EPA Greenhouse Gas Reduction Fund

EPA Greenhouse Gas Reduction Fund

March 06, 2023 | By Kenneth Hansen in Washington, DC

The Inflation Reduction Act establishes a $27 billion “greenhouse gas reduction fund” at the US Environmental Protection Agency.

The fund is to be used to provide grants to one or more non-profit organizations that are in turn to use the grant proceeds to provide downstream loans, grants and other financial assistance to a range of public and private sector recipients to support projects that will reduce greenhouse gas emissions and pollution, particularly in low-income communities.

The $27 billion fund is to be deployed by EPA in three tranches: $7 billion for deploying “zero-emission technologies,” such as solar panels, in low-income and disadvantaged communities, $8 billion for projects that reduce greenhouse gas emissions and pollution in low-income and disadvantaged communities but without restriction to zero-emission technologies, and $11.97 billion for “general assistance” for projects that reduce greenhouse gas emissions and pollution but without restriction as to either the technology or the immediately benefitting community.

All three tranches are to be transferred as grants, with a recipient’s permitted uses of the grant proceeds varying according to the tranche.

EPA said in mid-February that a “notice of funding opportunity” will be issued “by summer 2023.” The applications window is expected to open then for two of the three tranches — the $8 billion and $11.97 billion tranches — which by the statute are available only for private non-profit organizations.

The announcement confirmed that the remaining $7 billion tranche will be available to non-profits as well as to state, local and tribal governments, notwithstanding speculation that it might be restricted to public-sector entities, just as the other two tranches are restricted to private-sector non-profit entities.

Legislation was subsequently introduced in the House that would eliminate the fund. It is unlikely to be passed by the Senate and would, in any event, not survive a veto.

General Assistance

The largest portion, $11.97 billion, provided under the rubric “general assistance,” is for grants to “eligible recipients” for the purposes of providing financial and technical assistance both directly to “qualified projects” and to new or existing “public, quasi-public, not-for-profit, or non-profit entities that provide financial assistance to qualified projects at the State, local, territorial, or Tribal level or in the District of Columbia, including community- and low-income-focused lenders and capital providers.”

Given the wide range of public and private organizations that might be well positioned to invest in reducing greenhouse gas emissions, it is surprising that “eligible recipients” of grants from this tranche are restricted to 501(c)(3) non-profit organizations. Such organizations must also satisfy four criteria to receive grants. They must: provide capital, including by leveraging private capital, and other forms of financial assistance for the rapid deployment of low- and zero-emission products, technologies, and services; not take deposits; be funded by public or charitable contributions; and invest in or finance projects alone or in conjunction with other investors.

The financial assistance the grants must be used to provide is not defined, but the statute describes it as “grants, loans, or other forms of financial assistance.” It appears that such assistance could entail not only grants and loans, but also variations such as recoverable grants, subordinated debt, equity investments and co-financing arrangements, so long as the recipient benefits financially.

A “qualified project” is defined as any project, activity, or technology that “reduces or avoids greenhouse gas emissions and other forms of air pollution in partnership with, and by leveraging investment from, the private sector,” or “assists communities in their efforts to reduce or avoid greenhouse gas emissions and other forms of air pollution.”

That second prong suggests a broader program scope than just transferring funds. In-kind benefits should qualify.

Technical assistance, workforce development and community planning may all be qualified projects. Interested organizations are pressing for EPA funds to be used to educate communities how to take full advantage of other federal, state, local and private opportunities for grants, loans and tax incentives that encourage deployment of zero-emission technologies.

Disadvantaged Communities

The second-largest tranche, $8 billion, is also available only as grants to “eligible recipients.”

The types of “qualified projects” are identical to those for the $11.97 billion in general assistance grants, except that these funds are to be used only for financial and technical assistance in “low-income and disadvantaged communities.”

EPA said in February that these grants are to be allocated consistently with the Biden administration’s Justice40 Initiative, “which directs that 40% of the overall benefits of certain Federal investments flow to disadvantaged communities, including those facing disproportionately high and adverse health and environmental impacts.” By combining the $11.97 and $8 billion tranches, slightly more than 40% of the total funds will support such communities.

Zero-Emission Technologies

The third tranche, $7 billion for zero-emission technologies, is also designated for low-income and disadvantaged communities, but with two differences from the $8 billion tranche designated for such communities.

One is that this tranche has a wider range of potentially qualified direct recipients from EPA. In addition to section 501(c)(3) non-profit organizations that satisfy the four criteria noted earlier, grants from this tranche can also go to states, municipalities and tribal governments.

The second difference is use of proceeds. This tranche is to support projects that “enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies, including distributed technologies on residential rooftops, and to carry out other greenhouse gas emission reduction activities, as determined appropriate” by EPA.

This appears to support a narrower group of “qualified projects” than the $11.97 billion and $8 billion tranches, except that EPA has discretion to determine permissible uses of these funds. Thus, the ultimately available scope is not entirely clear.

The remaining $30 million of the total $27 billion is appropriated to EPA to fund administrative costs of funding the program until September 30, 2031, which suggests that EPA will be expected to keep an eye on how grant proceeds are used and the results achieved.

Eligible Recipients

Grants in all three tranches are to be provided on a competitive basis.

All fund appropriations must be obligated by September 30, 2024, roughly a year and a half from now. Grants need not be funded by then, but the amounts need to have been “obligated,, which will require EPA to have made contractual commitments to designated recipients by then, or it will lose access to the funds.

Many of the public comments received by EPA went to the question of how widely grants should be distributed.

The statute provides that EPA can grant funds from any of the three tranches to qualifying private non-profit organizations and that the $11.73 billion and $8 billion tranches can only go to such non-profits. While the $7 billion appropriation can also go to such non-profits, it can also be used to make grants to states, municipalities and tribal governments. While some observers expected the $7 billion tranche to be limited to states, municipalities and tribal governments, there was no sign of that in EPA’s February announcement.

The debate has focused on how broadly the $11.97 billion and $8 billion tranches should be shared. While all grants are to be competitively awarded, there is no requirement that there be more than one winner.

The idea of the fund arose in connection with a proposal to establish a national green bank, an idea promoted for more than a decade by the Coalition for Green Capital, a non-profit organization that has encouraged the establishment of regional and local green banks. It has lobbied aggressively to be awarded the full almost $20 billion, which is the full fund excluding the $7 billion tranche and the $30 million administrative budget.

The Inflation Reduction Act appeared to offer an opportunity to achieve that goal, but the technicalities of legislation passed through reconciliation precluded establishing a new federal entity — the hoped-for national green bank — so the work-around was to authorize funding for existing entities — the EPA and private sector recipients to be named later — to carry the mission forward.

EPA is now faced with the question of whether just to play its original part by concentrating all or most of the funding in a single, master entity that would in turn dole out funds to ultimate beneficiaries or to itself make multiple grants to assorted recipients and projects. Whether EPA is prepared to put all, or even a substantial portion, of its eggs in that one basket remains to be seen.

A partial answer was provided in recent EPA guidance, which indicates that EPA “expects to award up to 60 grants” in the competition for the $7 billion mixed public and private sector tranche. As to the roughly $20 billion-for-nonprofits competition, “EPA expects to make between 2 and 15 grants.”

While the specific criteria for an “eligible recipient” may have been contoured with a particular target in mind, they also fit other organizations, such as the existing green banks in California, Connecticut, Colorado, Florida, Maryland, New York and Washington, DC. and community development finance institutions. All these have track records of serving low-income communities. Certain existing environmental organizations with a regional or national scope might also serve. Each of these already has in place on-going programs for investing in clean energy projects, while the Coalition for Green Capital has been a policy and lobbying shop.

EPA may also see some benefit to taking a portfolio approach in supporting multiple organizations.

This is not to argue that all-eggs-in-just-a-couple baskets) is necessarily the wrong approach, particularly given the tight time frame. But there are at least some issues to be confronted in concluding that it is the better way to go.

Grants v. Loans

An interesting aspect of the program is that, though the EPA will make grants, the recipients, whoever they are, are authorized to redeploy those funds in a number of ways by making “loans, grants or other financial assistance.”

Federal funding programs are typically approved either as grant programs or as loan or loan guarantee programs. To contemplate both, with the allocation to be determined not by the agency but by the recipient of federal funds is not typical. EPA could make that choice for the recipient as it designs the program’s parameters. However, the statute suggests that substantial discretion will be left to the grant recipients.

The recipients are encouraged to establish sustainable operations, as to which they are to “retain, manage, recycle, and monetize all repayments and other revenue received from fees, interest, repaid loans, and all other types of financial assistance provided using grant funds . . . to ensure continued operability.”

This suggests that the recipient should not only, or perhaps not even substantially, simply pass grant proceeds downstream as further grants. If the EPA grants are to support sustainable operations, those proceeds will need to generate a revenue stream back to the source. That reflow could be interest on, and principal of, loans. It could also include recoverable grants, success-fee arrangements, and even equity investments in companies whose operations support reduced pollution or greenhouse gas emissions. But downstream grants will not serve.

A further complication arises from the conflict of interests that arises between EPA’s direct grantees and their downstream beneficiaries. Offered the choice between a loan or a grant, the downstream beneficiary’s choice is, all else equal, easy. All else should probably not be equal.

Borrowers and lenders have a shared interest in loan proceeds being used productively. If they are not, both face a business disappointment. A grant lacks the discipline imposed by an obligation to pay principal and interest. The incentive to use grant proceeds efficiently needs to come from something else. It may be the grantee’s independent commitment to achieve an objective supported by the grant. It will likely be reinforced by the terms of the grant agreement.

More fundamental than the challenge of structuring appropriate incentives for EPA’s grantees versus downstream beneficiaries is the question of whether the more efficient use of financial assistance is a grant versus a loan. Part of the answer is easy. Where the investment will generate revenue sufficient to repay a loan with interest as well as provide a reasonable return on any accompanying equity investment by the borrower, a loan will encourage the activity with less cost to the program and is the obvious way to go. If policy goals require incentivizing such investments that would not otherwise happen, then subsidized debt, with a less-than-commercial interest rate, may suffice.

Grants become the support of choice where policy desires to encourage an activity that will not, or will not without substantial risk, generate revenues for the recipient. The economists would look for circumstances where investments of grant proceeds would generate positive externalities that benefit society or a neighborhood, but that cannot be captured and monetized by the grantee.

That dichotomy may provide good guidance to EPA’s grantees for allocating grant proceeds between loans and downstream grants. Loans should go to income-generating projects, but with such risks attached that commercial debt is not available. Financing revenue-generating projects that lack such risks would violate the statute’s guidance to “prioritize investment in . . . projects that would otherwise lack access to financing.” Grants should go to projects that generate public benefits but not revenue or not enough revenue. In the latter case, a combination of loan and grant might be called for.

Given the natural preference of project developers for grants rather than loans, the sensible program structure might be a presumption of loans, to be complemented by grants if and to the extent that a case can be made of substantial public benefit not reflected in the project’s revenues.

Even where grants might make more policy sense than loans, another conflict of interest between EPA’s direct recipients and their downstream beneficiaries could stand in the way of grants being available. The grants received from EPA, if deployed as loans, add to the lender’s endowment. Grants made erode that endowment.

Rumors have it that the Coalition for Green Capital is already lining up prospective sub-recipients as borrowers rather than as sub-grantees. If the fund is to be an effective source of downstream grants, EPA will need to adopt program terms that assure that, where appropriate, grants will be available.