California urged to issue US$15bn of climate bonds

IFR 2535 - 25 May 2024 - 31 May 2024
4 min read
Michelle Chan

Advocacy groups are urging California lawmakers to pass a bill that would allow voters to decide whether to issue up to US$15bn of climate resiliency bonds to fight climate change.

The plan comes as the Golden State faces increasing pressure to cut its annual budget as its deficit widens, resulting in reductions in climate funding. In the latest revised budget this month, governor Gavin Newsom proposed another US$3.3bn cut in climate-related spending amid broader budget shortfalls.

A coalition of 170 groups rallied in Sacramento on May 22 to ramp up pressure on lawmakers. Supporters of the bonds said a separate source of funding would ensure important climate programmes are not subject to annual state funding cycles.

“It is significant to have such a large coalition come together in agreement,” said Jos Hill, project director for US conservation at The Pew Charitable Trusts, which is advocating for the climate bonds.

The general obligation bonds would fund projects to reduce climate risks and impacts from severe weather events, including flood protection, wildfire prevention and clean energy investments. About 40% of the proceeds would go to disadvantaged communities.

'Inadequate investments'

The cost of climate change to California is expected to reach US$113bn annually by 2050 without any intervention, the California Natural Resources Agency estimated.

“Californians are already paying the price for inadequate investments on climate action,” Hill said, citing skyrocketing home insurance costs due to frequent wildfires and extreme heat.

US municipalities are already facing rising credit risks related to climate events, credit rating agencies have warned.

More than 13% of the California’s GDP and 3.5% of total property value could be at risk by 2050, according to the Intercontinental Exchange’s climate model.

The State of California, rated AA– by S&P, had US$71.7bn of general obligation bonds outstanding as of May 1. It has also authorised US$26.6bn in bonds sales that are awaiting issuance.

An extra US$15bn in debt could have mixed credit impact, analysts said. “Even if an entity takes on more debt for climate mitigation, we can actually see that as an enhancement to their management and governance,” said Nora Wittstruck, a managing director at S&P.

Oscar Padilla, a lead analyst for California at S&P, said the state should have further capacity to issue climate bonds, given it is likely to take on additional debt gradually over several years – an approach similar to its current debt management policies. Still, he cast doubt on the prospect owing to ongoing budgetary cuts.

Downsizing debate

Groups campaigning for the climate bonds are also pitching a US$10bn alternative in the hope that a downsized bond could garner more political support.

Initiatives such as renewable hydrogen and offshore wind have been dropped in the new proposal because they have already received other forms of federal funding.

The two bills promising US$15bn investments – AB 1567 and SB 867 – have been stalled in California’s state legislature, which has until June 27 to pass them. A legislative working group is also drafting a proposal with investments ranging from US$6bn to US$13bn.

If passed, the climate bond proposal would go before California voters in November, potentially paving the way for the largest voter-approved climate investment in US history.

Nearly 60% of California voters support a US$15bn climate resilience bond measure, while 58% support a US$10bn measure, according to a survey conducted in March by FM3 Research.

Still, the state faces shrinking bond capacity as different agendas compete for resources. The California legislature is also considering a US$14bn education bond to modernise schools and a US$10bn housing bond to fund rental housing and home-ownership programmes.

Newsom did not respond to requests for comment. California state treasurer Fiona Ma said her office, as the agent of sale for all State of California bonds, remains neutral on bond measures.

Advocates said the state should prioritise climate investments. “The longer we wait, the harder it is to mitigate these climate effects,” said Hill. “We are going to get a better return by making these investments now rather than in the future.”