Office Buildings Could Evade Energy Upgrades Via ‘Giant Loophole’ in NYC’s Climate Law, Environmentalists Warn

Local Law 97 promises to reduce carbon emissions and create a more energy efficient city. But environmentalists warn that the current law creates a loophole for landlords, especially those who own office properties, to simply buy their way out of complying.

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Local Law 97, the most ambitious city-wide building energy law in the world, is coming to New York City in 2024 with the promise of making its building stock more energy efficient.

Known as LL97, the law is crucial in the fight against climate change since over 70 percent of New York’s greenhouse gas emissions come from buildings. The goal is to get properties larger than 25,000 square feet to make energy efficiency upgrades to reduce greenhouse emissions 40 percent by 2030 and 80 percent by 2050.

But environmentalists say the current perimeters are too lenient because they allow landlords, especially office property owners, to purchase a certificate known as a Renewable Energy Credit (REC) and simply buy their way out of complying.

“The rule that they have put in place on RECs is far too lax, and particularly privileges commercial office building owners. It gives them a gigantic loophole big enough to evade the law,” said environmentalist Pete Sikora, the climate and inequality campaigns director at New York Communities for Change.

To make their buildings more energy efficient, landlords can add solar panels, upgrade heating and air conditioning, convert building systems from gas to electric and install energy efficient windows. But two-thirds of office properties currently above their 2030 caps could use RECs to comply with the upcoming emissions limits without needing to invest in building upgrades at all, according to the decarbonization research hub Urban Green Council.

On Dec. 22, Mayor Eric Adams finalized the first batch of rules for the law. They set a cap on the amount of carbon each building can emit over a series of compliance periods, which will get stricter over time through 2049. Buildings that emit more than their individual limit at the end of each year will have to pay a fine of $268 for every metric ton of carbon dioxide above their cap.

But building owners can get out of paying the fine if they purchase the Renewable Energy Credits, which represent one megawatt-hour of renewable energy delivered to the electricity grid. Landlords can cash these credits in and use them to offset annual building emissions that go over their limit. The original bill as written didn’t include a limit on how many credits an owner could buy, which would need to be addressed via legislation under consideration in the City Council.

The RECs will become available for purchase once two clean energy projects, Champlain Hudson Power Express and Clean Path New York, start feeding green energy into New York City. That is expected to start happening by 2026, according to a spokesperson from the New York State Energy Research and Development Authority (NYSERDA). How much each REC will cost is yet to be decided, but the price will be set by NYSERDA and the clean energy power plants.

The “gigantic loophole”

As it stands, the rules say RECs can only be used to offset emissions brought on by electricity consumption, which environmental groups say that’s a good thing because it limits their use. That means landlords can’t buy credits to offset even more emissions that come from fossil fuels burned onsite for heat and hot water. 

But there is a flip side.

“Office buildings use a lot more electricity than multifamily [residential] buildings do. So they benefit from the ability to offset those emissions in a greater fashion,” Chris Halfnight, senior director of research and policy at Urban Green Council, told City Limits

Urban Green Council published a study which estimated office properties could use RECs to offset 85 percent of emissions that exceed the 2030 limits, compared to 40 percent from multifamily properties.

The New York City’s Comptroller’s office did a report of its own and found that “large commercial buildings, which are responsible for the largest share of emissions and mostly located in Manhattan, will benefit most,” without having to take “any action” to make the necessary upgrades envisioned by Local Law 97.

The solution proposed by the Comptroller’s office and the environmental community is to set a cap on RECs, allowing building owners to use them to offset up to 30 percent of their electricity consumption. 

“We found that limiting RECs to 30 percent of electricity overage, would result in a 79 percent building emissions reduction. That’s meaningful,” Louise Yeung, chief climate officer at the Comptroller’s office told City Limits. 

“As the current rule stands, buildings would only reduce 31 percent of emissions. That is such a disappointing outcome in our view of the promise that Local Law 97 really held,” Yeung added.

Pay the fine, skip the upgrades

Stuart Brodsky, who teaches at New York University’s Institute of Real Estate and previously worked in the real estate investment unit at General Electric Capital, warns that we could be headed for even more disappointment when it comes to Local Law 97.

“[LL97] isn’t going to stimulate investment in energy efficiency and carbon reductions in the majority of commercial space in New York City,” Brodsky said. 

Instead of investing in upgrades, Brodsky believes large real estate companies who own upscale buildings across the city “will rely on the RECs as much as possible” and then choose to just “pay the fine” if the energy credits no longer become an option. 

“I’ve looked at data that companies have given me for a 28 million square foot office portfolio and in 2024 they’ll be paying $3 million in fines,” under LL97 if they fail to lower their emissions to meet the law’s requirements, Brodsky said. But at the end of the day, “it will still be far more cost effective [for them] to just pay the fine than invest” in energy efficiency upgrades.

It would cost an estimated $1.3 billion for commercial buildings across New York City to invest in upgrades to reach their 2024 caps and $11.3 billion for 2030, according to a market analysis conducted by the Urban Green Council. 

Advocates say that energy efficiency upgrades or retrofits, as they are often called, may be costly upfront, but they are an investment that pays off in a number of ways over the long term, including new jobs. 

Another Urban Green Council analysis found that, thanks to Local Law 97, a new retrofit market for energy efficiency could blossom and stir up $20 billion in economic activity, 13 times larger than the retrofit market today. That in turn produces more employment: By 2030 LL97 could potentially create as many as 141,000 jobs in New York City.

A study conducted by the Guarini Center at New York University’s School of Law also found that by complying with LL97 and switching over to clean energy, building owners will save money on energy bills over time. The study projects that in the years LL97 is in effect, between 2024 and 2050, building owners could save a total of $2 billion.

But for the real estate world, the upfront costs associated with Local Law 97 might outshine those long term benefits.

When it comes to doing energy efficiency retrofits “building electrification projects have substantial upfront costs that will be particularly challenging for many buildings,” Daniel Avery, director of policy at the Real Estate Board of New York, said in an emailed statement. 

Fines for building owners who don’t meet their caps are set way too high, REBNY argued in a press release earlier this year. Restricting RECs even further “will significantly constrain the ability of building owners to comply with the law.” 

In an email, Avery said capping the use of RECs to just 30 percent of excess emissions “will lead to more penalties for thousands of buildings and reduce the investment in the green economy that we need.”

The way forward

Environmentalists, however, are pushing forward with their plea to limit the use of Renewable Energy Credits to no more than 30 percent of a building’s electricity emissions.

Environmental groups Food & Water Watch, New York Communities for Change, NYPIRG and TREEage have joined forces to publicly press for the 30 percent cap limit.

“Those limits have to be set, ” Shiv Soin, co-executive director of the environmental  youth coalition TREEage, told City Limits. “Using RECS to completely justify not doing any sort of retrofitting in buildings completely defeats the spirit of the law. And right now that is what Mayor Adams has put in place, and we’re hoping to get that corrected.”

To make that happen, the City Council is considering a construction code revision bill that aims to clarify language in the law to give the Department of Buildings the authority to make adjustments and add the 30 percent cap limit. The bill was introduced on Jan. 4 and is still under consideration.

“The Administration agrees with members of the City Council that limits on the total number of Renewable Energy Credits a property owner can purchase are needed, and we have been working with our partners at NYSERDA to study this issue further,” Andrew Rudansky, a spokesperson for the Department of Buildings said in an email. 

Rudansky said that if the bill passes “a rule related to RECs (informed by our further study of the issue) will be considered this year.”