ENVIRONMENTAL FINANCIAL ADVISORY BOARD
    Members

A. James Barnes, Chair

    Terry Agriss

    John Boland

  George Butcher

   Donald Correll

   Michael Curley

   Rachel Deming

   Kelly Downard

  Mary Francoeur

  James Gebhardt

   Scott Haskins

 Jennifer Hernandez

    Keith Hinds

  Langdon Marsh

  Mathilde McLean

    Greg Mason

   Karen Massey

   Lindene Ration

 Sharon Dixon Peay

    Cherie Rice

  Andrew Sawyers

    Doug Scott

    Greg Swartz

   Leanne Tobias

  Steve Thompson

    Jim Tozzi

  Chiara Trabucchi

   Justin Wilson

   Stan Meiburg
    Designated
   Federal Official
                                March 31, 2010
Honorable Gina McCarthy
Assistant Administrator
Office of Air
U.S. Environmental Protection Agency
Washington, D.C.

Dear Ms. McCarthy:

      The Environmental Financial Advisory Board (EFAB) is pleased to
submit the enclosed report, "Financing Mechanisms for Reducing Greenhouse
Gas Emissions, and Other Air and Water Pollution Problems. "  This report is the
fourth in a series by this Board aimed at creating finance mechanisms to address
the reduction of greenhouse gas emissions and other air and non-point source
water pollution problems.

      This report calls for the implementation of programs at the state and local
levels to finance the installation of energy efficiency and environmental
improvement devices at public and not-for-profit facilities such as: local
government buildings; colleges and universities; hospitals; schools; and churches.

      As  you know, the water sector has been well provided for in general. The
Clean Water State Revolving Fund (CWSRF) is approaching $75 billion in size
and the Drinking Water State Revolving Fund (DWSRF) is approaching $15
billion. Money wisely spent. Meanwhile, there are no  serious programs at all in
the air sector.  And, of all the CWSRF's billions, only 4% of the funds have been
spent on non-point source water pollution. This is especially disturbing for the
states that surround major bodies of water such as Puget Sound, Long Island
Sound, San Francisco Bay, the Chesapeake Bay, and especially the Gulf of
Mexico, where hypoxia and other effects of agricultural runoff have wreaked
havoc on water quality. New programs to finance air quality improvement and
reductions in non-point source water would be an invaluable addition to the cause.
                    Providing Advice on "How to Pay" for Environmental Protection

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       Based on Kf AB's examination and findings of a concept to extend energy
efficiency programs to public and non-profit facilities, the Board submits five
recommendations for your consideration.  We hope that you will find this report
constructive and useful. The members of HFAB appreciate having the
opportunity to advise and assist the Agency on important environmental finance
issues,

       U" you or your staff have questions about this report and would like to
arrange a meeting, please let us know.

       i                                 Sineerelv,              x

                                            ''          /7
                                         V  /   \-.'     ->, v_
V, James Barnes                          A.. Stanley Meiburg
>:FAB Chair                              t;l- AB Designated federal (Mlkial
Enclosure

cc;     Lisa P. Jackson, Administrator
       Bob Pereiaseepe, Deputy Administrator

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 Environmental Financial Advisory Board
EFAB

A. Stanley Meiburg
Designated Federal
Officer
Members
A. James Barnes, Chair
Terry Agriss
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Scott Haskins
Jennifer Hernandez
Keith Hinds
Langdon Marsh
Greg Mason
Karen Massey
Mathilde McLean
Linden Patton
Sharon Dixon-Peay
Cherie Rice
Andrew Sawyers
Doug Scott
Greg Swartz
Steve Thompson
Leanne Tobias
Jim Tozzi
Chiara Trabucchi
Justin Wilson
   Financing Mechanisms for Reducing
Greenhouse Gas Emissions, and Other Air
       and Water Pollution Problems
  This report has not been reviewed for approval by the U.S. Environmental
   Protection Agency; and hence, the views and opinions expressed in the
    report do not necessarily represent those of the Agency or any other
              agencies in the Federal Government.
                    March 2010

                 Printed on Recycled Paper

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             Financing Mechanisms for Reducing Greenhouse Gas Emissions, and
                          Other Air and Water Pollution Problems
BACKGROUND

In 2008, the Environmental Financial Advisory Board (EFAB) urged the Agency to advocate and
encourage states to create Air Quality Finance Authorities to finance commercial air pollution
reduction projects for facilities such as truck stops, dry cleaners, auto body shops, as well as
mobile sources such as diesel engines for trucks, construction and other heavy equipment, as
well as those for agricultural use1.

In 2009, EFAB issued two reports urging the Agency to advocate and encourage both states and
local governments to adopt "Voluntary Environmental Improvement Bond" programs to finance
energy efficiency as well as air and non-point source water pollution reduction programs for
homes and farms2. The Department of Energy has launched a major drive for these purposes.
They have succeeded in getting legislation adopted in sixteen states.  They call their program
"PACE", for Property Assessed Clean Energy.  Unfortunately, the PACE program only deals
with clean energy. With only one exception3, there are no provisions for air or water pollution
reduction in any of these sixteen new state laws.

THE CONCEPT

A concept to extend energy efficiency programs to public and not-for-profit facilities was
developed in 2009 at the University of Delaware by Dr. John Byrne, Distinguished Professor of
Energy and Climate Policy and a member of the Nobel Prize-winning Intergovernmental Panel
on Climate Change (IPCC).  In essence, the concept, as Professor Byrne developed it for the
State of Delaware, is this:

A group of institutions composed of local governments, universities, schools and hospitals form
a consortium to improve their energy efficiency. The consortium hires either an electric utility,
or other energy service company, to complete an energy audit at each of their facilities showing
them the cost savings for making certain energy efficiency improvements such as  installing
insulation or solar panels.  Based on these audits, each institution decides which improvements
they will make (if any). The Sustainable Energy Utility (SEU), a nonprofit organization created
by the State of Delaware, issues a bond to fund all  of them.  Each institution then executes a long
1 "Report on Innovative Finance Programs for Air Pollution Reduction"
 "Report on 'Voluntary Environmental Improvement Bonds':  An Innovative Local Environmental Finance
Concept for Mitigation of Climate Change Risk; Air Pollution Reduction; and the Reduction of Non-Point Source
Water Pollution", and, "Report on the Financial, Underwriting, Risk Mitigation and Consumer Protection
Considerations for the Adoption of Voluntary Environmental Improvement Bond (VEIB) Programs".

3 The State of Arizona's PACE statute includes greywater management and rainwater conservation systems.

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term payment agreement with the SEU to pay off the cost of their respective improvements and
their audits.  In short, this is a concept to aggregate otherwise relatively small energy efficiency
projects into a single finance program big enough to fund cost-effectively. The SEU announced
on January 7, 2010 that they expected their first bond issue to be in the $30-35 million range and
that they had begun the process of identifying state owned buildings for energy efficiency
retrofits.

Delaware's SEU model shows considerable promise because it has the advantages of a nonprofit
agency which can act more nimbly than a government agency. At the same time, it is governed
by a public board, named by the state's Governor, ensuring public oversight. As a "utility",
however, it necessarily only deals with energy projects, not other environmental improvements.

This concept is virtually identical to our VEIB concept except that it refers to public institutions
and not-for-profit facilities rather than homes and farms. However, because all of these facilities
are tax-exempt, the bonds issued to fund them are also tax-exempt.

We believe that Dr. Byrne's concept has great merit and, with significant additions, should be
implemented countrywide. We believe that this concept should be modified based on the
following considerations:

      Even though an institution might be exempt from real property taxation, these pledges
       (except for the local governments') should, as in the VEIB program, be secured by a tax
       lien.  This will greatly facilitate bond financing and should result in longer terms and
       lower interest rates.

      There is no reason why not to include churches in such a program, assuming they are
       creditworthy, as all of the other private institutions would have to be.

      Not-for-profit corporations are not always the most creditworthy of institutions and can
       be problematic to underwrite. Local government bond issuers may well want to consider
       general obligation pledges to support the credit ratings of these bonds.

      Individual states could either create their own SEUs, or they could simply pass enabling
       legislation for counties and other local governments to issue bonds to fund these
       programs, or states could create State Air Quality Finance Authorities which could issue
       bonds for this program, for VEIBs, and for the other types of air pollution reduction
       projects described in our 2008 report.

      While the bonds might be eligible for tax-exempt status, the issuing  agency might elect to
       issue a taxable, direct-pay Build America Bond (BAB) where the federal government will
       pay the SEU a 35% interest rate  subsidy.  Such BABs might actually result in a lower net
       interest cost than would tax-exempt bonds, especially for the longer maturities. There

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   are, however, complicated rules for the issuance of BABs where some of the bond
   payments may come from not-for-profit, tax-exempt organizations. Issuers should
   consult competent bond counsel on this matter to assure compliance with all Internal
   Revenue Code requirements.

  The use of BABs opens the question of whether a trust could be created and owned by
   the local electric utility, or a group of businesses, or groups of private investors, or - in
   the case of churches and private schools and hospitals - major donors.  These groups
   would own the devices and lease them to the exempt organizations and then take
   advantage of the federal tax benefits. Unfortunately, under current law, the biggest tax
   benefit - the energy efficiency tax credit - is probably not available. We understand that
   Section 50(b) of the Internal Revenue Code recites what is known as the "exempt use"
   rule that says that if equipment eligible for a federal tax credit is used for the benefit of an
   exempt entity, then the credit does not apply. If energy efficiency is, indeed, a high
   national priority, this rule seems counterproductive. Nonetheless, tax deductions for the
   allowance for depreciation may be available and may well be attractive enough to
   warrant the creation of a lease program.

  In addition to energy efficiency projects, again like the VEIB program, such a program
   could be broadened to include other environmental improvements such as permeable
   pavement, greywater management systems, rainwater conservation and management
   systems, as well  as green roofs.

  This concept would also fit into our 2008 recommendations to the Administrator urging
   the creation of State Air Quality Finance Districts. This program would  be a public
   sector program; which would provide balance to the type of private sector programs such
   as diesel truck programs,  organic  dry cleaning programs and other initiatives, all of which
   could be funded with bonds issued by such districts.

RECOMMENDATIONS

Based on the above considerations, the Board would like to make the  following
recommendations:

1) That the Agency urge the states to adopt programs as described herein to facilitate the
   financing of both energy efficiency and environmental improvement projects for the
   benefit of public agencies as well as not-for-profit organizations.

2) That the Agency urge the States to enact statutes either: a) to create Air Quality Finance
   Authorities which, as conduit bond issuers, can access the municipal bond market to

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   finance such programs, or, b) empower counties and other units of local government to
   issue bonds for such purposes.

3) That the Agency urge the states to enact statutes to enable localities: a) to enter into
   voluntary contracts with homeowners and farmers (the VEIB program), with local
   government agencies, and with not-for-profit organizations, including churches, to
   finance energy efficiency and environmental improvement projects on their premises, b)
   to finance such projects through the issuance of taxable or tax-exempt bonds, as
   applicable, and, c) to secure such financings by liens and assessments against the
   program participants' real property.

4) That the Agency initiate discussions with the Department of Energy, the Department of
   Housing and Urban Development, the Department of Transportation, the Department of
   the Treasury, the Office of Management & Budget, and any other relevant agency to
   determine whether the Administration should recommend to the Congress that Section
   50(b)(3) of the Internal Revenue Code be amended to recognize applicable tax credits for
   energy efficiency and environmental improvement projects which are undertaken and
   used for the benefit  of not-for-profit organizations such as private schools, churches and
   private hospitals.

5) That the Agency should work closely with individual States that are developing and
   implementing their own new and innovative programs to finance energy efficiency, air
   quality improvement, and non-point source water pollution projects.

The Board believes that, absent a major federal investment in air quality and an additional
major investment in energy efficiency, significant investments in such areas must come from
individual citizens and responsible not-for-profit organizations. The recommendations
contained herein, along with those  in our three previous reports, provide a blueprint for
organizing such involvement and marshaling such investment at the state and local levels.

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                               WA.Si HNGi TON, D C. ?046'i
                                       JUN   72010
Mr. A. James Barnes
Chair, Environmental Financial Advisory Board
Professor of Public and Environmental Affairs
Adjunct Professor of 1 aw
Indiana University
Bloomington. Indiana 47405

Dear Professor Barnes:

      Thank you for your letter of March 31. 2010, and the report entitled, "Financing
Mechanisms for Reducing Greenhouse Gas Emissions, and Other Air and Water Pollution
Problems," I am pleased with the recommendations set forth by the Environmental Financial
Advisory Board and hope to make progress on these and previous recommendations made by the
Board.

      I support states' efforts to adopt programs to facilitate financing for both energy
efficiency and environmental improvement projects. Low interest loan programs may help
homeowners, farms, and businesses finance many environmental improvements such as asbestos
removal, lead and radon abatement, and failing septic systems. At the same time, these programs
may also help finance energy efficiency/renewable energy projects such as solar panels,
vvoodstove replacement with cleaner appliances, insulation, etc,

      I agree that the recommendations you made regarding the creation of Air Quality Finance
Authorities by states would help local governments access the bond market to finance
environmental and energy projects, I understand that other federal and state agencies are
developing other incentives and tax credits that may help property owners afford these
improvements.

      Currently, the U.S. Environmental Protection Agency (EPA) is encouraging state and
local air agencies to implement innovative financing options for homeowners that want to
replace older biomass appliances with more efficient, less polluting units. We know that some
have suggested exploring biomass as an energy efficiency option for the Department of Energy's
Property Assessed Clean Energy (PACE) program.  As states implement legislation to allow the
PACE program, we are encouraging them to broaden this legislation to include other
environmental projects such as those mentioned above.
            Isn' Ret"/*' l

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       In addition, we are exploring a Voluntary Environmental Improvement Bond (VKIB)
pilot with a state air agency to help homeowners finance the replacement of older woodstoves
along with improved wcatherization.  This pilot has the potential to serve as a testing ground for
the feasibility of a VE1B approach to  financing. We look forward to partnering with a state
agency and will be pleased to share lessons learned with you and the Board.

       I appreciate the work that you and the Board put into the report and recommendations,
and 1 encourage you to continue developing innovative finance solutions for homeowners,
businesses, municipalities, and industries.  I am especially interested and would like the Board's
input on mechanisms to help fund small commercial and Industrial boiler replacement or retrofits
to comply with EP/Vs upcoming national rule for boilers.

                                        Sincerely,
                                       I   ;  ,    '  "      ._ -  "
                                        Gina McCarthy-
                                        Assistant Administrator
cc: Stanley Meiburg

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