Sunday, April 27, 2008

How GHG Emission Cap and Trade Will Impact Existing Building Owners

There appears to be little doubt that the next administration in Washington, D.C. will bring about federal GHG emission reduction legislation and that it will be based on a cap and trade program. In the absence of federal GHG legislation, however, many states and local governments have already adopted ambitious plans for reducing GHG emissions. Twenty-two states have entered into regional pacts that impose mandatory GHG emission caps and over 800 cities have adopted GHG programs calling for reductions in GHG emissions. The Regional Greenhouse Gas Initiative (RGGI), for example, which includes Connecticut, Delaware, Maryland, Massachussetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Pennsylvania (as an observer), will implement a regional cap and trade program in January 2009. The first auction of carbon dioxide allowances is planned for this September. Another example is the Western Climate Initiative (WCI) which includes six western states (Arizona, California, New Mexico, Oregon, Utah, and Washington, with Colorado, Kansas, Nevada and Wyoming as observers) who have agreed to reduce aggregate GHG emissions by 15% below 2005 levels by 2020. It is clearly evident that the use of cap and trade programs for the reduction of GHG emissions is the direction in which the U.S. is moving.

Why should existing building owners be concerned about this? Commercial buildings account for 38% of the carbon dioxide emissions in the country. As cities and states begin to implement their aggressive GHG reduction goals, it is highly likely they will realize that they will be unable to achieve their goals simply by imposing green building standards on new construction projects. As a result, existing building owners should anticipate that local government will move to impose energy reduction measures on their properties as well, at the very least on building renovation.

What can existing building owners do about this? In my view, the time is now to conduct an energy audit of all facilities to learn where and how much energy is being used, and where energy savings might be realized. With the spiraling cost of energy, the energy savings will be an attractive operating expense reduction. Also, if you are located in a state with GHG reduction plans, it would be prudent to keep abreast of the discussion, particularly how it may impact you.

Two Recent Studies Show Value of Green Buildings

Two recently released studies have confirmed the energy savings and increased value associated with green buildings.

The first study was conducted by the New Buildings Institute (NBI) for the U.S. Green Buildings Council (responsible for LEED certification), with support from the U.S. EPA (which has the Energy Star program). The March study measured the energy performance of 121 newly constructed LEED-certified buildings that had been occupied for at least one year. Measured energy savings on average were 28% over non-certified buildings. These savings were close to the 25% savings predicted.

The second study also published in March was conducted by the CoStar Group. CoStar analyzed over 1,300 LEED-certified and Energy Star buildings and compared them to non-certified buildings of similar size, location and tenancy. The findings showed that the LEED-certified buildings commanded a rent premium of $11.24 per square foot and had a 3.8% higher occupancy rate compared to their non-LEED certified peers. Energy Star buildings were also able to command a rent premium of $2.38 per square foot and had a 3.6% higher occupancy rate than non-Energy Star buildings. The CoStar study also showed that Energy Star buildings were selling for approximately $61 per square foot more than their non-Energy Star peers. Leed-certified buildings, however, were bringing in approximately $171 more per square foot than non-LEED certified buildings.

While more study is still needed, the results of these studies are substantiating that green buildings can save significant energy (typically 25-30%) and command a premium valuation.