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CARBON REMOVAL
Carbon removal is the process by which humans actively and intentionally remove carbon dioxide (CO2) from the atmosphere and store it in longer-lived reservoirs.
GREEN BANK
A Green Bank is a specialized financial institution that leverages public and private funding to accelerate investment in clean energy, energy efficiency, and other sustainable projects. Its goal is to make green solutions more accessible and affordable, particularly for underserved communities, by addressing financing gaps and reducing perceived risks for investors.
In 2023, the power sector accounted for 26% of global greenhouse gas emissions, making it the largest contributor. Addressing emissions is a complex challenge, but transitioning from fossil fuel-based energy systems to renewable sources like wind and solar is a proven solution. Achieving this transition requires innovative approaches to technology integration, energy consumption, and, importantly, a new financial paradigm designed to support sustainable energy development.
Green Banks play a unique role in bridging the financing gap for clean energy projects. Their primary mission is to demonstrate to private markets that these projects can attract and sustain financing. Green Banks operate on key principles: (1) offering financing rather than grants; (2) leveraging private investment alongside public investment; and (3) recycle public dollars to maximize both investment and the efficiency of each public dollar invested. [1]
Source: Coalition for Green Capital
Source: Coalition for Green Capital, 2016. An example of a Green Bank structure.
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Unlike traditional financial institutions, green banks do not operate to maximize profit. Instead, they focus on maintaining financial sustainability while accelerating investment into the green economy by offering ‘catalytic capital’ -- funding that drives projects forward and attracts private investment. Importantly, Green Banks complement, rather than compete with, the private financial market. This fosters partnerships to expand investment in the green economy.
Director of Innovation to the President at the Connecticut Green Bank
Yale School of the Environment; Yale School of Management
Presence
Green banks operate at the city, county, or state-level. Green Banks also exist on the global level. More than two dozen green banks already exist in 12 countries at either the national or regional level. [2]
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State Level Banks
International Green Banks
Source: Coalition for Green Capital. Green Bank status by state as of November 2024.
Reaching Underserved Communities
Many Green Banks, particularly public institutions, share a priority to address the unique needs of underserved and disadvantaged communities such as a limited ability to assume additional debt. By considering these needs during the development of financial offerings, Green Banks can develop products and programs that ensure that clean energy and sustainable technology are available and accessible by all. For instance, a low-income family seeking to install a solar PV system on their home might work with a local Green Bank to monetize the federal tax credit to reduce the upfront cost of their system or to secure a solar lease. [3]
A Diversity of Financial Institutions
The financial landscape is enriched by a diversity of mission-driven institutions, each designed to address specific gaps and challenges in the market.
Among these are Green Banks, Community Development Financial Institutions (CDFIs), and credit unions.
They cater to distinct needs while sharing a common goal of creating positive social and economic impact.
Together, these institutions demonstrate the power of specialized financial tools to address diverse challenges, from climate change to economic development to personal financial security.
Green Banks
As detailed above, Green Banks are specialized financial institutions focused on accelerating the transition to clean energy and sustainable practices. Their mission is to mobilize public and private capital for renewable energy projects, energy efficiency upgrades, and other environmentally beneficial initiatives. Unlike traditional financial institutions, green banks prioritize market transformation by de-risking projects, providing catalytic capital, and targeting underserved communities. They operate on a revolving fund model, recycling capital through loan repayments to maximize impact. By filling financing gaps and demonstrating the viability of clean energy investments, green banks play a pivotal role in addressing climate change.
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CDFIs
They are mission-driven institutions dedicated to fostering economic development and addressing inequities in underserved and low-income communities. Their focus is on financing affordable housing, small businesses, community facilities, and other projects that promote economic inclusion. CDFIs receive funding from federal programs, philanthropic grants, and private investment, which they use to provide accessible and affordable financial products. Unlike Green Banks, CDFIs have a broader mandate that includes sectors like healthcare and education. For instance, a CDFI might finance the construction of an affordable housing complex or provide loans to small businesses in rural areas, helping to create jobs and stabilize communities.
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Credit Unions
Credit unions are nonprofit financial cooperatives owned by their members, offering personal banking services like savings accounts, loans, and mortgages. Their primary mission is to service the financial needs of their membership, often providing lower fees and better interest rates than traditional banks. Credit unions rely on member deposits to fund their operations and are governed democratically by their members. Unlike Green Banks or CDFIs, credit unions are not typically designed to finance large-scale public benefit projects but instead focus on individual financial well-being. For example, a credit union might offer a competitive car loan to a member or provide financial education resources to help members achieve their goals.
Understanding Green Banks
Green Banks use a blend of capital from private investors and public sources such as ratepayer funds or proceeds from programs such as Regional Greenhouse Gas Initiative. Unlike traditional grants or incentives, which are one-time uses of funds, Green Bank capital is typically invested in a project and expected to be returned or repaid. This means that as one borrower pays back their loan, that capital can be reinvested in new projects, creating a continuous cycle of impact and stretching every public dollar further.
Green banks focus on funding proven, commercially viable technologies that are ready for market develoyment (i.e. past the research and development stages) but that are cost-prohibitive to finance with traditional capital. Green Banks also strategically take risks that private lenders typically avoid, such as supporting low-income customers or demonstrating innovative business models like new leasing structures. This approach ensures that critical clean energy solutions are accessible to more people while fostering innovation in the market.
Market Advancement
To advance the market, Green banks can provide technical assistance and information sharing for projects in clean energy markets that might be generally more unfamiliar and expensive. Green banks can take on this work to create standardized frameworks (documents, processes, etc).
Financing Techniques
While Green Banks can provide direct investment into projects, many of their financial products are designed to attract and leverage private capital. The challenge is twofold: supporting customers in adopting sustainable technology while showing the private sector that these are investable assets.
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Financial products provided by Green Banks can include warehousing, credit enhancements, and co-investments. These techniques alleviate issues such as short-term contracts, insufficient principal capital, or high interest rates in order to reduce cost of capital for consumers.
1. WAREHOUSING/SECURITIZATION
Clean energy projects, such as residential or small business energy efficiency projects, can be small, geographically dispersed, and more expensive to provide capital for. Warehousing and securitization are financial strategies used to manage and scale portfolios of loans or assets.
WAREHOUSING
This involves temporarily holding (or "warehousing") loans or other financial assets on a Green Bank's balance sheet until there are enough to bundle together for a large financial transaction, such as securitization.
SECURITIZATION
The process of bundling multiple loans or financial assets into a single pool and converting that pool into marketable securities, which are sold to investors. These securities are backed by the underlying loans and generate returns from the repayments made by borrowers.
Green Banks use these tools to amplify their impact by unlocking larger pools of private capital and recycling funds to support additional projects. Green Banks may originate loans for clean energy projects, such as rooftop solar installations or energy efficiency upgrades and temporarily hold these loans on their balance sheet (warehouse them). Then, once a sufficient volume of loans is warehoused, the Green bank bundles them into a portfolio and sells it to investors as securities (securitizing them). This process allows the Green Bank to recover its capital immediately rather than waiting for loan repayment, enabling it to reinvest in new projects more quickly.
2. CREDIT ENHANCEMENTS
A credit enhancement is a financial tool used to reduce the risk for lenders, making it easier for borrowers to access capital. It provides additional security to lenders by mitigating potential losses if the borrower defaults on their loan. Common forms of credit enhancements include loan guarantees, reserve funds, subordinated debt, or insurance.
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Green Banks use credit enhancements to encourage private investment in clean energy projects that might otherwise seem too risky for traditional lenders. By providing this added layer of security, Green Banks help reduce perceived risks associated with new technologies, underserved markets, or innovative business models. This lowers the barrier for private capital to flow into these projects. [4]
What is a Loan Loss Reserve (LLR)?
Green Banks can set aside reserve funds to cover potential losses, increasing lender confidence.
What is a Loan Guarantee?
A Green Bank might guarantee a portion of a loan, ensuring that the lender recovers part of their reinvestment even if the borrower defaults.
What is subordinated debt?
Subordinated debt is any debt that falls below senior debt and is less secure.
What is senior debt?
Senior debt is borrowed money that has the most seniority and thus needs to be paid back first and is very secure.
What is equity investment?
An equity investment is an ownership stake in a project, and lenders share in a project's risks and returns.
3. CO-INVESTMENTS
Green banks can also directly invest in projects in partnership with private investors and provide the gap financing needed to close a deal. By participating alongside private entities, Green Banks provide confidence in the project's financial and environmental viability. Because of its flexibility and objective of getting clean energy projects onto the market rather than maximizing profit, green banks can form different kinds of investment structures to fill the needs of a project or fund. [5]
Green banks strategically use co-investments to mobilize private capital for clean energy projects, tailoring the structure to align with the risk appetite and return expectations of each participant.
By combining these forms of capital, co-investments create a layered financing structure that aligns the interests of all participants:
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Risk Mitigation: the Green Bank's willingness to take subordinated debt or equity positions provides a safety net for senior debt providers, de-risking the project for private investors.
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Leverage: a small public investment from the Green bank can attract a much larger pool of proviate capital, maximizing the impact of public funds.
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Scalability: this approach enables financing for larger, more complex projects, such as utility-scale renewable energy installations, that no single party could fund alone.
Example Green Bank Financial Products
Green Banks have developed many different financing products suited to their region and capital structure. Some successful and long-running examples include:
1. Property Assessed Clean Energy (PACE) Financing
PACE is a financing mechanism that allows both commercial and residential property owners to finance energy efficiency, renewable energy, and other eligible improvements through a special assessment on their property tax bill. PACE financing is unique because it's tied to the property being improved, rather than the owner, and is repaid over time through property taxes. This structure makes PACE financing particularly appealing, as it reduces upfront costs and transfers repayment obligations to new property owners if the property is sold.
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Green Banks play a critical role in facilitating PACE financing by developing and scaling programs, often in collaboration with municipalities. They educate stakeholders, establish program frameworks, ensure consumer protections, and may provide initial capital or credit enhancements.
On-bill financing is a mechanism that allows property owners or utility customers to pay for energy efficiency improvements or renewable energy installations through their utility bills. The cost of the upgrades is spread over time and repaid in installments as part of the customer's regular utility payments. This structure creates greater security for the lender because utility bills historically have a very high rate of repayment.
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Green Banks can facilitate on-bill financing by partnering with utilities and stakeholders to design inclusive programs and can provide initial capital or credit enhancements to reduce risks and attract private investment. Green banks also advocate for strong consumer protections and help structure programs so that repayment obligations remain with the property, reducing barriers to participation and accelerating clean energy adoption.
Source: U.S. Department of Energy. A diagram showing the PACE model, a mechanism for financing energy efficiency and renewable energy upgrades on private property.
Ways of Adminstration
Green Banks can be administered as public entities or nonprofit organizations, each with distinct structures, funding sources, and operational approaches.
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Local or state agencies
Public Green Banks are government-affiliated entities established through legislation or executive action and funded by public sources such as state budgets, utility ratepayer funds, or environmental program proceeds. Often housed within government agencies or structured as quasi-public entities, they align closely with public policy goals. These Green banks are governed by boards that include government officials and industry experts, ensuring transparency and accountability to taxpayers and legislative bodies. Their operations are typically geographically limited, exemplified by institutions like the Connecticut and New York Green Banks.
Nonprofit organizations
Nonprofit Green Banks operate independently as 501(c)(3) organizations and are funded through philanthropic grants, donations, and program-related investments. Governed by boards of directors with expertise in finance, clean energy, and community development, they have greater flexibility to innovate and adapt to local needs. An example is the Montgomery County Green Bank in Maryland, which partners with investors and local governments to drive clean energy adoption.
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“The End of the Beginning” for U.S. Green Banks
The U.S. is home to a growing number of successful state and local Green Banks that have collectively leveraged $2.5 billion in public and philanthropic funding into $9 billion for green projects. Despite this progress, the absence of a national Green Bank, like those in Australia and Japan, has limited the scale and coordination of green financing across the country.
The Inflation Reduction Act is poised to change this landscape. Central to the Act is the creation of the Greenhouse Gas Reduction Fund (GGRF), a $27 billion federal climate fund designed to act as a de facto national green bank. The fund is aimed at financing projects that:
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Accelerate clean energy adoption
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Reduce carbon emissions
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Protect vulnerable communities [7]
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As of August 2024, the EPA has fully obligated the $27 billion GGRF under the National Clean Investment Fund (NCIF), Clean Communities Investment Accelerator (CCIA), and Solar for All grant competitions. These funds were awarded to a range of recipient--including states, municipalities, lenders, and others-- focused on accelerating investments in renewable energy, energy efficiency, and clean transportation. [8]
These awards are designed to expand proven Green Banking strategies into more communities while empowering existing Green Banks to scale their impact. By supporting emerging clean technologies and expanding green financing nationwide, the GGRF represents a transformative moment for the clean energy economy. This unprecedented investment marks the beginning of a unified and scalable approach to green financing across the U.S., helping to bridge the gap to a more sustainable future.
Footnotes
Footnotes
[1] Coalition for Green Capital. "What is a Green Bank?". https://coalitionforgreencapital.com/what-is-a-green-bank/.
[2] NRDC. “Green Bank Network.” Be a Force for the Future. https://www.nrdc.org/greenbanknetwork.
[3] Environmental Protection Agency. "Green banks." Resources for State and Local Governments. https://www.epa.gov/statelocalenergy/green-banks#:~:text=Green%20banks1%20are%20public,energy%20projects%20that%20reduce%20emissions.
[4] U.S Department of Energy. "Credit Enhancements." State and Local Solution Center. https://www.energy.gov/scep/slsc/credit-enhancements-0#:~:text=Loan%20loss%20reserves%20(LLRs)%20provide,principal%20of%20a%20loan%20portfolio.
[5] Coalition for Green Capital. "Green Bank Techniques." https://coalitionforgreencapital.com/what-is-a-green-bank/green-bank-techniques/.
[6] Coalition for Green Capital. "Green Bank and Product Overview." https://coalitionforgreencapital.com/wp-content/uploads/2016/06/CGC-Green-Bank-Product-Activity-Overview.pdf.
[7] NRDC. "How Green Banks are Financing the Fight Against Climate Change." https://www.nrdc.org/stories/how-green-banks-are-financing-fight-against-climate-change.
[8] Roosevelt Institute. "The End of the Beginning for US Green Banks." https://rooseveltinstitute.org/blog/the-end-of-the-beginning-for-us-green-banks/.
[9] Inside Climate News. "White House Awards $20 Billion to Nation’s First ‘Green Bank’ Network." https://insideclimatenews.org/news/04042024/biden-administration-green-bank-network-disadvantaged-communities/.