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Costing the Earth: Funding city climate initiatives with green banks

Green banks are on the rise as cities look for ways to fund essential work to prevent climate change and its effects.


The world needs to spend $2.4 trillion every year until 2035 to mitigate the effects of climate change. This was the stark reality delivered by the United Nations’ Intergovernmental Panel on Climate Change (IPCC) in its Special Report on Global Warming of 1.5°C.


Cities recognise they need to be on the frontline of the action and a growing list have officially declared a climate emergency, including Krakow, London, Liverpool, Paris, New York and Sydney. According to the Climate Emergency Declaration and Mobilisation in Action (Cedamia) website, more than 888 jurisdictions in 18 countries, covering 161 million citizens, have now declared such an emergency.


As the IPCC highlights, though, fighting climate change costs and the race is on to find sustainable ways to fund green initiatives in cities around the world. This is bringing new momentum behind the green bank movement. On July 2, Washington, DC Mayor, Muriel Bowser, signed the District’s Green Finance Authority Establishment Act, officially making it the first city in the country to establish a government-funded green bank. The bank is being capitalised with $105 million of public funds.


The world needs to spend $2.4 trillion every year until 2035 to mitigate the effects of climate change.


Jay Wilson, programme manager of the DC Green Bank in the District of Columbia Department of Energy & Environment (DOEE), told SmartCitiesWorld that the city would require upwards of $2 billion to achieve its green aims.


“Mayor Bowser’s clean energy plan and her commitment to move towards zero greenhouse gas (GHG) emissions by 2050 really necessitates greater investment in energy efficiency, clean energy and resilience in our city,” he said. “And one of the best tools to do this is a green bank.


“It provides an opportunity to leverage our government funding and the goal would be to leverage that 5:1 or more with private investment to bring in additional funding.”


Green bank concept


The concept of a green bank is not new and first emerged in 2009 in the US as part of an effort to create a federal green bank. There are now 14 in the US, mainly at state- and county- level, including the Connecticut Green Bank, Rhode Island Infrastructure Bank and the Montgomery County Green Bank. New York City has a green bank which works on a slightly different model as a non-profit specialist finance organisation.


Typically, green banks are public or quasi-public institutions that will finance green infrastructure projects in partnership with private lending companies. Connecticut was the first state-level green bank in the US, established by the Connecticut General Assembly in 2011. Since inception, it has mobilised over $1.6 billion of investment into Connecticut’s clean energy economy at almost a 7:1 leverage ratio of private to public funds.


Jeffrey Schub, executive director at the Coalition for Green Capital (CGC), the non-profit, which incubates local clean energy finance institutions, told SmartCitiesWorld that the core value provided by green banks is similar whether city-, county-, state-, or entire country-scale.


“Public dollars available for investment in green energy projects are limited, and policy-makers, of course, want to maximise the impact of each dollar of investment,” he said. “Green banks accomplish this in a unique way, blending public, private and philanthropic investment in clean energy projects that would otherwise struggle to find capital. Green Banks can also help to meet needs in hard-to-reach markets, such as those serving low-income customers.”


Green momentum is building


CGC’s work around the world over the last decade has led to over $2 billion of clean energy investment and helped to establish the Connecticut, Washington, DC and many other green banks. It welcomes the building momentum in the area, underlined by the introduction of the Climate Bank Act of 2019 in the US Senate earlier this summer that would create a federal bank to leverage public and private funds to invest in clean energy technologies and infrastructure.


The National Climate Bank would provide financing to eligible regional, state and local green banks, make investments directly into projects that reduce carbon emissions, and provide technical assistance for the start-up of new green banks around the United States. It would be capitalised with $10 billion initially, with an additional $5 billion every year for five years.


Momentum isn’t confined to the US, though. The C40 Cities Climate Leadership Group and the Overseas Development Institute (ODI) is calling for the creation of a new institution to finance green city projects. The Green Cities Development Bank (GCDB) initiative is supported by the ClimateWorks Foundation and law firm Baker McKenzie.


The C40 Cities Climate Leadership Group and the Overseas Development Institute (ODI) is calling for the creation of a new institution to finance green city projects.


Earlier this year it released a working paper on the subject and launched a consultation. Under a low-carbon scenario, the paper forecasts that $93 trillion will need to be invested in infrastructure globally by 2030, with 70 per cent of this related to urban areas.


James Alexander, director of the city finance programme, C40 Cities, told SmartCitiesWorld that capturing private capital and unlocking the “pension and insurance” funds is key to accessing the level of funding able to make the biggest impact. He said several high-level representatives from cities and the finance community had provided input into the consultation.


“Everyone agrees that the finance is not flowing into cities in the way it needs to and we need to find solutions for this,” he said, acknowledging there is still work to be done to make the case for a new institution that supports cities to access finance. “It is a serious proposition, and a significant undertaking, but we are still strongly of the view that an institution that combines the best elements of development banks with the green bank model to work directly with cities is the right way forward.”


He added: “The nature of a green bank means it is consciously focused on addressing market failures and getting finance to the place that is needed. And capturing private capital is at the heart of everything the institution does.”


How it would work in practice


In practice, Alexander explained that the institution would require some government funding initially and would prioritise projects depending on cities’ climate action plans and those that made the biggest impact.


The institution would be required to develop expertise in three key areas: cities and what it means to invest in them; the technology required to make these products a reality; and the financing mechanism that allows cities to take on these new technologies.


He gives the example of electric buses, which provide great opportunities for cities around the world to lower emissions and improve air quality. One of the big challenges is that the upfront cost of such buses is higher than the equivalent cost of diesel, even though the total cost of ownership can be lower in many cases.


He said the institution would need to become expert in how these buses work, what technologies they use and the different parameters for operations, and how they could be deployed on mass with replicable transactions.


“Building up global expertise in one institution around financing these electric buses means this wouldn’t just work for big cities but smaller ones, too, because you wouldn’t need the enormous deal size that is often required in bespoke transactions,” he said. “You can then start to get that market moving at a fast pace until such point that the private sector says ‘we don’t need the green cities development bank any more’, And then we say ‘job done’ and move on to what’s next on the list. That is the vision.”


DC’s green bank aims


While it is still relatively early days, the DC Green Bank has set out its clear aims and the next stage is to prioritise its projects. Specifically, it seeks to:


  • attract private capital at a ratio of at least five private dollars to every one dollar of public investment;
  • use bonding authority to increase capacity, accelerate lending, and recapitalise funds;
  • become a go-to resource for District residents, small business owners, and commercial developers interested in energy efficiency improvements, clean energy installations, and construction of green infrastructure; and
  • be a break-even entity, where the revenues earned from financing activity cover its operating costs.

Around three-quarters of Washington, DC’s GHG emissions come from the energy used in buildings so this will be a major focus. “So if we can try to switch that paradigm both in terms of new construction going towards net zero and existing buildings looking to renovate and improve their performance, we can make really big strides in achieving those goals,” said Wilson.


Around three-quarters of Washington, DC’s GHG emissions come from the energy used in buildings so this will be a major focus.


The city will use building energy performance standards – introduced in legislation earlier this year, establishing a minimum energy efficiency performance for existing buildings – as a benchmarking tool.


The DOEE is currently working on building out the rules and regulations in how buildings will comply with the programme. “For the green bank, it means that we have an opportunity to measure the performance of our buildings across the entire city and also potentially build a pipeline of projects that need funding and additional resources,” said Wilson.


Because funding will partially come from ratepayers’ surcharges on their electricity bills, Wilson said it is important that the focus isn’t only on large commercial developers but also on Class B and C office and multi-family residential buildings and single-family housing.


“How do we get this investment back into the communities? I think that is also going to be one of our main goals,” he said.


Sharing knowledge


Although DC is the first city-scale, government-funded green bank in the US, Wilson said the green bank movement is “one big happy family” and highlighted that sharing best practice, knowledge and success stories is vitally important. In Connecticut, for example, the Solar for All programme, increased solar adoption by more than 187 per cent in underinvested neighbourhoods also demonstrating the power of green banks to drive equity and inclusivity.


In Connecticut, the Solar for All programme increased solar adoption by more than 187 per cent in underinvested neighbourhoods.


Alexander agrees with the importance of knowledge-sharing and said its goal is “to invent as little as possible", especially since the world is engaged in a race against time: “We need to find ways to deploy capital quickly. This is important because of the speed of climate change but also because mayors are typically in power for four years and so we have to find solutions that can get a transaction through from start to finish in the typical term of a mayor.”


State and county routes to finance


Schub reminds cities that establishing a city-specific green bank is not the only way to participate in the green finance movement and that they can engage with state and county-level institutions to invest in local projects.


“For example, in Rhode Island, the state Green Bank [the Rhode Island Infrastructure Bank] has aggregated municipal bonds in order to lower the cost of capital for municipal energy efficiency projects,” he said. “This helped the municipalities more affordably finance a range of clean energy upgrades to their buildings.”


There is no doubt that current levels of global investment are still short of what cities need to avoid dangerous climate change but green banks are potentially a powerful tool to fight it.


“They are so important in bringing greater levels of investment into the mix and directing this investment to markets that otherwise would lag,” said Schub. “We have a long way to go, but we’re very encouraged by the rapid growth of green banks over the past decade.


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