Energy & Climate Change Policy
REAL ESTATE ROUNDTABLE POSITION: With energy usage projected to grow exponentially in coming decades and traditional fuel sources and prices increasingly subject to the vagaries of global political and economic conditions, the nation urgently needs a comprehensive strategy for ensuring plentiful, reliable, sustainable and independent energy supplies. Such a strategy should address both supply and demand by encouraging more sustainable, cleaner sources of energy; and by improving energy efficiency in homes, workplaces and commercial facilities. It should also factor in the economic, national security and environmental issues that must be addressed as part of any comprehensive strategy. On the environmental front, no issue appears more pressing than that of global climate change. In general, few direct greenhouse gas emissions are associated with buildings. However, energy use in buildings account for about 40% of the country’s overall energy consumption and 70% of electrical energy consumption. The energy used in buildings is generally produced elsewhere such as at coal-fired power plants, resulting in the production of “greenhouse” gas emissions as a by-product or indirect impact. In terms of this indirect impact, buildings today account for more than 30% of the nation’s greenhouse gas emissions, principally C02 emissions at power plants. We don’t believe this has to be the case. Through federal policies that promote “smart,” “high performance” buildings and communities — and that take advantage of our industry’s positive track record in adopting energy saving technologies and strategies — we can lower real estate’s share of the greenhouse gas “pie.” To that end, specifically, we support:
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STATUS: Major energy legislation passed in 2007 and more is likely in the near future. The “Energy Independence and Security Act of 2007”, H.R. 6 was enacted into law late last year. It imposed tougher efficiency standards on automobile emissions and various appliances. It also mandated a more efficient federal buildings stock (30% more efficient over the next 10 years) and required that all new federal buildings be “carbon neutral” by 2030. Landmark Climate change legislation is now inevitable although the timing remains uncertain. In the next 24 -36 months climate change legislation is likely to begin gaining significant political traction. While unlikely to become law this year, the climate legislation that passed out of the Senate Environment and Public Works Committee in December of 2007, “The Climate Security Act”, S. 2191, represents an important milestone and a likely “blueprint” for future efforts in this area. Notably, S. 2191 is the first mandatory carbon “cap and trade” legislation in U.S. history to emerge out of a Congressional committee. 5 Back to top 5 BACKGROUND and RATIONALE Real Estate’s Stake in the Energy and Climate Debate For real estate, the stakes of the energy and climate debate could not be higher – actions in Washington will affect:
The opportunity to participate in multi-billion dollar “cap and trade” markets by owning” and “trading” the value of the C02 reductions produced by energy efficiency. Today’s policy debate on energy and climate change are as significant historically as those that preceded enactment of the Clean Water Act and other landmark environmental statutes of the 1970s and 1980s. 5 Back to top 5 The Official, Internationally-Recognized Science of Climate Change The leading international scientific organization assessing the state of the evidence on climate change is the Science Working Group of the Intergovernmental Panel on Climate Change (IPCC). Its most recent report — and officially “accepted” by the U.S. government — is a distillation of peer-reviewed science in this area and expresses with “90 percent” certainty that man-made emissions, principally, from the burning of fossil fuels have been a primary cause of the steady rise in atmospheric temperatures. Download IPCC's "Climate Change 2007: Synthesis Report - Summary for Policymakers" (.pdf) The flavor of the new “consensus” on the science is reflected in the comments of the President and CEO of Duke Energy, the third largest consumer of coal in the U.S., who testified recently before Congress that: “At this point, I view the science as having resolved two important questions: The earth is warming and human activities are contributing. The scientific debate has now moved to questions of timing and ultimate impact. In any event, it is my judgment that we need to act now to begin reducing our carbon footprint.” 5 Back to top 5
High-Visibility Local and State Climate Change Initiatives Key players at the local and state level have begun to act – even in the face of some continuing “unknowns.” It is significant, for example, that 786 mayors representing millions of Americans from all 50 states have signed onto the U.S. Mayors Climate Protection Agreement. Under that protocol, participating mayors agree to strive to meet or beat the Kyoto Protocol targets in their own communities, through actions ranging from anti-sprawl land-use policies and green building programs, to urban forest restoration projects to public information campaigns. To date, Boston, and Washington, DC have adopted aggressive energy efficiency or “green building” mandates on government and private sector buildings seeking building permit approval. Los Angeles, Seattle and San Francisco are poised to follow suit. These types of laws generally require buildings over a certain size to be “certifiable” at the minimum LEED level under the U.S. Green Building Council’s rating system. They may also impose very aggressive energy efficiency requirements. Other cities, including New York, are likely to have functionally the same requirements as their state-wide building codes are moving in the same the same direction. As an organization, the U.S. Conference of Mayors has also supported an aggressive goal aimed at making all new buildings designed in 2030 or later “carbon-neutral” (i.e., not using any fossil fuels at all). This goal is part of an initiative known as the “2030 Challenge” that is also advocated by the American Institute of Architects (AIA). The challenge calls for immediate energy reduction for all new and renovated buildings to 50% better than the national average for any given building type. It would then require increased reductions of 10 percent every five years so that all buildings designed by the year 2030 will be carbon neutral. To help advance these goals and others, the U.S. Conference of Mayors successfully advocated for a new federal funding program, The Energy Efficiency and Conservation Block Grant (EECBG). Contained in the energy legislation signed by the President, H.R. 6, it authorized (but did not appropriate) $2 billion in funding to assist eligible local and state government agencies in implementing energy efficiency and conservation strategies appropriated. State governments have also been active. According to the National Conference of State Legislatures, over the last two years 300 bills have been filed in 40 states that address heat-trapping gases and climate change in some form. Almost two-thirds of these include proposed green building standards or energy efficiency standards. Notably, as part of the Regional Greenhouse Gas Initiative (RGGI) the governors of nine Eastern and Mid-Atlantic states have committed to a regional program to “cap” C02 emissions and yet allow “emitters-polluters” who exceed specific reduction levels to sell or “trade” unneeded “allowances.” In California, Governor Arnold Schwarzenegger’s program developed in concert with the state's Democratic-controlled legislature is intended to reduce California's carbon dioxide emissions to 1990 levels by 2020 and a deeper reduction target by 2050. It includes mandates to reduce energy use in government buildings. It also allows for a similar “cap” and “trade” program. Policymakers in California (more so than in Washington) are openly discussing the impact of real estate and the “built environment” generally on carbon emissions and policies to reduce that impact including land use controls. 5 Back to top 5 National Policy Initiatives Congress, the Administration and industry groups in Washington have also advanced initiatives of their own in this area. All three leading presidential candidates support mandatory caps on carbon emissions with relatively minor differences in approach. Today the most politically viable federal climate change legislation is titled the “Climate Security Act", S.2191 and was approved by a majority of the Senate Environment and Public Works Committee on December 5, 2007. The legislation originally co-authored by Senators Joe Lieberman (D/I-CT) and John Warner (R-VA) may be considered by the full Senate in the spring or summer of 2008. The bill’s sponsors project it would reduce total U.S. greenhouse-gas emissions by as much as 19% below the 2005 level (4% below the 1990 level) in 2020 and by as much as 63% below the 2005 level in 2050. The Administration opposes the Lieberman-Warner legislation or any other bills with mandatory cap and trade provisions. Under current Administration policy, the goal for voluntary action) is to reduce emissions “intensity” by 18% below 2002 levels by 2012. (Intensity measures the efficiency of the economy per unit of GDP as opposed to constituting a target that remains the same no matter how quickly the economy grows). While the White House goals are somewhat lower than other major initiatives, it should be noted that the Administration’s own targets are more aggressive than the original Kyoto targets. The Administration’s voluntary approach incorporates programs such as the Energy Star program. In an effort to build momentum for action on climate change in the House, House Speaker Nancy Pelosi (D-CA) has set up a special select-committee on Energy Independence and Climate Change chaired by Rep. Edward Markey (D-MA). Actual legislation will be advanced through traditional committees of jurisdiction – principally the House Energy and Commerce Committee – but Markey’s committee has been working to ensure lawmakers remain focused on this issue. At the national level a well-publicized “Climate Change Action Partnership” has taken shape with the participation of top U.S. Corporations (including companies with Roundtable-affiliated subsidiaries General Electric, Lehman Brothers and Duke Energy) and national environmental groups such as the Natural Resources Defense Council. The new Partnership has agreed to advance mandatory climate change regulation at the national level with reduction goals set at 60% 80% below 2005 levels by 2050. 5 Back to top 5 Energy Efficiency, Green Buildings & Real Estate’s Successful Track Record The numerous climate change-related Congressional hearings have not yet focused much attention on the fact that 70% of the nation’s electrical energy use occurs in buildings (including the appliances and electronics used in buildings). During the last 30 years there has been significant progress– in making the building sector more efficient. These successes were realized without any federal regulation of the construction or operation of buildings although, there were financial incentives offered – typically by utility companies. Since the mid-1970s residential energy use per household has declined 37% and commercial energy use per square foot of commercial building space has declined 25%. The improvements were achieved despite a sharp (50%) increase in the average new home size during that period – and a dramatic increase in energy-dependent technology in buildings, including greatly increased plug loads from increasing numbers of home appliances and office equipment. Over the last thirty years, building energy use has increased at less than half the rate of growth of the nation’s gross domestic product. That is the kind of energy “intensity” reduction that the Administration has argued is the most useful metric of success. In more recent years, The Roundtable and affiliated trade associations have been active on the energy efficiency front. In 1999, a national energy performance rating system for office buildings — similar to the miles per gallon rating for vehicles — was introduced and now applies to various other building types such as schools, hospitals, hotels, and grocery stores, among others. The joint EPA-Energy Department initiative is known as the Energy Star Performance Rating (benchmarking) program. The Roundtable’s work in helping to design the program was recognized by EPA in the year 2000 when our organization was awarded the prestigious Climate Protection Award. The statistics with respect to the individual buildings that actually earned an Energy Star label “for superior energy and environmental performance” are extremely impressive. In 2007 EPA recognized more than 3,200 buildings (representing almost 575 million square feet) for their energy efficiency achievements. On average, these buildings use about 35% less energy than typical buildings, and about 400 of them use 50% less energy. Overall, the owners of these buildings are saving an estimated $600 million annually on their energy bills relative to average buildings. Engineering and construction expertise in the realm of high-performance green buildings is also growing and is showcased by a number of projects of Real Estate Roundtable members. In New York City alone, today — with active support Mayor Michael Bloomberg (I) — four well-known real estate industry leaders (The Durst Organization, Tishman Speyer, Forest City Enterprises and The Related Companies) are in the midst of constructing major high-performance “green” office and residential projects. Lessons learned from these and similar projects in other cities will have an immediate and direct influence in the market for existing building energy upgrade renovations. In the past five years, the real estate industry's increased engagement in the area of green or sustainable development is also reflected in number of buildings seeking and or obtaining designation as "green" by the U.S. Green Building Council (USGBC). In 2002, there were 624 project applicants (or "registered" projects) and 38 certified projects covering 80 million square feet of commercial building space. Today, there are 5,562 project applicants and 781 certified projects covering 867 million square feet of commercial building space. According to USGBC the products and services market for green building is expected to exceed $12 billion in 2007. Finally, a growing number of leaders in the real estate industry have announced their companies’ commitments to build “green” buildings or to retrofit existing buildings to reduce their energy consumption and “carbon footprint.” For example, ProLogis, the largest company developing industrial warehouse space, committed to building all new buildings to the U.S. Green Building Council’s (USGBC’s) LEED certification standards. CB Richard Ellis, the largest manager of commercial buildings in the world, announced its intention to become a leader in reducing greenhouse gas emissions associated with the buildings they manage as well as their own operational offices. G.E. Real Estate, one of the largest owners of office buildings in the U.S. made the commitment to work with the Clinton Foundation on reducing energy in its portfolio and on “greening” buildings in accordance with the USGBC standards. 5 Back to top 5 New Federal Law Promotes Energy Efficient Green Buildings Under existing law (provision included in the “Energy Independence and Security Act of 2007” ) all federal government buildings are required to be designed and built so that “fossil-fuel energy use” — relative to the 2003 level — is reduced 55% by 2010 and eliminated altogether by 2030. In addition, annual energy reduction goals for existing federal buildings are increased by the new law so that federal buildings need to reduce energy use by 30% over 10 years. The law also prohibits (with a variety of exceptions) any federal agency from leasing new space in buildings over 10,000 square feet that have not earned an EPA Energy Star label (designating them as in the top 25% of similar buildings for energy efficiency). The legislation also sets up an office of high-performance green federal buildings at the General Services Administration. The new office is required to identify and develop Federal high-performance green building standards for all types of Federal facilities and appears likely to use the LEED system as the standard. A separate provision of the new law focuses on privately owned “commercial” buildings and sets non-mandatory energy efficiency goals to be advanced by an office of “Commercial High Performance Green Buildings” housed at the Department of Energy (DOE). The legislation sets a national goal to achieve zero net energy use in new commercial buildings built after 2025. A further goal is to retrofit all pre-2025 buildings to zero-net-energy use by 2050. The office is intended to coordinate R&D funding and related initiatives to prove out the technology necessary to achieve these goals. The DOE has no regulatory authority over buildings and the new legislation does not change that reality. 5 Back to top 5 New Policy Challenges at the State and Local Level (Land Use Mitigation & Stricter Building Codes) Despite substantial progress in some quarters, local and state governments are gearing up to do more to address the relationship between real estate development and greenhouse gas emissions. Some state and local policymakers have identified as a serious concern the relationship between C02 emissions and so called auto-dependent “sprawl” development. As a result of California's new legislation, an effort is underway to assess and influence how land use patterns can be modified to reduce “carbon footprint” of development projects. A new Urban Land Institute study titled “Growing Cooler: The Evidence on Urban Development and Climate Change”, recommends that federal law mandate that regional transportation plans pass a Clean Air Act “conformity test for C02 emissions” similar to those for other pollutants. Because Clean Air act compliance is delegated to state and local agencies, the practical consequence of this “conformity” requirement for real estate projects would be greater transportation related exactions at the state and local level. Local, state and regional governments are also implementing increasingly stringent energy-efficiency oriented building codes. California has the toughest energy-related building code requirements in the country (“Title 24”). The state plans to increase the stringency of that code and as a result, building departments in other parts of the country are likely to follow suit– as they have in the past. As stated above, in a growing number of communities building codes are being rewritten to include “green” construction practices and materials well beyond energy efficiency. The LEED standard was developed as part of a fully “voluntary” rating system. Indeed, numerous Roundtable members have had projects successfully rated by the LEED system. Its transformation, however, in some regions of the country into a mandatory “code” and zoning requirements is problematic. It is the official position of the U.S. Green Building Council that LEED should not be used as the standard for mandatory programs. Notably, the House version of H.R. 6 included a provision (not included in the final bill signed by the president) that contained language developed in part by Senator Charles Schumer’s (D-NY) office that sets as a goal that by 2020 new buildings be 50% more efficient than the current national model standard (set by ASHRAE). It also set an interim requirement that that buildings be 30% more efficient than the current ASHRAE standard by 2010. The AIA supported this proposal in general but objected to the language that made it “mandatory”. The provision is troublesome for the precedent it would set of having the Energy Department develop, in effect, a national building code in the event ASHRAE’s model code fails to meet the targets in the bill. In practice, however, the mandate may be quite light because the only consequence of a state’s being “out of compliance” is that it foregoes the $500,000 per state funding for helping states develop new codes. 5 Back to top 5 Opportunities at the State and Local Level — Financial Incentives Among the positive opportunities for the industry at the state and local level are policies aimed at encouraging green development through economic incentives. Examples of energy efficiency incentives for real estate companies are tax credits and deductions, sales tax exemptions, permit fast tracking, zoning density bonuses and loan guarantees. Other incentives take the form of utility rebates and other subsidy programs that continue to improve as a result of utility regulation. An example of a local tax incentive is one applied by New York State, which has a green building tax credit that provides up to $25 million dollars in credits through 2009. Maryland has a tax credit worth up to 8% of the total cost of the building. It is linked to compliance with the LEED green building rating system. Other incentives come from utility companies in the form of inducements to invest in energy efficiency. As it stands now, the full potential for utilities to promote energy efficiency will only be realized when utilities no longer always earn more money by selling more energy and have no parallel financial incentive to reduce demand from the grid. Fortunately, an increasing number of jurisdictions are changing the regulatory structure to remedy this problem. Known in policy circles as the “de-coupling” of utility revenues from sales, this trend is freeing up utilities to be more committed partners on energy efficiency and on-site generation projects. In addition to removing disincentives for utilities to advance energy efficiency, some jurisdictions are ensuring utilities are actually required to encourage efficiency and renewable energy. They do this through “energy efficiency and natural resource portfolio standards.” These are simply mandatory targets that utilities need to meet in terms of the percentage of energy made available to their customer base via alternative energy sources (e.g., solar or wind) or through energy efficiency savings. Texas, Connecticut, Hawaii, Nevada, and California all have promising programs in this area. 5 Back to top 5 Opportunities at the Federal Policy Level — Reform and Extension of Existing Tax Incentives At the federal level, policymakers are offering to extend, and increase the amount of incentive associated with, energy efficiency and renewable energy tax provisions. The Roundtable-backed Energy Incentives Tax Act of 2005 provided a targeted, temporary tax deduction for energy-efficient building construction and renovation equal to $1.80 per square foot in construction expenditures. To qualify for the deduction, newly constructed or renovated buildings must meet certain strict energy efficiency standards. The deduction applies to qualified property placed into service for the three-year period between December 31, 2005 and January 1, 2009. As originally proposed, the incentive was set at $2.25 per square foot. That number was based on historic California Utility rebate data, to provide a financial incentive for developing new buildings or making major renovations to existing structures. Known as the “EXTEND The Energy Efficiency Incentives Act of 2007” – it was offered by a diverse set of lawmakers including Senators Olympia Snowe (R-ME), Dianne Feinstein (D-CA), Gordon Smith (R- OR), Ken Salazar (D-CO) and Norm Coleman (R-MN). For projects now in the planning, design or early construction phase, the short fuse on this existing tax deduction effectively limits its impact. Many buildings in the design phase today will not meet the January 1, 2009 placed-in-service date. Indeed, it is common for major construction projects to take between 5 and 7 years to complete from initial design to occupancy. We are, therefore, pleased that the EXTEND legislation will apply these important incentives to projects occupied through the year 2012. Legislation has also been introduced to provide economic support for important “clean” alternative energy sources that can be integrated “on-site” at major buildings. Current law provides a 30 percent investment tax credit for those acquiring solar energy generating equipment or fuel cells. That credit is slated to expire at the end of next year. For the larger real estate projects that our members undertake, the short lifetime of this provision limits opportunities to demonstrate the viability of solar or fuel cell powered commercial buildings. A bipartisan group of Senators, including Senator Salazar (D-CO) have offered the “Securing America’s Energy Independence Act of 2007” to extend the investment tax credit for all residential and commercial solar and fuel cell equipment for eight additional years – and revert the commercial solar investment tax credit to 10 percent in 2017. 5 Back to top 5 Other Opportunities: Energy Efficiency Portfolio Standards, C02 Emission “Credits” and other Incentives Federal legislation is also under consideration that would require all utilities to meet at least modest minimum energy efficiency and renewable portfolio standards. Policymakers have also proposed various climate change regulation regimes that call for “cap-and-trade” systems. Under these approaches, regulated industries can buy and sell what are, in effect, permits to pollute. Such a market for tradable permits is already in effect with respect to pollutants regulated under the existing Clean Air Act and is underway in Europe to implement the Kyoto accords. The system is intended to allow companies that go beyond the required emission reductions to “sell” their “extra” allowances to companies that have not been able to fully meet their requirements. At present in the U.S. only direct emitters such as utility companies with power plants qualify to be able sell credits based on their ability to exceed the regulatory requirements. It is important that the real estate industry ensure there are ways to “credit” building owners and others that reduce demand for energy — and therefore reduce C02 emissions associated with the generation of that energy — by making energy efficiency investments. Notably, legislation that passed the House as part of H.R. 6 in its original form (but was not included in the final House-Senate version of the bill) would have promoted an energy efficiency credits program at the national level. In addition to making the case for “crediting” building owners in any cap and trade program, the real estate industry has a stake in supporting legislation (most likely in the form of specific amendments to the Lieberman-Warner climate change bill, S. 2191) to encourage energy efficiency in existing buildings. In its current form, S. 2191 does not include provisions that would provide incentives for the owners of existing buildings to voluntarily retrofit these structures to use electricity more efficiently. We have pointed out that for some real estate owners there are few incentives to retrofit current buildings in their portfolio: the process is costly, and typically not authorized as a use of cash flow from tenant leases. Moreover, we have pointed out the benefits, in the form of lower electrical bills, are realized primarily by tenants, rather than by building owners themselves. In addition, often, the time in which the pay back from energy efficiency investments is realized exceeds the time the building is held for investment by the owner (sometimes hold periods are as short as two or three years). In short, we have argued that, if statutory provisions are not included in S. 2191 to encourage building owners to retrofit existing buildings, the move to energy efficiency in the nation’s building stock will be much slower and an opportunity for substantial additional greenhouse gas emission reductions will be lost. 5 Back to top 5 # # #
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