November 3, 2011 - From the November, 2011 issue

Environmental Defense's Jim Marston on the Carbon War Room's Goals & Priorities

British businessman Richard Branson established the Carbon War Room to, “harness the power of entrepreneurs to implement market-driven solutions to climate change.” Texas-based Jim Marston, the head of energy programs with the Environmental Defense Fund, has worked closely with the Carbon War Room’s energy-efficient upgrades in old properties. TPR interviewed Marston to discuss business-friendly approaches to improving the environment.

Jim Marston

"What [The Carbon War Room] can do is try to remove legal and policy barriers that prevent getting these investments to scale."

Please share with our readers your involvement, representing the Environmental Defense Fund, in what’s called the Carbon War Room. Could you introduces us to that entity, its purpose, and your involvement?

The Carbon War Room is a project of Sir Richard Branson and several other wealthy philanthropists around the world. They have organized around an interesting principle: this is a war to save the planet. 

They have divided the areas where one needs to make progress on reducing green house gases into several separate campaigns, and we’re helping them on two of these. One is related to alternative financing of energy efficiency upgrades, or what we used to call ‘retrofits’. In that area there are a large number of studies by McKinsey & Company and others that show there are great opportunities for reducing energy consumption by making buildings more efficient. The Carbon War Room has spent a lot of time talking to bankers, building owners, and others about what the market barriers are to getting energy efficiency to scale. Our role is to help implement the policies that their analysis produced, passing legislation rules for PACE commercial and trying to do on-bill financing with utilities. We look at ways we can get clean funds to invest in an area and ways to make building owners comfortable that these upgrades will pay off in a very short time. 

The other area we work on with the Carbon War Room concerns Ports. The War Room has a project regarding shipping, which largely deals with getting large shipping customers to demand cleaner ships and cleaner fuel. A WalMart may say they will only transport goods in greener ships, and we’re supplementing that work by trying to green the port operations in the United States.

How successful is your work, to date?

On the issue of energy efficiency alternative financing, if it were easy it’d already be done by now. We had to collect a lot of data and test what would work. But now we’ve got a number of PACE commercial projects taking off, particularly in California and Florida. We have on-bill financing projects moving forward in Austin, Texas and in California. I think we’re finally starting to see some real progress, and I noted today that Bank of America made an announcement with regards to new energy efficiency financing. After about a year of hard study and negotiations, I think we’re about to see progress that a lot of people will be proud of. 

And the Ports?

The ports are actually working very well. We’ve had a number of ports that have either made commitments or achieved real accomplishments. The Port of Houston greened their trucking operations, as L.A. and Long Beach had already done. We’re now in conversation with the Port of Savannah and the Virginia port, which is much of Newport News, mainly the civilian side of that very large military port.

Returning back to the mission of the Carbon War Room: what are the market barriers to scaling up efficiency? And how is EDF’s collaboration with the Carbon War Room assisting your efforts? 

I think both Carbon War Room and EDF would say that we are not the only players. Ultimately those are the large banks, investors, and building owners. There is a group called PACE Now involved. A number of cities have passed PACE local ordinances to allow businesses and individuals to use their property taxes as part of a financing mechanism, and thus local government is a player. What we can do is try to remove legal and policy barriers that prevent getting these investments to scale. 

There are a lot of barriers, but let me offer you three. One, in many buildings you have a split-incentive. That is, the owner of the building doesn’t pay the electric bill, and putting money into an energy upgrade does not directly benefit him. The people who do pay the electric bill tend to be short-term tenants, renting a year or two at most, and most energy efficiency investments don’t pay back in two years. It’s hard to get people to want to spend money when the windfall arrives later down the road to someone else. We’re looking to try to do something called on-bill financing that solves that problem. 


Another market barrier is the issue of scale. The large banks really don’t want to make a $5 million loan; they want to make a $500 million loan. Most building upgrades are not $500 million; in fact none of them are. Thus, one of the things we realized is that we need to figure out a way to standardize underwriting criteria across states and across buildings. We need to standardize contractual terms for energy efficiency loans so the banks can feel comfortable aggregating those and securitizing them into big loans. Of course we want to make sure we don’t do the stupid things that occurred in the housing area and have loans where nobody’s responsible for making sure that these are good, sound investments. I think we can do that, but we do need to figure out ways to standardize and securitize. We’re working on that. 

Another barrier is to figure out how we can provide private capital to homeowners and small building owners, where the banks have traditionally not granted loans for things like energy efficient investment. The concept called Property Assessed Clean Energy (PACE) has emerged, and that’s to deal with the lack of private capital for unconventional loans. While we’re still trying to deal with that legal problem with the Federal Housing Administration and with Fannie Mae and Freddie Mac, we’re going around that by focusing on commercial buildings, or buildings owned by individuals who don’t have an outstanding federally backed loans. PACE commercial is targeting one third of the housing market that is owned free and clear right now. What that does is allow folks to make unconventional loans for energy upgrades and have the local community collect money to pay back that loan through property taxes. So there’s high certainty that the loan will be paid back, and this gives the people providing the loans a greater degree of security. Of course the way it works, we think, is that the fee to pay back a loan will be less than the monthly saving in the energy bills.  Homeowner or commercial building owner benefits. Folks to voluntarily pay back loans through their taxes as a way to keep interest rates down and get new money for these activities. 

Many may believe that the latter are no-brainers, but all seem to be a great challenge. Could you elaborate more on why it’s been so difficult to scale energy efficiency?

There are three things going on. Number one, many of the investments in energy efficiency have become really cost effective only in the last few years. Certainly this is partly the result of high tech gadgets like smart appliances or sensors. Number two, you have got the problem of new types of loans that people aren’t familiar with coming along at exactly the wrong time, right after the banks screwed up and with regulators looking at their portfolios with new scrutiny. And finally, you’ve just got some classic market barriers, like split incentives, that are often hard to overcome in any setting. This is particularly the case when you have someone with a long-term interest in building and another person with a short-term interest in paying the electric bill. 

Of course we’re now at a time when people realize that energy efficiency is money lying on the ground. We just have to figure out a way to make it easy to pick this money up, as opposed to it being blown around or getting stuck to some gum. 

Jim, if we talk a year from now on this same subject, what progress do you think will have been made?

I think we’ll see dozens of high profile PACE commercial projects underway and working, and I think we’ll have proven in a couple of pilots that on-bill financing works. I think we’re going to see more announcements like today’s Bank of American announcement showing that the big banks understand that this is a profitable and safe place to put money. It provides economic benefits to the customers, energy security, and a cleaner environment to the country. 

Lastly, could you also comment on the unique role played by the Environmental Defense Fund, which is fairly described as grounded in science but also interested in forming partnerships that harness the power of market incentives? Talk about EDF’s role as opposed to that of other environmental groups on the political playing field today. 

Our philosophy is a good fit with the carbon war room. We share this belief that to get the kind of change necessary to make reductions in green house gases in time to prevent climate catastrophe you’ve got to have business involved in a big way. We also believe that to get business involved in a big way you need to make it profitable for them to make these investments. You need to think not only on what is the reduction strategy but also on how you finance it and on turning a profit. That’s for folks who make the investments and also for folks who provide the innovative technologies—whether they are renewable energy, energy efficiency, or demand-response—who need markets for their cool, energy-saving products. To do that you’ve got to have people buying them and buying them at scale.


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