning, incorporating climate and biodiversity concerns, national and local governments, non‑party stakeholders.
	Concessions for sustainable forest management.	Biodiversity offsets/biobanking (e.g. payment-in-lieu or project-based offsetting). Tradeable permits (e.g. carbon emissions, water rights).	Fiscal transfer schemes (e.g. transfer of resources between different governments in the same country).	Development assistance (e.g. coherent consideration of nexus areas in Natural Resource Management, forestry and biodiversity projects).
		Property rights and secure and tenure. Liability instruments. Non-compliance fines.		Capacity building (including education and training).
Considerations for rural development	Regulations bear the challenge of being one-dimensional and not looking at cumulative impacts on landscapes. They can also lack economic and social aspects. For better rural development these should be included. Protecting areas can contain other development opportunities i.e. for recreational or touristic activities.	The introduction of taxes can have uneven effects across territories. Some rural areas might be disadvantaged based on their economic profile, tailored responses are needed. Subsidies for innovations, payment schemes, tradeable permits offer opportunities for rural development, they require a change in valorisation, knowledge of opportunities, new sets of skills are needed. Land rights are the basis for economic development in rural areas.	Certifications can be linked to local branding and agro-tourism, shaping the image and economic profile of a region. GPP schemes specific to rural regions, supporting rural businesses to access these funds.	Lower tariffs can increase profits for rural areas based on sustainable tradeable goods. R&D relevant to green rural economies collaboration with research institutions to work onsite. Involvement of local (rural stakeholders in policymaking). Capacity building of local administrations on sustainability issues and for businesses and landowners.

Source: Own elaboration based on OECD (2020[147]), Towards Sustainable Land Use: Aligning Biodiversity, Climate and Food Policies, https://doi.org/10.1787/3809b6a1-en (accessed on 11 September 2020).

Agriculture emissions per capita across regions vary enormously and are highest in regions with high meat and milk production, for example in Ireland or New Zealand (see Figure 4.9). So-called “hot spot areas” are associated with intensification. Examples from France show nitrogen surpluses range from 16 kg to 69 kg per hectare of agricultural land (Hardelin and Lankoski, 2018[145]). These contribute to emissions as well as water pollution. This uneven distribution of emissions highlights that place-based approaches are needed to address individual challenges.

Figure 4.9. Agricultural emissions per capita for each TL2 region, sorted by national average, 2016

Note: Does not include emissions from land use and land use change.

Source: OECD calculations based on EC (2020[47]), EDGAR - Emissions Database for Global Atmospheric Research, Joint Research Centre, European Commission.

Housing, transportation, energy, water, agriculture, tourism and economic development all make demands on how land is used. For instance, maximising food production without regard to environmental impacts can raise GHG emissions and negatively impact habitats (and biodiversity), while increasing carbon sequestration from afforestation and bioenergy use combined with carbon capture, use and storage (CCUS) can reduce arable land. Likewise, extending protection in one area might shift deforestation but can also generate income. Consequently, sustainable land use presents a complex governance challenge that has to deliver simultaneously on social, economic and environmental policy outcomes as well as a large number of stakeholders (OECD, 2020[147]). Sectoral policies dealing with only one aspect are usually not suitable to address interconnected needs. The OECD Principles on Rural Policy stress the need to promote integrated spatial planning with Principle 4: “Set a forward-looking vision for rural policies”, requiring land use planning to consider multiple aspects such as environmental quality, waste management, natural resources development, community attractiveness, climate change mitigation and adaptation as well as population ageing and out-migration (OECD, 2019[148]).

Regional governments have significant roles to play in transitioning to more sustainable land use, but co‑ordination is needed. While the national governments generally set the over-arching framework, subnational governments, in particular at the local level, are in charge of spatial planning and land use policies. In order to co-ordinate well, national and regional governments can establish frameworks to support integrated planning across functional territories. The Austrian Conference on Spatial Planning, for example, provides effective co-ordination across levels of government and across policy sectors. Better integration and co-ordination of policies is particularly important if a wider range of policy instruments is used to steer land use. Without better co-ordination mechanisms, it will not be possible to align an even more diverse set of policies to influence land use effectively (OECD, 2017[149]).

Land use policies must pay greater attention to the incentives that other public policies provide to use land. Whenever possible, policies unrelated to land use should not provide incentives that contradict spatial objectives. For example, countries that wish to restrict urban sprawl should not provide greater tax incentives for ownership of single-family homes over multi-family homes. More generally, policies outside of the planning system should be used to encourage desired forms of spatial development. Tax policies are of particular importance; higher transport taxes, for example, increase the costs of commuting and thus provide incentives to live closer to employment centres, in turn encouraging compact development (OECD, 2017[149]).

Managing rural land use change through landscape approaches

Landscape planning approaches can help regional policymakers balance the social, environmental and productivity goals in their regions. These approaches offer an alternative to siloed measures focusing on production sectors or farm-level and consider the social, economic and ecological functions of an area holistically to develop spatial and development plans. They offer an organising framework, facilitate the investigation of different courses of action and are increasingly being used, for example as part of the World Bank Forest Action Plan FY16-20 (OECD, 2020[147]). Most importantly, however, they give practitioners a tool to adapt to local conditions (Sayer et al., 2014[150]).

Supporting landscape approaches in rural regions:

• Introduction of new decision-making tools that incorporate non-market values. Multi-criteria decision analysis (MCDA) is a method that can combine ecological objectives with social and economic criteria and is able to consider non-market values of ecosystem services. It has been developed to allow the inclusion of data from various sources (e.g. economic, ecological, stakeholder opinions) into quantitative decision-making models and has been used extensively for land use. Multiple Danish studies have shown that the tool is useful to identify areas for land use improvements through scenarios that allocate weights to environmental services (Vogdrup-Schmidt, Strange and Thorsen, 2017[151]; 2019[152]). MCDA requires sound sociotechnical design, reflecting both the social (who participates, when and how) and technical (which methods, which software) considerations. Overall, MCDA is made up of the following participants: decision-makers who choose between alternatives; stakeholders who are the source of scores and weights; analysts who are responsible for design and implementation; and experts who provide advice. Generally, the method relies heavily on the weights used by the decision-maker and/or relevant stakeholders (Kennedy et al., 2016[153]).

• Improve local data availability. Data can strengthen the design, implementation, monitoring and enforcement of landscape approaches. Data availability, however, is often a challenge, especially in rural places. Geographic information systems (GIS) are fundamental tools of local land use planning. The use of satellite spatial data can provide important insights on land use change, land degradation and waste. In Europe, the European Environment Agency (EEA) is an important source of open data on land use, including the CORINE Land Cover (CLC) dataset, which provides land cover information at a resolution as fine as 100 m. Further, the INSPIRE Directive aims to create a new EU-wide spatial data infrastructure (Weber, Eilertsen and Suopajärvi, 2017[154]). Apart from ecological information, cultural, historical and visual aspects are much more difficult to capture through data.

• Landscape approaches can and should integrate regional climate adaptation challenges. Regional climate modelling can provide important insights into local adaptation challenges. Future climate-change-induced extreme weather events will get worse in many regions but will also change in nature. Heat waves and drought will become common in many regions where they have not been so far. Regional policymakers need to work with climate modellers and local authorities to harness local knowledge and define potential socio-economic vulnerabilities, on which regional climate models can provide further insights.

• Support through larger rural policy agendas. Rural policy across OECD countries is currently undergoing a paradigm shift from a sectoral focus to a more place-based approach, underpinned by the recognition that rural places are diverse and structural changes, such as climate change, need to be addressed through a multidimensional multi-stakeholder approach (OECD, 2020[19]). New rural policy approaches can work to support local landscape approaches by giving them the needed validation and authoritative support recognising the value of working across policy and administrative barriers. A first step in the right direction is that a number of countries already embed climate change objectives in local economic development strategies and programmes and seek to break up silos this way (OECD, 2013[155]). While the EU Rural Development Programme (RDP), under Pillar II of the Common Agricultural Policy (CAP), is still largely focused on funding individual actors who undertake different actions (Rega, 2014[156]), its LEADER programme, albeit small, seeks to address aspects of territorial governance, so important for the implementation of landscape processes, and the co‑ordination of actors that undertake individual actions.

Creating value from ecosystem services

In rural communities, policy drivers and market incentives are still forcing land users to prioritise unsustainable economic development over climate protection. Market values only capture provisioning ecosystem services such as the production of food, wood and energy, rather than the full range of supporting, regulating and cultural ecosystem services, including nutrient cycles, pollination, water filtration, biodiversity, disaster prevention (i.e. floods), recreation and cultural heritage (Natural Capital Germany, 2016[157]). In this context, policymakers must find ways to reward the provision of supporting, regulating and cultural ecosystem services. For instance, in agriculture, market price support is currently based on crop-specific area payments. Commodity production increases but often at the expense of higher GHG emissions and a lower capacity of vegetation and soils to absorb carbon. Biodiversity and water quality may also worsen (Hardelin and Lankoski, 2018[145]) Yet, land use practices consistent with climate objectives must be scaled up sharply. Redirecting subsidies for agriculture to payments for ecosystem services, to strengthen CO₂ sinks by preserving carbon-rich soils and vegetation and encourage emission reduction, is one policy option to scale up climate action in rural regions (Box 4.14).

Box 4.14. Ecosystem service payments to integrate GHG reduction in rural regional development

Payments for ecosystem services (PES) can mitigate climate change through increased carbon sequestration and reduced emissions. They are most likely to be effective in intensive farming and if they are outcome-oriented (OECD, 2020[26]). Redirecting subsidies for agriculture in this way would also remove environmentally harmful subsidies. These actions need to be scaled to reach net-zero GHG emission objectives for 2050. Options with the highest potential include afforestation, conversion of cropland to grassland and reduced tilling. Payments per ton of sequestered carbon below estimated climate costs have induced conversion of agricultural land to forest land, changes in tillage practices and crop mixes on remaining agricultural land, and changes in livestock management. They often also contribute to climate adaptation and substantial further climate and well-being benefits.

• The conservation of high-carbon ecosystems, such as peatlands, wetlands, mangroves and forests, has an immediate impact on carbon emissions from land use and multiple benefits for the conservation of water resources, thereby reducing draught vulnerability, biodiversity, flood control and halting land degradation recreational benefits (IPCC, 2019[141]). Costa Rica established a programme of PES that compensates farmers and landowners for forest conservation (OECD, 2020[26]).

• Afforestation, reforestation and peatland restoration require more time to deploy their potential. The need to be scaled up quickly so they can still contribute in time for net-zero emission objectives by 2050. For example, in the UK, afforestation should rise from below 10 000 hectares per year to 27 000 hectares by 2025 rewarded (Climate Change Committee, 2019[77]). Small-scale deployment with a broad variety of native species, involving local stakeholders, afforestation in degraded areas can minimise trade-offs for food production and make the most of co-benefits, notably the protection of biodiversity, resilience against extreme weather events or wildfires and the protection of soils (IPCC, 2019[141]). The protection of soils and biodiversity in particular are, alongside climate change, key global environmental challenges. Protecting them is also important to reduce the risk of future pandemics, as pointed out in Chapter 1.

• Sustainable management of forests and biofuel crops can play an important role in reducing emissions by allowing the use of biomass firing and timber. This requires managing the carbon stocks in plants and soils. Performance over and above established thresholds can be rewarded. Firing of biomass from sustainably managed forests and biocrops can also contribute to negative emissions if combined with carbon capture, use and storage (BECCS). Access to CO₂ storage and the most suitable sites for BECCS plants is key for this purpose (Climate Change Committee, 2019[77]).

• Farming practices such as reduced tillage, permanent soil cover, use of organic products, diversified cropping systems and agroforestry can sequester carbon and reduce GHG emissions from fertilisers and animal farming. Growing leguminous crops can be used to fertilise the soil and therefore limit the use of chemical fertilisers. These practices generate further environmental benefits. The adoption of reduced tillage also reduces soil erosion and has the potential to significantly improve water quality, aquatic ecosystems and lower air pollution. Farmers in the Canadian province of Alberta, Canada, can earn carbon offset credits with carbon saving practices (OECD, 2020[26]).

Result-oriented payments require monitoring with satellite imagery, sensors or other digital tools. Such tools may also be needed to identify where particular practices, such as afforestation, have the desired benefits. Policy must support land managers with skills, training and information. Payment schemes may also need to deal with the caveat that sequestration could be reversed if farmers switch back to conventional practices or forest cover is lost (IPCC, 2019[141]; OECD, 2020[26]).

Understanding and rewarding the true value of ecosystem benefits, including GHG emission reductions, offers potentials for rural development – but also holds challenges. A key challenge for policies to protect ecosystem services, such as ecosystem service payments, is the difficulty to measure and manage them. Currently, measurements and metrics largely depend on multidimensional spatial and temporal variations. Furthermore, ill-defined payment schemes can lead to unintended consequences, for instance through the introduction of fast-growing (often non-native) trees that satisfy carbon sequestration but also consume much water or cause soil loss (Chan et al., 2017[158]). Hence, while ecosystem service payments can make sustainable land use practices economically viable, they cannot regulate such practices alone through the incentives they provide. Other challenges relate to building the required local scale and limited understanding of and inhibition in switching behaviours. This means that smart policy design needs to integrate economic incentives as well as potential social and cultural barriers and ecologic consequences.

PES are used to incentivise land managers to provide certain services (conservation and restoration, water, carbon and biodiversity purposes) in certain regions. Payment schemes related to ecosystem services often do not pay for the service itself but cover the cost of adopting certain practices to increase the provision of ecosystem services. This approach may miss rewarding those who already protect ecosystem services at the time of introduction. Alternative approaches seek to involve producers, extractors and the supply chain in mitigating impacts, for instance through paying ecosystem “stewards” (i.e. the land users who are already undertaking positive actions) (Chan et al., 2017[158]). Overall, PES programmes are diverse and can be public, private or a combination of both, voluntary or mandatory, as well as small or large in monetary and geographical scale (OECD, 2013[159]; Hardelin and Lankoski, 2018[145]).

The following considerations may serve to link rural development and PES:

• Regional policy and linked fiscal transfers need to recognise the fundamental benefit of ecosystem services from natural asset protection. Assessing, measuring and communicating positive externalities of ecosystem services can help to promote understanding and inform regional policymaking. In the UK, the National Ecosystem Assessment framework considers economic value, health value and shared social value when evaluating changes in ecosystems (UK National Ecosystem Assessment, 2011[160]). Other examples include the EU Mapping and Assessment of Ecosystems and their Services (MAES), which aims to build a coherent analytical framework as well as common typologies of ecosystems for mapping across the EU. As part of this initiative, the EFESE (L’évaluation française des écosystèmes et des services écosystématiques) in France has produced six assessments of different ecosystems (OECD, 2020[147]). Despite some success in using the results of MAES in policy design, a recent EU assessment suggests that unclear relationship of results and regulatory frameworks in respect to land use/landscape planning, lack of human and financial resources to make results operational and rigid national legislation not open to incorporation of the ecosystem services concept hamper the process (Ling et al., 2018[161]).

• The geographical scope is an important element for successful PES. The application of PES is often heterogeneous with a wide variety of approaches, low availability of information and inconsistent monitoring and evaluation. This limits the needed geographical scope to improve the sustainability of larger land use systems as participation is often split among small land parcels and does not correspond to the spatially dependent nature of ecosystem services. National systems like the one in Mexico (the world’s first) can help address fragmentation. Mexico’s PES scheme was introduced in 2003, mainly targeting forest ecosystems. The scheme avoided 18 000 ha of deforestation between 2003 and 2007 and reduced forest fragmentation (OECD, 2020[147]). More local approaches to build scale include stimulating co-ordination between land users across parcel or farm boundaries. One option to incentivise this includes agglomeration bonus payments for participants co-operating cross-boundary (Wätzold and Drechsler, 2014[162]).

• PES should seek to contribute to economic development opportunities more broadly. This can include driving regional innovation, diversifying the economic base or adding to community well-being. In Australia, PES are linked with the economic development of Indigenous communities. One example is earning revenues from carbon credits. Indigenous fire management practices have reduced the intensity of bushfires, limiting carbon release. Roughly 118 ranger groups exist across the country and employ over 2 900 Indigenous Australians. Overall, rangers reported they felt greater individual and community well-being, including self-worth, health, closer connections to family and country as well as safer communities, strengthened culture, ability to find meaningful employment, increased respect for women and more role models for younger people (NIAA, n.d.[163]). These land management practices have also driven technological innovation. For example, the Yawuru Indigenous community in Western Australia is developing capability in GIS mapping to support their land and water management (Raderschall, Krawchenko and Leblanc, 2020[164]). Other local benefits from PES can include the development of new leisure services, as research has shown that tourists prefer rural landscapes of forest patches interlinked with hedgerows, rather than open landscape dedicated to agriculture or only forest (Hardelin and Lankoski, 2018[145]). Further benefits can include local branding of the products and advertising from sustainable land use.

• Regional institutions can offer support, provide information, raise awareness and promote social inclusion. Existing power structures and inequalities can easily undermine equitable access to PES. In Costa Rica’s national PES programme for instance, participants continue to be wealthier and more educated landowners, despite the addition of explicit social goals and associated requirements to include less wealthy and more vulnerable people (Chan et al., 2017[158]). A review in Indonesia highlighted the importance of local-level working groups to improve programme uptake, provide information and promote co-ordination between beneficiaries and other stakeholders (OECD, 2020[147]).

• Make PES attractive for land users. Inflexible programmes targeting only one ecosystem service are often not successful because ecosystem services function as bundles. So‑called stacking approaches allow land managers to receive payments for different ecosystems services provided in the same area, thereby increasing the cost-effectiveness (Lankoski et al., 2015[165]). Also, stacking can be used to incentivise the development of higher-quality projects, such as restoring a wetland instead of simply planting a vegetative buffer. Similarly, bundled payments describe programmes where participants receive single payments for multiple ecosystem services (Cooley et al., 2011[166]). The French Flowering Meadows agri-environmental measure (AEM) is known for its flexibility: the results-oriented scheme allows farmers to choose how they achieve the desired result. Farmers commit to ensuring that at least four plants from a reference list of 20 species with high ecological value are in their meadows. The reference list was drafted by a range of stakeholders, including farmers. Acting in collaboration with other stakeholders to define the goals and means may also increase motivation (Fleury et al., 2015[167]).

• Clearly defined and enforced land tenure is a prerequisite for sustainable land use. If land users have sufficient certainty over land tenure and clarity about who owns or has the rights to manage land, they will be more willing to plant trees or restore peatland (Wreford, Ignaciuk and Gruère, 2017[168]). Lack of clarity can also lead to illegal logging, mining and agricultural activities, in Brazil, Indonesia and Mexico for example. Supporting and intensifying ongoing land reform efforts is essential for effective land use policies (OECD, 2020[147]).

• Identify land use incentives that are inconsistent with the net-zero-emission transition and ecosystem services. Switzerland, for example, has reformed its direct payment system by removing direct payments to livestock farmers and increasing payments to farmers engaging in extensive upland grazing. Transition payments were used to minimise negative impacts on farmers and environmental groups helped make sure that potential beneficiaries were informed (OECD, 2017[169]).

Rural regions need to take an active role in the energy and industrial transition

The territorial impact of the energy transition is already present today but will need to increase sharply in scale. Wind and solar energy make up roughly 11% of total electricity generation today in OECD countries but their share will have to increase to 50% by 2040, much of it in rural regions (Chapter 3). Remote regions record a higher share of renewables (51% of total production) than regions that are close to a small or medium city (33% of total production, Figure 4.10) This means that some rural areas have a clear comparative advantage in producing renewable electricity, largely because of their favourable geographies such as elevated and open spaces, biomass availability and low population density. However, not all rural geographies offer equally favourable conditions. It is therefore important to identify potential based on a place-based analysis (Phillips, 2019[170]; OECD, 2012[171]; Poggi, Firmino and Amado, 2018[172]). Some regions, especially those that rely on traditional energy industries, may lose activity to renewable energy (RE) generation locations, leading to economic losses. In this context, energy transition also needs to enable economic development through economic diversification and job creation where possible. This section will outline how rural regions can best benefit from their comparative advantage in RE and which barriers need to be overcome.

Rural regions have a comparative advantage in producing renewable energy

Rural regions, especially remote ones, are leading in renewable electricity production. Overall, rural regions account for 43% of the electricity produced in OECD countries, generate 38% of their electricity using renewable sources. In total, regions far from metropolitan areas account for around half of the total electricity produced from renewable sources in the OECD, with hydropower being the most used renewable source (OECD, 2020[173]).

Cost reductions in renewables and innovations have opened up new possibilities for rural areas. Since 2010, the cost of investment for photovoltaics decreased by 82%, for onshore wind by 39% and offshore wind by 29%. These falling costs have enlarged the possible group of owners with raising the potential for profit margins. In terms of innovations, offshore wind, in particular, has high potential to meet electricity demand, offering higher capacity factors due to ever-larger turbines that tap higher, more reliable wind speeds and floating turbines that open up possibilities for new locations for instance in the North Sea (IRENA, 2020[174]; IEA, 2019[175]).

Renewable energy can have positive effects on the job market but aspects such as technology type and regional fit matter. For example, in EU countries, under the scenario of 80% emission reduction by 2050, deploying wind and solar panels may create one million jobs (direct and indirect) between 2014 and 2050. The share of jobs across three stages of wind and solar panel deployment will be 40% at the manufacturing stage, 23% at the installation stage and 37% at the operations and maintenance stage. Estimates however vary, depending on the learning rate of the technology, fossil fuel prices, energy demand and policy initiative among others (Ortega et al., 2020[176]).

Figure 4.10. Sources of electricity production, 2017

Note: Renewable energy sources include hydropower, wind, waste, biomass, wave and tidal, geothermal and solar. Fossil fuels are divided into two subcategories: coal, which corresponds to the most carbon-intensive energy source; and the other fossil fuels, including oil, petroleum, coke and gas.

Source: OECD (2020[173]), Regions and Cities at a Glance 2020, https://doi.org/10.1787/959d5ba0-en.

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Box 4.15. Key factors for successfully linking renewable energy to rural development

• Embed energy strategies in the local economic development strategy so that they reflect local potential and needs.

• Integrate renewable energy within larger supply chains in rural economies, such as agriculture, forestry, traditional manufacturing and green tourism.

• Limit subsidies in both scope and duration, and only use them to encourage renewable energy projects that are close to being viable on the market.

• Avoid imposing types of renewable energy on areas that are not suited to them.

• Focus on relatively mature technologies such as heat from biomass, small-scale hydro and wind.

• Create an integrated energy system based on small grids able to support manufacturing activities.

• Recognise that renewable energy competes with other sectors for inputs, particularly land.

• Assess potential projects using investment criteria and not on the basis of short-term subsidy levels.

• Ensure local social acceptance by ensuring clear benefits to local communities and engaging them in the process.

Source: OECD (2012[171]), Linking Renewable Energy to Rural Development, https://dx.doi.org/10.1787/9789264180444-en.

Developing renewable energy projects to the advantage of rural development is not straightforward. Evidence is mixed on whether construction, operation and maintenance activities from renewable energy projects actually support long-term rural development (Clausen and Rudolph, 2020[177]; OECD, 2012[171]). While there is an indication that renewable energy creates jobs, for instance from operation and maintenance of equipment, studies suggest that the largest potential for employment is rather indirect and can develop along the value chains, the reallocation of abandoned facilities or more affordable local energy can make other production activities possible, including food processing, storage and transport (European Court of Auditors, 2018[178]; OECD, 2012[171]; ILO, 2019[179]). In addition, considerations on how profits of local resource use are distributed and retained locally to benefit social and economic development is a central question (OECD, 2020[26]). Experience with other types of resource extraction including mining has demonstrated the importance of assuring local community benefits and local participation in resource development projects to ensure community ownership and acceptability.

Regional level governments play an essential role in decision-making for renewable energy. While national-level governments are important to establish legal frameworks and supply financial support for technological innovations, the final decisions about renewable energy deployment are better placed at the local or regional level. This is because potentials for renewable energy development are unevenly distributed across countries and closely linked to spatially diverse natural conditions (OECD, 2012[171]). Conducting economic and social benefits assessments can help decision-makers to understand what kind of impact renewable energy deployment can have in their regions and help to illustrate regional benefits to the population (Jenniches, 2018[180]).

Making use of renewable potentials for the benefit of rural regions

Enhance innovation potential

RE deployment can generate innovation (in products, practices and policies) that result in new business opportunities in rural regions (OECD, 2012[171]). Rural communities can and do engage in R&D related to RE. Lately, innovations have developed specifically around: transmission and storage (smart grids, batteries, hydrogen); applications (e-mobility, green ports); and administration and service (legal, consulting, supply chain, financial service, etc.). Nord-Norge, in Norway, for instance, is drawing on what it has in abundance – water and energy – in order to produce green hydrogen (IEA-RETD, 2016[181]). Hydrogen can be used for fossil-free fuel for transportation in shipping and heavy road transport and in manufacturing, provided it is produced with renewable electricity. As governments seek to increase hydrogen production, they should involve rural areas.

Other rural regions have engaged in specific RE projects to push the technological frontier towards new technologies. In Canada, Nova Scotia, one of the poorest Canadian provinces, has started to generate, store and export tidal energy. As tidal energy is still in the early stages of development, the region seeks to utilise the early adopter advantage in this industry to develop services exportable to other parts of the world. To this end, it has set up consulting businesses that support other rural communities with tidal power potential (IEA-RETD, 2016[181]). In September 2020, the Canadian government announced major investment in four tidal energy projects – two of them located in Nova Scotia – to build a tidal turbine array using subsea tidal technology in the Bay of Fundy and research environmental effects at the local university (Government of Canada, 2020[182]).

Networks are key to foster innovation around RE. Innovations are recognised as co-learning and a co‑creation process, involving many other actors rather than a single “inventor”. Specifically, innovation normally involves joint and mutually supporting activities that involve regional and local governments, enterprises, universities and research institutions and users. Key ingredients for regional innovations are related to building and fostering this network, through good external and internal linkages, local decision-making power and ownership but also the support at the structural level with regards to investments and regulatory frameworks (OECD, 2012[171]).

While electricity markets are increasingly integrated as renewables expand, stronger local production of renewable electricity may support the creation of new forms of activity, complementing present activities such as agriculture. Examples include processing, storage and transport in food systems. Particular benefits can be overserved in remote regions that are poorly integrated into energy networks. On the Scottish Isles, for instance, the installation of local grids has freed residents from dependence on diesel generators and supported drinking water and heating as well as several new businesses in the tourism and leisure industry such as restaurants, shops, guest houses and self-catering accommodation (Chmiel and Bhattacharyya, 2015[183]).

Revive existing facilities

Existing infrastructure and buildings can constitute an opportunity for new companies in the RE sector. Economic transition and population decline can render existing facilities in rural regions unused. Reappropriation of existing building and infrastructure for renewables-related businesses can bring these abandoned places back to life. A factory in Trenton, Nova Scotia, formerly used to build locomotives and train wagons, is now being used to build windmill pylons. In other countries such as Norway, unused water distribution pipes and storage find additional usage to drive turbines and generate electricity.

Rural regions which have been involved in carbon-intensive industries might have opportunities to reuse existing spaces and knowledge for RE development. A recent report attests a significant potential for RE development in previous coal regions. It states that the deployment of renewable energy technologies in the coal regions can create up to 315 000 jobs by 2030 and up to 460 000 by 2050 in the EU and that investments significantly benefit from the availability of infrastructure, land, skills and industrial heritage already in place. In the region of Visonta, Hungary, 72 500 solar panels have been installed on coal mine sites, as well as in Klettwitz, Germany, where wind farms are placed on similar sites (Kapetaki and Ruiz, 2020[184]).

Ensure community involvement and benefits

Community ownership and participation in benefits and decision-making support rural development. A case study from rural Sweden, for instance, found that in the absence of community benefit schemes, employment opportunities are modest and depend on the presence of local manufactures (Ejdemo and Söderholm, 2015[185]). Across many OECD countries, there has been resistance to the siting of renewable energy developments in rural areas. Reasons for these are varied and include biodiversity loss, competing land use (such as agriculture), as well as visual impacts. Loss of view or increased noise might reduce property values or opportunities for the tourism industry (Phillips, 2019[170]; Poggi, Firmino and Amado, 2018[172]). To address these issues, two aspects are important: i) procedural fairness, i.e. the ways in which communities are involved in the RE development decision-making leading to implementation; and ii) distributional fairness, i.e. fairness in the benefits communities receive from installation as well costs and risks (González et al., 2016[186]).

Procedural fairness improves trust with large companies or developers. Trust has been highlighted as one of the most important factors needed to gain the acceptance of RE development by communities (González et al., 2016[186]). Trust can be increased if residents feel the information is handled with transparency and accuracy throughout all stages of the project and their concerns are reflected in prospected operations. Communities who perceive that decisions are made to benefit all as opposed to only a few also display more trust. Options to improve trust include setting in place inclusive and sufficient mechanisms for dialogue and consultation as well as ensuring concerns are taken into account in decision-making (Moffat and Zhang, 2014[187]). This, however, is often lacking because of unbalanced power relations, limited community capacity and funds (rural communities often have small administrations and tight budgets in comparison to large energy companies), missing guidance or legal frameworks.

Regional and national policymakers are responsible for clarifying planning and permission processes and act as mediators. The state of North Rhine-Westphalia, Germany, for instance has set up state-wind energy dialogues and mediation on renewable energy projects at the local level. The process includes information, consultation and expert advice as well as round table discussions and an interactive website with information on planning and permission processes, conducted by an independent agency to ensure neutrality and unbiased support. Mediations include targeted problem-solving within municipalities and help negotiate positions, ideas and interests directly. Other German state governments have established similar platforms. Between them, they exchange ideas, latest developments and experiences (The Climate Group, 2016[188]).

Benefit-sharing agreements and funds can be critical tools to support rural development from renewable energy. Such agreements and funds can set rural communities on a path of sustainable development and increase social acceptability. But the extent to which benefit-sharing agreements and funds deliver robust results for rural communities differs considerably. Much comes down to the nature of the benefits and ownership regimes and how they are implemented. The mining industry has a long tradition of benefit-sharing agreements (Raderschall, Krawchenko and Leblanc, 2020[164]). These can be instructive for renewables deployment. Local-level benefit-sharing approaches can take a range of forms, including:

• Financial payment into some form of “community fund” that can be used for the benefit of local residents.

• The delivery of some form of community “benefit in kind”, such as a facility or infrastructure improvement.

• “Share ownership” or “profit sharing” where residents of an area receive a stake in an energy development such that community benefits are tied to its performance (Phillips, 2019[170]; Kerr, Johnson and Weir, 2017[189]).

Among these options, community ownership or co-ownership offer the greatest potential and have achieved promising results. This increases the potential for benefits (in this case revenues) to be retained and reinvested in a way that allows for local enhancements of rural communities, reducing dependence on outside investments or grants. Greater community involvement also fosters the creation of new capacities and skills, mobilises local skills for renewables deployment, increases local identification and community cohesion and empowerment (Clausen and Rudolph, 2020[177]). The REScoope MECISE project showed that a stronger involvement of European citizens is needed to achieve the transition to renewable energy. Decentralised ownership of projects encourages greater acceptance of renewable energy and benefits local communities. Renewable energy communities can be made up of natural persons, local authorities (including municipalities) and SMEs (OECD, 2020[190]). The following mechanisms can help to enable communities to better exploit these opportunities:

• Rural regions and communities might require access to professional/technical skills and capabilities in order to effectively engage with renewable energy proponents. Power and information asymmetries can be barriers to community ownership models. In order for smaller administration or communities to make informed decisions regarding RE developments, they require access to various expertise including commercial, legal, financial, land use and geological expertise and data. In some cases, these skills can be developed, in others, they need to rely on external experts. This advice is expensive and the costs should not be the sole responsibility of the rural region but part of the project cost. Information sharing platforms and peer learning between rural regions can further improve capacity building and support peer learning.

• Governments set the rules – they must acknowledge capacity and power imbalances and set fair and transparent processes. Small-scale RE developments still face obstacles including legal restrictions, disproportionate administrative and planning procedures, lack of finance and punitive tariffs that inhibit investments – these need to be identified and removed. This happens for instance because small initiatives do not have the same means to deal with documentation required in permitting granting procedures. Access to one-stop-shops where small initiatives can easily submit relevant documentation, have access to technical information and can expect clear waiting times to get projects approved can be an opportunity to support processes. Targeted financial tools, revolving funds or favourable loans, grants or tax reductions for investments by small energy projects can also help. Governments are also crucial in setting up engagement and consultation (OECD, 2020[190]). This can happen through the provision of guidelines, dialogues, mediation as well as setting the rules and regulations by which industries operate.

• Local benefit-sharing approaches should be guided by a coherent regional policy framework. Funds should be distributed to meet specific objectives and funding amounts should be related to these policy aims. Furthermore, local planning can facilitate communities to identify their assets and opportunities and determine their development priorities through locally-led governance.

A prominent example that demonstrates the regional and local effects of the energy transition are coal regions. As coal is often geographically concentrated, highly specialised local economies and strong cultural identities linked to the industry have developed in these territories. Research on transitioning coal regions shows that, in the past, policy approaches to phasing out lack coherent long-term visions and strategies for dealing with unemployment and loss of income. To enable a just transition,2 programmes need to be carefully designed and adjusted to local contexts. Countries are seeking solutions to these challenges in different ways and have started initiatives to assist regions with structural changes. In Germany, the Commission on Growth, Structural Change and Employment suggested steps to address the impact of the energy transition on mining communities (BMWi, 2019[191]). Further, the EC Coal Regions in Transition Platform is preparing a roadmap for the phase-out of coal, with a special focus on strengthening growth and employment for the people living and working in affected regions (EC, 2019[192]). A promising example is the Latrobe Valley in the state of Victoria, Australia. The region will have to close all 4 coal power stations over the next 27 years. To secure the economic, social and environmental future of the region the Victorian Government has established an authority to co‑ordinate the transition and has endowed it with roughly AUD 300 million to promote economic diversification, growth and resilience through a range of projects (Cain, 2019[193]).

Rural regions face specific challenges and opportunities in the context of decarbonising transport

Globally, transport accounts for one-quarter of total CO₂ emissions, largely driven by freight and rural passenger transport. Over the past 50 years, CO₂ emissions from the transport sector have grown faster than any other sector (OECD, 2019[95]). Furthermore, worldwide transport CO₂ emissions are projected to grow by 60% by 2050 (ITF, 2019[88]). While eliminating transport emissions is crucial for rural and urban areas alike, a strong policy focus on urban passenger transport shows results with a projected decrease of 19% by 2050. Freight and non-urban passenger transport, on the other hand, are projected to increase in demand – 225% by 2050 (ITF, 2019[88]). This demonstrates the significant policy action needed to decarbonise rural transportation in order to reach the Paris Agreement.

Overall, policies can reduce emissions from the transport sector through multiple channels:

• Reducing the emissions intensity per passenger kilometre travelled, by encouraging a shift from private vehicles to public transport, biking or walking and by incentivising carpooling or car sharing.

• Reducing the emissions intensity per vehicle kilometre travelled, through measures that encourage shifts from fossil fuel-powered cars to more energy-efficient vehicles such as EVs and increasing and investing in opportunities for less carbon-intensive energy generation.

• Reducing the total number of kilometres travelled, by encouraging fewer trips, for instance by making increased transportation cost and by incentivising teleworking (OECD, 2020[190]).

Policy solutions for decarbonising transport need to account for spatial configurations. Predominantly rural and intermediate regions are especially car-dependent. Measures to punish high CO₂ emissions, for instance by increasing tax on fuel to disincentive car use, disproportionally affects rural dwellers. Redistributive policy from urban to rural areas or differential taxation of car usage, depending on whether it takes place in rural or urban areas, are solutions to this problem (OECD, forthcoming[194]). In addition, in places close to cities, improved bicycle infrastructure and service offers as well as improvement in public transport (express lanes and optimisation of train lines) are important to offer alternatives to car use (The Shift Project, 2017[195]). Also, electric bicycles can increase the reach of cycling substantially. In remote places, improving the safety of roads for soft transport can also increase walking and cycling in rural areas, with important health benefits. In addition, solutions need to focus on zero-carbon engines and technological innovations to reduce emissions. Low-income households should not be left behind (Kamruzzaman, Hine and Yigitcanlar, 2015[196]). This section will present key policy consideration for decarbonising transport in rural regions.

Figure 4.11. Average number of private vehicles per 1 000 inhabitants, by type of region

Note: Latest available data year from 2010 onwards. Definitions of private vehicles differ across countries. For example, the EU defines passenger vehicles as vehicles “designed...for the carriage of passengers and not exceeding eight seats”.3 The US, on the other hand, defines passenger vehicles primarily based on weight.4 Consequently, sports utility vehicle (SUVs) are not classified as passenger vehicles, although they are often used this way in the US. Hence, if they were to be included, US rates would be higher.

Source: OECD Statistics.

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Multimodal transport has climate benefits and systems foster rural-urban linkages but require integrated planning. Multimodal systems enable residents to move around by using a combination of walking, cycling and public transportation. While these are already widely applied in cities, there are also opportunities for rural places and small towns, especially those in proximity to urban areas (Porru et al., 2020[197]). Multimodal transport infrastructure that integrates rural regions into the local labour market of cities located in their proximity, creates a greater variety in job opportunities and raises the living standards of inhabitants. In addition to these benefits, multimodal transportation also provides more inclusive mobility by increasing affordability and adding options for non-divers (i.e. elderly, people with disabilities and youth) (OECD, 2020[198]). Well-designed multimodal transport requires integrating different modes of transportation and facilitating the switch between transport modes. Unique ticketing systems and other accommodations for travellers, such as public transport vehicles with space for bikes or scooters, can favour these systems. Finally, intermodal trips can be encouraged by making walking and cycling more amenable transport mode choices for short journeys, for instance through policies making walking and cycling infrastructure safer and more comfortable to use (OECD, forthcoming[194]). Overall, comprehensive planning strategies resulting from the objective to foster accessibility within regions (i.e. maximising the access to opportunities such as workplaces, services, entertainment, education, goods and culture) can be used as a policy design tool to pursue economic, social and environmental goals simultaneously (OECD, forthcoming[194]).

Figure 4.12. Average number of private vehicles per 1 000 inhabitants, by type of region in each country

Note: Latest available data year from 2010 onwards. Definitions of private vehicles differ across countries. For example, the EU defines passenger vehicles as vehicles “designed...for the carriage of passengers and not exceeding eight seats”.5 The US, on the other hand, defines passenger vehicles primarily based on weight.6 Consequently, SUVs are not classified as passenger vehicles, although they are often used this way in the US. Hence, if they were to be included, US rates would be higher.

Source: OECD Statistics.

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On-demand transport and pooling solutions are promising solutions for lower-density areas. In some cases, classic modes of public transportation become uneconomical as regions undergo demographic change (de Jong et al., 2011[199]). On-demand pooling can address this problem while securing important public service for the local population. In Spain, on-demand pooling transport services have been introduced in the municipalities of Sant Cugat del Vallès and Vallirana. The services replace former regular services introducing a technological pooling platform with positive results in terms of occupancy and cost. In Sant Cugat, the average occupancy of vehicles increased from 6 passengers per trip to 16 with the new service and the flexible service’s operational costs are 15% less than the former conventional line (OECD, 2020[190]).

The electrification of personal mobility constitutes one of the most effective ways to reduce CO₂ emissions from passenger transport and offer significant co-benefits in rural regions if renewable energy is used to power them and negative effects of sourcing rare earth metals are mitigated. While the lifetime costs of EV is currently higher than that of cars with internal combustion engines (gasoline or diesel), a break-even point might be reached as soon as 2023 (OECD, 2020[19]). For many rural residents, the break-even point may therefore well be reached before 2023: because they drive more, they can benefit more from lower operating cost of EVs – the cost for EVs can be less than half as much as fuel-powered cars due to fuel savings and less maintenance (McMahon, 2018[200]). While important, price incentives are not sufficient from a rural development perspective. The use of EVs in rural regions offers important opportunities for rural economies in the context of the needed large-scale deployment of renewables. Sector coupling links renewable energy production with local consumption closing resource loops. Smart charging of vehicles, for instance, could be used to absorb electricity produced at almost no cost at moments of abundant renewable supply and vehicles can provide electricity back to the grid in times of peak demand. Rural development policymakers should therefore support regulatory policy reforms which foster the integration of renewables in the electricity market, including high-resolution pricing over time and space, and flexible demand response, facilitating sector coupling. Further, the sourcing of rare earth metals such as lithium, graphite and cobalt for the production of EV has reportedly significant negative externalities on local rural communities and ecosystems (Ballinger et al., 2019[201]). Promoting EVs in one rural region should not come at the expense of another. Hence, it is important for policymakers to assure that the extraction of natural resources generates improved and sustainable well-being for producing regions and those local communities receive adequate benefits.

Uptake of EVs requires investments in charging infrastructure, especially in rural regions. While, new electric cars typically offer ranges of 400 km or higher, lack of charging stations can pose barriers to rapid EV adoption. Most governments continue to provide financial incentives to increase demand rather than investing in charging infrastructure (ITF, 2019[88]). In rural regions, the dispersed nature of residences and infrastructure requires recharge points to be placed strategically, for instance at supermarkets and schools. Governments also need to consider increasing demand for total electricity with increasing market penetration of EVs, which calls for more co-ordinated charging and local reinforcements of grids. Investing in the construction and upgrading of transport infrastructure is also important to improve the connectivity between rural and urban areas and boost local economies (OECD, forthcoming[202]). A leading example of investments in EV infrastructure can be found in Southern Alberta, Canada. In the province, civil society groups, local businesses and local and regional governments collectively invest in EV charging infrastructure to facilitate emission reductions, economic development and tourism. The project has installed 22 charging stations, powered using renewable energy sourced from the region (Peaks To Prairies, 2019[203]).

Green hydrogen production can offer rural regions specialised in renewable energy an opportunity for economic development. Many rural economies require heavy-duty transport including trucks, maritime and aviation to export their tradeable goods. At the same time, projections see road freight activity at least doubling by 2050, offsetting efficiency gains and increasing road freight CO₂ emissions (ITF, 2018[204]). Green hydrogen can be used to produce alternative fuels for heavy-duty transport and decarbonise industrial processes at the same time. The first hydrogen-fuelled trucks have recently been put onto the road and governments start to invest strategically in this technology. Portugal is planning a new solar-powered hydrogen plant, which will produce hydrogen by electrolysis by 2023. The Netherlands unveiled a hydrogen strategy in late March, outlining plans for 500 megawatts (MW) of green electrolyser capacity by 2025 (EBRD, 2020[205]). While prices are not competitive yet, increased demand could reduce the cost. The fact that renewable energy is required for zero-carbon hydrogen production makes rural regions a key player in the development of this technology and would allow them to sell it to regions with limited potential or higher costs of renewable power generation.

Reducing travel demand in rural places can save emissions and has the potential to (re)vitalise local business and services. Business and service availability play a role in reducing transport-related CO₂ emissions in rural regions. The decline in local service provision in areas outside cities often results in the need for longer trips. Rural people also prefer to use local services. Temporarily subsidising local services can result in long-term financial viability, while at the same time reducing emissions (Kamruzzaman, Hine and Yigitcanlar, 2015[196]). Further, innovations such as the collective distribution of e-commerce purchases to reduce individual travel can be used to support local businesses, as they function as order and receipt points (The Shift Project, 2017[195]). Other possible interventions involve aspects such as increasing scope for telework. These can reduce travel and induce local interaction, for instance, if telework is located in rural co-working places. Germany’s first rural co-working space is situated in Bad Belzig, Brandenburg. The Community and Concentrated Work in Nature (Coconat) is a temporary work station in a remodelled estate. Since 2017, it has become a meeting place for digital nomads, urban working tourist and regional dwellers working for the digital and knowledge industry (Coconat, 2020[206]).

Leaving no region behind

Regions facing job losses in the net-zero-emission transition need to attract new economic activity

The analysis in Chapter 3 suggests that in most large TL2 regions, employment in sectors at risk of job loss from the net-zero-emission transition is modest. However, there are significant differences between regions and some of this employment is geographically concentrated even within these regions. The socio-economic characteristics of these regions are diverse. As shown in Chapter 3, some regions with particularly high emissions in industry or power generation have unusually high GDP, though this does not translate into equally high subjective well-being. In some of these cases, high GDP per capita may relate to the economic rents from the extraction and processing of fuels and materials. In others, including coal regions, GDP per capita is below average and poverty and unemployment may already be high. Rural regions can be particularly vulnerable because economic opportunities are scarcer and life satisfaction tends to be lower (Box 4.16). Especially for these regions, digitalisation can help overcome some traditional rural challenges, such as low density and shrinking local markets. However, rural communities often face more of a lack of digital connectivity than urban areas, reflecting a need to strengthen technological and civil infrastructure, quality education and skills training (OECD, 2020[19]). For all regions, it is important to find ways to benefit from the transition to a net-zero-emission economy, attracting new activity that is consistent with this transition. Doing so in a way that harnesses skills and assets rooted in these regions, including those inherited from industries that are set to disappear in the transition, can help avoid protracted regional decade-long decline, often characterised by self-reinforcing emigration of businesses and workers.

Box 4.16. Economic opportunities tend to be weaker in rural regions

Economic opportunities follow a clear urban gradient

OECD analysis in Cities in the World (OECD/EC, 2020[45]) based on a consistent definition of human settlements and data from the Gallup World Poll shows that economic opportunities follow an urban gradient across the world. Some rural regions face difficulties in generating employment and high-income jobs, which helps explain domestic migration to large cities (OECD/EC, 2020[45]). For example, regular employment opportunities are significantly more common in cities than elsewhere.

Local conditions for starting a business offer one pathway for economic mobility and renewing economic activity (OECD/EC, 2020[45]). On average, they tend to be slightly better in more densely populated areas. In some countries, entrepreneurship-friendly local conditions differ significantly across space. Rural areas in countries in Central Asia and Eastern Europe especially struggle to provide adequate conditions for business creations with the share of rural residents believing that their area is a good place to start a business falling 20-30 percentage points below that of city residents in Bulgaria, Lithuania, Poland or Russia.

Differences in subjective well-being across the degree of urbanisation

Economists and policymakers are increasingly going beyond GDP by using a multitude of well-being indicators. Self-reported life satisfaction can encompass many aspects of quality of life. As highlighted in Cities in the World (OECD/EC, 2020[45]), in general, life satisfaction appears to be somewhat higher in densely populated areas for a sample of 111 countries across the world.1 Life satisfaction in towns and semi-dense areas is lower than in cities but higher than in rural areas. For a sample of 13 OECD countries, the difference between cities (28.7% satisfied with their lives) and rural areas (24.4% satisfied with their lives) amounts to more than 4 percentage points.2

Living in a city is not only associated with higher life satisfaction but also with more positive expectations. While residents are generally more optimistic about their future than about their present, residents in cities tend to be the most optimistic (Figure 4.13). This difference is the biggest in the poorest countries.

Figure 4.13. Difference between future and current life satisfaction

Note: The figure presents the percentage point difference between current and future life satisfaction by country income class across the degree of urbanisation.

Source: OECD/EC (2020[45]), Cities in the World: A New Perspective on Urbanisation, https://dx.doi.org/10.1787/d0efcbda-en.

1. Data come from Gallup World Poll and consist of countries from all world regions and all country income groups. In total, 13% are high-income countries, 65% middle-income countries (32% upper and 33% lower middle income) and 22% low-income countries.

2. All reported averages for the Gallup data by income group or world region are unweighted country averages.

Even so, industrial renewal will raise the demand for some occupations while reducing it for others (OECD/Cedefop, 2014[207]). The transition to net-zero emissions will also change the way tasks are done within occupations (Cedefop, 2012[208]). New “green” skills can help local economies secure employment for workers losing out from the transition. Local policymakers are at the forefront of this change in the world of work due to their responsibilities in active labour market policies, training and a number of public services (Martinez-Fernandez, Hinojosa and Miranda, 2010[209]).

Place-based innovation policies need to support and direct structural change

As shown in Regions in Industrial Transition (OECD, 2019[210]), industrial innovation policies based on the concept of smart specialisation aim to boost economic activity through economic diversification and by connecting new activities to established local businesses and worker skills. This avoids employment loss and the emigration of businesses, firms and workers, which tend to characterise persistent regional decline. Establishing clear priorities in the regional development policy agenda according to this principle facilitates the allocation of available resources in the face of industrial transitions (McCann and Ortega-Argilés, 2015[211]). The approach helps avoid spreading public support thinly across a wide spectrum of activities or to copy experiences that may have been successful elsewhere with no real regard for regional context. Both have resulted in proliferating small-scale initiatives incapable of exploiting the full benefits of the positive network externalities characterising industrial clusters that help establish an industrial fabric that will prevent regional decline (Foray, 2017[212]).

Unlike previous shocks to the industrial fabric of regions, the net-zero-emission transition allows identifying economic activities that are likely to suffer employment losses or substantial technological or business model transformations well in advance, making this approach particularly useful to prepare regional transitions. To be able to anticipate the transition, a clear timetable for phasing out industrial activities that are inconsistent with the transition or require a major transformation is useful. Such a timetable can remove uncertainty, avoid risks of stranded assets and can be based on scenario analysis. For example, countries in the Powering Past Coal Alliance, committed to exiting coal use in electricity generation by 2030, argue that this was a cost-effective date for high-income countries to pursue efforts to limit global warming to 1.5°C.

Smart specialisation has two main characteristics:

• First, a smart specialisation strategy (S3) consists of identifying the economic activities that have potential, based on established local resources, including worker skills, infrastructure, local technology and other comparative advantages, and prioritise the development of these sectors through innovative activities or technologies. Selection criteria can include a critical mass of companies in a specialisation, innovation capacity, clustering and entrepreneurial dynamics. The consistency of smart specialisation with the net-zero emission transition is critical (Asheim, Grillitsch and Trippl, 2017[213]).

• Second, the choice of the activities that will receive government support should be based on the evidence collected through the interaction of key stakeholders (central, regional and local governments, businesses and higher education institutions). The aim is to explore and assess new activities and their possible development trajectories as well as their policy needs. The search for and discovery of new activities is known as the entrepreneurial discovery process (Foray, David and Hall, 2009[214]).

Successful industrial transformation needs to rest on the participation of local actors and an evidence-based approach

Engaging stakeholders to identify investment priorities for smart specialisation requires an inclusive and interactive bottom-up process in which participants from different environments uncover and produce information about potential new activities. Most regions are endowed with important innovation actors, such as higher education institutions, innovative businesses, the regional and local governments and civil society. Their knowledge is however often fragmented over sites and organisations. Smart specialisation processes, therefore, introduce a range of tools to foster collaboration, such as working groups, advisory boards, partnerships and public-private committees. Recent approaches argue that stakeholder engagement should be built together with evidence-based analyses, such as studies relating local to global scientific, technological and economic trends (Kroll, 2015[215]).

A key question is whether governments have the right governance mechanisms to build long-lasting broad partnerships with private sector actors. Arguably, the process of smart specialisation has been most successful in the Northern countries, e.g. Sweden, home to high-quality institutions and strong existing innovation networks. Leveraging multi-stakeholder networks to identify future-oriented priority areas can however also work in moderately innovative regions. The Pomorskie region in Poland provides an example of a well-designed entrepreneurial discovery process within an environment that lacks a legacy of strong collaborative ties (Box 4.17).

Box 4.17. Stakeholder engagement for smart specialisation in Pomorskie, Poland

The Pomorskie regional government took a collaborative approach to the development of smart specialisation priorities through the entrepreneurial discovery process. Smart specialisation investment priorities in Pomorskie were identified largely through a bottom-up process entailing the following main steps:

• Step 1: An economic diagnostic of key regional strengths and weaknesses, accompanied by public consultation and the formation of partnerships.

• Step 2: A call for proposals to research and industry stakeholders for joint smart specialisation projects.

• Step 3: An initial assessment of proposals by a selection board composed of national and international experts and a public hearing. The selection took into account global trends, market potential, economic and technological potential, a domestic and international benchmarking, the proposed strategy and action plan, and the potential of the partnership. This led to a narrowing down to six specialisations and partnerships.

• Step 4: Four smart specialisations were selected.

• Step 5: An implementation plan was set up for each specialisation.

• Step 6: Partnership agreements with priority access to EU funding were established for each specialisation.

Source: OECD (2019[216]), “Local entrepreneurship ecosystems and emerging industries: Case study of Pomorskie, Poland”, https://doi.org/10.1787/8fd63992-en (accessed on 30 November 2020).

The OECD report on Broad-Based Innovation Policy for all Regions (OECD, 2020[217]) has shown that regional development agencies can play an important role in fostering innovation. In Andalusia, Spain, for example, the regional Innovation and Development Agency (IDEA) has been instrumental in strengthening the capacities of the aerospace industry. It provided a platform for universities and companies to realise that researchers could develop prototypes with local SMEs. With the Centre for Technological Innovation and Advanced Aeronautical and Naval Manufacturing (CFA), the region then provided a place and infrastructure where collaboration can take place (OECD, 2020[217]).

Building consensus around future specialisations can help target policy instruments better to serve transition-consistent structural transformation. These policy instruments include support for firms to become more innovative and to encourage knowledge exchange and collaboration. University-industry partnerships can be supported through collaborative research tools such as grants and innovation vouchers. The OECD evaluation of the smart specialisation academy in Värmland has indeed shown that the co-operation between the regional government and the local university – in this case with a formal agreement – has been important to identify future activities that build on regional strengths and research and development capacities.

Regulatory or fiscal incentives strengthen the engagement of local actors for regional innovation and collaboration. Examples are direct funding to businesses for R&D or R&D tax credits, which are mostly provided at the national level. At the regional level, R&D contract opportunities can help develop innovative products or organisational practices that can increase productivity. Universities can also receive funding from the government to support spin-offs and academic entrepreneurship, one good way to spur entrepreneurial dynamism in the region. Open research laboratories or student hiring are additional instruments to support exchange between industry and university. Important preconditions to make collaboration instruments work are adequate and sustainable funding, clear rules on property rights and confidentiality issues, and sufficient trust among actors. An example of a university taking a leadership role in local industrial transitions comes from Northeast Ohio in the US (Box 4.18).

Regions that transform their industries to become consistent with the net-zero GHG emissions need to take into account international contexts when activities are subject to international competition. For example, zero-emission consistent steel production faces higher costs than conventional steel production. Carbon border adjustments are one option (OECD, 2020[218]); integrating trade agreements could include environmental criteria while minimising compliance costs (Bellmann and van der Ven, 2020[219]). Else, government incentives to decarbonise these industries may need to be designed to keep them competitive (DIW, 2018[220]). Another approach may be for regions hosting similar activities to work together across international borders, for example in maritime port regions.

Box 4.18. How higher education institutions play a role in industrial transition

In Akron, Ohio, in the US, a university mobilised its industrial heritage to build an advanced research centre

In the 1970s and 1980s, large tire companies based in Akron struggled with international competition, leading to closures and layoffs. Due to the large share of jobs represented by the rubber and tire manufacturers, plant closures had a severe effect on the city’s and the region’s well-being. Although the government, businesses and citizens also played important roles, the University of Akron played a key role in attracting new employment by further developing its polymer and material science labs. These labs were still intact from Akron’s industrial period.

The university began expanding the number of students and making partnerships with innovative industries and the Ohio government. The latter invested an initial USD 2.1 billion into funding technological companies’ partnerships with research institutions. One major outlet of university research has been in technologies relevant for the green transition yet drawing on established skills, such as pollution measurement instruments, clean energy sensors and fuel-cell polymer development.

Source: OECD (2018[221]), Job Creation and Local Economic Development 2018: Preparing for the Future of Work, https://dx.doi.org/10.1787/9789264305342-en; Ledebur, L. and J. Taylor (2008[222]), “A restoring prosperity case study: Akron, Ohio”, https://www.brookings.edu/wp-content/uploads/2016/06/200809_Akron.pdf; Van Agtmael, A. and F. Bakker (2016[223]), “How cities can use local colleges to revive themselves”, https://www.theatlantic.com/business/archive/2016/03/cities-colleges-akron-polymers/472881/.

As outlined in the OECD report Regions in Industrial Transition (2019[210]), policymakers can support digital take-up by people, firms and local governments. They can help firms and their workers acquire digital competencies and support business innovation networks. Policy instruments can include targeted loans and vouchers to small firms. Training support can include a mix of support activities, events, webinars, counselling and training programmes to foster digital competencies. These programmes often have a specific focus on SMEs, as they frequently lag in the adoption of digital technologies.

Prompt remediation and restoration of contaminated sites, especially when mining activities are abandoned, support ecological redevelopment as well as economic development on brownfield sites with access to infrastructure and increase the local economic attractiveness for new business development (Sartor, 2018[224]). Mining companies should establish appropriate financial mechanisms for the remediation of past damage to land and water resources. If individual companies’ resources are insufficient, this should be financed by revenues from a charge on the mining industry as a whole (OECD, 2013[225]).

Skills mapping can help identify skill needs for industrial transitions

Skills anticipation and assessment help identify skill needs in future investment priority areas in regions in industrial transition and in accordance with projected labour market trends by sector, local area and/or occupation. Indeed, in regions facing industrial transition, it is often uncertain how the skills of former “brown” workers are transferable to emerging jobs, particularly those in low-carbon sectors (OECD, 2019[210]). Skill mapping does not always require new institutions, as many OECD countries already have sectoral skills councils, observatories and skills advisory bodies that could play the role (OECD/Cedefop, 2014[207]). The region of Wallonia, Belgium, has entrusted detailed skills mapping exercises to the region’s public employment service (Box 4.19).

Box 4.19. Industry and skills mapping by the Public Employment Service in Wallonia

Wallonia’s Public Employment Service is undertaking a prospective analysis – the Le Forem study – to identify local skill needs in strategic business areas. The objective of the exercise is to develop appropriate training offers for Wallonia’s strategic and future-oriented economic activities and to communicate the identified skill needs to relevant audiences. The analysis first classifies future occupations and associated core skills in eight sectors. It then identifies a set of related skills that could subsequently arise from developing the sectors. The approach follows a four-step qualitative process:

1. Analytical staff from the Public Employment Service produce reports to identify the sectors in which economic activities of strategic future importance take place.

2. A panel of experts consisting of directors of local skills centres, firm managers, Le Forem account managers and representatives of sector associations answers to a set of questions that are then included in the sector reports. The objective is to detect activity/sectoral trends in the chosen eight sectors and their effects on occupations.

3. Based on the received inputs, the skills required for each occupation are identified. To this end, expert workshops, organised by occupation, identify key evolution factors and the potential evolution scenarios. They then select the most likely (or desired) scenario, also identifying the associated skill needs.

4. The local training department receives the results of the analysis in order to start designing appropriate training programmes. The results are also published and sent to the education authorities.

The sectors and associated industries value the programme since they themselves do not have the capacity or resources to undertake such an extensive study.

Source: OECD (2019[210]), Regions in Industrial Transition: Policies for People and Places, https://dx.doi.org/10.1787/c76ec2a1-en.

On-the-job training helps laid-off workers to settle in new employment structures

Reflecting strategically on existing skills and making use of them to transform local industrial specialisation so it becomes consistent with the net-zero-emission transition can help avoid depreciation of skills and make training in green skills correspond with local job creation (OECD, 2019[210]). The OECD Programme on Local Economic and Employment Development (LEED) has highlighted that green skills can take the form of industry-specific technical skills as well as transversal skills. Transversal skills include technological knowledge (e.g. energy efficiency), innovation management as well as “transversal generic skills” to support worker transitions (OECD/Cedefop, 2014[207]; OECD, 2017[226]). Green skills will be required across occupations and economic sectors, and play an important role in local industrial transitions (OECD, 2017[226]). “Greening” of skills is likely to require upskilling, as low-carbon sectors are estimated to require more skills than carbon-intensive industries. It can help accelerate transitions, for example in waste management systems. It has been highlighted that transferring workers to new jobs and providing on-the-job training at a new place of employment should be given priority over external and/or additional retraining programmes to avoid large-scale training programmes being set up without a connection to job prospects. Such on-the-job training may therefore be a good candidate to receive government funding and facilitate the transition (IDDRI, 2017[227]).

Policies to support redundant workers may include entrepreneurial training. However, it should be noted that only a limited share (2%-3%) of displaced workers typically return to work by starting a business (OECD/EC, 2017[228]). Although findings vary, overall, start-ups supported in this way have relatively high survival rates, though they require multifaceted support, including coaching (Caliendo, 2016[229]).

Governments can tailor local employment services to the needs of regions in industrial transition

Several regions across the OECD have supported workers in transitioning to quality employment in other more sustainable sectors or production methods. In Flanders, Belgium, the Public Employment Service has given discretion to local employment offices to create partnerships with local labour market actors as highlighted in the OECD report Boosting Skills for Greener Jobs in Flanders, Belgium (2017[226]). The Flanders Public Employment Service has developed a green transition plan that has integrated sustainability principles and green skills in training programmes to tackle some of the region’s sustainability risks (Box 4.20). Paired together, local delivery flexibility and green Active Labour Market Policy (ALMP) strategies can help vulnerable workers from “brown” industries benefit from locally relevant ALMP packages.

Box 4.20. Employment services in Flanders, Belgium, gear programmes to green transitions

VDAB is introducing sustainability principles across ALMPs and giving local offices policy discretion

VDAB, the regional public employment service of Flanders, has developed an array of ALMPs focused on the green transition. Training modules have started integrating relevant skills. For instance, in the construction sector, programmes have begun integrating sustainable building and energy efficiency methods. VDAB has also developed a building centre to co‑ordinate with actors in the sector and develop training curricula.

VDAB has also given more flexibility to its regional employment offices to deliver services. District offices can forge their own partnerships with local labour market actors and develop their own strategies based on local realities. The OECD has highlighted that multiple sectors in the region, such as chemical product manufacturing, basic metal manufacturing and energy production may face pressure. In 2010, these sectors represented 16.7% of employment in Flanders and upwards of 18% in West Flanders. Local offices can anticipate these risks and develop strategies with local companies and unions to ensure processes and workers adopt more sustainable methods. These partnerships complement VDAB’s large-scale job matching programme and Flanders-wide programmes, as well as VDAB’s links with Belgium’s federal employment service.

Source: OECD (2017[226]), Boosting Skills for Greener Jobs in Flanders, Belgium, https://dx.doi.org/10.1787/9789264265264-en; OECD (2018[221]), Job Creation and Local Economic Development 2018: Preparing for the Future of Work, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264305342-en.

Engaging employers – and SMEs in particular – is essential for training success and lifelong learning in the workplace

Engaging employers in skills development programmes can help align skills programmes with industry needs. Subnational leadership can play a role in reaching out to employers to promote awareness and participation in training (OECD/ILO, 2017[230]). Regions undergoing sharp employment transitions can liaise with firms to understand their skill requirements. For example, OECD firm interviews conducted in Pomorskie, Poland, found the training system may not dispense the green economy skills needed in the local labour market (OECD, 2017[231]). Training systems may benefit from greater knowledge of local skill needs, particularly in emerging green industries or occupations, so that they can be integrated into their learning programmes.

The OECD has highlighted that governments should encourage firms to support their workforce through lifelong learning (OECD, 2018[221]). This can take the form of workplace or offsite training and education, ensuring workers both grow professionally and absorb skills needed to green production processes (OECD/Cedefop, 2014[207]). Production methods will need to become more energy and resource-efficient, calling for upskilling. Development training subsidies, training vouchers and tax incentives can encourage upskilling.

Given the strong presence of small firms in regions in industrial transition, it is important to involve SMEs in skills planning. This can take the form of encouraging their participation in regional employer councils or co-designing and co-delivering training initiatives with vocational colleges, universities and large firms. The OECD has highlighted the role of integrating SMEs into such networks to foster trust-based relationships among firms, knowledge sharing and generate opportunities to pool training costs and resources.

Compensation policies

As regional industries face sustainability risks, some workers will be able to retrain and find gainful employment, while others will be unable to find work with equal pay and conditions. Some workers will require prolonged economic support. Specific economic compensation for laid-off workers supports the well-being of communities during transitions. In economically undiversified regions, tax revenues and local incomes can be heavily reliant on high emission companies and their employees (OECD, 2019[210]). Worker compensation policies specific to industrial transitions support workers financially in addition to unemployment benefits and compensation rights established in national labour law. Compensation can range from temporary unemployment schemes to early retirement.

Extensive case studies in France, Germany, Italy, Slovenia and Sweden found that policy co‑ordination, stakeholder involvement, rapid and appropriate taking of action, comprehensive communication to workers and adequate financing are key (OECD, 2020[190]). Many workers were largely hesitant to travel for work or relocate, highlighting the relevance of local labour market solutions. Younger or higher skill workers are more willing to move for work and find employment more easily. Companies, unions and governments need to take into account the preferences and situations of workers with widely different backgrounds, as well as local labour market realities.

Summing up: Policy conclusions from Chapter 4

While climate-related objectives and strategies are largely international and national, subnational governments need to take the action that is appropriate for local characteristics.

Multi-level climate governance and finance need to identify goals for government levels and regions to reach national 2050 net-zero emission targets. Subnational governments are responsible for most of public spending and investment in sectors with a direct impact on climate change and other environmental issues.

• Transfers between subnational governments need to be linked to climate policy goals, so subnational governments have the incentives and resources to make all their policy actions consistent with reaching net-zero emissions.

• Revenue and spending systems should be overhauled, including subnational green budgeting and GPP and by eliminating environmentally harmful subsidies. For example, property taxes on land and buildings and land value capture mechanisms can be designed to avoid urban sprawl and finance infrastructure.

• Borrowing frameworks should make room for investment serving the net-zero emission transition.

Cities account for most energy consumption and emissions. In high-income cities, emissions inherent in the consumption of goods and services are often a multiple of locally generated emissions.

• Effective governance integrates climate policy at three levels:

  • National – National urban policy (NUP) frameworks need to co‑ordinate sectoral policies to make them consistent with net-zero emissions and improve well-being.

  • Metropolitan – metropolitan governance can enable coherent urban planning, housing and transport policies towards the 2050 net-zero GHG emission target, while improving well-being, across municipalities belonging to the same travel-to-work area.

  • Intracity – policies to decarbonise urban planning, transport and housing should be co‑ordinated across municipalities belonging to the same commuting areas.

  • Intercity – networks of cities should be supported to share knowledge across cities.

• Cities hold large potentials for modular technologies to integrate solar rooftop photovoltaic panels, small-scale wind turbines and heat pumps. Regulating energy markets is at the national level but cities can influence uptake.

• Encouraging walking, cycling and public transport to substitute individual car use, in addition to electrifying passenger transport, reduces materials needs and can avoid inequality, as well as deliver broad well-being benefits. Location-based connectivity and accessibility indicators can guide cost-effective improvements.

• The spread of low-density neighbourhoods should be avoided to reduce network costs.

• Provided it replaces individual car use, digital-based on-demand ride-sharing lowers CO₂ emissions, energy consumption and congestion while saving on costs and boosting innovation.

• The adoption of the local circular economy framework can help accelerate reaching the net-zero transition at a lower cost, for example in building materials, by eliminating food waste and by encouraging a sharing economy.

• Cities should address specific adaptation challenges with vulnerability risk assessments (and local resilience action plans).

• Road use charges need to replace fuel taxes as fossil fuels are phased out and reflect mobility costs, such as congestion.

• All new buildings must be consistent with net-zero emissions in energy use and all existing buildings refurbished to such standards within 25 years.

Because of their natural endowments, rural regions are pivotal in the transition to a net-zero-emission economy and in building resilience to climate change.

• Decisions on land use are still largely defined by short-term, sector-specific production objectives. Integrating social, economic and ecological impacts is key.

• Ecosystem services in rural regions are key to the foundations of well-being in urban and rural regions alike. Understanding and rewarding ecosystem benefits, including for GHG emission reductions, for example through afforestation that is respectful of local biodiversity, offers potential for rural development.

• Rural regions need to take an active role in the energy transition to benefit from renewables potentials. Through rural community participation in benefits and decision-making, trust can be built to support the needed expansion of renewables.

• Rural regions may benefit the most from the low operating costs of EVs but need to pay particular attention to charging infrastructure and affordable vehicles. On-demand shared transport and pooling solutions are also promising solutions.

Smart specialisation can help leave no region behind as high-carbon activity is phased out. It aims at connecting new activities to established local businesses, worker skills and assets, involved in activities that need to be phased out and beyond.

• Regions facing job losses in the net-zero-emission transition need to attract new economic activity that is consistent with this transition. Building consensus around future specialisations through early local stakeholder involvement, such as from higher education, innovative businesses, regional and local governments, is key.

• Skills mapping can help identify future occupations and associated skill needs for industrial transitions. Engaging local employers in skill development programmes can help align them with industry needs for the net-zero-emission transition.

• Ageing and less-educated populations, as well as less diversified economic activity, put some rural regions at particular risk. Innovative processes around agriculture, reinforcing regional urban-rural connections, for example in food markets, renewable energies and new modes of transportation, can be attractive options to diversify.

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Notes

← 1.  The Paris Agreement (Article 4, paragraph 2) requires each party to prepare, communicate and maintain the successive nationally determined contributions (NDCs) that it intends to achieve. Parties shall pursue domestic mitigation measures, with the aim of achieving the objectives of such contributions.

← 2.  In 2015, the International Labour Organization (ILO) adopted a set of guidelines based on inputs from governments, businesses and trade unions to ensure “A just transition”. These guidelines highlight the need for policy coherence between actions taken on climate change and economic development, industrial, labour market and enterprise policies. They emphasise the need to pay special attention to regions and workers that could be negatively affected. The guidelines recommend action to anticipate adverse effects of the transition, implement international labour standards and actively promote social dialogue (ILO, 2015[232]).

← 3.  See https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32009R0443.

← 4.  See https://www.epa.gov/emission-standards-reference-guide/epa-emission-standards-light-duty-vehicles-and-trucks-and.

← 5.  See https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32009R0443.

← 6.  See https://www.epa.gov/emission-standards-reference-guide/epa-emission-standards-light-duty-vehicles-and-trucks-and.