While the federal government has taken steps to reduce environmental regulations, local regulation has been more efficient, with states and cities taking essential action to curb their emissions and incentivize development of renewable energy sources. Florida has invested in raising roads and installing flood pumps, California has imposed stricter emission requirements on vehicles, and New York City has invested billions to install solar panels on the rooftops of one million buildings. However, these efforts are costly and local governments require revenue to fund these ambitious projects. While congressional funding is generally a primary revenue source, states like Florida have been required to rely on their residents while others seek outside funding from environmental organizations. Given the time constraints of conducting economic analysis on environmental regulations and the natural political uncertainty characterizing federal regulators, solutions for climate change will likely arise from a bottom-up approach where states develop their own environmental protection projects through creative financing methods independent of the federal government. The application of green bonds in Europe demonstrates the efficiency of this financial instrument in raising capital for environmental purposes, and local governments should move quickly to implement this strategy.
Bonds are debt instruments that are used in the public and private sector to raise capital to fund projects. The bondholder, or lender, purchases the bond from the bond issuer in exchange for a promise of repayment of principal plus interest on the loan. Cities generally issue municipal bonds (munis) to fund schools, highways, or other projects they are seeking to implement. Green bonds are bonds that are issued primarily for environmental, or “green” purposes.
In 2007, the European Investment Bank (EIB) established the market for green bonds by issuing a “Climate Awareness Bond” and has issued €23.5 billion ($24.98 billion) as of 2018. The World Bank then issued green bonds in November 2008 for the purpose of funding environmentally friendly projects. U.S. states and municipalities have also issued green bonds since the first municipal green bond (green munis) in 2013 and credit demand has only grown since. Further, the rise of ESG (Environmental, Social, and Governance) investing has also required money managers to seek environmentally friendly investments to attract a new generation of investors.