Congress Should Approve a Federal Green Bank to Promote a Just Energy Transition
By Kelly Sims Gallagher and Amy Myers Jaffe
As Congress continues to debate infrastructure legislation, it should endorse a proven model for addressing the complex political landscape in the United States: Green banks. The Biden administration is proposing the establishment of a $27 billion “Clean Energy & Sustainability Accelerator’ which, in effect, would be a federal green bank. A new report from Climate Policy Lab argues that a federal green bank can be “one of the best tools in the country’s toolbox for ensuring a just energy transition” by targeting communities being left behind.
Many countries have national banks that have successfully mobilized climate finance and created jobs. Our research shows that Germany’s national development bank Kreditanstalt fur Wiederaubau (KfW) has served as a critical source domestic capital promoting small businesses, clean energy development and start-ups in Germany.
In fashioning a green bank provision, legislators will want to structure the institution to promote co-investment, where multiple investors each contribute to financing a project and agreeing in advance how and when each will receive investment returns. Permitting equity stakes, where a percentage of the business or project will be owned by shareholders like the government or private investors, could facilitate balance sheet funding to community-based lenders who provide financial services to vulnerable communities. Providing equity, combined with technical assistance, serves to build lending capacity and lower the cost of capital for hard-hit communities, including those suffering from an increase in poverty or environmental degradation as a result of climate change or shifting energy markets.
The Accelerator can also facilitate loans for distributed solar and other transformative investments by lending to local lenders at low rates on the condition that these lenders use that money to finance clean energy projects for their customers. This so-called “on-lending” has been successful at the state level when used by local green banks in the United States and internationally by public development banks such as the KfW.
Research from National Bureau of Economic Research (NBER) finds that the effects of environmental policy on overall U.S. employment are likely to be small, especially in the long run. That is because, over time (and sometimes quickly depending on the right policies), there is a reallocation of workers across multiple industries – think offshore oil rig welders and engineers shifting to deep water wind or energy data scientists to healthcare industries. But negative impacts can be harder to solve in the short-run in particular geographies where employment is linked to sunsetting industries or in communities that have been underserved for reasons related to bias and poverty. A federal green bank can be an effective way to target on-lending by local financial institutions and promote social justice and green industrialization in the communities where it is needed most. A federal green bank could be a valuable tool to accomplish the Biden administration’s target that 40 percent of overall benefits of relevant federal investments should accrue to disadvantaged communities. We urge Congress to get on board.
To read the full report, click here.
Kelly Sims Gallagher is the Academic Dean of The Fletcher School, Tufts University, Professor of Energy and Environmental Policy, and Director of the Climate Policy Lab.
Amy Myers Jaffe is a Research Professor at The Fletcher School, Tufts University and Managing Director of the Climate Policy Lab.