States eye green bonds, superfund and cap-and-invest programs to fund resilient infrastructure needs

As the municipal bond market expects issuance to swell over the next decade to accommodate climate-related infrastructure needs, states are also eying cap-and-invest and superfund programs to augment what is expected to be substantial needs in the face of extreme weather.

That's the finding from Pew in a Nov. 21 brief, "States are exploring paths to finance climate resilient infrastructure." The article follows a September piece examining the risks that climate change poses to public transportation and water systems.

After that article, co-authors senior officer Fatima Yousofi and associate Eli Gullett started to consider how the states "were getting their heads around these added costs," Yousofi said. They reviewed all state-level climate resiliency-related legislation and policy proposals in fiscal 2023 and most of 2024, and found that many states are taking the issue seriously.

"This is a pervasive issue for states, and it's something they'll continue to tackle going forward," Yousofi said. "It's on the top of their minds."

The pair outline a few main funding and financing tools that states are eying: climate bonds, superfund or "polluter pay" models, and cap-and-invest programs. States are also tapping federal programs in the Infrastructure Investment and Jobs Act, Pew found.

States and cities finance 80% of infrastructure in the U.S., and will be responsible for managing climate risk even as federal lawmakers focus on the need to shore up the Federal Emergency Management Agency's disaster relief fund. Municipal Market Analytics has estimated the coming era of "adaptation finance" could lead to a 100% increase in muni bond volume by the mid-2030s.

Yousofi and Gullett found "common themes" among the funding and financing options that states are considering or have already enacted. Vermont this year became the first state to enact climate superfund legislation, a proposal that is also being eyed by lawmakers in Maryland, California and Massachusetts. New York has passed similar legislation.

The states are projecting substantial funds raised by the superfund programs. Pew said New York and Massachusetts expect to collect $75 billion over the next 25 years, and Maryland expects to achieve $9 billion.

Cap-and-trade or cap-and-invest programs, where companies can buy or sell permits to stay within a certain cap and the government reinvests the money in climate-resilient projects, are also gaining momentum among states, Pew found.

California's cap-and-trade program, which help funds the California high-speed rail system among other projects, went into effect in 2012. Washington last year enacted a cap-and-invest program, which survived a ballot challenge in November, and 12 East Coast states have similar programs through the East Coast Regional Greenhouse Gas Initiative, Pew said.

"New York estimates that its cap-and-invest program, launched in 2024, could generate between $6 billion and $12 billion annually by 2030, with $4 billion to $8 billion available for investments," the Pew brief said.

On the more traditional bond front, more states have considered high-profile, large borrowing plans where the proceeds are restricted to climate-related projects. California voters in November approved $10 billion of bonds for climate change mitigation. Voters in New York State in 2022 approved a $4.2 billion general obligation environmental bond. Proceeds can be used to protect water quality and climate change adaption and resiliency.

The tools are not free of risks and implementation challenges, Pew said. Political opposition remains an hurdle for major borrowing programs. Legal challenges face many superfund proposals, and states that enact cap-and-invest programs face potential threats from businesses to avoid the cost by relocating.

"Despite such impediments, the need for proactive resilience funding remains urgent as states work to upgrade infrastructure systems for the challenges they face now and in the future," Pew said.