Virginia has $43 million in carbon market revenues. How is it going to spend it?

The $43 million was “in the state’s hot little hands,” Mike Dowd told the group. 

So what next?

That was the question facing not only Dowd, director of the Virginia Department of Environmental Quality’s Air Division, but also a collection of developers, state officials and environmental and low-income advocacy groups who had gathered over Zoom on Monday. 

All were focused on the best uses of that $43 million in carbon money, the first round of funds Virginia had received through its participation in the Regional Greenhouse Gas Initiative, an 11-state agreement that puts a price on the carbon emissions that are driving climate change, requires power plants to pay that price and then channels the proceeds back to the states.

Most of that funding will eventually be paid for by customers of the state’s electric utilities, which are allowed under state law to pass on the costs of carbon allowances to customers, with no extra returns for investors. State officials had conservatively projected annual proceeds from RGGI’s carbon auctions to be in the range of $106 to $109 million. But with allowances trading at $7.60 per short ton of emissions at this March’s quarterly auction, actual revenues now look to be much higher, amounting to perhaps as much as $174 million annually if prices hold. 

What to do with that major new stream of income — especially in a pandemic year when purses are tight — has been the preoccupation of dozens of Virginia officials this winter.

The law passed by the General Assembly in 2020 authorizing participation in RGGI spells out certain high-level priorities for the funds: 50 percent for low-income energy efficiency programs, 45 percent for a new Community Flood Preparedness Fund to assist communities affected by recurrent flooding and sea level rise, 3 percent for DEQ to oversee Virginia’s participation in RGGI and carry out statewide climate change planning and the remainder for other administrative work. 

But between those goals and projects on the ground lies a lot of space. Should the state be creating new programs or beefing up existing ones? Should certain housing types or certain geographic areas get priority — particularly given new equity commitments designed to ensure that benefits are felt across the board? 

“There’s not a whole lot of direction there, so I think it’s really important … to think about the spirit of the legislation and try to address some of the underlying causes,” said Dawone Robinson, director of an energy affordability program run by the Natural Resources Defense Council and a member of one of the advisory boards Virginia convened to decide how to spend its carbon dollars. 

Compounding the challenge has been time constraints: Virginia’s fiscal year ends on June 30. With the first auction funds arriving this March, agencies have only a few short months to spend them. While RGGI funds are nonreverting, meaning agencies won’t lose them at the end of the fiscal year, most are eager to get the funds out of the door immediately.

“If we’d had our druthers, we would have been working on this last year,” said Carmen Bingham of the Virginia Poverty Law Center, who is also serving on the same advisory board as Robinson. Between slowdowns due to COVID-19 and the RGGI law not going into effect until July 1, however, the agencies that will receive the bulk of the carbon funds — the Department of Housing and Community Development, which will oversee the low-income energy efficiency funds, and the Department of Conservation and Recreation, which will oversee the Flood Preparedness Fund — have been forced to move quickly to narrow down their priorities. 

“We’re in this very weird place of having to work frantically in order to come up with how do we spend this first round of money,” said Bingham. But, she added, “that’s the hand we’re dealt and the cards we’ve got to play.” 

Low-income energy efficiency

From the beginning, Gov. Ralph Northam’s administration zeroed in on the possibilities the funds earmarked under the RGGI law for low-income energy efficiency offered for affordable housing. 

Low-income tenants ideally would be able to rent “more highly efficient properties” as a result of RGGI funding, then-Deputy Secretary of Commerce and Trade Angela Navarro said during a webinar last July. An administration memo similarly identified “deeper levels of energy efficiency” in affordable housing and upgrades to public housing as priorities.

Advocates, however, pointed in a different direction: weatherization, a set of improvements to a building that cut down on energy waste and consequently tend to lower electric bills. 

The federal government has funded weatherization programs for low-income households since the 1970s, but federal program guidelines strictly define what falls under the weatherization umbrella. Improvements like roof or wall repairs that are deemed health and safety issues don’t, even if they are fixes that have to occur before weatherization can be done. When weatherization providers encounter these issues, they have to walk away, creating what’s called a “deferral.” 

In Virginia, those number in the hundreds: Janaka Casper, CEO of Community Housing Partners, the state’s largest weatherization provider, said that as of 2019 his organization had recorded 525 deferrals. 

In practice, that has meant that “the homes that are most in need of weatherization services can’t be worked on,” said Chelsea Harnish, executive director of the Virginia Energy Efficiency Council. “This is housing stock that is in desperate need. This could be a hole in the roof. It could be a hole in the floor. To me that directly goes to energy efficiency.” 

To many advocates, who have been asked by the Department of Housing and Community Development how its portion of the RGGI money — which this fiscal year will amount to $21.7 million — should be spent, the deferrals were a top priority. Not only did they represent an identified need, but they offered the opportunity to address some of the commonwealth’s most vulnerable populations, including historically economically disadvantaged and minority communities. 

“From a sheer climate perspective, it has often been the preferred route to tackle the low-hanging fruit,” said Robinson. “That’s not low-income housing. That’s not rental housing.”

But policymakers must “look at the totality of benefits that can be achieved,” he insisted. 

“If you value equity, what is the cost of achieving racial equity? If you value increasing indoor air quality, what is the value of human health?” he asked. “These are invaluable measures that aren’t addressed and aren’t calculated in a traditional cost-benefit (analysis).” 

As the Department of Housing and Community Development’s RGGI advisory group met throughout the winter, weatherization slowly slid onto the priority list. This Monday, the group signed off on a recommendation for how this year’s carbon funds should be spent: 60 percent on weatherization and 40 percent on efforts to increase energy efficiency for affordable housing through the state’s Affordable and Special Needs Housing Program. 

Advocates like Bingham said the split bridged the state’s immediate needs and longer-term ones. 

Weatherization “has that immediate impact that we can actually see, whereas housing projects are going to take awhile. They’re not going to be as quick to get a benefit right away,” she said. 

Flood preparedness

Virginia’s top flood officials were also facing a similar windfall — and a similar dilemma. As the recipient of 45 percent of the RGGI funds, the Virginia Department of Conservation and Recreation will get more than $19 million. 

As it does with the Department of Housing and Community Development’s money, the RGGI law put some guardrails on the DCR’s new revenue, which would be collected into the Virginia Community Flood Preparedness Fund. The money must be “used solely for the purposes of enhancing flood prevention or protection and coastal resilience.” At least 25 percent must go to projects in low-income areas, and priority must be given to projects using nature-based solutions for “community-scale hazard mitigation.” 

“There’s already a little bit of priority that’s written into the code itself, but obviously we need to get a little bit more granular,” said the agency’s deputy director, Russ Baxter. 

That task has proven even more difficult than expected. In December, the department issued draft guidelines for how the fund would be administered, attempting to sketch out how it would work, who would be eligible for grants and how those grants might be awarded. 

A wave of comments followed, many concerned about the vagueness of the six-page framework. 

“The very general nature of the draft guidelines makes it difficult for stakeholders to develop comprehensive and constructive feedback,” wrote one coalition of prominent environmental groups, including the Chesapeake Bay Foundation, Southern Environmental Law Center and Wetlands Watch. 

Other fault lines also emerged, particularly concerning the question of whether the money should be available statewide or should prioritize coastal areas like Hampton Roads that are already facing recurrent flooding linked to sea level rise. 

“We believe that it is critically important for regional equity to be a guiding principle in the administration of this fund and grant award decisions. … Numerous communities outside of coastal Virginia have significant needs with regard to the data and planning necessary to identify and undertake meaningful climate and flood resilience projects, and it is incumbent upon the state to help bridge those gaps,” wrote Adam Gillenwater of the Piedmont Environmental Council in one. 

Norfolk officials, however, rejected that idea, with one characterizing the use of funds for non-coastal areas as “diluting the fund and negating the intended purpose of establishing a dedicated funding source to assist coastal communities with the greatest 21st century challenge that will face the commonwealth: sea level rise.”

Facing competing priorities, the agency has slowed its pace. While final guidelines were expected to be released March 1, Baxter said DCR is now focusing on hammering out the details in a grant manual that will spell out more precisely how the fund would work. That manual will then be released for a 30-day public comment period. 

“Things are revving along,” he said. “We’re in the process of making some final decisions.” 

Statewide climate planning

Final decisions are also on the mind of the Department of Environmental Quality, the agency that has been most intimately involved in Virginia’s participation in RGGI and that will receive 3 percent of its revenues. 

 “Our relatively small allocation for RGGI pays a big dividend for the state’s ability to invest in climate action,” said Deputy Director Chris Bast,

For DEQ, which has long dealt with a dearth of funding and employees, carbon dollars will go toward new staffing and programming. The agency has already hired someone to lead its efforts to inventory the state’s greenhouse gas emissions and to work with the RGGI program, and it expects to make more hires in the coming months. Other programs that aim to coordinate and chart statewide efforts are being considered, although Bast and Dowd, the Air Division head, said plans are still being developed. 

“We have a lot on our plate, a lot of regulations to draft,” said Dowd. 

But while Dowd emphasized that “culturally, we’ve always gotten a lot done with not a lot of staff,” Bast cast the agency’s task as building up a “climate bureaucracy.”  

“That’s what this funding is for, is to help us make sure that within the bureaucracy we can meet that level of ambition that policymakers have implemented,” he said. 

This story has been updated to clarify that while agencies are working to spend money before the end of the fiscal year, they are not required to.