In a previous blog post, I wrote about steps the U.S. federal government can take to invest sufficiently in decarbonization despite the self-imposed limitations on congressional appropriation. Similar steps are needed for states and municipalities. They are the first governments to feel the impact of natural disasters and increased pressure on public services. And they play an outsized role in the financing of American infrastructure.
Unlike the federal government, most state governments are constitutionally required to balance their budgets. This restrictive practice can result in undesirable outcomes during recessions when additional government spending is badly needed to turn the economy around, but states and municipalities are experiencing dramatic declines in tax revenues. A bad enough economic crisis could force states to cut allocations to renewable energy and efficiency investments. The bond market for state and local governments is not much better. According to Yakov Feygin at the Berggruen Institute, the smaller size of municipal bonds, sheer variety and lack of standardization, and number of municipal governments limit the bond market’s ability to effectively finance infrastructure. The lack of a permanent emergency lender also means interest rates sharply increase in financial crises—making borrowing more expensive.
Three specific reforms should be enacted to give states and local governments more room to respond to the climate crisis. First, Congress should institutionalize a permanent system of grants to state and local governments that rise automatically when unemployment increases. Second, the Federal Reserve should revive an improved version of the Municipal Liquidity Facility that it used to stabilize interest rates in the municipal bond market during the early months of the Covid-19 pandemic. This time, it should lend at more generous rates instead of at a penalty, accept bonds of longer maturity, and expand the eligibility of borrowers. The Federal Reserve should also specify that it will specially seek out bonds for purchase that fund climate investment (so-called “green bonds”). Finally, Congress should create mechanisms by which the Federal government can borrow money on states’ behalf, provided they use it for specific purposes like decarbonization. This would effectively bypass the straitjacket on state-level fiscal policy imposed by balanced budget amendments or local laws that limit tax increases.
State and local governments have a lot of agency to address the climate crisis. The Political Economy Research Institute (PERI) publishes climate plans for specific states with tailored policies for pursuing ambitious climate targets. Carrying out those plans will be expensive. California climate plan’s would enable it to become a zero emission economy by 2045 by spending 3.8 percent of its GDP ($138 billion) per year on average between 2021 and 2030. West Virginia would need to spend 2.4 percent of its GDP ($2.1 billion) per year between 2021 and 2030 to reduce emissions to one-half of 2018 levels by 2030. While the PERI reports meticulously detail ways to raise the money, the additional steps proposed in this post would greatly increase the capacity of states to painlessly raise funds without making harsh cuts to other vital programs or pursuing unpopular tax increases. These actions would also ensure municipal interest rates remain low—which the reports argue would keep overall costs down—or fall even lower. Best of all, states on course to meet their climate targets could cheaply and profitably invest in more capacity to help lagging states.
