About three years ago, Connecticut changed its approach to promoting renewable energy: It decided to act more like a bank than like a state government. Gone were many of the subsidies that had propped up the regional clean-energy market for years. In their place, Connecticut officials started to lend money to fund commercially viable green projects. The goal was to combine public financing with private loans from community banks and other financial institutions to help create a renewable-energy marketplace.
This marks a shift in the argument for clean energy from a moral to a capitalist one. "Connecticut is trying to demonstrate that clean energy is an arena where money can be made," says Daniel Esty, the former commissioner of the Connecticut Department of Energy and Environmental Protection and a professor at Yale Law School. "It's not just a story about clean energy. It's a story about cheaper, cleaner energy, and that has much broader appeal."
Among the enterprises that the green bank has funded thus far is a 15-megawatt fuel-cell project in the aging industrial city of Bridgeport, built on the site of an old brownfield. The bank pumped roughly $6 million of state money into the $67 million endeavor; over the course of the 12-year-loan, it expects to earn almost $1.5 million in interest.
Meanwhile, other states are following suit. New York started its own green bank in December 2013 and is now evaluating various proposals to fund. Officials in California, Hawaii, and New Jersey have plans to create entities similar to green banks.
In 2012, Reed Hundt—a former Clinton administration official and onetime Obama adviser—founded the Coalition for Green Capital, a D.C.-based nonprofit that offers free consulting services for states interested in learning more about the green-bank phenomenon. Hundt believes the best path for renewable-energy innovation and financing lies outside the paralysis of Washington. "Energy markets are largely regional and very localized," he says. "Most energy is made and consumed within a radius of a few hundred miles, so it makes sense to have regional and local solutions."
Hundt and other proponents argue that if green banks can help to fund projects that ultimately create a competitive marketplace and bring down the cost, then consumers will easily move to cleaner forms of energy. "The lesson is that if you ask consumers to pay for all of the switch themselves, then they revolt," Hundt says. "If you say to them, 'You'll have cleaner and cheaper energy,' then they'll switch."
This approach is not just a blue-state trend. Increasingly, global corporations (even ones not typically thought of as progressive or particularly green) have started to pay attention to the risks and costs associated with climate change. Many of them assume that at some point, they will be heavily regulated in their ability to use traditional energy, and so they are looking for ways to invest in clean energy as a strategic, long-term plan.
The newish market for green bonds—which allow people to borrow money, provided it goes toward funding environmentally friendly and sustainable projects—is a symptom of this trend. In 2013, the green bond market stood at $11 billion; Standard & Poor's estimates it could increase to $40 billion or $50 billion in 2014. And global investors took note this year when the French power company GDF Suez issued a $3.4 billion green bond, one of the largest bonds of this type to date. Of course, the green bond market is still tiny compared with the overall global bond market of roughly $90 trillion, but it shows the strong growth of an entirely new type of asset class built around acknowledging and tackling climate-change solutions.
The takeaway from all of this green-energy financing? Washington may be stuck arguing over the very existence of climate change, but plenty of other actors—states, local governments, and global financial markets, which are not typically familiar bedfellows—are forging ahead.
This article appears in the July 26, 2014 edition of National Journal Magazine as The Rise of Green Banks.