The core of our work at the Environmental Finance Center at UNC is helping communities tackle the challenges of paying for environmental services. The environmental finance issues that we address are as complex as they are varied, and as an organization with a research mission, our goal is to discover and share lessons learned, best practices, and innovative strategies.
As part of this effort, we hosted a group of prominent environmental finance experts and innovators at our Future of Environmental Finance Public Forum. This event fostered discussion and identified emerging trends, strategies, and ideas in answering the basic “how will we pay” questions at the heart of successful environmental protection. Because the forum was hosted a little over a year ago, we’ve had a lot of time to verify some of the experts’ predictions. In the year since the forum, the following 10 themes that emerged still hold true (read the full report here).
The Past is Not Coming Back
The way communities pay for and administer environmental protection is changing. Traditionally, environmental programs were funded through a combination of federal grants and general revenue. Today, most protection programs are funded through local fees. In this transition, the private sector has taken on a much more prominent role in financing and/or administering a range of environmental programs, particularly in environmental enterprise services such as water and wastewater programs.
There is Urban Demand and Rural Need
As urbanization continues to channel attention towards the needs of larger cities, rural communities will be forced to grapple with aging infrastructure systems and diminishing financial resources. Many areas of the country are expected to see huge population growth in the coming years, while other areas are slated to lose residents in remarkable numbers. Rural communities founded on manufacturing or farm economies are at particular risk of population decline, with businesses moving overseas or closer to urban areas and decreasing demand for workers. Rural flight is expected to leave behind older, resource poor communities with fewer means to finance infrastructure projects, but with equal or greater need for upkeep and upgrades.
Big Challenges are Driving Innovation
The changing landscape of environmental finance is driving new ways of thinking about and addressing public problems. In the absence of traditional public financing, public private partnerships (PPP) are offering new and unique ways to plan for infrastructure projects, in some cases adjusting the traditional five to ten year Capital Improvement Plans (CIPs) into two to three year plans in order to zero in on immediate needs. Administrators are also beginning to adjust the way they think about infrastructure projects. Traditional gray infrastructure is beginning to merge with green technologies, and green infrastructure is now appearing in CIPs. As environmental issues continue to grow and multiply, communities are beginning to select more integrated, innovative, and dynamic solutions as a means of achieving greater environmental and financial resiliency.
Distributed Solutions are Needed but are Difficult to Finance and Coordinate
Green is going grassroots. There is potential for billions of dollars to be channeled from both the private and the public sectors to finance small, distributed projects such as solar installations or green infrastructure on private property. Over the years, private financial institutions have become increasingly familiar with the process of securitizing and standardizing solar contracts and loans, adding a crucial degree of certainty, visibility, and scalability. However, outside of solar, small distributed projects such as rain gardens or green roofs present unique financing challenges that are at odds with traditional private finance principles. Much of the distributed green technologies lack standardization, causing large, cash-infused institutions to generally shy away from extending finance. New institutions such as New York’s Green Bank are working to fill this financing gap by providing up-front credit to jump start emerging green technologies and promoting standardization in underwriting for asset classes and documentation.
Multiple Skill Sets will be Needed to Meet Future Challenges
As solutions to environmental problems grow more collaborative and integrative, administrators will need to employ multiple skill sets to ensure a collective approach is indeed effective. Such skills will include a strong grasp on market principles, including how to set rates, plan for capital investments, and anticipate market fluctuations. They will also draw from the social sciences, including how to communicate and work with diverse groups, how to listen, and how to solve problems collectively. The seemingly opposing nature of these demands will require increased dynamisms of administrators and an honest desire to understand issues from multiple perspectives.
Public-Private Partnerships are an Option, but not the Only Answer
Public investments in infrastructure projects, including incentives, credits, fees, and taxes, are crucial for advancing effective environmental solutions. However, without access to private markets, innovative technologies will remain beyond the financial reach of many private property owners and businesses. Public private partnerships (PPP) are crucial in spurring the development of both large and smallscale infrastructure projects. Targeted government investments can help attract and drive private investments by providing securitization and certainty. Nonprofits can complement government policies by helping to focus the mission of public initiatives, building consensus within the community, and working in a more nimble manner. Each sector has its own unique concerns over environmental initiatives, but drawing on the strengths of public, private, and non-profit institutions can help overcome the traditional barriers to environmental finance and craft a more navigable path forward.
Unlikely Partners are Driving Innovation
Financing will work best when founded on true coalitions. Building a network of public and private alliances will help local institutions address environmental problems in more proactive, cost effective, and creative ways. Environmental programs and services provide incredibly diverse benefits from economic development to public health. Capturing “the market” for these diverse (and somewhat difficult to monetize) benefits requires tapping into interests, energy, and resources of diverse and uncommon organizations. Federal agencies are co-financing projects, local governments are partnering with other communities up and down the watershed, and nonprofits are working in lockstep with investor-owned utilities to outline new rules for operations. Such partnerships are starting to take place across the country and are highlighting the need for sound business plans, diverse revenue streams, long-term financial planning, and creative contracting to cross political boundaries and ownership models.
There is Opportunity in Data
Community data, including population trends, economic data, and compliance capabilities are pushing wiser, more data-driven spending decisions. These tools are also opening the door for a more robust and dynamic use of funds. For example, New York State used Clean Water State Revolving Loan Funds (CWSRF), which are typically earmarked for wastewater collection and treatment, to guarantee loans for residential energy efficiency retrofits. In order to justify using water funds for emission reduction programs, the state analyzed pollution from power plants, including nitrogen dioxide, carbon dioxide, sulfur dioxide and other gases that contribute to acid rain, and analyzed how reducing emissions could lead to increased water quality. New York found that increased air quality could, in turn, reduce wastewater treatment costs. This dynamic use of data can serve as an example to other states interested in administering funds in innovative and overlapping ways, ultimately helping to stretch limited public dollars to meet a growing environmental need.
Consumers Need to be On Board
Public support is a crucial precursor to effective public policy and fund raising. Local and state administrators must take the time to educate the public about environmental initiatives, articulate a solid business case underlying the policy goals, and make the connection between investments and quality of service. Significant policy gains can be achieved by engaging the public and fostering a sense of citizen empowerment, ownership, and responsibility. For example, Raleigh, North Carolina successfully added a small watershed protection charge to residents’ monthly water bill in order to clean up the area’s drinking water source. The city received little push back on the initiative and has seen consistent reductions in water use since the outreach campaign took effect. Non-governmental organizations can be effective at mobilizing a community to push the envelope and ask hard questions.
Fairness and Equity will Continue to Be Challenges
How to pinpoint and distribute the financial burden of environmental protection is an ongoing challenge in the world of environmental finance. In the past, in some cases large public grants have hidden the cost of infrastructure from current users. While in some sectors great strides have been made to assign costs to environmental impact, other sectors still struggle to align benefactors and beneficiaries. Loan terms that match project lives can help assure that future beneficiaries pay their share. Complex and emerging environmental issues such as climate change still pose a significant challenge in assigning and distributing costs.