The Case for Innovative Climate Finance
To state the obvious: we are living in polarized times.
The conversations around whether climate change is real, caused by humans, and how best to tackle it are as polarized in the United States as topics like tax cuts, abortion, and healthcare. I cannot profess to understand all the causes that led to climate change becoming a political conversation shrouded in theology in which people “believe” or “do not believe” whether the greenhouse effect exists, rather than its rightful place in being a scientific conversation. I will admit that I am in the camp that believes the 98%+ of peer-reviewed scientists who say that two hundred years of unchecked spewing of anthropogenic carbon has resulted in incomprehensible changes to our climate that cannot be explained by non-human ‘natural’ cycles. Many of my friends and colleagues are in the same camp.
Many of us (myself included) get caught up in an ‘us vs. them’ dynamic where we label people as ‘climate-deniers’ who are ‘ignorant’, ‘uneducated’, ‘misguided’, and ‘on the wrong side of history.’ And perhaps we can claim a self-righteous (and ultimately Pyrrhic) victory while sipping on lattes of indignation, the world continues to go on, adding 1 million people every four and a half days while billions of people in the developing world are buying iPhones, Happy Meals, Disney toys, and SUVs for the first time, and will soon have a carbon and waste footprint on par with Western consumers.
The problem at hand is much too grave and urgent to continue to shame people into joining the cause. There has to be another way.
There is an old cliché that says you can hold more sand in your hand if you keep your hand open than if you make a fist.
In order to get the estimated tens of trillions of dollars in investment into low-carbon solutions across electricity, energy, buildings, agriculture, transportation, and industrial practices needed in the coming decades to prevent runaway climate change, we must focus on economic opportunities that enable people to invest without having to be convinced of the ideology behind such solutions.
This is mainly what my company, CleanFund, does with a financing structure called “PACE” or Property Assessed Clean Energy. Here is how it works and why such structures point to scalable solutions to tackling climate change: for 100 years in the U.S, we have been using property taxes to pay for public infrastructure like building public schools, paving sidewalks, and abating mosquitos.
PACE Financing Explained
In 2007, the city of Berkeley decided it wanted its citizens to have more solar energy but didn’t want to use government money to pay for it. So, Berkeley created a public-private partnership that enabled homeowners to borrower 100% of the capital for a solar project from a private financing company and repay it via a special assessment on their property taxes.
Since the ramifications for not paying one’s property taxes is municipal foreclosure, this is an exceptionally safe form of lending from a capital provider’s perspective. Simply put, people pay their property taxes. As a result of this security, CleanFund (which only works on commercial and industrial buildings and not on single family homes) is able to do things that traditional lenders are unable to do, like: 30 year terms that are fixed-rate (with a low interest rate) and non-recourse (meaning we can’t go after the personal assets of the borrower).
Additionally, since we are repaid from property taxes, if our clients ever sell their buildings, they never have to repay us, as the obligation to repay stays with the property taxes. This also enables us to extend financing to non-profits and low-income apartment buildings since the only thing we care about is the likelihood the building will repay us and not the net worth of our borrower.
PACE can be used for renewable energy, energy efficiency, and water efficiency (and seismic upgrades in California). 35 states have passed PACE legislation and it is rolling out across the US; early next year it will be available in NYC, Chicago, and Massachusetts.
Making the Business Case for Green Building Upgrades
I’ll give an example of a real project we did that I think captures the power of PACE – and such market-based tools for tackling climate change: a few years ago, CleanFund financed one of the largest projects in PACE history with a developer we will call Sam (details and name have been changed to respect the client’s wishes for confidentiality).
We went through his construction budget and found that he had a significant number of items that might qualify for PACE (windows, roof, lights, mechanical equipment, elevators, etc.). Let’s say, for round numbers, Sam needed $50MM for his construction project: $30MM was going to come from short-term debt that had a 5% interest rate and the other $20MM was coming from an equity investor who expected a 20% return. We said to Sam, “We think we can get you $10MM of PACE, but you are going to need to make some changes in your budget: you will have to replace that black tar roof with a cool ‘TPO’ white roof, and you will have to put in a more efficient air-conditioning system, LEDs, and low-flow water fixtures and a better elevator.
If you do those things, we can provide you PACE at 6.25% repaid over 25 years, replacing the $10MM of equity that you were going to have to give an investor 20%. This will save you $1MM per year. Are you interested?”
Sam is a Republican and not motivated by sustainability or creating a green building. He is not a gymnast either, but I think I saw him do a backflip when we told him that by making a more energy efficient building, he would save more than a million dollars per year in borrowing costs that would go straight into his pocket. That his building is saving 40% more energy than a comparable building is a nice additional benefit for Sam that he now is using in his marketing materials to attract tenants who care about their carbon footprint and want to have lower operating expenses.
Sam didn’t need to be convinced to care about the plight of the polar bears or the glaciers in the Himalayas or be convinced that we are now above 400 ppm of CO2. He did, however, need a bridge to get him to make the right decision – and one that was aligned with his self-interest and not at odds with his self-identity.
Herein lies the beauty and power of harnessing market-based forces, like PACE. By offering motivating economics, we brought Sam into the solution. While the Sams of the world might predominantly be focused on their traditional bottom line, by finding common ground, we can reach the other two bottom lines.
And this is the great opportunity of our lives.
Leave your comment below, or reply to others.
Please note that this comment section is for thoughtful, on-topic discussions. Admin approval is required for all comments. Your comment may be edited if it contains grammatical errors. Low effort, self-promotional, or impolite comments will be deleted.
Read more from MeetingoftheMinds.org
Spotlighting innovations in urban sustainability and connected technology
Social distancing is becoming the new normal, at least for those of us who are heeding the Center for Disease Control’s warnings and guidelines. But if you don’t have reliable, high-speed broadband, it is impossible to engage in what is now the world’s largest telecommunity. As many schools and universities around the world (including those of my kids) are shut down, these institutions are optimistically converting to online and digital learning. However, with our current broadband layout, this movement will certainly leave many Americans behind.
Accenture analysts recently released a report calling for cities to take the lead in creating coordinated, “orchestrated” mobility ecosystems. Limiting shared services to routes that connect people with mass transit would be one way to deploy human-driven services now and to prepare for driverless service in the future. Services and schedules can be linked at the backend, and operators can, for example, automatically send more shared vehicles to a train station when the train has more passengers than usual, or tell the shared vehicles to wait for a train that is running late.
Managing urban congestion and mobility comes down to the matter of managing space. Cities are characterized by defined and restricted residential, commercial, and transportation spaces. Private autos are the most inefficient use of transportation space, and mass transit represents the most efficient use of transportation space. Getting more people out of private cars, and into shared feeder routes to and from mass transit modes is the most promising way to reduce auto traffic. Computer models show that it can be done, and we don’t need autonomous vehicles to realize the benefits of shared mobility.
The role of government, and the planning community, is perhaps to facilitate these kinds of partnerships and make it easier for serendipity to occur. While many cities mandate a portion of the development budget toward art, this will not necessarily result in an ongoing benefit to the arts community as in most cases the budget is used for public art projects versus creating opportunities for cultural programming.
Rather than relying solely on this mandate, planners might want to consider educating developers with examples and case studies about the myriad ways that artists can participate in the development process. Likewise, outreach and education for the arts community about what role they can play in projects may stimulate a dialogue that can yield great results. In this sense, the planning community can be an invaluable translator in helping all parties to discover a richer, more inspiring, common language.