Climate Neutral Bonds: A Local Global Warming Solution

A new report from the Institute for Local Self-Reliance (ILSR), shows how communities can act now to reduce global warming. Through an innovative concept, climate neutral bonds, local and state governments can require that any new project financed with tax-exempt bonds would generate no new global warming pollutants. If a new building is financed, for example, any greenhouse gas additions from the operation of the building would have to be offset with reductions from other sources in the community.

In 2004, local and state governmental bodies financed about 9,000 individual projects with about $230 billion in municipal bonds. Tax-exempt municipal bonds are issued to finance a variety of development and public works projects, from police stations and schools to water treatment facilities and power plants. Collectively, municipal bonds finance projects that consume large amounts of energy over the life of the bond.

Says John Bailey, author of the report, “The slightly higher upfront investment in energy efficient or renewable powered buildings repays itself several times over during the life of the bond.”

“With no federal action on the horizon, cities and states must lead the way in reducing global warming, he says . “If a city or other public agency is serious about reducing greenhouse gas emissions in its community, a climate neutral bonding policy should certainly be one of the tools in its global warming toolbox.”

As of December 2005, seven Northeastern states have committed to cut their CO2 emissions 10 percent by the end of 2018 (Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, Vermont). California’s goal is to reduce statewide GHG emissions by 80 percent compared to 1990 levels by 2050. And nearly 200 U.S. municipalities have formally declared their intention to achieve the greenhouse gas reduction goals of the Kyoto Protocol. Concretely, that means reducing emissions generated by city agencies and local businesses and residents by 7% below 1990 levels.

These are welcome and potentially far reaching developments, but they will take time to have an impact. Most states and communities will have to gather data before they develop policies – estimates of base emission levels in 1990, current emissions levels and future growth rates – a time consuming and lengthy process. Climate neutral bonding, on the other hand, can be implemented immediately. Determining the baseline emissions under climate neutral bonding is simple. It’s zero. That means any greenhouse gases emitted after the bond-financed project becomes operational will have to be offset.

How Climate Neutral Bonding Works

Climate neutral means that there is no net increase in greenhouse gas emissions within the bond issuing agency’s geographical jurisdiction after the project becomes operational. Several elements of this definition might require further elaboration and justification.

Why a zero net increase standard? Shouldn’t we do better than that?

Of course. The zero net increase standard was chosen because of its simplicity. All of the methodologies and procedures developed to implement this policy could be used to apply a more stringent policy. For example, one might adopt a policy that for every 1-pound increase in CO2-equivalent GHG emissions from a bonded project, there must be a 1.5-pound decrease elsewhere.

Why require the offsets to occur within the bond issuing agency’s jurisdiction? Wouldn’t it be less expensive if offsets in other states or countries were allowed?

It may be less expensive to do offsets elsewhere. But we view climate neutral bonding as an initiative of community responsibility. It becomes the first step in what should be a truly comprehensive process of addressing a global problem at the state and local level. Responsibility is undermined if we can continue to generate pollution simply by planting trees in a far off region of the planet.

We also believe that architects and engineers will find a treasure trove of opportunities for improving efficiency and tapping into renewable energy within the state or local jurisdictions. Moreover, the effectiveness of local GHG offsets can be more easily monitored than remote projects.

With this said, each jurisdiction will frame its own rules. Some may allow, for example, the purchase renewable energy certificates from projects in other parts of the country. Although not a hard or fast rule, we believe that in most cases, local energy efficiency improvements will be a cheaper offset option than the purchase of regional or national green electricity.

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Adapted from the report, “Climate Neutral Bonding: Building Global Warming Solutions at the State and Local Level.”