Among the many pro-climate funding mechanisms in the Inflation Reduction Act (IRA) is the creation of the Greenhouse Gas Reduction Fund, which grants the U.S. Environmental Protection Agency (EPA) $20 billion to establish a national green bank, and an additional $7 billion specifically for state, local, and tribal governments’ own clean power investments. Green banks are nonprofit institutions designed to provide and leverage capital to accelerate the transition to clean energy and mitigate climate change, and there are currently 23 sub-federal green banks across 17 U.S. states and territories.
The IRA’s allowances for green banking will facilitate direct and indirect investments into emissions reductions projects, especially in underserved communities, and states will play a huge role in allocating funds. In states with or without existing green banks, climate policy actors must understand how the IRA affects state-level clean power financing institutions.
To explore the IRA’s impacts on sub-federal green banks, including both state-funded and independent nonprofit institutions, we were joined by Henry Litman, Senior Director at Coalition for Green Capital, Bryan Garcia, President and CEO of the Connecticut Green Bank, and Duanne Andrade, Chief Strategic and Financial Officer of the Solar and Energy Loan Fund in Florida.
Henry Litman, Coalition for Green Capital
The Campaign for a National Green Bank
Since 2009, the Coalition for Green Capital (CGC) has been working on getting the Greenhouse Gas (GHG) Reduction Fund (or something like it) passed by the U.S. Congress. To establish a track record for green banking, CGC helped build the American Green Bank Consortium, composed of 23 green banks across 17 states and Washington, D.C., proving the success of the green bank model when the political opportunity came to pass a national green bank. This became a possibility when President Biden was elected with a Democratic majority in the House and Senate, after which CGC worked to create a national green bank through the Infrastructure Investment and Jobs Act (IIJA), and later through the Inflation Reduction Act (IRA), which was signed into law in August of 2022.
The IRA’s Investment in Green Banking
The IRA doesn’t create a national green bank, but it does create the GHG Reduction Fund, which allocates $27 billion to the EPA to make grants to one or more entities that would function as a national green bank. $20 billion of this is eligible only for nonprofits — this could be granted entirely to a national, nonprofit green bank — and requires that 40 percent of this, or $8 billion, must be invested in projects that reduce GHG emissions in low-income and disadvantaged communities, as required by President Biden’s Justice40 Initiative. The other $7 billion is available directly to states, municipalities, tribes, and eligible nonprofits for their own clean power investments.
The Plan for Achieving Emissions Reductions through a National Green Bank
While the EPA is still figuring out how exactly to allocate this $27 billion investment, CGC has a plan for how it might be used. They envision supercharging the existing network of 23 sub-federal green banks such that every community in the country is served by at least one green financing institution. These include community development financing institutions (CDFIs), minority-owned banks, nonprofits, and other organizations aligned with the mission of green banks. This means increasing the capacity and capital of existing institutions; working with mayors, governors, city councils, and other governing authorities to support new and existing institutions; and involving private investment in building robust climate finance ecosystems outside of taxpayer money.
GHG Reduction Fund investments must be designed to reduce GHG emissions, and they fall into two categories. The first is direct investment, which invests money into specific projects that require financial assistance. These include high-impact, nonstandard projects that cut across regions or have national significance, but may not attract any single, local financier. A green bank can step in to make the initial investment in the project and unlock further capital from local institutions. The second is indirect investment, which increases local capital, enhances existing financing institutions, and otherwise builds capacity in communities so that they are able to then make direct investments. These indirect investments are essential to fill several common commercial financing gaps across states, where the investments are good from social, environmental, and financial perspectives, but the market hasn’t caught up.
In general, there are four offerings that a national green bank could provide to support major increases in nationwide green investment:
- Operating grants to expand administrative capacity.
- Access to low cost, long-term debt facilities.
- Access to equity that allows for experimentation and the development of new approaches to decarbonization.
- Access to secondary markets to ensure there is always more money flowing in.
Over ten years, the national green bank can achieve substantial leverage on a public grant. It must invest in a way that mobilizes private capital, to ensure that there isn’t major competition over limited public funds. This model has a proven track record — from 2011 to 2021, the 23 existing sub-federal green banks have driven $9 billion of green investment, using relatively small amounts of public money and stretching it to generate tons of investment in emissions reduction projects. Scaling this up with a national green bank can catalyze an unprecedented level of clean investments that are required to transition us toward a clean, equitable society.
Bryan Garcia, Connecticut Green Bank
About the CT Green Bank
The Connecticut (CT) Green Bank was the first state-level green bank in the country, operating with a mission to confront climate change and increase resilience. In 2009, when the American Clean Energy and Securities Act didn’t pass, the main proponent of the bill, the Coalition for Green Capital, approached Connecticut’s Governor with a proposition to create a state-level green bank via the legislative process, resulting in the creation of the CT Green Bank in 2011 with bipartisan legislation.
The CT Green Bank is a quasi-public organization, using public dollars to attract multiple forms of private capital investment, while also utilizing the disciplines of business to move faster than the traditional speed of governmental entities. They also function as an intermediary in the market, attracting investment to hit CT’s ambitious state-level climate goals, including an emissions reduction target of 45 percent below 2001 levels by 2030. Beyond financing clean energy projects, including fuel cells, electric and alternative fuel vehicles, and associated infrastructure, their scope was broadened in 2021, expanding to environmental infrastructure related to water, agriculture, waste and recycling, land conservation, and more.
The CT Green Bank is supported by a few sources of public revenue at the state level: (1) a state-level system benefit fund costing families $7-10/year, aggregating to $25 million, and (2) 23 percent of the Regional Greenhouse Gas Initiative’s allowance proceeds, aggregating to $5 million. Each year, they aim to turn this $30 million into $200-300 million of investments into the green economy through loans. Additionally, they are supported federally through competitive solicitations and non-competitive resources, and supported through issuing green bonds and generating interest income. Over the last decade, they’ve invested $320 million and mobilized over $1.9 billion of private investment, leading to the deployment of over 500 megawatts of renewable energy, energy cost reductions for over 65,000 families, and 26,000 clean energy jobs. These investments take various forms, including:
- Home solutions: reducing energy burdens and increasing energy security for families.
- Building solutions: reducing energy burdens on businesses, nonprofits, and multifamily housing.
- Investment solutions: enabling people to invest in green solutions for their communities while earning a return.
- Community solutions: investing in environmental infrastructure (coming in 2024).
Equity at the CT Green Bank
The CT Green Bank is rooted in ensuring that their benefits are accessible to all. When they realized that low to moderate income (LMI) families were being left behind in the creation of the green economy, they shared with industry and capital partners that low-income doesn’t mean low credit, working to break unconscious bias present in their financing products. They also increased incentives for low-income families to participate in their programs. Unfortunately, these efforts didn’t lead to much change, so they issued a request for proposals, the Green Bank Capital Solutions. They worked with PosiGen to create a solar lease and energy efficiency package to reduce energy burdens for LMI families and transformed CT into a state where solar and justice go hand in hand.
The PosiGen model reduces energy burdens on families by saving participating households $0.11 per kilowatt-hour of production. It also addresses energy poverty and increases resilience by building up battery storage. LMI families will be able to add battery storage to their existing solar systems, while the CT Green Bank reduces the cost of that storage. In this way, LMI families can realize the savings benefits from solar while also receiving energy security benefits of battery storage.
Understanding State and Federal Policy to Achieve Climate Goals
In order to achieve ambitious emissions reductions, state and local actors have to navigate the ‘incentive maze’ of state and federal climate policy. At the state level, there are various targets (i.e. emissions reduction targets, renewable portfolio standards) and incentives (i.e. green banks, energy solutions programs). On the federal level, there are tax credits, tax credit ‘adders’ (i.e. Justice40), and trading value structures (i.e. direct pay, transfers). The CT Green Bank hopes to make it simpler for customers to understand these policy mechanisms and make it easier for them to participate.
Equity for Green Banks under the IRA
$15 billion of the total $27 billion of IRA investments into green banks will go toward low-income and disadvantaged communities. If green banks can leverage that investment into multiples of private investment, we can get billions of dollars of investment to the country’s most vulnerable residents. Green banks not only fill the gap for enabling private investment in clean energy deployment, but also to direct this capital to those who need it most.
Without lifting up our most vulnerable low-income and disadvantaged communities in the transition to a green economy, we will never solve the climate crisis. Through their work, the CT Green Bank envisions a planet protected by the love of humanity.
Duanne Andrade, Solar and Energy Loan Fund
SELF, an Independent Nonprofit Green Bank and CDFI
Public, state-funded organizations like the CT Green Bank are not the only model that green banks follow. While large, public green banks are leveraging investments in the billions of dollars, independent nonprofits like the Solar and Energy Loan Fund (SELF) are in the millions. Across the country, context in geography and policy determine how green banks are structured and funded, and not everyone starts in the same place.
SELF was created in 2009 by a local government in St. Lucie County, Florida with a $2.9 million Energy Efficiency and Conservation Block Grant, part of the Obama-era attempt to stimulate the economy through innovative approaches to climate financing. They were one of 20 counties in the country to receive this money, with the goal of starting up a green revolving loan fund. A few years later, SELF became an independent 501(c)(3) nonprofit, and in 2012 became a certified community development financial institution (CDFI).
SELF’s focus is financing resilient, healthy, and affordable housing for a sustainable future, and their focus as a CDFI has always been helping LMI communities transition to a clean energy economy, with 74 percent of their lending in LMI communities. They are the only independent, non-profit, non-regulated, CDFI and green bank in the Southeast. While starting with only $2.9 million of seed funding, they have deployed $30 million in direct loans for over 2,600 projects, leveraging over $90 million in public and private investments across Florida, South Carolina, Georgia, Alabama, and soon, Tennessee and some other states.
SELF’s mission is to advance the clean energy economy inclusively and holistically. Not only are the beneficiaries of their services people of all colors and incomes, but so are the contractors, developers, and other service providers. They offer three main products for different types of stakeholders:
- Homeowners: unsecured loans to complete upgrades on single family and small multi-family products.
- Landlords: unsecured energy efficiency and resiliency rehab loans for affordable rental and workforce housing.
- Developers: predevelopment and gap funding for green, affordable housing for mid-size multifamily projects led by minorities.
With no state funding and limited federal funding, partnerships have been central to SELF’s survival. In a state like Florida with few pro-climate state policies, local action is the main avenue for establishing climate goals. SELF acts as an implementation tool for this local climate ambition by partnering with local governments, housing authorities, and nonprofits to create and preserve resilient, affordable, energy-efficient housing. They customize programs to local needs, leveraging local government resources and raising blended impact capital for successful, impactful project deployment. In this way, the transition to clean energy is natural, not forced, and rooted in exactly what communities need.
SELF’s Green Financing Innovations
Green banks are an extremely important mechanism for creating and testing new, innovative approaches to green financing. The primary innovation that SELF developed was the creation of small, unsecured home improvement loans based not on credit scores but on the ability to repay. This is because the LMI designation includes 40 percent of American residents — while some of them may not have good credit scores, financing institutions must still provide them accessible, affordable capital. SELF was able to create their own proprietary system to gauge the ability to repay, and they subsequently deployed $28 million in unsecured loans. 74 percent of these recipients were LMI, 50 percent had credit scores under 620, and the program has a default rate of less than two percent. This innovative financing model proves that regardless of credit score or income, LMI populations are credit-worthy and deserve access to capital.
SELF has also deployed various other nontraditional approaches to financing:
- Multi-family rehab loans, in partnership with the Atlanta Housing Authority. Through this program, they are pushing the boundaries of traditional financing to reduce energy burden and increase safety for low-income tenants.
- Affordable housing gap financing, which provides financing options for small to mid-sized minority developers.
- Solar for climate resilience, a pilot of the first emergency response solar rooftop project for public housing in Miami Dade.
SELF’s Capital Stack, including the IRA
SELF has grown from one funding source to many over the years, and their capital stack is now very diverse. This includes global crowdfunding, climate and health organizations, private impact investors, the federal CDFI fund, faith-based organizations, and soon, funding from the IRA’s recently-established Greenhouse Gas Reduction Fund. Available IRA money includes billions of dollars from various federal agencies, including the Department of Energy, EPA, and more. For SELF and other green banks, ensuring equity from these funds means ensuring deployment in disadvantaged communities is flexible and customized to community needs, partnering with other green banks and CDFIs, and financing cost ‘gaps’ of carbon-reducing improvements not covered by tax incentives or rebates.
Q: What are the accountability measures in place to ensure that LMI and disadvantaged communities can actually take advantage of IRA funding for green banks?
Henry Litman: There need to be a lot of accountability measures. It starts with negotiating the contract between the (soon-to-come) National Green Bank (NGB) and the EPA — specifically, the measures included relate to accountability, transparency, and reporting requirements. There will be an environmental justice team to make sure that the contract reflects those priorities. The second step relates to personnel in government. The management team and board of directors at the NGB needs to be reflective of the double bottom line goal: serving LMI communities and reducing GHG emissions. Next, we need to be really deliberate about mapping. The Biden administration has already done a lot of work on defining and identifying communities that are disproportionately burdened by pollution, high energy prices, and more. We need to make sure there’s really good data about where the money is going and who it’s serving, to confirm that it’s benefitting who we need it to. The last piece is about being patient rather than distributing the money right away to organizations that already have a lot of money and capacity. We need to offer a lot of operating support related to grant writing and technical assistance, to ensure that disadvantaged communities are able to build their own capacity. The money can’t just go to those that are already most equipped to receive it.
Q: What about someone in a state with elected officials that aren’t very pro-climate, or someone in a small town or rural area without access to organizations with a lot of capacity? How do they access these funds?
Duanne Andrade: The first step is to identify if there are credit unions or CDFIs working in your area, who may be preparing themselves to receive and distribute these funds. Secondly, keep an eye out for green banks partnering with local community-based organizations (CBOs). If none of that exists, do what we did — create your own! Go out there, knock on green banks’ doors, and tell them what your needs are. Many green banks have plug and play models that can be shared with you to help you get started with some financing. I encourage everybody, especially in rural or small communities, to carry the flag; start a 501(c)(3), look for your CBOs, gather people around this goal and do not miss this opportunity.
Bryan Garcia: I agree with all of that. CBOs, CDFIs, community-based foundations, these are the roots of our local communities across the country. In states without ambitious climate policies, there could be some cities and towns that have those, so you can build off of that. If cities and towns aren’t pushing forward on their own, work with CDFIs like SELF to make it happen. We can’t leave those communities behind just because policymakers aren’t recognizing the importance of these policies.
Duanne: I’ll just add one thing. You don’t have to ask permission to do what’s right for your community. The IRA funds will be available through a state or local government, and I would recommend looking at the resources from Rewiring America which tell you how these funds are flowing.
The IRA provides $27 billion in green banking investments, and with 23 existing sub-federal green banks, there is a proven track record of successfully leveraging public and private investments in emissions reduction projects. Look to organizations like the Coalition for Green Capital, the Connecticut Green Bank, and the Solar and Energy Loan Fund to learn more about how these investments can flow from the federal government to your community. If we can scale this up across the country through a national green bank and state-level action, green banks can and will become one of the primary drivers of the country’s equitable transition to mitigate climate change.