Status of Scoping Plan Development
The Global Warming Solutions Act (Health & S C §§38500–38598) requires the California Air Resources Board (CARB), before January 1, 2009, to finalize a Scoping Plan setting forth the range of mechanisms it is proposing be implemented to achieve the “maximum technologically feasible and cost-effective reductions in greenhouse gas emissions” by 2020 (as well as the further reductions targeted for 2050 as required by Executive Order S-3-05). Health & S C §38561(a). The Scoping Plan will then be updated at least once every five years. Health & S C §38561(h).
Part 2 of this article provides a general overview of the process CARB is required to follow in developing the Scoping Plan, including the range of measures that may be considered for adoption to achieve the purposes of the Global Warming Solutions Act. It also summarizes the significant issues evaluated by CARB, as well as input received from certain involved agencies, committees, and stakeholder parties during the Scoping Plan development process.
On June 26, 2008, CARB issued a preliminary draft of the Scoping Plan (Draft Scoping Plan) for public review and comment in advance of public workshops scheduled in July 2008. Part 2 of this article summarizes some of the key aspects of the Draft Scoping Plan and highlights the direction in which CARB appears likely to proceed in its efforts to achieve the targeted level of statewide emissions reduction.
The Scoping Plan Development Process
As part of the Scoping Plan development process, CARB must consult with a broad range of agencies having regulatory authority over various greenhouse gas emission sources, including the California Energy Commission (CEC) and the Public Utilities Commission (CPUC), with respect to those aspects of the Scoping Plan addressing energy-related issues. Health & S C §38561(a). In selecting from the range of possible actions, CARB needs to consider other state, regional, and international greenhouse gas reduction programs, including the Regional Greenhouse Gas Initiative, which is soon to be implemented in the northeastern United States, and the European Union Emissions Trading Scheme, which is already in place in the European Union. Health & S C §38561(c). CARB must also evaluate the Scoping Plan in terms of the potential costs and the economic and [PAGE 106]noneconomic benefits to the economy, public health, and the environment. This must be accomplished, in part, by using the “best available economic models, emission estimation techniques, and other scientific methods.” Health & S C §38561(d).
CARB has a wide array of available options to achieve the necessary emission reductions, with the statute authorizing any combination of “direct emission reduction measures, alternative compliance mechanisms, market-based compliance mechanisms, and potential monetary and nonmonetary incentives.” Health & S C §38561(b). Regulations establishing greenhouse gas emissions limits and implementing the emissions reduction measures identified in the Scoping Plan must be adopted by January 1, 2011, and be effective by January 1, 2012. Health & S C §38562(a). In developing these regulations, CARB is required, in part, and to the extent practicable, to:
· Design the regulations and, where appropriate, the “distribution of emissions allowances” in an equitable manner that attempts to “minimize costs and maximize the total benefits to California”;
· Ensure that actions conducted in accordance with these regulations do not “disproportionately impact low-income communities” or interfere with other air quality regulatory programs;
· Consider cost-effectiveness and overall societal benefits; and
· Minimize the administrative burden of compliance and leakage (a term that refers to emission reductions in California that are, in essence, offset by similar increases outside the state).
Health & S C §38562 (b). CARB also must adopt methodologies to quantify voluntary emission reductions and to ensure that entities having made such reductions before a regulation’s effective date receive appropriate credit. Health & S C §38571.
CARB is authorized to incorporate a broad range of market-based compliance mechanisms in the Scoping Plan, including “a regulation that establishes a system of market-based declining annual aggregate emission limits for sources or categories of sources that emit greenhouse gas emissions, applicable from January 1, 2012, to December 31, 2020.” Health & S C §38562(c). Before incorporating any market-based compliance mechanisms into new regulations, however, CARB must:
· Consider the potential for these mechanisms to result in “localized impacts” to communities already subject to air pollution concerns;
· Design the system to ensure there are no increases in emissions of toxic air contaminants or criteria pollutants; and
· Maximize any environmental and economic benefits to the state.
Health & S C §38570 (b).
Emission Reduction Mechanisms Considered by CARB
Although CARB is accorded significant discretion in selecting the range and types of emission reduction measures to best achieve the statutory mandates, the focus in public workshops and in comments from stakeholders and involved agencies has been on market-based compliance mechanisms—in particular, a cap-and-trade program. For summaries of these comments, see http://www.arb.ca.gov/cc/scopingplan/comments/summary.htm. In part, this appears to stem from actions taken by the Governor immediately after passage of the Global Warming Solutions Act reflecting preference for the adoption of such mechanisms. In Executive Order No. S-20-06, issued shortly after the Global Warming Solutions Act was signed into law, the Governor directed the Secretary of Cal-EPA to create a Market Advisory Committee, to be composed of “national and international experts,” charged with making recommendations to CARB, on or before June 30, 2007, concerning “the design of a market-based compliance program.” CARB must consider those recommendations in developing a market-based program that ideally “permits trading with the European Union, the Regional Greenhouse Gas Initiative and other jurisdictions.” Executive Order No. S-20-06 (Oct. 18, 2006).
Although direct regulations will play a significant role in enabling California to achieve the level of emission reductions required under the Global Warming Solutions Act, CARB has given serious consideration to the development of a cap-and-trade program, at least with respect to certain source categories of greenhouse gas emissions. CARB has also considered the imposition of a carbon fee, assessed either on sources of greenhouse gas emissions or users of carbon fuels, and the adoption of a broad range of alternative measures, including some intended to provide flexibility and a “market component” to the more traditional regulatory mechanisms. Examples include rebate programs to encourage the purchase of green products, subsidies to foster the development of clean technologies, and “feebates,” a mechanism to essentially influence market decisions through a combination of fees assessed on the purchase of carbon-intensive products that would then be used as rebates to encourage the sale of environmentally preferable alternatives. See CARB Scoping Plan Workshop Series (Nov. 30, 2007, Dec. 14, 2007, Jan. 16, 2008, May 19 and 28, 2008). For the archive of Scoping Plan Workshops, see http://www.arb.ca.gov/cc/scopingplan/meetings/archive-scopingmtgs.htm.
The Cap-and-Trade Option
Under a cap-and-trade program, the air pollution control agency (CARB) sets an overall cap on the amount of a particular pollutant (greenhouse gases) that can be released into the environment on an annual basis from those categories of sources or economic sectors subject to regu[PAGE 107]lation. The cap will typically be reduced by the agency on a periodic basis, with the intent of eventually achieving a predetermined level of emission reductions. Individual sources are assigned annual emission limits, typically referred to as “allowances.” Depending on the program, the allowances may be allocated freely, auctioned for a fee, or distributed through some combination of the two methods. A source that can be verified to have reduced its emissions below its annual allowance can receive credits for the differential. These credits have an economic market value in the cap-and-trade program, and can be purchased by or traded with another regulated entity whose annual emissions exceed its allowance. Most programs also authorize a regulated entity to bank its credits for use in subsequent years, and many allow emission offsets generated by sources outside the program to be traded within the program. SeeU.S. EPA, Tools of the Trade: A Guide to Designing and Operating a Cap and Trade Program for Pollution Control (June 2003) for a more detailed overview of cap-and-trade programs.
Cap-and-trade programs tend to be favored by industry because of their purported flexibility and ability to facilitate the achievement of emission reductions at a lower cost than more standard regulatory approaches. Environmental interest groups tend to be more skeptical, based in part on the potential difficulty in verifying the accuracy of claimed emission reductions and credits. Allocation schemes allegedly favoring those entities with high levels of historic emissions have also served as another basis for objection.
With certain key exceptions, the vast majority of entities participating in the Scoping Plan development process that likely would be covered under a cap-and-trade program have supported such a system. Most participating environmental organizations have also been generally receptive to a cap-and-trade program, albeit one of a more limited scope than that favored by industry and that contains appropriate safeguards. However, a group of environmental justice organizations has announced its strong opposition to any efforts by CARB to establish such a program under the Act. See California Environmental Justice Movement, Declaration on Use of Carbon Trading Schemes to Address Climate Change (Feb. 19, 2008), viewable at www.ejmatters.org/declaration.html.
Based on prior public workshops involving the Scoping Plan’s development, some of the issues that CARB has seriously considered in evaluating the merits of a cap-and-trade program include the following:
· The particular economic sectors that are appropriate for regulation under such a program;
· The point within each covered sector where emission reductions should be evaluated;
· The extent to which allowances should be freely allocated or auctioned;
· The uses of generated revenue if an auction is used;
· Whether emission reductions from sources outside the cap should be allowed to be traded within the program;
· How California’s program should be linked with comparable programs at the regional, national, and international level;
· Any cost containment measures that should be included as part of such a program; and
· The types of enforcement mechanisms that should be incorporated into the program, including measures to verify the accuracy of any purported emission reductions.
See CARB Scoping Plan Workshop Series (Nov. 30, 2007, Dec. 14, 2007, Jan. 16, 2008, May 19 and 28, 2008); CARB Technical Stakeholder Workgroup Meetings (Feb. 29, 2008, Mar. 17, 2008, Apr. 4 and 25, 2008, and June 3, 2008).
Input Received From Involved Agencies and Committees
CARB has received extensive comments from various agencies and committees charged under the Act with assisting in the development of its emissions reduction program. In a report issued in June 2007, the Market Advisory Committee recommended that if CARB adopts a cap-and-trade program in conjunction with other regulatory directives, it do so in stages, to eventually cover all major sectors of the California economy that emit greenhouse gases. The Committee suggested that special emphasis be placed on the electricity, industrial, transportation, and building sectors. With regard to the electricity sector, the Committee recommended that a cap-and-trade program work in conjunction with ongoing regulatory actions addressing energy efficiency and renewable energy sources. Most members of the Committee suggested that the program take a “first seller approach,” under which coverage would extend to the entity first selling power into the California market (including power imported from other states). The Committee also proposed that allowances initially be distributed through both free allocation and auctions, with a gradual increase in the share of allowances subject to annual auction, leading eventually to complete auction distribution. Auction funds could be used, in part, to support the development of clean technology, to promote energy efficiency, and to assist communities historically affected by pollution. In the electricity sector, rebates or other assistance could also be offered to consumers. Additionally, the Committee suggested that CARB recognize the use of offsets generated by sources falling outside the program (including those located outside California), provided that appropriate mechanisms are in place to track and verify the accuracy of the claimed reductions. The need to “encourage linkages” with other trading programs was also highlighted. Market Advisory Committee, Recommendations for Designing a Greenhouse Gas Cap-and-Trade System for California (June [PAGE 108]30, 2007). The Climate Action Team has also issued a report generally endorsing the use of a cap-and-trade program under appropriate circumstances and setting forth its recommendations on the scope and design of such a system. Climate Action Team, Report to Governor Schwarzenegger and the Legislature (Mar. 2006).
The CPUC and the CEC have jointly prepared recommendations on the mechanisms that they believe should be adopted by CARB to obtain the necessary reductions in greenhouse gas emissions from the electricity and natural gas sectors. See Interim Decision on Basic Greenhouse Gas Regulatory Framework for Electricty and Natural Gas Sectors, CEC Docket No. 07-OIIP-1; PUC Rulemaking 06-04-009 (Mar. 2008). These recommendations were adopted by the CEC on March 12, 2008, and by the CPUC on March 13, 2008, and have been formally submitted to CARB.
The CEC and CPUC recommend that CARB “adopt a mix of direct mandatory/regulatory requirements for the electricity and natural gas sectors and a cap-and-trade system that includes the electricity sector.” With regard to the electricity sector, they suggest that retail providers of electricity be required to provide “a minimum level of cost-effective energy efficiency programs and renewable energy delivery” to their customers and that legislation be considered to require electricity providers to exceed a 20-percent renewable energy requirement at some undetermined point in the future. These measures would work in conjunction with a cap-and-trade program focused on deliverers of electric power to the California grid (a slight variation of the proposal offered by the Market Advisory Committee) to achieve further reductions more cost-effectively, and from a wider variety of sources, than if additional regulatory mechanisms were adopted. Under this proposal, a portion of allowances under the cap would be auctioned, with most of the proceeds used to assist the California consumer (likely through rebates or additional investments in energy efficiency or renewable energy measures). They also recommend that California’s cap-and-trade program be designed to ensure consistency with regional and federal systems, including systems under development through the Western Climate Initiative and those proposed under pending federal legislation.
As to the natural gas sector, the CPUC and CEC recommend that CARB reserve the potential adoption of a cap-and-trade program for a later date due to the limited number of commercially viable alternatives to natural gas and available emission reduction opportunities. In the interim, they propose that CARB require all entities involved in the “transportation, distribution, and/or retail sales of natural gas to end users (natural gas providers) in California be required to provide a minimum level of energy efficiency or other demand reduction programs to their customers.”
The CEC and CPUC have continued to evaluate the development of a cap-and-trade program for the electricity sector, including an appropriate mechanism for allocating emission allowances. They intend to provide CARB with more detailed recommendations later this summer.
In developing its regulatory program under the Act, CARB is required to minimize economic costs to the extent feasible. CARB is performing economic modeling to evaluate the extent to which certain regulatory strategies under consideration may impact the California economy. CARB is performing five preliminary modeling runs, all of which incorporate a set of “core measures” that will be present in the final Scoping Plan. Three of these runs will also include variations of a cap-and-trade program; one will include a direct regulatory scheme; and another will be based on adoption of a carbon fee on fuel use. CARB reports that, based on the preliminary results of these efforts, the economy-wide savings likely to result from improved efficiencies and the transition to more renewable energy and alternative fuel sources are projected to exceed the costs of complying with the various recommended emission reduction measures. Later this summer, CARB intends to issue a supplement to the Draft Scoping Plan that will include the final economic modeling results as well as an assessment of the benefits to public health and the environment that will be achieved through implementation of the Scoping Plan.
Consistency With Other Emission Reduction Programs
CARB must ensure that any market-based compliance program adopted is consistent with other regional, national, and international greenhouse gas emission reduction programs. The Regional Greenhouse Gas Initiative (RGGI) and the Western Climate Initiative (WCI) are the two regional greenhouse gas emission reduction programs most often cited with respect to the development of a similar program under the Act. RGGI involves a cap-and-trade program intended to address carbon dioxide emissions from power plants in 10 mid-Atlantic and northeastern states. The program places a cap on current emissions from covered facilities in 2009, with the goal to initially stabilize and then to eventually reduce emissions by 10 percent by 2019. The WCI is a regional market-based compliance program under development by California, six other western states, and three Canadian provinces. The goal of the WCI is to reduce economy-wide greenhouse gas emissions to 15 percent below 2005 levels by 2020. The WCI is committed to developing a market-based compliance program, including a cap-and-trade system. Draft recommendations addressing the design of various elements of the program were issued in May 2008, with final program design recommendations scheduled for issuance in September 2008. Any program in which California would agree to participate as a WCI member must be consistent with the requirements of the Global Warming Solutions Act.
Efforts this year in the United States Senate to enact comprehensive legislation to reduce greenhouse gas [PAGE 109]emissions, in part through a market-based trading program, were unsuccessful. However, this endeavor arguably laid the groundwork for Congress to more seriously consider such legislation in 2009, when passage in some form is considered more probable. Further, both Senator John McCain and Senator Barack Obama have previously expressed support for the reduction of greenhouse gas emissions through a cap-and-trade program. The impact that any future federal legislation would have on CARB’s efforts to implement the Global Warming Solutions Act is unclear. However, any market-based compliance program established by CARB under the Act would need to be consistent with any similar program that may eventually be established under federal law.
Credits for Voluntary Emission Reductions
Another issue in the Scoping Plan development process has involved the extent to which credit will be provided to those entities that voluntarily reduced greenhouse gas emissions before the date by which the full CARB regulatory program is deemed to be effective. At its meeting on February 28, 2008, CARB approved a Policy Statement on Voluntary Early Actions to Reduce Greenhouse Gas Emissions intended to address this concern. In relevant part, CARB has agreed, to the extent feasible, to ensure that the Scoping Plan and regulations implemented thereunder “encourage and reward voluntary early reductions of greenhouse gas emissions” and “ensure the recognition of actions taken to reduce greenhouse gas emissions after the enactment of AB 32.” In furtherance of this policy, CARB has agreed to work with the California Climate Action Registry “to establish a process that will allow entities taking voluntary early actions to document those actions so that the reductions can be considered for credit against AB 32 obligations once the full program is in place.” CARB, Policy Statement on Voluntary Early Actions to Reduce Greenhouse Gas Emissions (Feb. 28, 2008).
The Draft Scoping Plan
On June 26, 2008, CARB issued the Draft Scoping Plan for public review and comment. See CARB, Climate Change Draft Scoping Plan: A Framework For Change (June 2008 Discussion Draft), viewable at www.arb.ca.gov/cc/scopingplan/document/draftscopingplan.htm. The Draft Scoping Plan sets forth the measures CARB currently recommends be adopted, or that CARB is still evaluating for potential adoption, to enable the state to meet both the targeted level of emission reductions in 2020 and the more stringent long-range goals for 2050. Although many issues are still subject to ongoing consideration, CARB has proposed the implementation of a wide range of measures, including market-based mechanisms, traditional regulations and standards, and voluntary programs intended to work in a coordinated fashion to achieve the emission reduction targets.
Since publication of Part 1 of this article (31 CEB RPLR 70 (May 2008)), CARB has slightly revised downward from 600 million metric tons of carbon dioxide equivalents (MMTCO2e) to 596 MMTCO2e its estimate of California’s projected total greenhouse gas emissions in 2020 under a “business-as-usual” scenario. Given the previously approved 1990 statewide emissions level of 427 MMTCO2e, CARB must ensure that the version of the Scoping Plan ultimately adopted includes measures to reduce greenhouse gas emissions by 169 MMTCO2e in 2020. Draft Scoping Plan at 8. Although the anticipated reductions to be achieved from certain measures are still subject to assessment, those recommendations outlined in the Draft Scoping Plan are estimated to achieve at least 169 MMTCO2e of emissions reduction by 2020. Draft Scoping Plan at 11.
CARB proposes to obtain a significant share of the 2020 emissions reduction target through regulatory measures currently under development (or already developed but not yet implemented). Many of these measures were previously approved by CARB as “discrete early action measures” or “early action measures” and are summarized in Part 1 of this article. The Draft Scoping Plan also indicates that CARB intends to place an increasing emphasis on measures intended to significantly enhance both the efficient use of energy across all sectors of the California economy and the role that renewable energy sources play in the state’s energy market.
Energy Efficiency Measures
CARB recommends setting targets for the statewide reduction in energy demand of 32,000 gigawatt hours and 800 million therms from levels estimated to occur in 2020 under a “business-as-usual” scenario. CARB believes that these reductions can be met, in conjunction with efforts by the CPUC and the CEC, in part through “enhancements” in the existing incentive programs involving investor-owned and publicly owned utilities and through further modifications to the state’s Energy Efficiency Building Standards and Energy Efficiency Appliance Standards. Draft Scoping Plan at 21.
The Draft Scoping Plan also recognizes the role that “green” building standards can play in reducing greenhouse gas emissions with respect to both new and existing construction, in part through more efficient energy usage. Draft Scoping Plan at 22. With regard to industrial sources, CARB recommends that those facilities emitting more than 0.5 MMTCO2e of greenhouse gases annually be required to conduct an energy efficiency audit on certain emission sources and to evaluate the potential for cost-effectively reducing emissions of greenhouse gases, criteria pollutants, and toxic pollutants through the replacement or upgrade of existing equipment. Draft Scoping Plan at 36.
Renewable Energy Programs
CARB further proposes that California adopt a “more aggressive” Renewables Portfolio Standard, such that by 2020 the goal would be to have at least 33 percent of all [PAGE 110]electricity supplied in the state generated from renewable energy sources. Draft Scoping Plan at 24. CARB has also focused on emission reductions that will be achieved through a program to be implemented under recently enacted legislation that will provide incentives to support the installation of up to 200,000 solar water heaters in the state (thereby reducing natural gas consumption) and through the Governor’s “Million Solar Roofs Program,” which provides incentives to install new solar systems as part of construction projects exceeding certain levels of energy efficiency. Draft Scoping Plan at 21, 30. See Pub Util C §§2862(k), 2867.3.
The Draft Scoping Plan also recommends the creation of a cap-and-trade program beginning in 2012 that will eventually be linked with those currently under development in other states and provinces through the Western Climate Initiative, eventually leading to a regional emissions trading system. Draft Scoping Plan at 15. CARB currently proposes that the sectors covered under the program include electricity, large industrial sources, transportation fuels, and natural gas, which collectively are estimated to account for approximately 85 percent of statewide greenhouse gas emissions. Under a “business-as-usual” scenario, CARB has projected that sources within these sectors would emit 512 MMTCO2e of greenhouse gases annually by 2020. Under the CARB proposal, emissions from these sources would be subject to a declining cap, with an eventual limit of 365 MMTCO2e in 2020, assuming full participation across all sectors. Draft Scoping Plan at 17. Although a significant portion of the reductions in emissions and energy usage from these sources would come from mandatory regulations and standards, facilities would have the option of obtaining additional reductions through the purchase of allowances under the cap-and-trade program. The detailed mechanisms of the cap-and-trade program, including establishment of the cap, development of an allowance distribution methodology, and adoption of rules governing the use of offsets, are not addressed in the Scoping Plan and would be set by CARB through the regulatory process. Draft Scoping Plan at 19.
Additional Measures Under Consideration
The Draft Scoping Plan outlines several additional measures that CARB is considering for possible inclusion in the Proposed Scoping Plan—some in lieu of, and others in addition to, the existing recommended measures. CARB is contemplating even further reductions in the targeted statewide energy demand reduction goals, expansions to the existing array of incentive programs supporting solar power use, and even “zero net energy targets for new buildings.” Draft Scoping Plan at 38. Of note, too, is CARB’s continued evaluation of the potential merits of carbon fees, to be levied either on sources of greenhouse gas emissions or on carbon fuels, as a potential means to “drive investment and fuel use choices toward more efficient and lower carbon options.” Draft Scoping Plan at 43. CARB reports that, to achieve the desired level of emission reductions, a carbon fee would likely need to be in the range of $10-$50 per metric ton of CO2e. CARB estimates that “[f]or every $10/metric ton, the fees would increase the wholesale price of coal-fired electricity by $0.01 per kilowatt-hour, of gasoline by $0.10 per gallon, and natural gas by $0.05 per therm.” Draft Scoping Plan at 41.
CARB held a series of public workshops in July 2008 to obtain feedback on the Draft Scoping Plan. For a schedule of workshops, including live webcasts, see http://www.arb.ca.gov/cc/scopingplan/meetings/meetings.htm. Written comments were also sought during that time period. CARB will revise the Draft Scoping Plan based on the outcome of its own ongoing internal analysis, the comments and input received from members of the public, other involved agencies, committees, and retained parties, and the results of the economic modeling to be presented as a supplement to the Draft Scoping Plan later this summer. It is currently anticipated that the Proposed Scoping Plan will be issued in October 2008 and presented to the CARB Board of Directors for adoption at its November 2008 Board meeting. Once the Scoping Plan is approved, any regulations required to implement the emission reduction measures it identifies must be adopted no later than January 1, 2011, and be effective by January 1, 2012. Health & S C §38562(a).
Issues for the Real Estate Practitioner to Consider
Land use, construction, and real estate transactional lawyers and their clients will be affected by the standards and initiatives enacted under the Global Warming Solutions Act. CARB, in the development of the Scoping Plan, is charged with ensuring that a broad range of measures is adopted to achieve mandated emission reductions. Health & S C §38561. These measures will include new energy efficiency standards imposed by the state for new or existing developments and “green” building and land use initiatives promulgated in partnership with local governments and agencies.
According to the U.S. Green Building Council, buildings in the United States alone account for 65 percent of electricity consumption, 36 percent of energy use, and 30 percent of greenhouse gas emissions worldwide. See www.usgbc.org. In California, buildings are the second largest contributor of greenhouse gas emissions. Draft Scoping Plan at 22. Accordingly, building efficiency offers a significant opportunity for CARB to achieve mandated emission reductions. “Green buildings offer a comprehensive approach to reducing greenhouse gas emissions that cross-cut multiple sectors including Energy, [PAGE 111]Water, Waste, and Transportation.” Draft Scoping Plan at 22.
CARB is expected to require “green” building and land use standards in the final Scoping Plan. CARB has created a “Green Buildings Subgroup”—one of 11 multi-agency subgroups formed to provide recommendations to CARB as it develops the final Scoping Plan. In particular, recommendations from the Green Buildings Subgroup are aimed at “making our buildings more energy efficient, environmentally-friendly and sustainable.” Draft Scoping Plan at 5. CARB has also formed a “Land Use Subgroup” to develop new land-use planning strategies for reducing greenhouse gases. Through the summer of 2008, CARB will hold a series of workshops and solicit public comment on “green” building and land use measures, the results of which will be included in a proposed Scoping Plan to be published in October 2008 and finalized by January 1, 2009.
It is clear that CARB is recognizing the need for “green” building measures to achieve the goals of the Global Warming Solutions Act—the reduction of statewide emissions of greenhouse gases to 1990 levels. CARB has stated that “green” building measures will be adopted in the form of a mandatory California Green Building Standards Code that will require minimum performance standards for all buildings in 2010. Draft Scoping Plan at 23. “Existing residential and commercial buildings offer tremendous potential for meeting these efficiency targets because the majority of California’s stock was built to lesser or non-existent building standards.” Draft Scoping Plan at 38.
In all likelihood, the Green Building Standards Code will be based on the example set by the state with respect to new and existing state-owned buildings. Through the Governor’s Green Building Initiative, California requires that all new state buildings meet Leadership in Energy and Environmental Design (LEED) Gold Standards and that existing state buildings be retrofitted to achieve standards equivalent to LEED-EB Silver.
It is likely that the Green Building Standards Code will incorporate standards equivalent to LEED certification. LEED standards are defined by the U.S. Green Building Council. See www.usgbc.org. The LEED for New Construction Rating System, for example, is designed to guide and distinguish high-performance commercial and institutional projects, including office buildings, high-rise residential buildings, government buildings, recreational facilities, manufacturing plants, and laboratories. Credits under LEED are given, in part, for optimizing energy performance and the use of renewable energy. For a detailed discussion LEED standards, see California Construction Contracts, Defects, and Litigation, chap 4 (Cal CEB 2008).
Solar, Water, and Other Energy Efficiency Incentives
CARB is also considering expanding existing state solar incentive programs, including the Million Solar Roofs Program and the Residential Solar Hot Water Heater Installation Program, which would require building owners to meet certain efficiency requirements as a prerequisite to qualify for financial incentives. Draft Scoping Plan at 38. California will be instituting incentives for up to 200,000 solar water systems to save as much as 26 million therms of natural gas per year. Pub Util C §§2862(k), 2867.3; Draft Scoping Plan at 21.
Other initiatives at the state level are being considered. For example, on October 18, 2007, the CPUC implemented commitments made with 16 other major California organizations to aggressively pursue energy efficiency as part of the National Action Plan for Energy Efficiency. In doing so, it issued a decision finding that “California’s highest energy priority is to pursue cost-effective energy efficiency measures over both the short- and long-term,” declaring that “energy efficiency [is] an integral part of ‘business as usual’ in California.” In so declaring, the CPUC issued an interim mandate to adopt three programmatic initiatives with the following goals:
· All new residential construction in California will be zero net energy by 2020.
· All new commercial construction in California will be zero net energy by 2030.
· Heating, ventilation, and air conditioning (HVAC) industries will be reshaped to ensure optimal equipment performance.
The CPUC further solidified its intent to establish new, collaborative processes with key business, consumer, and governmental organizations in California to “institute a comprehensive, long-term energy efficiency strategy to achieve our ultimate goal—making energy efficiency a way of life.” Decision 07-10-032 (Oct. 18, 2007); Rulemaking 06-04-010 (filed Apr. 13, 2006), Interim Opinion on Issues Relating to Future Savings Goals and Program Planning for 2009-2011 Energy Efficiency and Beyond.
With respect to land use initiatives, in August 2007, the Governor signed Stats 2007, ch 185, which requires the Office of Planning and Research (OPR) to develop guidelines under the California Environmental Quality Act (CEQA) “for the mitigation of greenhouse gas emissions or the effects of greenhouse gas emissions” by July 1, 2009, thus confirming that real estate developers will need to address greenhouse gas considerations in their CEQA documentation. See Pub Res C §21083.05.
Toward this end, in June 2008, OPR issued a Technical Advisory to provide guidance in assessing climate change impacts associated with projects subject to CEQA review [PAGE 112]pending completion of revisions to the CEQA Guidelines and receipt of input from CARB on the range of viable methods to determine thresholds of significance for greenhouse gases. The Technical Advisory references information on recognized models to estimate greenhouse gas emissions and contains a list of measures that may be appropriate to mitigate climate change-related impacts associated with certain development projects. See OPR, Technical Advisory: CEQA and Climate Change: Addressing Climate Change Through California Environmental Quality Act (CEQA) (June 19, 2008), available online at www.opr.ca.gov. The California Attorney General’s Office has also taken an active role in challenging project approvals and general plan updates that are perceived to have been issued without adequate consideration of global warming-related impacts. The Attorney General’s Office has also developed a lengthy list of measures that it believes could be adopted under appropriate circumstances to reduce potentially significant impacts from greenhouse gas emissions associated with individual projects and general plan updates. For a list of these mitigation measures and information related to examples of project approvals recently challenged by the Attorney General, see http://caag.state.ca.us/globalwarming/ceqa.php.
As of January 1, 2010, all commercial building owners in California will be required to disclose to all prospective buyers, tenants, and lenders the Energy Star Portfolio Manager benchmarking data on energy consumption and usage within their buildings. Pub Res C §25402.10. In enacting this law, the legislature found that mandatory disclosure of benchmarking data is expected to foster “green” building by using scores to “motivate building operators to take actions to improve the building’s energy profile and help to justify financial investments.” Stats 2007, ch 533, §1.
Local Government Initiatives
Although state initiatives are expected to make a significant impact on greenhouse gas reductions, initiatives at the state level will not be sufficient to achieve the goals of the Global Warming Solutions Act. Accordingly, CARB has stated that local governments are an essential partner in achieving greenhouse gas reduction goals. Draft Scoping Plan at 31. In doing so, CARB has partnered with the Local Governments for Sustainability (ICLEI) to develop local government protocols for greenhouse gas assessment. See http://www.iclei.org. CARB is also tracking and accounting for actions taken by local governments as the Scoping Plan is implemented.
To that end, several California local governments have adopted climate action plans to combat greenhouse gas emissions by instituting “green” building standards on new construction projects. For example, in San Francisco, Mayor Newsom is seeking to enact legislation that would require “green” building standards on seven types of construction projects:
Type of Construction
Green Building Requirement
New high-rise residential buildings (over 75 feet high)
LEED Certified standards in 2008
LEED Silver standards in 2010
New mid-rise residential buildings (under 75 feet high, 5 or more units)
25 GreenPoints in 2009
50 GreenPoints in 2010
75 GreenPoints in 2011
New small residential buildings (1-4 units)
25 GreenPoints in 2009
50 GreenPoints in 2010
75 GreenPoints in 2011
New high-rise commercial buildings (over 75 feet high or more than 25,000 square feet)
LEED Certified standards in 2008
LEED Silver standards in 2009
LEED Gold standards in 2012
New high-rise commercial buildings (under 75 feet high and between 5000 and 25,000 square feet)
7 specific LEED credits in 2011
Large commercial interior renovations (over 25,000 square feet)
LEED Certified standards in 2008
LEED Silver standards in 2009
LEED Gold standards in 2012
Major alterations (25,000 square feet with major structural modifications)
LEED Certified standards in 2008
LEED Silver standards in 2009
LEED Gold standards in 2012
City and County of San Francisco, Office of Economic Analysis, Mayor’s Green Building Requirements: Economic Impact Report at 6 (May 21, 2008) .
San Francisco has also required that all city-owned building projects (new construction and major renovations over 5000 square feet) achieve LEED Silver standards. See San Francisco Mun C §707. The city also offers expedited permit review in the Planning Department, Department of Building Inspection, and Department of Public Works for developers constructing to LEED Gold standards. See San Francisco Planning Dep’t, Director’s Bulletin No. 2006-02 (Sept. 28, 2006).
Similarly, on April 22, 2008, the City of Los Angeles adopted a “green” building ordinance that requires LEED Certification standards for five types of construction projects. See Los Angeles Mun C §§16.10, 16.11.[PAGE 113]
Consumer Demand for “Green” Buildings
State and local “green” legislation is not the only motivation for building owners to build “green.” The practice of constructing traditional buildings is changing as building owners, developers, landlords, and lenders respond to consumer and end-user demands. Additionally, building owners will be financially motivated to build “green” because of lower operating costs and higher rents. “Green” buildings are generally more energy efficient and resourceful than traditional buildings. By upgrading existing facilities, a business owner and tenants may save up to $0.60 per square foot in energy costs (as much as a 40 percent reduction) and up to $0.10 per square foot in water costs. Draft Scoping Plan at ES-6. “Green” buildings also incorporate sustainable, low-emitting materials that provide a healthy indoor environment and, some say, a more productive workforce. Other benefits for building owners may include:
· A decrease in tenant turnover (and higher occupancy rates);
· Attractiveness to investors and lenders;
· An increase in rental rates;
· An increase in quality of construction (and corresponding decrease in need for future capital improvements); and
· An increase in value (attractiveness to potential purchasers).
Due Diligence and Other Transactional Considerations
Whatever the motivation, as “green” building and development becomes more commonplace in the industry, it is likely that “green” considerations will become a central part of real estate due diligence, contracting, and transactions. Buildings that do not incorporate “green” construction may be viewed as outdated when compared to other buildings. The cost of bringing a building into compliance with “green” standards could be a significant factor to a buyer in determining the purchase price of a building. This would be of particular concern in jurisdictions that require “green” construction for major remodels, or in jurisdictions that require “green” building upgrades at the time of sale. The Natural Resources Defense Council advocates that CARB adopt regulations requiring certain energy efficiency standards for buildings to be achieved at the time of sale. This would not only require that buildings meet such standards initially, but would effectively require the standards to be maintained throughout the life of the building. NRDC and Others, Recommendations for Policies to Reduce Global Warming Pollution for the AB 32 Scoping Plan (Oct. 1, 2007).
From a financial perspective, due diligence investigations may also involve:
· An evaluation of the operating costs of the building, particularly in a full service building for which the owner bears the cost of operation;
· The contractual ability of an owner to make “green” capital improvements to the property when cost savings may be achieved, and whether those costs may be passed through to the tenants as operating costs;
· Whether “green” lending products (e.g., lower interest rates and higher loan-to-value ratios to assist developers and investors who are building “green”) are available to a buyer to increase a buyer’s purchasing power; and
· Whether insurance premiums may be affected as “green” legislation is adopted, since the replacement cost to bring a “nongreen” building into compliance with current “green” codes following a property loss may be more expensive to the insurer than a building that was “green” before the damage occurred.
“Green” considerations are also integral to the construction process. The practitioner should be familiar with applicable state and local “green” codes and laws in order to address legal compliance issues. Construction contracts should be drafted to appropriately incorporate “green” design and performance standards and requirements, including allocating responsibilities among the responsible parties for ensuring the achievement of targeted “green” certifications.>
From a marketing perspective, considerations as to whether a project may be marketed as a “green” building may be of material concern. Because “green” certifications are generally awarded following project completion, the client may be concerned with legal exposure that may arise in marketing a project as “certified” to a particular “green” standard before achieving certification, and whether the client is exposed to litigation brought by consumers or tenants if such certification is not ultimately achieved. The client may rely on counsel to assist with applying for certifications and permit fast-tracking, and to advise about suitable sites for the project necessary to achieve necessary “green” credits (e.g., up to 14 points may be awarded for “Sustainable Sites” under LEED for New Construction). The practitioner may also be called upon to give guidance with respect to “green” incentives, tax credits, and available exemptions for the project.
“Green” building ordinances are a reality today; legislation at the state and local level is expected to substantially increase over the next few years. Building owners, purchasers, and tenants will need to know whether a particular building is subject to “green” building laws, whether the building will be subject to such laws in the future, the cost to comply with such laws, and whether the cost may be offset or passed through to another entity. Developers will need to know how “green” legislation will impact their developments, what alternatives are available to satisfy applicable laws, and whether incentives, tax credits, or exemptions may be available to offset the cost of compliance. Failing to assess these areas can lead to significant and unexpected short- and long-term monetary costs or lost opportunities for the client. Thus, the well-informed real estate practitioner can be a key asset to the owner, developer, purchaser, or tenant in this evolving legal environment.