How New York can optimize its bold new building efficiency regulations

This past April, as part of New York’s Climate Mobilization Act, the City Council passed a series of laws targeting building energy emissions, with a goal of reducing carbon emissions from the building sector by 80% by 2050. While the new law presents a major challenge for real estate owners, it also presents an opportunity to spur innovation.

City policymakers, technology leaders, advocates and the real estate community should work together to craft regulations that will catalyze new technology and design. One way to accomplish this is to establish a citywide cap-and-trade program for building emissions and use the fines levied against noncompliant building owners to invest in a strong, clean tech ecosystem in New York. In the meantime, building owners should capitalize on emerging technologies to better measure, manage, and reduce energy.

Of the dozen or so laws in the Climate Mobilization Act, Local Law 33 and 97 are some of the most significant for the real estate industry. Local Law 33 requires New York City buildings with at least 25,000 square feet to post in a “conspicuous location” a letter grade, A-F, reflecting the energy intensity of the building. “A” buildings are energy efficient; “D” buildings, not so much.

Local Law 97 takes a more dramatic step forward. It establishes a framework for reducing emissions by 40% by 2030 and 80% by 2050. The law creates a new department, the Office of Building Energy and Emissions Performance, and gives that department authority to develop new standards and regulations to achieve these goals. Starting in 2024, buildings that fail to meet specified targets will be fined based on their excess carbon emissions. The regulations apply to roughly 40,000 of the one million buildings in New York.

Together, Local Laws 33 and 97 create powerful incentives for building owners to move quickly to reduce emissions. In the short-term, building owners and managers should capitalize on a deep market of technology companies focused on making buildings smarter, like New York-based Logical Buildings, improving energy management, like Lucid and Entic (acquired last year by Aquicore), and providing clearer and simpler sustainability data and reporting, like Measurabl.

But that won’t be enough. The U.S. Department of Energy estimates that current technology can bring down energy use by a maximum of 46%. To get to 80%, new hardware, software, and architectural systems will be required.

In the past, market-oriented regulatory regimes reduced pollution, boosted innovation, and minimized costs for participants. Take for example the 1990 Clean Air Act Amendments, which created a national cap-and-trade system for sulfur dioxide (SO2). In that system, the roughly 650 U.S. coal-fired power plants could earn credits by reducing their SO2 emissions and then sell those credits to other plants. The concept was to reduce system-wide emissions rather than requiring each plant to reduce emissions to a single standard.

By 2004, SO2 emissions from the power sector fell 36%. Over the same time period, coal-fired power plants actually grew electricity output by a quarter. Meanwhile, the market-based system spurred the creation of more pollution-reducing technology than prior command-and-control policy regimes. It also reduced costs. The EPA estimated it would cost industry $6.1 billion to implement the Clean Air Act; in the end, an industry-backed research report found, it cost only $1.7 billion.

Meanwhile, Tokyo has demonstrated the power of a cap-and-trade system for building emissions at the metropolitan level. Under the Tokyo program, which was enacted in 2008, more than 90% of buildings surpassed their reduction targets for the first compliance period, with more than half of buildings buying credits to hit their targets.

The Climate Mobilization Act already requires that the City evaluate an emissions trading scheme as one potential policy regime. This option should be given serious consideration. During the evaluation process, city policymakers should consult with building owners, property managers, technologists, architects, environmental advocates, and other stakeholders. Ultimately, the design and implementation will be critical. To bring building owners and managers into the market, the system would need to be relatively simple and insulated from politics. At the same time, the market must be transparent so that it inspires public confidence.

Buildings that fail to meet their emissions standards will be fined. The fines may be quite significant, generating tens if not hundreds of millions of dollars of revenue. While the Climate Mobilization Act’s sponsors publicly argued that the goal of the system is not to create revenue, revenue there shall be. Rather than going to the city’s general operating budget, those fines could be set aside to support clean energy innovation. For example, the City could fund clean energy research directly or in partnership with academic institutions, create scholarships at CUNY schools in relevant academic programs like environmental engineering, or support centers for innovation. The Urban Tech Hub, a partnership between the New York City Economic Development Corporation and the private sector, is a great example on which to build.

New York City is the most important real estate market in the world; with the right regulatory regime in place, entrepreneurs will develop new technologies that will not only help New York reach its 80% emissions reductions goal by 2050 but bring benefits to the rest of the globe.

Nate Loewentheil, a former economic adviser to President Barack Obama, is a Senior Associate at Camber Creek, a leading proptech venture capital firm.