Green banks in the U.S. trace their history back to 2009, when then Representative Chris Van Hollen (D-MD), with help from the Coalition for Green Capital (CGC) introduced the Green Bank Act to create a national green bank that could provide low-cost financing to clean energy and efficiency projects.

In the same year, the American Clean Energy and Security Act (ACES), referred to as the Waxman-Markey bill, also included a provision to create the Clean Energy Deployment Administration, which would function as a green bank and provide financial assistance to clean energy projects.

Thirteen years after these bills failed, green banks finally made their way into the Inflation Reduction Act (IRA) in the form of Greenhouse Gas Reduction Fund (GGRF).

So, what are green banks and how do they work? How might a green-bank structure work in the Northwest so the region could take advantage of GGRF funds? The Clean Energy Transition Institute set out to answer these questions in early 2023 by researching the GGRF and interviewing green bank experts from the following organizations:

• Inclusive Prosperity Capital
• NYCEEC
• Michigan Saves

Here’s what we learned.‍

Innovative Financing to Address Climate Change

According to the CGC—a national nonprofit that advocates for, creates, and implements green bank finance institutions—green banks are “mission-driven institutions that use innovative financing to accelerate the transition to clean energy and fight climate change.” Green banks use financing mechanisms such as direct loans or credit enhancements to maximize impact and fill gaps in the market to finance clean energy projects that otherwise likely would not get funded.

After green bank legislation failed to pass in 2009, several state and local green bank entities emerged. Today, there are 36 member organizations of the CGC’s American Green Bank Consortium, ranging in design:

• Nonprofit entities (e.g., Michigan Saves, the nation's first nonprofit green bank, established in 2009)
• Quasi-public entities (e.g., CT Green Bank, the nation’s first state green bank, established in 2011)
• Public entities (e.g., NY Green Bank, established in 2013)

Most green bank entities are limited to specific geographic boundaries due to their source of funding. For example, public or quasi-public green banks often get appropriations from a state legislature to help with capital, and therefore are only able to finance projects within that state. Other green bank entities (e.g., Inclusive Prosperity Capital) are national nonprofits that can finance projects in any location.

Some green banks also have a specific focus, such as serving low-and moderate-income neighborhoods or financing projects related to buildings, while others are broader in scope. Green banks also sometimes administer city or state programs, such as Commercial Property Assessed Clean Energy (C-PACE).

Regardless of the exact structure, all green banks share these characteristics:

• Work to address climate change by accelerating innovative clean energy investment, often by reducing the cost of capital for clean energy projects.
• Use financing, not grants. This means that capital will eventually be returned or repaid, maximizing the impact of every dollar.
• Fill gaps in the market by financing projects in new markets, geographies, or technologies, that would not get financed by other banks.

The GGRF Design: Three Grant Competitions

Administered by U.S. Environmental Protection Agency (EPA), the GGRF is designed to provide grants to eligible entities, including existing green banks, who will in turn provide loans, grants, and other forms of financial and technical assistance to projects. The GGRF is designed with the following aims:

1. Reduce greenhouse gas emissions and other air pollutants.
2. Deliver the benefits of greenhouse gas and air pollution reducing projects to low-income and disadvantaged communities.
3. Mobilize financing and private capital to stimulate additional deployment of greenhouse gas and air pollution reduction projects.

The GGRF includes $27 billion divided between three competitive grant programs, explained in detail below. The Notice of Funding Opportunity(NOFO) is expected to open as early as June 2023, with funds available through September 30, 2024.

All three GGRF programs are expected to be in line with the Justice40 Initiative, which dictates that 40% of the benefits flow to “disadvantaged communities” as defined by the Climate and Economic Justice Screening Tool.

$14 Billion National Clean Investment Fund

• Amount: $13.97 billion
• Number of Awards: Two to three national nonprofits
• Eligible entities: National nonprofits that are 1) designed to provide financing for the rapid deployment of low- and zero-emission products, technologies, and services; 2) do not take deposits; 3)are funded by public or charitable contributions; and 4) invests in or finances projects alone or with other investors.
• Grant activities: Through direct investments, grantees will provide financial products and support predevelopment expenditures to qualified projects.
• Qualified projects: While further details will likely come in the NOFO, EPA expects to require that qualified projects: 1) reduce greenhouse gas emissions, 2) deliver benefits to American communities by addressing two or more of the following: climate change, energy, health, housing, legacy, pollution, transportation, water and wastewater, and workforce development; 3) may not have otherwise been financed; 4) will spur private sector investment; and 5) use technology or activity that is already commercially available (i.e., not research and development).
• Priority project categories: Additionally, EPA identified three priority project categories, although applicants will have the flexibility to explain alternative priority project categories in the NOFO. The EPA’s priority categories are: 1) distributed power generation and storage; 2) decarbonization retrofits of existing buildings, and 3) transportation pollution reduction.

$6 Billion Clean Communities Investment Accelerator 

• Amount: $6 billion
• Number of Awards: Two to seven hub nonprofits
• Eligible entities: Nonprofits, consistent with the definition above, that can build the capacity of specific networks of public, quasi-public, and non-profit community lenders (community development financial institutions, credit unions, green banks, housing finance agencies, minority depository institutions, and others).
• Grant activities: Through indirect investments, grantees will provide the following, with at least 95% of the grant funds passing through to community lenders: capitalization funding (no more than $5 million per community lender), technical assistance (no more than $625,000 per community lender), and technical assistance services.
• Qualified projects: Grantees will provide financial support to community lenders, which in turn will help finance the deployment of projects within the EPA’s three priority project categories: 1) distributed power generation and storage; 2) decarbonization retrofits of existing buildings, and 3) transportation pollution reduction.

$7 Billion Solar for All

• ‍Amount: $7 billion
• Number of Awards: Up to 60 grants, with at least one per geographic area (states + territories), with a separate funding track with1-3 awards to Tribal nations. ‍
• Eligible entities: States, Tribal governments, municipalities, or eligible nonprofit recipients. ‍
• Grant activities: Grant funds can be used to expand existing low-income solar program or to deploy new Solar for All programs. ‍
• Qualified projects: Residential rooftop and community solar photovoltaic projects, associated storage, and enabling upgrades for low-income and disadvantaged communities.

Northwest GGRF Considerations

There are big questions about how the Northwest might take advantage of the GGRF since there are currently no green banks in the region.

Design

When thinking about how to design and stand up a green bank in the Northwest, we learned about the following questions to consider:

Geography: Regional, state, or local?    

• If the green bank were only relying on federal funding dollars through the GGRF, a regional nonprofit model could work. However, a regional model could get complicated if it were trying to receive funding from state legislatures.  

Structure: State agency/public agency? 501(c)(3)?

• Public entities often get appropriations to help with capital, but also can get caught up in slower government bureaucracy.
• Nonprofit entities can act more independently from the legislative process and government but lack the centralized coordinating power of state government. There are examples of nonprofit entities that have been created by state legislation (e.g., Nevada Clean Energy Fund) and therefore act as the state’s official green bank despite not being a public entity.

Product: Where are the gaps in the ecosystem? What are the market needs that could be met with green bank financing? What product(s) is the green bank offering? Note: If expecting to use GGRF funding, these answers should consider EPA guidance about qualified projects.

• It is worth considering the other Bipartisan Infrastructure Law (BIL) and IRA funding that will be deployed simultaneously and thinking about how different programs will best complement each other.
• In Washington, there is also the question of how funding from the Climate Commitment Act and Clean Energy Fund might complement GGRF dollars.

Partnerships: How does the green bank work with existing community banks, regional banks, and government agencies funding economic development?

‍Technical Assistance: What technical assistance and/or programmatic support will the green bank provide?

• How would the green bank provide technical assistance and education about clean energy project development?

Gift of Public Funds in Washington

When discussing green banks in the Northwest, people sometimes ask whether Washington’s gift of public funds restrictions would prohibit the state from standing up a green bank. “Gift of public funds” refers to a set of prohibitions in the Washington State Constitution that aim to “prevent state funds from being used to benefit private interests where the public interest is not primarily served” (Japan Line v. McCaffree).

Because the gift of public funds doctrine refers to funds that would not serve the public interest and the mission of a green bank is precisely to serve the public interest, it does not appear that a green bank entity would be in conflict with the Washington State Constitution.

Furthermore, the state legislature has navigated around this issue by deeming a program that achieves a public good to be within constitutional bounds. For instance, the state’s Clean Energy Fund awards to some private entities with the caveat that “state appropriation in this section must be used for projects that provide a benefit to the public…” (6020-S.E.pdf-wa.gov).

Although it seems that there isn’t an issue with the Washington Constitution, an expert legal opinion should be sought to confirm that the gift of public funds does not preclude the establishment of a state green bank.

What's Next?

The GGRF represents a historic opportunity to accelerate clean energy technologies in the Northwest, and now is the time for key stakeholders to evaluate how the region could take advantage of these funds. At the very least, it seems that Northwest states should be prepared to submit applications for the $7 billion Solar for All program, which expects to distribute at least one grant per state.

As for the other two programs (the $14 billion National Clean Investment Fund and the $6 billion Clean Communities Investment Accelerator), it appears possible that Northwest entities could later apply for funding from whichever national groups receive the awards this coming September.

However, there are still many remaining questions about how the GGRF will be administered; the multiple layers between initial funding and project; the trade-offs between having a national green bank versus a more distributed approach; and how financing will flow to the disadvantaged communities that it intends to serve. Therefore, there is still much to be learned and much work to be done to ensure successful and equitable implementation.

Additional Resources

Up-to-date EPA guidance: EPA-Greenhouse Gas Reduction Fund

• 02/14/2023: Initial Program Guidance
• 04/19/2023: Implementation Framework
• Upcoming public listening sessions (Week of 5/1)

Gift of Public Funds: MRSC-Gift of Public Funds

ClimateX-Change Webinar: “Green Banks and the IRA — How States Can Leverage Funding for Climate Action”

Coalition for Green Capital: What is a Green Bank and Green Bank Resource Library

Atlas Public Policy: Greenhouse Gas Reduction Fund Issue Brief