Financing the net-zero transition of Mission Cities: governance barriers and enablers to the use of innovative financing instruments

As CO 2 emissions continue to rise and the impacts of climate change reach unprecedented levels, cities must accelerate the net-zero transition through rapid and effective action. The EU Mission for Climate-Neutral and Smart Cities has made strong commitments to lead this transition, but securing the necessary resources increasingly requires leveraging innovative financing instruments (IFIs). This paper provides an exploratory empirical assessment of governance barriers and enabling conditions shaping innovative finance in Mission Cities, drawing on qualitative analysis of cities’ Climate Investment Plans and in-depth interviews with six Mission Cities (Barcelona, Münster, Parma, Pécs, The Hague, and Thessaloniki). The results reveal a high level of interest but limited uptake of IFIs, with many instruments remaining in conceptual stages. We identify six mutually reinforcing categories of barriers—fiscal and financial; legal and regulatory; institutional and capacity; behavioral and cultural; political and macroeconomic; and technological and market—through which instrument choices become constrained and cities remain reliant on grants and concessional loans. At the same time, progress is enabled by motivated municipal leadership, EU-funded technical assistance and peer learning, and prior “learning-by-doing” experience with specific instruments. Building on these findings, we propose governance-oriented recommendations across four areas to help cities move from plans to implementation: strengthening institutional and financial capacity, improving public engagement and acceptance, reforming national rules that constrain local fiscal tools and borrowing, and restructuring EU funding programmes to reduce administrative burden while deliberately building more effective, innovative, and blended urban climate finance.