Case studies: innovative finance for air quality

Investing in clean air will mitigate climate change, reduce global health burdens and boost green growth at the same time. The World Bank’s new president, Ajay Banga, recently made access to clean air part of the organisation’s remit, and acknowledged the importance of clean air in delivering development goals. Yet air quality projects continue to be chronically underfunded by donor governments, agencies and multilateral development banks.

There are a range of financial instruments available to funders with the potential to incentivise and catalyse more funding towards air quality and climate projects. Here are five examples of innovative forms of financing by multilateral development banks from our latest report on The State of Global Air Quality Funding 2023. 

1. Policy-based lending

Mongolia’s capital, Ulaanbaatar, is one of the most polluted cities in the world. In 2022, the average PM2.5 levels 11 eleven times higher than the daily WHO recommended limits. But in in 2018, the average particulate matter pollution levels were almost 40 times higher than the daily WHO limits. Outdoor air quality improved significantly in recent years thanks to the government’s National Program for Reducing Air and Environmental Pollution.

Progress was also made possible through adequate financing. The Asian Development Bank (ADB) supported the Mongolian government through a $290.75 million Policy-Based Loan (PBL) for the implementation of the Ulaanbaatar Air Quality Improvement Program. Policy-based lending is usually made available by multilateral development banks to support the national implementation of policy and institutional reform programmes. In this case, funding was specifically linked with air pollution reduction measures including air quality monitoring, communication and awareness, improvements to clean heating supply and operationalizing a green financing mechanism.

By placing air quality at the core of the local agenda, the Mongolian government was able to attract other funding. For example, the World Bank deployed an additional $12 million in 2019, after a first $27 million loan in 2012 to support the Ulaanbaatar Clean Air Project, and is financing other outdoor air quality projects in Asia.  Moreover, ADB launched the Asia Clean Blue Skies Program (ACBSP) to scale up investments in outdoor air quality improvement projects in Asia and the Pacific.

The Ulaanbaatar Air Quality Improvement Program is a successful case where the combination of strong governmental commitment and funding from international development finance agencies led to considerable improvements in air quality to boost public health and living standards. Other international development funders should join the movement to meet both air quality and climate objectives.

2. Credit guarantee funds

Rapid economic development and population growth have severely degraded Bangladesh’s environment and ecosystems. In 2017-2018, the main sources of air pollution in the capital, Dhaka, were industry (largely brick kilns), construction and vehicles. The World Bank also estimated that, in 2015, air and water pollution together cost $6.52 billion in urban areas. Yet only $2.4 billion of air quality finance was committed to Bangladesh in from 2015 to 2021.

In response, the Bangladesh Environmental Sustainability and Transformation (BEST) project, supported by the World Bank, has focused on strengthening environmental management capacity and increasing private sector participation in green investments. The latter component involved exploring innovative green financing mechanisms and public-private partnerships to mobilise private finance. 

BEST includes a specific air pollution control segment, built on a $170 million Green Credit Guarantee Fund (CGF), financed by the World Bank, AFD and the private sector (approximately 70%). The CGF supports investments in pollution reduction, focusing on the brick kiln sector, municipal waste management and rooftop solar systems. The project is expected to reduce the health risks associated with outdoor air pollution for low-income populations and women.

The innovative financing aspect of the CGF is its provision of credit guarantees to incentivise private actors to finance investments in direct and indirect air pollution control. By guaranteeing projects, international development funders can take on the risks inherent to green projects which often deter private actors from investing.

If there is no default, the international development funder does not actually lose money and can reallocate that portion of capital for other projects or purposes. In short, credit guarantees are an innovative instrument for international development funders to catalyse private finance for air pollution control projects. They have been successfully used in other green sectors and offer high potential for much-needed private finance to tackle the air quality crisis.

3. Grant-based technical assistance

According to the WHO, Kolkata is the 20th most populated city in the world and ranks as the 2nd most polluted city in India. The main source of pollution in Kolkata is transportation, especially road transport. To put the city on the road to clean transport, the World Bank’s Energy Sector Management Assistance Program (ESMAP) provided a $250,000 grant to assist the West Bengal Transport Corporation (WBTC) in building a strategic roadmap for electric vehicle transition. Based on the results of this study, WBTC chose to procure 80 electric buses for Kolkata.

The upfront cost of an electric bus in Kolkata is over three times that of a diesel bus. However, the operational costs are much lower, with battery-operated electric buses half as expensive as diesel buses. This particular financial profile – steep upfront costs followed by lower operating costs – demands innovative financing models to facilitate the transition to electric buses in Kolkata and other cities facing the same financial barriers. 

The programme demonstrated that replacing just 5% of conventional bus fleets with electric buses could yield an expected reduction in CO2 emissions of 3,094 tons per year, with associated and immediate benefits for air quality and public health in the city.

4. Just Energy Transition Partnerships

South Africa is the largest carbon emitter in Africa (18% of the continent’s greenhouse gas emissions in 2019). A high dependence on coal directly worsens air quality in the country. Despite the strong potential for solar energy development, coal still accounted for 72% of the energy supply in 2020. 

Just Energy Transition Partnerships (JETPs) are a nascent financing cooperation mechanism between international development funders (governments, multilateral development banks and development finance institutions) and heavily coal-dependent emerging economies. JTEPs help achieve a just energy transition, ensuring training and alternative job creation for affected workers. Since these partnerships seek to reduce greenhouse emissions, they offer scope – and finance – for integrating air quality objectives into national transition plans.

The first JETP was announced at COP26 for South Africa. The UK, the US, France, Germany and the EU agreed to deploy $8.5 billion in a first tranche of grants, concessional policy loans, sovereign loans, and investments in the private sector. Other countries set to benefit from JETPs include India, Indonesia, Vietnam and Senegal.

The $8.5 billion financing package for South Africa is only the first step to achieving a just energy transition in the country. In November 2022, at COP27 in Sharm-el-Sheikh, South Africa presented its Just Energy Transition Investment Plan (JET IP), requiring $98 billion in the period 2023-2027. It lays out three priority investment sectors – electricity, new energy vehicles, and green hydrogen (GH2) – and a cross-cutting investment in the development of national skills, to ensure capacity and expertise in relation to clean energy.

There is currently no evidence that South Africa’s JETP has quantified and monetised the public health co-benefits it is likely to generate. Such health benefits would first and foremost affect the communities who live near coal mines and power plants and, therefore, would also implicitly constitute equity benefits. Since donors are interested in achieving health and equity benefits in their development interventions, fully accounting for the co-benefits of JETPs is essential to catalyse more funding. Additionally, effectively communicating the short-term health gains of JETPs can help to generate buy-in amongst political leaders and affected communities.

5. Close cooperation on financing 

The Maldives is a remote island state that is highly vulnerable to climate risk and does not have much land to dispose or treat waste. The Greater Malé capital region and its 32 outer islands suffer from severe environmental pollution, mainly due to the 10-hectare dumpsite on Thilafushi island where 830 tons of solid waste are dumped or burned every day. Established in 1992, this site has no pollution control measures. It harms air quality, affecting the population’s health, and threatening the local economy, specifically fisheries and tourism.  In 2019, the Government of Maldives launched the $151 million Greater Malé Waste-To-Energy Project, aiming at establishing a sustainable regional solid waste management system.

International development funders are closely collaborating to maximise action on climate change and air quality.  Financing was approved in 2020 and largely provided by the Asian Development Bank (ADB), through a $38 million concessional loan and a $35 million grant. Asian Infrastructure Investment Bank (AIIB) co-financed a $40 million loan. Other financial support came from Japan Fund for the Joint Crediting Mechanism (grant of $10 million) and the Government of Maldives ($28 million). An additional $500,000 grant from the ADB supports the reinforcement of the Ministry of Environment and the Environmental Protection Agency that supervises WtE operations.