How US cities are finding creative ways to fund climate progress
By Caroline George, Joseph Kane, Adie Tomer
Even as the international community coordinates global climate action through the Paris Agreement and the U.S. government makes strides through major bills such as the Inflation Reduction Act, there is plenty that cities must still do on their own to clean up their economies and built environments. One of the most frequent approaches are decarbonization plans, which are often nested within larger climate action plans. Decarbonization plans outline specific steps cities will take to eliminate greenhouse gas (GHG) emissions from their electricity systems, buildings, transportation networks, and related sectors.
Last September, we evaluated the implementation potential of decarbonization plans from 50 of the country’s largest cities. What we found was concerning: While most cities took some steps toward reducing GHG emissions, their plans often lacked the details necessary to meet aspirational goals. That was especially the case for funding and finance issues—meaning how cities plan to pay for needed infrastructure improvements and other actions to reduce GHG emissions. With larger cities requiring billions of dollars to retrofit their building stock, construct new transit lines, or modernize local electricity distribution systems, being realistic about how to fund all these investments is an essential step to decarbonization.
Cities frequently fell short across four different criteria in our analysis. First, while every city should thoroughly spell out details on funding and financing, only 70% of cities integrated these concerns into their decarbonization strategies, and second, only 66% identified existing funding sources. Third, only 54% proposed specific, innovative, consistent, and/or long-term funding sources or financing mechanisms, and finally, just 34% estimated the financial impacts of each decarbonization strategy. Only eight cities—Cincinnati; Denver; Memphis, Tenn.; Nashville, Tenn.; New York City; Sacramento, Calif.; San Francisco; and San Jose, Calif.—satisfied all four of these funding and financing criteria in our original evaluation. Sound funding and financing strategies are the exception when it comes to decarbonization planning in American cities.
Lackluster aggregate scores tell one part of the story, but they also obscure the experimentation and innovation currently taking place as cities work to fund ambitious decarbonization efforts. Based on our detailed scan of 50 large U.S. cities, we encountered a range of funding and financing policies that formally commit to investing real money to decarbonize their local built environments, including real estate, electricity systems, and transportation networks.
This report summarizes specific funding and financing policies found in these 50 cities to provide a glimpse into the variety and scale of local climate finance innovations. Adopted before the passage of the Inflation Reduction Act (IRA), these strategies focus on locally driven efforts and innovations rather than new federal funding streams. Still, in the context of increased federal investment, strong local institutions and policies are even more important. For example, the IRA’s $27 billion Greenhouse Gas Reduction Fund can directly fund local green banks and provide the technical and financial assistance necessary to establish new green banks or similar institutions. While not comprehensive, the examples in this piece offer a kind of early roadmap for any city looking to commit to genuine climate action and make the most of coming federal climate investments.
Some cities, such as Portland, Ore. and Denver, have the kind of climate-friendly support among voters that lends itself toward sweeping actions like dedicating new taxes to fund climate action. Where enabling state and local legislation exists, financial tools such as property assessed clean energy programs are helping cities address specific climate challenges like retrofitting old buildings. Other cities have built off their relationship with local utilities or adapted existing funding streams to have a more explicit climate focus. While there’s no one-size-fits-all approach to paying for decarbonization efforts, these examples offer lessons for how political environments, staff knowledge, and complementary laws can influence decarbonization investments.
Two cities’ efforts to raise dedicated climate funds through taxes
Our analysis identified two cities as standout leaders in establishing long-term, flexible funding to address climate change: Portland, Ore. and Denver. Both cities passed ballot measures to establish dedicated climate funds by raising a large business tax and sales tax, respectively. In each case, grassroots efforts led the ballot measures to success, and the funds provide a landmark sustainable funding source. Accompanying innovations (e.g., the use of five-year fund planning cycles and the creation of new competitive award programs prioritizing underserved communities) transformed each city’s approach to action-oriented planning and equity-focused implementation.
In November 2018, 65% of Portland voters passed the Clean Energy Community Benefits Fund Initiative (Ballot Measure 26-201). The measure requires large retailers to pay a 1% Clean Energy Surcharge on “gross revenues from retail sales in Portland, excluding basic groceries, medicines, and health care services.” The resulting funding—which the coalition supporting the ballot measure memorably referred to as “1% from the 1%”—is placed in the city’s new Portland Clean Energy Community Benefits Fund (PCEF) and spent via competitive awards on climate action projects. While originally projected to raise between $44 million and $61 million annually, the fund has outperformed expectations, with new revenue projections reaching $90 million annually. As of October 2022, funded projects and actions totaled $130 million, including a range of workforce programs such as the Green Janitor Education Program; agriculture and resilience projects such as NAYA Neerchokikoo Food Sovereignty Project; and energy efficiency projects such as the Deep Energy Retrofit Project.
Shaped by years of BIPOC-lead organizing and campaigning, the Portland measure included a bold commitment to environmental justice from its start, with city staff prioritizing awards that benefit people with low incomes, communities of color, and workers facing discrimination. In response to recommendations from the program’s recent audit, 2022 updates added a requirement that the city produce five-year Climate Investment Plans, which will then be used to ensure funds contribute to the city’s broader climate strategy. This shift toward investment-focused climate planning—wherein planned strategies are already funded, and thus much more likely to be implemented—will allow the city to continue its journey toward a more grounded, strategic approach to connecting climate planning to decarbonization action.
Denver’s Climate Protection Fund follows a similar story. In 2019, local environmental advocates collected signatures for an energy use tax. While the local advocacy group Resilient Denver was unable to get the measure on the ballot in its original form, it caught the attention of the Denver City Council and the mayor, who created a citizen Climate Action Task Force to “[engage] Denver’s communities in defining goals, gaps, solutions, and investment opportunities.” The task force—with participants ranging from community members to Xcel Energy representatives—recommended a 0.25% sales tax increase to replace the energy use tax, and the city council put Measure 2A on the ballot for November 2020.
Measure 2A passed with the support of 62% of Denver voters, and was projected to generate between $30 million and $40 million annually to fund climate action—50% of which would go toward equity-focused projects. One year later, the city’s Office of Climate Action, Sustainability, and Resiliency, which manages the fund, produced its first Climate Protection Fund Five-Year Plan. The plan set forth strategies to manage, spend, and track the fund’s impact and alignment with allowable funding routes (staff positions, agreements with other city agencies, and competitively awarded contracts with external partners), allowable uses (workforce development, renewable energy, buildings and homes, sustainable transportation, adaptation and resiliency, and environmental justice) and equity values. The fund’s 2021 annual report found actual revenues ($41 million) outperformed initial projections ($37 million) for the year. Within its first year, the fund committed nearly $57.7 million dollars to projects ranging from e-bike libraries for essential workers to workforce development for green jobs and community solar installations.
These two ballot measures show the potential of strong grassroots organizing—combined with new institutional structures—as a strategy to raise sustainable, flexible capital for equity-centered climate action. The creation of Portland’s Clean Energy Community Benefits Fund and Denver’s Climate Protection Fund have not only provided each city with the ability to fund their existing decarbonization planning efforts, but have also introduced new levels of engagement, transparency, and oversight into local climate governance. Originating from resident-led coalitions, these funds also formalize monetary and procedural commitments to equity, whereas unfunded climate plans often offer only words.
Property assessed clean energy: A popular tool for climate investments
Passing a citywide tax increase to fund climate action is a rare achievement, so cities beyond Portland and Denver are coming up with other creative methods to fund their climate action priorities. One of the more common financial strategies is the use of property assessed clean energy (PACE) programs to incentivize building efficiency upgrades. PACE programs allow commercial (C-PACE) and sometimes residential (R-PACE) property owners to make energy efficiency improvements to their properties by fully financing all upfront costs. (See PACENation for a list of approved capital providers by state.) These costs are then attached to property tax assessments and paid off over an extended period, often up to 20 years. Over the course of repayment, property owners often save enough on energy efficiency to more than cover the cost of the improvements.
Enabled by state-level legislation, PACE programs are currently allowed in 39 states. All but eight of these states have active PACE programs, meaning that at least one local government in the state has passed a municipal ordinance establishing a local PACE program. This strategy is growing in popularity; several plans analyzed in our original report cited the success of their local PACE programs, while others laid out strategies to bring new PACE programs to their city. These include:
- Atlanta: Atlanta’s 2016 Climate Action Plan implicates PACE as a key financing strategy for its building energy efficiency goals. The city’s C-PACE program is managed by Ygrene Energy Fund. The local economic development authority, Invest Atlanta, authorized $500 million in bond issuances for the program.
- Cincinnati: The 2018 Green Cincinnati Plan includes a goal to increase the number of PACE projects completed in the city. Ohio PACE, which manages the city’s Energy Special Improvement District’s PACE program, reports nearly $20.6 million in total principal.
- Columbus, Ohio: The 2021 Columbus Climate Action Plan emphasizes the success of their PACE program to date, targets $250 million in annual PACE investments by 2030, and aims to pair those investments with the establishment of a green bank by 2025.
- Dallas: The 2020 Dallas Comprehensive Environmental and Climate Action Plan commits to developing a landing page and “comprehensive educational program” for building owners and tenants to learn about energy efficiency programs, including the city’s PACE program. The program is available to commercial, industrial, and multifamily residential property owners in Dallas, and is administered by the Texas PACE Authority. As of August 2022, the program invested over $73 million dollars and completed nine PACE projects.
- Kansas City, Mo.: The 2022 Short-Term Implementation Plan for Kansas City’s Climate Protection and Resiliency Plan includes PACE as a planned financing strategy for grid stability, resilience, and residential energy efficiency.
- Orlando, Fla.: The 2018 Community Action Plan celebrated $500 million in financing in the PACE program’s first two years. The plan also highlights Orlando’s utilization of $17.5 million in green bonds to improve energy efficiency in 55 municipal buildings.
Our research found several other cities aspiring to bring PACE programs to their communities, either through the passage of enabling legislation, starting up a program in an area where it is already permitted, or increasing awareness and participation in existing programs. But despite its growing adoption, PACE programs are far from a financial panacea; they are limited to the building sector, and some critics are concerned about consumer protections, particularly around the potential for predatory practices and oversight challenges in residential PACE programs. The National Consumer Law Center has identified troubling cases of contractors pushing unneeded improvements (sometimes with little associated energy savings) on vulnerable homeowners who have not been properly screened for their ability to pay. In response to new requirements in the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, in 2019, the Consumer Financial Protection Bureau issued advanced notice of a new rule requiring PACE programs to follow existing ability-to-repay regulations.
Other emerging strategies for decarbonization financing
Besides those listed above, cities are using a variety of other financial strategies to pay for decarbonization activities. Below are promising practices highlighted in other decarbonization plans we analyzed:
Local financing authorities
- Boston: The 2019 City of Boston Climate Action Plan cites Renew Boston Trust as the city’s current and future vehicle to “invest in energy efficiency and renewable energy generation in municipal buildings.” Originally established in 2017, the Trust has already invested $10 million in energy savings performance contracting—a process in which upgrades are financed through future energy savings. The plan commits to $35 million in additional investments through the Trust.
- New York: New York City’s 2019 “A Livable Climate” plan commits to growing the Green Housing Preservation Program for low- and no-interest energy efficiency loans. The city also plays an important role in broader climate finance systems through strategic investment of its pension funds.
- Washington, D.C.: The 2018 Sustainable DC 2.0 Plan committed to establishing a green bank by 2020—a goal that was met in less than a year. The DC Green Bank now serves as a central access point for several innovative local climate finance programs, including the District’s PACE program, an Affordable Housing Retrofit Accelerator, a Clean Energy Advantage Program, a Community Impact Initiative, a Commercial Loan for Energy Efficiency and Renewables program, a Navigator Pre-Development Loan program, and an open solicitation for innovative clean energy financing proposals. In 2022, the DC Green Bank committed over $26 million in capital.
- Los Angeles: The 2019 Green New Deal Sustainability City Plan proposes stormwater capture actions funded by the Safe Clean Water Program (Measure W, a 2018 ballot measure), which collects an estimated $300 million annually through a 2.5-cent tax per square foot of impervious surface on private parcels in the Los Angeles County Flood Control District.
- San Diego: The 2022 City of San Diego Climate Action Plan celebrates the $4.8 million Climate Equity Fund, founded in 2021 and financed in part through the city’s energy franchise agreement with the electric utility SDG&E. Such franchise agreements are an emerging financial strategy for localities and energy providers to collaborate on cleaner energy and other climate outcomes.
- Chicago The city’s 2022 Climate Action Plan includes an analysis of climate-related Recovery Plan investments, which total $188 million.
- Sacramento, Calif.: The 2022 City of Sacramento Preliminary Climate Action and Adaptation Plan begins by noting a one-time budget allocation of $4.5 million to fund the plan’s implementation. While not yet implemented, a diverse and comprehensive set of financing options are explored in Appendix D of the plan.
Funding and financing are often the biggest barriers to local decarbonization efforts. That reality is borne out through the overall lack of detail and clarity we found when analyzing decarbonization plans from 50 of the country’s largest cities. But many cities have found creative strategies to address vexing problems such as the high upfront cost of building retrofits and the compounding environmental and social inequalities vulnerable neighborhoods face. As climate challenges mount, such strategies will be essential in securing the necessary investments for making our cities resilient and sustainable for decades to come.
For more case studies on innovative local approaches to fund and finance decarbonization, see the Department of Energy’s State and Local Solution Center, the National Association of State Energy Officials’ energy financing resources, and the Atlas’ local government case studies.