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Financial Stewardship through Green Public-Private Partnerships

This article is part of a Special
in the March/April 2011 print issue of PA TIMES. Contact Editor
Christine Jewett McCrehin ([email protected]) for more information on
the print issue. See the Related Articles box for links to read more from the Special Section.

Daniel G. Bauer

Rising resource and infrastructure costs combined with an inability to keep pace with explosive energy, information and resource demands are creating a tenuous position for communities, citizens and businesses. Higher social service costs combined with falling municipal tax receipts are creating untenable fiscal situations. Scientific evidence validates the derogatory impact greenhouse gas, or carbon, emissions are placing on our environment.

These challenges are serving as the backdrop public administration officials, as well as private sector business managers, are facing on a daily basis. Furthermore, these challenges provide unappetizing choices such as higher costs, cutting services, raising taxes, or all of the above. Unchecked and unmanaged, these trends will continue. Local governments are particularly vulnerable and sit now on the precipice of prolonged public financial distress.

A total community focused solution is needed to address, measure and reduce our explosive consumption of essential services impacting our economic, environmental and financial ecosystems. Solutions born of effective environmental stewardship may be providing the pragmatic mechanisms necessary to reduce carbon or greenhouse gas emissions footprints; mitigate costs, lessen taxpayer burden; while providing a new recurring revenue stream to municipal coffers.

The consumption of energy resources incurred by a residence, building, business, municipality–all representing a community, is commonly referred to as an environmental carbon footprint. This footprint incorporates greenhouse gas emissions, measured and expressed in units known as carbon credits or carbon offsets (1 carbon credit equates to 1 metric ton of emitted carbon dioxide (MtCO2) representing emissions of six greenhouse gases) identified by the United Nations led Kyoto Protocol Treaty.

Carbon offset credits are financial instruments, priced and traded on over a dozen ‘climate’ exchanges worldwide, including Canada in North America. Additional carbon exchanges are commencing trading in China, Australia, New Zealand and several other countries. Within the United States, California is in the process of implementing an environmental carbon cap and trade program. Scheduled for operation in 2012, California carbon cap and trade program represents the largest such undertaking outside of the Kyoto Treaty’s Clean Development Mechanism (“CDM”) standards.

California is a member of the broader North American Western Climate Initiative. Additionally, known as the Regional Greenhouse Gas Initiative, several Mid-Atlantic and New England States are running a limited cap and trade program for electricity production. However, due to fiscal constraints, as well as other circumstances, revenues resulting from carbon and green projects are already being diverted to general funds, as is the case with New York State. This experience highlights two big challenges that not only state and local governments face, but all members of our American community–environmental-financial stewardship and subsequent lack of political will.

In order to seek out potential solutions addressing not only environmental concerns but public finance concerns as well, green public-private partnership research projects have been undertaken by certain communities within the State of Florida as well as the States of California, Ohio and Michigan to name a few, each providing a unique regulatory and fiscal dynamic. The select communities chosen were based upon their commitments as signatories to the U.S. Mayors Climate Protection Agreement.

The climate agreement is an ongoing initiative of the U.S. Conference of Mayors, an official nonpartisan organization of municipalities with populations of 30,000 or more citizens. Currently, more than 1,000 communities across all 50 States, Washington, DC and Puerto Rico representing over 87 million Americans have committed to greenhouse gas emissions reductions. Among the goals spelled out in the U.S. Mayors Climate Protection Agreement are targets for Greenhouse gas emissions reductions as well as efforts to be undertaken urging U.S. Congress to pass bipartisan legislation for potential emissions trading systems involving carbon offsets.

Driven by concerns of increasing the cost burden to private businesses, certain members of the legislative branch of the U.S. federal government are contemplating stripping the enforcement elements of climate change from the U.S. Environmental Protection Agency (“EPA”). Now comparatively speaking, carbon management and environmentalism are leading elements incorporated into strategic plans for both China and European Union member states. Collectively, the two are committing in excess of US$1 trillion in climate change and environmental finance, paving the way for long-term infrastructure financing and public-private partnerships.

Financial matters are complicated further by the fact that the average age of American infrastructure (versus other countries such as China)–water, sewer, power grid, power plants, amongst other capital intensive projects, is way beyond their depreciable lifecycles. For example, the recent Build America Bonds (“BAB”) financing program provided an opportunity for public finance to seek favorable financing terms for capital project proposals. The BAB program concluded this past December, 2010 accounting for over US$150 billion in infrastructure financing.

Born out of the BAB program, various green infrastructure financing programs were undertaken in Oregon, Texas and other special districts, communities, state and local governments. According to Bond Buyer, with the conclusion of BAB financing, the municipal (“muni”) market has decreased to a trickle. Considering close to 100 million Americans living in over 1,000 cities have already formally committed to climate change policies; several states are participating in quasi- and full-cap and trade programs; the EPA is pursuing standardization; private sector is moving towards corporate social responsibility and environmental disclosure and both nonprofit and private sector organizations are employing personnel through partnering with municipalities, are we making rational public choices?

Asset backed securities with relevant future revenue streams consisting of carbon offset credits may represent a financing vehicle that public finance managers, as well as corporate treasurers, could be utilizing, lowering the cost of debt, naturally leading to sound fiscal debt management. Historically, a linkage between environmentalism and financial stewardship seemed paradoxical. A leadership role for Public Administration is emerging.

Since many U.S. state and local government jurisdictions cannot enter into a deficit position several turn to the federal government for subsidy adding to the ballooning federal deficit position. Green public-private partnerships research projects provide insight into resolving such challenges. Ultimately, carbon environmental cap and trade may have little to do with greenhouse gas emissions reductions, but a lot to do with restoring financial solvency to the states and local municipalities.

Carbon environmental solutions may provide opportunities for local jobs, neither susceptible to off-shoring nor leaving town; improving sustainable infrastructure; setting the stage for green public-private partnerships and finally, a way to create new revenue streams serving as a rational public choice. A new twist on an old norm and no longer to be viewed as a cost center, environmental stewardship, delivered through carbon offset credits organized as green public-private partnerships may be innovating public finance and financial stewardship.

ASPA member Daniel G. Bauer is a PhD student at Florida Atlantic University in the School of Public Administration. He also has an Executive MBA, International Business from Florida Atlantic University College of Business and BBA in Finance, Marketing from The University of Toledo. Email: [email protected].

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