6 Innovative Funding Methods to Achieve Climate Action & Equity in US Cities

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Originally published on RMI.org.
By Alexander Dane & Alisa Petersen

US city budgets are tighter than ever due to COVID-19. The American Rescue Plan Act, recently passed by Congress and signed into law by President Biden, will provide some relief in the near term, while the proposed American Jobs Plan offers a tantalizing vision of federal infrastructure investments that could drive local climate action and equity nationwide.

Yet there remains an immutable reality that US cities without dedicated revenue streams to fund climate change mitigation, resilience, and environmental justice will continue to face fiscal constraints. Simply put, these social and environmental causes are at risk of being deprioritized when they stand side-by-side with other essential services.

But even in our economically challenging times, the light of leadership remains bright at the city level. Mayors, community coalitions, advocacy groups, and city councils have maintained focus on climate change and the need for aggressive action to protect and improve their communities’ futures.

Notably, the relationship between equity and climate is now receiving more attention than ever. This is fitting, since climate change and pollution disproportionately impact Black, Indigenous, Latino, and low-income communities. For example, on average, Black Americans are exposed to 1.54 times more particulate matter than the rest of the population, and people in poverty are 1.35 times more exposed.

As cities increasingly recognize that climate action can deliver multiple benefits, they are finding innovative funding methods to simultaneously address inequity and climate.

6 Funding Methods to Support City Climate Action and Equity

For more than a decade, cities have developed and proposed a variety of innovative funding models to address climate and equity. When cities put these approaches before their community members via ballot initiatives, voters have made it clear that climate and equity are priorities:

1) Sales Tax Approach

In November 2020, Denver, Colorado, residents voted to pass Ballot Measure 2A, creating a new sales tax that will generate $40 million to fund programs aimed at eliminating greenhouse gas emissions, reducing air pollution, and adapting to climate change. As a result, all Denver residents and visitors will now be subject to an additional 0.25 percent sales tax on nonessential items.

The revenue will fund and benefit a wide range of outcomes, including local clean energy workforce training; neighborhood-based environmental and climate justice programs; energy efficiency upgrades to homes and offices; and increased investment in solar power, battery storage, and other renewable energy technologies. The measure specifically notes that the funds should “maximize investments in communities of color, under-resourced communities, and communities most vulnerable to climate change, and endeavor to invest 50 percent of the dedicated funds directly in communities with a strong lens toward equity and race and social justice.”

Cincinnati, Ohio, voters also approved a transit-oriented sales tax, Issue 7, in 2020. The measure will raise the county sales tax by 0.8 percent to create a new funding source that will primarily go toward Cincinnati Metro bus services. This is critical funding for the city. As a result of COVID-19, fare-dependent public transit experienced a 50 percent decrease in ridership, leaving the system facing a budget deficit that will disproportionately impact low-income communities due to a greater reliance on public transit. The tax also supports climate goals, because transit reduces single-occupancy vehicle usage, thereby reducing local pollution and emissions.

2) Retail Tax Approach

In 2018, voters in Portland, Oregon, passed the Clean Energy Community Benefits Fund, a tax expected to bring in $44 million to $61 million annually to fund climate action that advances racial and social justice. The city structured its tax so that the entire cost burden was placed on large retailers not headquartered in Portland (like Walmart, Target, and Best Buy), placing a 1 percent gross receipts tax on large retailers that make $1 billion or more in gross sales nationally. Communities of color-led and developed the effort; grassroots campaigning helped it pass by a large margin. Programs supported by the fund teach valuable skills, such as insulating and improving inefficient heating and cooling systems and installing rooftop solar panels on the homes of low-income Portlanders.

3) Fossil Fuel Production Tax Approach

In November 2020, voters in Long Beach, California, approved an increase to a fossil fuel barrel production tax to support climate and community programs. Long Beach’s Barrel Tax effectively serves as a carbon tax, collecting money from oil producers, whose products will result in emissions, and using that funding to support various purposes, including climate initiatives. While the city already taxed oil producers for every barrel produced in Long Beach, the November ballot measure increased the tax by $0.15 per barrel to support general-purpose funding, including programs that address climate change and the environment, community health, and youth services.

4) Electricity Consumption Tax Approach

In 2006, voters in Boulder, Colorado, passed the nation’s first voter-approved carbon tax with approval of the city’s Carbon Action Plan tax. The tax brings in about $1.8 million annually to fund climate initiatives, such as incentives for clean technology and staff time to run programs that mandate building performance upgrades. Boulder structured its tax so that industrial customers pay the largest share ($9,600/year, on average), followed by commercial customers ($94/year) and then residential customers ($21/year). Because industrial customers are the largest carbon emitters in Boulder, this structure also minimizes the burden on residents and small business owners. The tax supports equity by funding a program that requires rental properties to undergo retrofits, thereby reducing renters’ energy burden and improving the quality of rental properties.

More recently, voters in Albany, California, passed Measure DD, an energy consumption tax. All Albany residents except for designated low-income residents will begin paying an increased 9.5 percent blanket utility service tax that will ultimately fund general city services, including disaster and emergency preparedness, emissions reduction projects, and emergency response and environmental sustainability programs.

5) Climate Bonds Approach

When it comes to funding large-scale, capital-intensive projects, many municipalities have adopted climate bonds. Projects funded by climate bonds typically align with internationally recognized guidelines such as the Climate Bond Standards, which can evoke greater confidence in the outcomes of bond revenue use. States, cities, and other special purpose authorities have issued these bonds, with proceeds being used exclusively to develop clean energy, transportation, water, and green building projects.

In line with an ever-growing trend in municipal bond financing for climate change mitigation and adaptation projects, voters approved the Miami Forever Bond in November 2017. This one-time, $400 million general obligation bond is being used to make Miami more resilient to sea-level rise and more frequent and extreme storms. The bond provides an example of how both innovative finance and equity principles can be co-designed, as equity is one of five guiding themes used for selecting projects to fund with this bond. The city has also committed to distributing investment benefits fairly across neighborhoods and income groups, while emphasizing social cohesion and diversity. Bond funding supports affordable housing as well as green infrastructure projects.

6) Resilience Bonds Approach

Coming on the heels of climate bonds’ growth, the market for resilience bonds has also matured. These resilience-focused finance mechanisms are a bit more complex in how they are structured, which includes bringing in insurance companies, quantifying the monetary value of mitigating risks, and consequently lowering the cost of insurance (as reflected in either premiums or payouts). Generally, these bonds seek to serve one of three purposes for municipalities: 1) reducing a city’s climate risk or liability exposure; 2) obtaining funding for a specific resilience project; or 3) reducing the cost of insurance or expanding insurance coverage for municipal assets.

To take one example, the New York Metropolitan Transportation Authority is using this type of bond to insure resilient power infrastructure, which underpins New York City’s metro rail service, upon which lower-income commuters are disproportionately dependent.

Designing Equitable Climate Funding

As various cities have used the different funding methods above to jointly advance their climate and equity goals, here are some key takeaways that other cities can consider in their own efforts:

• Inclusion from the start: Community members that a program aims to serve can be given early seats at the table to provide authentic and representative perspectives to program planning and design. These participants can also have formal authority in decision-making processes. For example, Portland’s Clean Energy Benefits Fund was intentional in the Board selection overseeing the design and management of the program.
• Intentional design: The proposed tax structures can be carefully designed to minimize the tax burden levied on low-income community members to the greatest extent possible. For example, see Denver’s “Polluters Must Pay” ordinance below, which has a very intentional tax structure.
• Transparent and accountable use of funds: The ways in which equity could be honored can be laid out clearly, whether it is through funding allocation, implementation processes, embedding equity outcomes into project selection criteria, or dedicating percentages of funding to be explicitly used for programs that serve Black, Indigenous, Latino, or low-income communities. For example, Denver’s Ballot Measure 2A specifically calls out end-use purposes of the funding spend and has created a stakeholder process to guide usage.
• Complementary messaging: When campaigning for these dedicated funding streams, some cities have chosen to speak about equity and carbon as interconnected issues. For example, Portland’s climate tax has shifted its terminology to using the broader “Clean Energy Community Benefits Fund” rather than a “clean energy surcharge.”

Looking Ahead: Funding Proposals to Watch

2021 looks to be another defining year for cities developing innovative ways to finance climate and equity projects—energy consumption-based taxes and fees in particular are gaining momentum. Initiatives currently being set forth include specific language on tax revenues to create new opportunities in the energy transition at the local level, such as:

• In Portland, Oregon, a proposed Healthy Climate Fee and Clean Air Protection Fee is under consideration. The city-led initiative would raise roughly $11 million per year to support pollution reduction programs. The funding for this fee is sourced from institutions surpassing set emissions thresholds. The city plans to invest the revenue in projects that reduce emissions, improve local air quality, and enhance community health and resilience, particularly for the communities most impacted by climate change.
• In Denver, Colorado, a proposed “Polluters Must Pay” ordinance would add a new consumption-based tax on electricity and natural gas. Advocates are seeking signatures needed for the measure to appear on the 2021 ballot. The initiative focuses on equity, with funds “directed to frontline communities that will experience the harshest conditions due to the climate crisis.” The initiative exemplifies the growing sophistication of community-led efforts in designing and considering advanced taxation structures. In this proposal, energy consumption taxation would be triggered only after residential, commercial, and industrial customers exceed predefined “allowances” set in terms of both electricity (kWh) and natural gas (thermal units) usage. The tax rates would be tiered across customer classes, while exempting low-income customers.

Trying to address climate change without also considering equity, environmental justice, and racial justice is an outdated approach that will have limited success, because all of these issues are so inextricably linked. For cities that share climate and equity ambition, existing examples provide a real-time learning opportunity to observe, consider, and adopt similar models. Looking ahead, the ever-growing alignment between climate and equity funds may just be the beginning of sustained local change.