New York City passed the most aggressive climate bill in the nation in April, and the city got it done in a truly New York way.
The Climate Mobilization Act is the city’s effort to abide by the Paris climate-change agreement even after the Trump administration withdrew the US from the global accords. Before its abrupt about-face, America’s plan had been to cut carbon emissions by 80 percent by the year 2050. New York is taking up that pledge by introducing new regulations to address the energy performance of buildings.
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).
The city’s new “80-by-50” law prescribes several benchmarks along the way to the ultimate goal in 2050. Some buildings will need to produce real results soon; different types of buildings will be subject to specific targets. The city’s first big milestone arrives in 2030: By then, New York buildings will need to have collectively cut their carbon emissions by 40 percent. Any buildings larger than 25,000 square feet will be subject to the cap (with some key exceptions), which means around 50,000 buildings in total. For landlords and building owners, this is an enormous lift in just over 11 years. That’s by design.
“There’s still a lot of details to figure out as to how this gets implemented,” says Lindsay Robbins, a director for strategy and implementation at the Natural Resources Defense Council, which hashed out this policy’s compromises with the Real Estate Board of New York. “I don’t think any city has done this on this scale before.”
The hope is that New York’s climate law is awesomely burdensome. No, that doesn’t mean a ban on glass skyscrapers. But a law that turns over the everyday dealings of real estate in New York has a great deal of promise for upsetting how buildings work everywhere. That’s what this represents, according to supporters like John Mandyck, CEO of the Urban Green Council, a nonprofit devoted to making New York buildings sustainable. “This law could possibly be the largest disruption in our lifetime for the real-estate industry in New York City,” he says.
New York’s new law is an effort to make the road by walking: It’s not something anyone knows how to do until everyone commits to doing it. The fact that this legislation is sweeping in its scope is why it stands a chance of succeeding, its supporters say. It’s the first plank in the suite of legislation that Mayor Bill de Blasio describes as the city’s own Green New Deal. The idea is to build a durable industry in energy retrofitting, one that benefits everyone involved—and by doing so, establishing a model for other cities around the world. And the city can’t get there with a measure that asks building owners to simply swap out light bulbs.
“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 US 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.
It’s a policy with teeth, in other words. Fortunately for landlords, there’s a lot of room for buildings to improve, according to Vivian Loftness, professor at Carnegie Mellon University and the Paul Mellon chair in architecture.
“Buildings in the US, and certainly commercial buildings, have been incredibly sloppy in their energy use,” Loftness says. “We’ve got [older] mechanical systems that are running at 50 percent efficiency, where there’s things on the market that will run at 95 percent efficiency. We’ve got a lot of room for upgrades for boilers and chillers, air-handling units, control systems—there’s so much room in just the hardware of buildings.”
New York’s strict standard may work for landlords
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.
“A coalition of stakeholders including environmental organizations, labor, engineering professionals, housing advocates and real estate owners came together and proposed comprehensive and balanced reforms that would have achieved these goals,” Banks said. “The bill that passed today, however, will fall short of achieving the 40 x 30 reduction by only including half of the city’s building stock.”
Douglas Durst, the chairman of the Durst Organization, wrote in a letter to Crain’s New York Business that under this legislation, “empty buildings score better than occupied ones, and hundreds of thousands of inefficient and energy-intensive smaller, city-owned and [New York City Housing Authority] buildings have significantly less stringent standards.”
“To get down to even 20 percent from where I am today, with the technology that exists, there’s nothing more that I can do,” Ed Ermler, the board president for a group of condo buildings in Queens, told the New York Times. “It’s not like there’s this magic wand.”
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.”
Over a long enough time span, in fact, the heavier lift makes it more likely that landlords will succeed, not less so, according to supporters of the bill.
“What’s smart about this bill is it doesn’t ask for a small increase. It asks for a big increase,” says Greg Kats, president of Capital-E, a clean-energy consultancy and capital firm. “It’s the kind of thing where if you’re going to do something, you should do quite a lot of it, because the transaction costs [for landlords] to set it up, to engage with tenants, are substantial fixed costs.”
Switching to solar might show gains in kilowatt hours fast. But often, measuring energy efficiency is trickier. It means achieving a negative outcome, a reduction in energy consumption, usually by introducing additive systems that contribute to an overall decrease. Buildings are complex systems: Higher-efficiency windows lead to lower air leakage, which reduces heat loss, which lowers heating bills. Buildings are all different, though, so figuring out the suite of improvements suited to a particular building is complicated.
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.
The hassle of getting to a 10 or 15 percent reduction is not that different from reaching 40 percent, Kats says. Either way, a landlord needs to capture data, engage with landlords and utilities, meet with vendors and consultants, and buy new equipment. These transaction costs are high, but many of these costs are the same whether the goal is 15 percent or 40 percent.
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.
Owners who also occupy their buildings tend to have longer views about costs, she says, but they may not share the same long-term economics. The question is academic for a building owner who doesn’t have the capital to pay for building upgrades. So it’s good news, for both investors and owner-occupants alike, that the market has an answer to help New York meet this new burden.
The solution comes from California. When the state passed energy-conservation laws 30 years ago, it made utilities responsible for achieving those savings, with the idea being that utilities can bear to wait 30 or 50 years to see a gain. So California utilities have actively promoted investments, financed by the utilities themselves, as a way to meet the regulatory burden. A similar approach is likely to be popular in New York to meet the new energy benchmarks.
“Rather than you, the building owner, having to come up with the money, the utility is coming up with the money, and basically taking the payback through the energy savings,” Loftness says. “Your bill stays the same, but 10 years later, you’ve paid back the ‘loan’ of what they invested in the building.”
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.
Whether it’s Con Edison or Siemens, these organizations play an important function, as lenders, consultants, or engineers who help building owners bridge the gap for their capital needs.
The federal government, for example, can literally print the money it needs to invest in its own energy retrofits. But federal agencies have a hard time getting Congress to actually allocate the funds to meet these standards (namely set by the Energy Policy Act of 1992). So the government relies on ESCOs to finance and perform this work for federal buildings. As silly as it sounds, the federal government pays private entities to finance this work, through anticipated future savings, even though it’s a safe bet that the US Department of Energy will still be here 50 years down the road.
State and local governments offer their own avenue for financing energy retrofits. Known as property assessed clean energy (PACE) programs, these municipal assessments are effectively loans that are attached to the property. PACE programs, such as the one that New York is introducing with the Climate Mobilization Act, offer long-term financing for little or no money down, with an alternative approach to underwriting that opens up access to these loans to a greater number of consumers than private lenders might. 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.
Loftness says that she expects that this meta-industry around energy efficiency financing will be a much bigger part of the New York landscape by 2030 and beyond. “It makes financial sense,” Loftness says. “They make more money on the savings than they do on the expense to upgrade the building.”
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.
The law also establishes an advisory board, with members appointed by the mayor and the city council, to evaluate several issues on an ongoing basis. The board will at times reconsider the per-square-foot carbon reduction goals for each of 10 building category types, from residential to hospitals to retail. While the legislation has set standards for the first compliance period, there are still a lot of details to determine for the next phase (2030–2034), and the fine print will fall to the Department of Buildings, the advisory board, and the Mayor’s Office of Sustainability.
“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.
If New York’s policy is done right, carbon trading could serve low-income neighborhoods in particular. Extra credit could be given to upgrades performed in distressed areas, creating an incentive in areas that lack access to capital, whether the factor is 2-to-1, 3-to-1, or 10-to-1. Picture an ESCO—a Siemens or a FirstEnergy—meeting with building owners in low-income neighborhoods and offering do the building upgrades in exchange for the credits.
“This creates an entirely different source of capital to finance efficiency upgrades in low-income neighborhoods,” Mandyck says.
“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.
Residential buildings over 25,000 square feet with affordable units represent half the large buildings in New York. This means half of the applicable buildings won’t be required to meet the energy standards, which also means the other half will need to work that much harder to get to 40 percent by 2030 and 80 percent the following decade. New York lawmakers feared that the cost would be passed on to renters, or that rents on buildings might be raised to the point at which units are no longer considered rent stabilized.
“We understand the constraints and the reasons why rent-regulated housing was dealt with the way that it was,” Robbins says. “But that is such a huge swath of the multi-family buildings in this city, and it is a sector that we really want to see get the benefits of energy efficiency.”
There are other features of the bill that could produce big changes in industry. Mandyck notes that the law enables building owners to switch to renewable energy sources in order to get to compliance; currently, 70 percent of all electric energy use in New York City is generated through fossil fuels. He says that a renewable-energy credit will create a much higher demand for renewable energy in New York.
There are drawbacks to be addressed, too. Laurie Kerr, president of LK Policy Lab, a research and design institute for energy efficiency, says that it might be a mistake to set a single target for compliance in 2030. Rather than asking owners of half of New York’s buildings to hit a single deadline, the city might consider cascading annual targets for different building typologies.
But she praises the potential of a building-to-building carbon-trading market as a “least-cost path” for a bill that otherwise sets stringent targets for buildings. She points to a similar, smaller ordinance in Tokyo as a model for carbon trading. New York’s bill is strict, she says; any degree of freedom for building owners is going to help.
While the long runway and high benchmarks for success set by New York’s climate law makes it worth the trouble for building owners—and tenants, and providers, and consultants—it will still mark a huge shift for the city. The Real Estate Board of New York is joining forces with the Institute for Market Transformation, an energy-efficiency nonprofit, to provide training sessions to help the real-estate industry adjust.
It could fail—it could fall to corruption, incompetence, or politics. Sweeping climate answers such as the Paris accords have demonstrated that they are vulnerable to populism and the slow-moving wheel of democratic consensus.
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.”