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To prepare the following summary, I've reviewed the text of the legislation and drawn heavily on a July 14 article authored by my good friend Michael Zimmer with the law firm of Thompson Hine, LLP. Mike co-chairs the American Bar Association's renewable and distributed generation resource committee and serves as vice chair of ABA's Carbon and Energy Trading and Finance Committee.
Key real estate-specific provisions of the House cap and trade bill are the following:
• National building energy efficiency targets would be established by the Department of Energy (DOE), linked to baseline standards set for commercial buildings under the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) Standard 90.1 - 2004 and for homes under the 2006 International Energy Conservation Code. [Note: The legislation also permits the national standard to be based on a recognized national consensus standard. Presumably, this would be Standard 189.1, the model building energy efficiency code being developed through an ANSI standard-setting process headed by ASHRAE, the Illuminating Engineering Society of North America and the U.S. Green Building Council.]What are the real estate industry implications of the House cap and trade legislation? If the bill should pass the Senate in substantially similar form later this year (by no means a sure thing) the U.S. real estate industry will be reshaped in the following ways:
• Upon enactment of the bill, new commercial and residential buildings would be required to achieve 30 percent improvements in energy efficiency relative to baseline. By January 1, 2014, new residential buildings would have to improve energy efficiency by 50 percent; commercial buildings would be required to achieve 50 percent improvements relative to baseline by January 1, 2015. Additional reductions in energy use would continue in subsequent years at 5 percent additional savings every three years. DOE could accelerate or lessen these standards on the basis of lifecycle cost analysis. The baseline under consideration is 2005.
• Within a year of enactment of the federal legislation, state and local governments would be required to adopt the national code or revise their building codes to meet or exceed the federal standards. For states in which building codes are adopted by local governments, the state would be required to document that appropriate local building codes were adopted by jurisdictions representing 80 percent or more of the state's population. Compliance would be verified by the Department of Energy. Competitive awards for local government, disbursed through the federal Department of Housing and Urban Development (HUD) would be used to assist localities with building code enforcement.
• The federal sale of carbon allowances would be used to fund building retrofit initiatives to promote energy efficiency, to be known collectively as the Retrofit for Energy and Environmental Performance (REEP) program. REEP would be administered by the U.S. Environmental Protection Agency (EPA), in consultation with DOE and the U.S. Department of Housing and Urban Development. REEP funds would be distributed through states and local governments and could be used for the establishment or operation of the establishment of revolving loan funds, loan guarantees, or other forms of financial assistance. [The REEP program is part of a larger effort to pass through to states funds raised by the auction of carbon allowances; this initiative allows state governments to establish State Energy and Environmental Development (SEED) accounts with proceeds raised by carbon allowance auctions.]
• Building energy performance under REEP would be documented through Energy Star Portfolio Manager, the Home Energy Rating System (HERS) rating system, or other energy modeling software approved by EPA.
• A model building energy labeling program would be created by EPA in consultation with the Department of Energy within a year of enactment of H.R. 2454. Labels would be proposed for new commercial and residential buildings and demonstration programs conducted to help develop the model label and to test the usefulness of labeling in additional building types.
• The development of net zero energy buildings would also be funded through demonstration grants.
• Increasing reliance on building codes (instead of voluntary standards such as LEED) to establish energy efficiency and green building practices.
• A stronger role for the federal government in prescribing building energy efficiency requirements.
• Increasing standardization in building energy performance metrics in the commercial and residential sectors.
• Greater reliance on the public sector and on public-private partnerships in creating and financing building energy efficiency programs.
• Growing employment in green collar jobs related to building energy efficiency.
An unanswered question is whether the increasing importance of building energy efficiency will accelerate real estate industry consolidation.
It is possible that the combined effect of new building energy standards and energy efficiency labeling will leave under-capitalized building owners -- who cannot afford energy efficiency retrofits -- at a more significant competitive disadvantage.
At the same time, the playing field could be leveled by public programs that provide financial assistance directed to smaller commercial property owners and households.
As Zimmer notes: "The legislation, if enacted, is transformative. Residential and commercial buildings, multifamily and low income housing, new and existing buildings, development and real estate finance will all be impacted. The surprise is how quickly the time frames are proposed. The reasons appear centered on the substantial opportunity buildings offer, with almost 48 percent of all greenhouse gas emissions and 70 percent of projected electricity use over the next decade."
Leanne Tobias is founder and managing principal of Malachite LLC,
an advisory firm that specializes in the development, leasing,
management, financing and certification of sustainable or green real
estate on a global basis. Comment online, or write to Leanne about your
green real estate thoughts and experiences at greenstimulus@malachitellc.com. She'll share the best of reader feedback in future posts.
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Existing Buildings
How are existing commercial buildings affected? I see they may be at a competitive disadvantage if undercapitalized, but what standards will they be subject to under this proposed legislation? Thank you!