If you ask local government professionals in charge of tackling climate change across the country what their biggest challenge is, a huge percentage of them will answer “money.” 1
The second and third most commonly stated concerns are a lack of political will and limited staff capacity. However, the former is less important than the problem of money (plenty of communities support climate action on paper, but change their minds when they have to pay for it out of their own pockets) and the latter is really just a proxy for money, too. Thus, money is really the primary bottleneck holding back climate action in most communities around the country.
Broadly, local governments have three options when it comes to funding climate action if they don’t want to mess with the existing budget: (1) raise taxes, (2) lobby for more state/federal funding, or (3) get creative with innovative financing techniques.
The first option is straightforward but rarely politically tenable. The second option is more complicated and no guarantee, especially when local governments are seeking to take action now. That leaves the best option for most local governments: to get more creative with their approaches to financing climate projects.
Up to this point, cities have already been pretty creative about leveraging performance contracts to reduce their emissions from municipal operations. However, the concept doesn’t extend to community-wide emissions, which is unfortunate since municipal emissions rarely constitute more than 1% of the emissions in a locality overall. 2
Fortunately, there is a conceptual counterpart to performance contracts that can be used to bankroll much larger climate projects. And it’s a tool cities already widely use: tax increment financing (TIF).
How TIF compares to performance contracts
The conceptual basis of a performance contract is that retrofitting a building for energy efficiency inevitably reduces one’s electricity bill. In many cases, there is a delta (i.e., difference) between the old and new bill that is great enough to pay for the retrofits altogether, assuming a third-party financing agency pays for the initial capital expenditure and offers a competitive rate.
This contrasts with TIF which doesn’t aim to reduce expenses but rather to increase property tax revenue in a municipality. For example, TIF was first introduced for use in urban renewal projects that dramatically revitalized blighted areas. Beyond improving quality of life for residents and the economic wellbeing of these areas, property values inevitably increased substantially after these projects. Just like with a performance contract, if the delta—or what TIF calls an increment—is great enough, these projects pay for themselves.
While historically local governments have relied upon TIF for tackling urban blight, it can be used to fund any project that’s expected to increase property values. 3 And luckily for local governments, there’s a wealth of research which shows that many climate projects not only mitigate emissions and improve resiliency, but also serve to raise property values.
How does tax increment financing work?
Let’s start with a basic explanation of property tax generally. Ad valorem (literally, Latin for “[according] to value”) property taxes form the backbone of local government and public school funding, and work by multiplying the value of a property by a rate (frequently expressed in “mils” representing 0.1%). So, a property worth $100,000 in a jurisdiction with a tax rate of 10 mils would pay $1,000 in taxes each year. Of course, this calculation can be complicated because a network of exemptions, valuation rules, and overlapping jurisdictions results in convoluted calculations for each property’s tax bill.
In most areas, property values increase over time. TIF is a form of value-capture that capitalizes on this by calculating the increase in tax revenue generated by a property over a predetermined baseline year. Using the above example, if next year the property was worth $105,000, the new tax bill would be $1,050. The additional $50 is the increment.
Tax increment financing involves a local government borrowing money to pay for improvements now that will, hopefully, result in increased property values in the future. This would correspond with increased tax revenues from that property, which would be used to repay the loan. In the example, that means the original $1,000 of revenue would still go to the local government like normal to pay for roads, parks, or firefighting, while the extra $50 is used to pay the loan for the improvements.
As you can see in the graphs below, TIF works because of the compounding growth rate that a comprehensive plan of improvements engenders in property values. If the tax revenue were to increase just once (such as if you added solar panels to a single roof), even by 20%, it would take more than double the time to finish payments.
But with TIF, property values don’t just go up once. They increase multiple times with almost every project that takes place as a result of the local TIF program. You add solar panels in year one, easy access to public transportation in year five, and a sprawling greenspace in year ten—all of this creates a value growth loop. Coupled with the fact that property values, on average, increase by 3.5% due to inflation, TIF programs can foment significant increases in tax revenue which in turn finances substantial capital improvements.
Using TIF for green projects
The good news for green projects is that typically, capital improvements that reduce greenhouse gas emissions also increase neighborhood property values. For example, green roofs increase the value of the property the roof is installed on by 7-11%, and increase the value of properties with a view of the roof by 2-5%, depending on distance. 4 General green infrastructure that is less visible can result in an increase of about 2% in the perceived value of the property, according to a UK study. 5 Increased greenspace has a more significant impact; a study of parks in Portland, OR showed an increase in home values of $1,290-$3,455, while a study in Philadelphia indicated that replacing vacant lots with managed greenspace resulted in property value increases between 2% and 5%. 6 In Atlanta, homes within a half-mile of the Beltline (a 22-mile loop of connected trails and parks) increased in value between 17.9% and 26.6% compared to homes further away. 7 Even more encouragingly, research is finding stronger effects over time, which suggests that property purchasers are taking green infrastructure into greater account as they become more aware of the realities of climate change.
What all this means is that the current real estate environment presents a good opportunity to improve the natural environment by creating green TIF districts—areas where TIF-funded projects create a matrix of carbon-mitigating improvements that transform the area:
- Leveraging private investment by subsidizing improvements from standard to green in new construction
- Creating localized zoning requirements for reduced carbon footprints in new construction and allowing mixed-use or neighborhood commercial development
- Reducing or centralizing vehicle parking and increasing pedestrian and bicycle paths
- Increasing the quantity of street trees
- Centering green transportation options, including EV charging and electrified transit
- Providing access to community solar (including subsidizing low-income household participation)
- Using green materials in public construction projects
Exactly which options to choose is a decision to be made by local leaders and stakeholders, which means each community can decide on a collective vision for what a green city—or a green district—means to them.
Bigger is better
The best TIF projects are larger-scale ones, not just a collection of small-scale, marginal improvements. Big-ticket projects are encouraged because those are precisely what drive up property values enough to make the TIF program viable in the first place. For local climate planners that are used to having to severely limit their projects’ scope due to budget constraints, TIF presents a unique opportunity for their ambition and comprehensiveness to finally be rewarded.
One way that this ambition could be channeled is to use TIF to fund a “green district” concept in a city. 8 This geographic area could be a showcase of what a carbon-free city could look like and also demonstrate how climate projects have numerous co-benefits such as economic development, improved equity, and greater resilience. Green districts can also serve as policy laboratories for cities to try out new policies and innovative capital infrastructure projects that promote a greener future.
Some concluding thoughts
The important thing to realize is that TIF is only going to become a more viable option for green financing moving forward. This isn’t a creative financial hack, but rather a reflection of the direction that the broader free market is moving toward naturally, with an opportunity for local government to capture some of the value created by that movement.
This was best underpinned by Larry Fink, CEO of BlackRock—the largest investment management firm in the world—saying “Climate risk is investment risk” in January 2020. 9 The implication of Fink’s statement is that investing in a greener portfolio is not only a socially responsible thing to do, but a financially wise investment decision as well.
Similarly, companies and individuals alike will be more discerning about how sustainable and climate-aware their community is moving forward. This will inevitably get priced into property values over time, and green TIF is a clever way to capture this value and use it to realize an area’s full green potential as soon as possible.
If you enjoyed this post and are thinking of exploring green TIF in your own community, we want to hear from you! We’ve been working to design some resources and tools that may be useful for this type of project and are happy to share. Shoot me an email at firstname.lastname@example.org.
Thanks to Evie Bauman, Sustainability Director for the City of South Bend, IN, for the conversations and questions that prompted this discussion. You can read more about South Bend’s innovative sustainability programs, or follow them on Twitter.
In theory, a city could serve as an aggregator for a performance contract that a number of private entities like homeowners or commercial building owners could participate in, but this would place a great deal of demand on staff time and have limited value over other, more straightforward mechanisms in most cases. ↩
Of course, this is contingent upon your state’s statutory regulations surrounding TIF. Be sure to check with local counsel to understand the local context surrounding what is a permissible use of TIF in your state. Even where statutory TIF is not available, municipalities with home rule powers can often use TIF anyway. ↩
Impact of Green Infrastructure on Property Values within the Milwaukee Metropolitan Sewerage District Planning Area. Madison. Center for Economic Development Publications. May 1, 2013. ↩
To green or not to green: Establishing the economic value of green infrastructure investments in The Wicker, Sheffield. Mell, Henneberry, et al. Urban Forestry and Urban Greening. August 2016. ↩
Sustainable for Whom? Green Urban Development, Environmental Gentrification, and the Atlanta Beltline Gentrification, and the Atlanta Beltline. Immergluck, Balan. Urban Studies Institute at Georgia State University. 2017. ↩
A few cities in the US have adopted EcoDistricts, which is a similar concept but are more developer-focused and have often lacked the robust funding that a TIF program could provide. And unfortunately, many of them focus more on appearing to be green to attract businesses and homebuyers rather than truly committing toward a carbon-free future. ↩
A Fudamental Reshaping of Finance: Larry Fink's 2020 Letter to CEOs. Fink. BlackRock. January 2020. ↩