Green Banks and Nature-Based Solutions: How to Make the Most of the Greenhouse Gas Reduction Fund
By Matthew Carney, Associate Director
Editor’s note: this post was updated on May 16 to include a link to the joint letter to the EPA from 14 organizations, including QV, with feedback on the Greenhouse Gas Reduction Fund Implementation Framework.
The Inflation Reduction Act’s Greenhouse Gas Reduction Fund (GGRF) is a massive leap forward for climate investment – providing up to $27 billion in funding to reduce greenhouse gas emissions, with at least 40% dedicated to low-income and disadvantaged communities. The ~$27B fund will be leveraged to support projects via direct funding and/or financing support. Monies will be awarded by the EPA through two competitions but final guidance on the structure of the GGRF is still in development and will be released in Summer 2023.
Approximately $7B of these funds will be distributed via competitive grants, purely for deployment of residential rooftop solar, community solar, and associated storage. This pot of funds, also known as the Zero Emissions Technology Fund Competition, offers little opportunity to expand investments beyond energy.
However, the General and Low-Income and Disadvantaged Communities Competition is much more broadly defined – stipulating only that funds be used for projects that reduce greenhouse gas emissions. This ~$20B fund is the culmination of more than a decade of efforts to establish a national green bank. Herein lies the opportunity to address both energy and climate resilience needs.
We recommend two key actions for the Greenhouse Gas Reduction Fund to realize its full potential to reduce emissions, mobilize private capital, and address historic environmental inequalities.
Move beyond an exclusive focus on energy and toward emissions-reducing projects in the agriculture, land conservation, and water sectors.
Maximize impact by capitalizing a national green bank and empowering it to leverage the full array of funding opportunities provided by complementary programs and recent legislation.
Broaden GGRF Scope to Enable Financing of Nature-Based Projects in the Agriculture, Land Conservation, and Water Sectors
Each of these areas presents the opportunity for nature-based solutions that not only reduce greenhouse gas emissions, but also benefit public health, economic development, community resilience, and biodiversity.
Agriculture
In the United States, agriculture is responsible for 11% of all greenhouse gas emissions. The GGRF can help address emissions in this sector by allowing funds to facilitate the increased adoption of measurable and verifiable climate smart practices by producers. These practices could include cover crops, compositing, reduced or no-till farming, managed grazing, agroforestry, agrovoltaics, high-efficiency irrigation, and more.
Financing and leveraging private capital can play a significant role in adoption of these practices, as QV’s partnership with the Iowa Soybean Association on the Soil and Water Outcomes Fund has shown. QV uses financing to pay farmers to implement climate smart practices and then sell the resulting carbon sequestration and water quality outcomes on ecosystems markets once they’ve been realized – which is a much more compelling incentive than expecting farmers to pay for all the initial costs associated with practice changes and then recoup their investment over time. During the past two years farmers enrolled in the program have sequestered 211,000 metric tons of greenhouse gas equivalents in their soil, the equivalent to removing 46,000 cars from the road for a year. In addition to the emission reductions, these practices also prevented millions of pounds of nitrogen and phosphorus from leaving enrolled fields and entering local waterways. We estimate that every $3 in environmental outcomes purchases (i.e., purchase of reduced nitrogen or phosphorous outcomes), leverages $1 in carbon investment – which demonstrates the potential for the EPA to multiply the benefits of GGRF funds by leveraging across a range of outcomes.
Land Conservation and Natural Landscapes
In 2020, the U.S. land sector absorbed the equivalent of about 13% of the country’s greenhouse gas emissions, and most of this CO2 removal came from forests – presenting a significant opportunity to connect GGRF efforts with natural landscapes, forest, and land conservation projects. Scaling land conservation practices is a unique opportunity to emissions through carbon “sinks” rather than reducing existing emissions. For example, forests in California sequester over 8 million metric tons of carbon a year – the equivalent of the amount of methane emitted by California landfills in a year. They also conserve nature-positive territory that supports biodiversity, benefits gateway community economies, improves water quality through preventing erosion and runoff, and enhances public health. In urban settings, trees and vegetation can reduce urban heat island effect and improve air quality.
There are numerous opportunities for financing to enable project investments that would not otherwise be made, particularly by aligning efforts with the USDA’s existing Forest Legacy programs to help reduce carbon emissions through the preservation and proper maintenance of forestland. This could include bridge financing to enable conservation organizations to purchase land as soon as it becomes available or financing forest fire management practices on private land.
Water and Green Stormwater Infrastructure
Natural, vegetated stormwater practices – most commonly referred to as green stormwater infrastructure (GSI) – can reduce emissions by capturing and storing carbon dioxide. This could include bioretention basins, urban tree planting, green roofs, vegetated swales, and constructed pools and wetlands. These nature-based solutions also yield secondary benefits – such as reducing heat island effects and improving air quality in urban environments – both critical public health outcomes that disproportionately affect disadvantaged communities.
Currently, there is a lack of investment in green stormwater infrastructure, with most states and territories primarily investing in traditional gray infrastructure (i.e., tunnels and pipes). Between 2016 and 2020, states allocated only 3% of Clean Water State Revolving Fund commitments to green stormwater infrastructure and natural infrastructure – providing a significant opportunity for private entities drive adoption by leveraging GGRF funds.
Capitalize a National Green Bank and Empower it to Leverage the Full Array of Funding Opportunities
There are numerous reasons why a significant portion of the ~$20B GGRF funding pool should be dedicated to the creation of a national green bank.
A well-capitalized national green bank would spur investment in clean energy and resilience measures. Already, new state and local green banks across the country are forming to take advantage of the GGRF, and related opportunities in the Inflation Reduction Act and Bipartisan Infrastructure Law. These new green banks are often uncapitalized and are in the process of determining what types of programs they want to offer. Rather than disbursing the ~$20B fund to dozens of applicants in a single application window, creating a national green bank will provide a more valuable, long-term resource for these new local green banks because it can administer funds on an ongoing basis and help new green bank entities to grow. Also, creating a single national green bank that then provides capitalization funding to a network of state and local green banks will allow for more flexibility to quickly respond to changing market needs.
As transformative as the GGRF can be, it is only one of many potential funding sources for clean energy and resilience projects. Green banks have long touted their ability to leverage public funds into additional investment. For example, the Connecticut Green Bank estimates that through financing it multiplies the impact of each public dollar it receives by a factor of 7x. A national green bank should aspire to this same amplification of impact by encouraging recipients to pair any GGRF funds they receive with additional sources of “free” funding opportunities available at the federal or state level.
One of the most consequential things that EPA can do to reduce administrative burdens and increase the impact of GGRF funding is to align project and borrower eligibility rules with existing complementary programs. This will expand the pipeline of potential eligible projects by making it easier for applicants who are already enrolled other programs to understand how GGRF dollars could supplement their efforts. This could consider USDA, EPA, FEMA, and other grant programs as potential additional pots to achieve these large-scale investments. Secondly, making it easier for GGRF-eligible projects to receive separate public funding will reduce the overall project costs and increase the viability of lenders to repay capital into the GGRF fund. Lastly, program alignment can induce private investment – which will de-risk transactions for lenders, enabling programs to scale more quickly and reach more participants.
What Next?
Aside from the EPA, there is action to be taken by any green bank hoping to pursue nature-based solutions. As green banks seek to expand their offerings across industries, sector-specific expertise will be necessary to inform program design.
This capacity can be secured through additional hiring, technical assistance, and partnerships. As quasi-public institutions, green banks are beholden to their enabling legislation. Currently, green bank statutory authorities vary widely– while some green banks can only finance clean energy projects, others are also statutorily empowered to finance a range of climate resilience measures. However, these authorities are not permanently set it stone. Moving forward, existing green banks can petition to revise their statutes to include a broader climate focus, while new green banks can purse wide-ranging statutes from the outset.
Quantified Ventures’ proven ability to structure blended capital solutions and mobilize private capital for climate and environmental projects – and our work with several Green Banks – informed our comments on the EPA GGRF request for information. Looking ahead, we hope the EPA will consider these recommendations as they finalize the launch of the GGRF.
If you want to talk about Quantified Ventures’ work or explore these ideas in greater depth please reach out to me directly!