Buildings contribute a huge share of New York’s carbon emissions—nearly 70 percent, thanks to normal everyday use, but exacerbated by inefficient heating and cooling systems—so they’re an obvious target for regulation. But it’s less obvious how the building sector will answer this charge.
There’s a fundamental mismatch in expertise: The people who know how old buildings really work aren’t the same people designing energy-efficient retrofits. Only a big push will get them in the same room (at great expense to landlords).
“New York City is going to spend billions and billions of dollars to meet this new law. When we do that, New York Harbor is still going to flood if the rest of the world doesn’t enact aggressive climate reduction strategies as well,” Mandyck says. “Our point all along has been that if we’re going to spend the billions of dollars, let’s make sure we come up with policies that are exportable.”
New York is going it alone here
Other cities are looking at building performance, to be sure. Every city has an incentive to level up the energy efficiency of buildings: In New York, buildings alone account for 95 percent of electricity use for the city, according to the Urban Green Council. But most cities have not taken steps beyond tracking and disclosure.
More than 25 U.S. cities have adopted various energy-benchmarking policies, as have the states of California and Washington. These laws make it mandatory for building owners to report their energy use (namely their electric and gas bills). Disclosure laws have guided net-zero building codes and voluntary agreements. Philadelphia and Washington, D.C., were early signers.
It’s worth noting the limits of disclosure. Building owners who don’t meet voluntary standards don’t pay any price. Importantly, disclosure is not supposed to be a shaming tool: Benchmarking in New York might show a range in energy consumption by hotels, for example, with usage calculated per square foot so as to compare big hotels with small ones, without naming any specific buildings.
What New York is doing is more strident: It’s the first city to attach a dollar value to these disclosure figures. Washington, D.C., passed a building-energy performance standard in December for buildings over 50,000 square feet, and when buildings in the District fall out of compliance, those landlords will be moved into an advisory lane to get back on track. San Francisco passed a law this month requiring big buildings to switch to renewable electricity, an easier goal for a city with a forgiving climate located in a state with a cleaner grid.
In New York, building owners who don’t meet their carbon reduction requirements will pay fines. Potentially very large fines: The statute calls for a penalty of $268 per every assessed ton of carbon over the cap. For landlords just over the line, the fine will be nominal. But the city’s worst offenders could be looking at annual penalties of more than $1 million.
The Climate Mobilization Act sets deep reduction targets over a fairly short period. Since the law establishes 2005 as the benchmark year—meaning building energy consumption needs to fall 40 percent below 2005 levels by 2030—landlords who have made some strides in energy reduction will get credit for their work.
The poorest performers will need to show improvement sooner, by 2024, but about one-quarter of buildings won’t require substantial changes. Taking the progress already made into consideration, New York will need to level up its building-energy-performance game by 26 percent over the next 11 years.
Still, it’s significant, especially for New York landlords with multiple buildings in their portfolio. The Real Estate Board of New York, which represents many large developers, has vocally opposed the legislation. The legislation “does not take a comprehensive, city-wide approach needed to solve this complex issue,” said John H. Banks, the board’s president, in a statement. The group objects in particular to exemptions that they say put a greater strain on the building owners subject to this regulation.
It will take work, no question, says Lane Burt, managing principal for Ember Strategies, a consultancy and strategy firm. But it will not take a wizard. For starters, not every individual building needs to make the 40 percent mark: That’s an aggregate goal. And buildings don’t need to hit their target tomorrow.
“If you’re a building owner and your engineers are telling you, it’s impossible to get 20 percent carbon reduction or 30 percent carbon reduction, really, you need better engineers,” Burt says. “What I interpret from that concern is that the owners are saying, ‘It’s financially impossible for me to do this right now.’ And that I believe completely.” He adds, “The good news is, it might be financially impossible for them to do right now, but we’re not necessarily talking about right now. We’re talking about three decades.”
After all, the work involved is interruptive, whether it means overhauling HVAC processes or considering more costly improvements to a building’s roof or facade. While tenants see the benefit of this work once it’s done, they hate it while it’s happening. With a long-enough runway, landlords can plan around the natural business cycle of a lease (around 10 years, generally) to find the lowest-cost window for this work. And given a tall order, building owners have an incentive to spend in order to achieve big savings.
A bad bill—something that asked landlords to make smaller changes more gradually, or with less certainty about future benchmarks or timing—might encourage landlords to look for the low-hanging fruit, the barest improvements necessary to meet the regulatory burden. But big asks translate into benefits that landlords can show to tenants. A law firm may not love an interruption from building management—but replacing office lighting with LED lamps that improve visual acuity? A promise against freezing-cold workspaces that landlords can actually keep? Tenants want those changes!
“If you go deep on [energy efficiency], there are some real economies of scale,” Kats says. Landlords can make changes “that save on capital costs or create more space for you that’s rentable space. It’s that kind of systems approach which deep upgrades allow that makes it much more cost effective.”
How will building owners come up with the capital? Deep upgrades require capital, of course. Improvements for buildings are expensive, and the payback is long. Most investors don’t think of the building sector as a 50-year investment or even a 30-year investment.
It’s rare for a building owner to weigh upfront investments against long-term operating costs, because the capital comes from different pockets, and the savings may variable or may not be guaranteed, according to Loftness. Building improvements ought to pay out within the lifetime of the equipment or materials, but not within, say, 5 years—so there’s a mismatch between up-front costs and long-term savings.
The most common category of energy-efficiency financing are negotiated payments known as energy service performance contracts (ESPCs). Under this arrangement, a third party finances the upgrade, sharing the savings with the property owner and making a profit.
Third parties that develop, design, build, and fund these improvements are called energy service contract organizations (ESCOs). When utilities are directly involved, as in the California model, the savings-backed arrangements are called utility energy service performance contracts (UESPCs or USPCs), to complete the acronym soup of energy-efficiency financing.
By attaching a loan to a property (and not the property owner who takes out the loan), PACE assessments can transfer with the property when the title changes—meaning that a building’s former owner is not stuck with the tab.
An industry may emerge to fully support the changes coming to New York buildings. That doesn’t mean it won’t be a challenge. The city will need to help building operators and owners—the people who know the most about their buildings—talk with the people who can design the solutions to improve them over time. Operations and design engineering aren’t the same skill sets. It may take the full three decades between now and 2050 to find all the answers.
“The reality is, this is difficult. This is the engineering challenge of our time,” Burt says. “There’s not a lot of folks around who really understand how big buildings work, especially the way they were designed 50 or 60 years ago.”
This problem is not specific to New York. The knowledge gap between operating buildings in St. Louis and boosting building performance in St. Louis is just as wide. But if New York can figure out a solution that touches all the buildings in New York, then it will have necessarily developed the knowledge, the expertise, and the specialization that can serve the entire country. Or the world.
Saving the climate through better bureaucracy. New York’s law aims to put officials and experts in an optimal position to answer the questions that haven’t even come up yet. To that end, it creates a new sub-department under the New York Department of Buildings. While its precise mandate is still to be determined, this department will be outside the mayor’s office and fully integrated into the function of the city. “That’s the city sending a signal to building owners that this is something you need to manage, just like vacancy or rent,” Burt says.
“For this [policy], the Department of Buildings is also the same department that has administered the benchmarking legislation and the audit requirements that have been in place, so I think that’s they were also chosen to administer this,” Robbins says. “Since this is a whole other level of oversight and decision-making, and paperwork and processes, that’s why they decided to create a whole new division and a new person to head that up, to make sure this legislation is successfully implemented.”
The city’s forthcoming Office of Building Energy and Emissions Performance will be headed up by a registered design professional, the legislation stipulates. No director has been named yet.
Still to come: Carbon cap-and-trade for buildings. One of the most formidable policy ideas in the bill also falls in the TBD category: It sets the stage for a carbon-trading market between buildings. It authorizes a study and guidelines for implementing a real-estate carbon market by 2021. If and when carbon trading comes to town, building owners could trade carbon-emissions credits in order to meet the cap. Owners of large portfolios could trade between their buildings to meet targets.
“The overall importance of trading is that it’s globally relevant,” he adds. “It doesn’t matter what political system you have, what climate you’re in, what your building stock is. Building carbon trading can work anywhere in the world.”
There are still lingering questions that the Climate Mobilization Act hasn’t addressed. Some involve the carbon trading market: how those low-resource neighborhoods will engage in the carbon market shaping up around them, for example. Robbins notes that New York State has committed to a number of energy-efficiency investments; it’s unclear whether buildings owners can apply for these grants in order to meet New York City goals, or whether the state will deem them “free riders” for whatever political reasons.
Robbins also notes that an enormous chunk of New York City buildings were exempted from the guidelines. Any building with more than one rent-regulated housing unit will face a different regulatory path. If buildings with affordable housing—and this means buildings with any affordable housing—don’t comply with the carbon caps, they’ll face a list of “pre-set prescriptive measures,” Robbins says. A slap on the wrist compared to fines.
But if New York real estate and New York regulators can get it right? If a climate bill can work in New York, it can work anywhere.
“There was a time before cities had departments of sanitation. There was a time before cities had departments of health,” Kerr says. “These were all game-changers in the histories of cities. This is another turning point.”
By Kriston Capps