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Environmental, social, and governance risks and opportunities

Maryland Resets its Trajectory with Greenhouse Gas Reduction Law

Maryland has enacted the most rigorous state law in the country reducing GHG emissions
ESG

With legislation that became law last week, without the Governor’s signature, Maryland has enacted the most rigorous state law in the country reducing greenhouse gas (GHG) emissions and otherwise addressing ESG stewardship including climate change. Businesses can and should treat this as the greatest opportunity and responsibility of our time.

Literally resetting the trajectory of Maryland, making sweeping changes to the Old Line State’s already tough climate change laws, among other things, Senate Bill 528 establishes new and alters existing energy conservation requirements for buildings, requires the State to achieve net zero statewide GHG emissions by 2045, establishes requirements for the purchase of zero emission vehicles in the State fleet, and more than two dozen other initiatives in a more than 100 page bill, much of which takes effect June 1, 2022 (.. only days from now).

The enrolled bill, now a statute known as the Climate Solutions Now Act of 2022, is premised on the idea that “the State has the ingenuity to reduce the threat of global warming and make GHG reductions a part of the State’s future” by, among other things, achieving net zero statewide GHG emissions by 2045.

The bill explicitly requires the State to reduce statewide GHG emissions by 60% from 2006 levels by 2031, a near term target unmatched by any other state.”

To accomplish this the bill advances everything from “food residuals” and organic materials diversion, a new environmental justice litmus test, a solar panel “recovery, reuse, and recycling working group,” an electric school bus mandate, recognizes “nuclear power” as a carbon free energy source, and much, much more. Many future regulations will have to be promulgated to make all of this happen, much of that by future working groups that companies should actively participate in not only to ‘de-risk’ implementation but to be a trusted partner in helping Maryland thrive as it literally rewrites the rules of the game, including by way of example that the State must adopt the 2018 International Green Construction Code (.. something the legislative branch had previously authorized, but the executive branch balked at) before January 1, 2023 and then adopt subsequent triennial versions.     

The first direct contact that many businesses with have with this new law, beyond increasing electricity and natural gas rates, will be that commercial, including multifamily, building owners must report GHG emissions to the State annually beginning in 2025. That is a big deal because most businesses have never calculated and do not know how to calculate their GHG emissions.

That is, the law provides that buildings, commercial or multifamily with a gross floor area of 35,000 square feet or more, except elementary and secondary school buildings, must achieve a 20% reduction in net GHG emissions before January 1, 2030, a 40% GHG reduction before January 1, 2035 and be net zero before January 1, 2040. From the new law,

To facilitate the development of building emissions standards under this section, the Department [of the Environment] shall require the owners of covered buildings to measure and report direct emissions to the Department annually beginning in 2025.”

The bill’s principal sponsor clarified that it is 2024 GHG emissions that will be first reported to the state in 2025.

Hugely important, this GHG disclosure requirement must be viewed in context including that on March 21, the U.S. Securities and Exchange Commission issued a proposed new rule to mandate Scope 1, 2, and 3 GHG emissions disclosures by public companies and the many other businesses in their supply chains. That disclosure is far deeper that the new Maryland law that arguably tracks Scope 1 only, but Maryland’s mandate is immensely broader compelling most businesses to contribute to the cause of protecting the environment.

One knock on the bill is that it unduly burdens privately owned real estate with GHG emission reductions, ignoring other sectors, when for example cumulatively real estate in Maryland is responsible for about 18% of GHG and transportation is responsible for 40%, but transportation is barely mentioned in the more than 100 pages? Moreover, even with respect to real estate, the government has largely excepted itself when public schools, the largest public building type are exempt from these laws.

Significantly, what is not in the bill was a requirement that all newly constructed buildings be electric only, which was amended out, but will no doubt be back after 15 month study and drafting of an all-electric building code.

Also amended out of the bill and of great import was verbiage granting permission to local governments to exceed state law in requiring emission reductions from buildings. Montgomery County is currently considering such an ordinance that as a result of that amendment is all but certainly preempted by this new state law.

Of course, the bill does not provide a mechanism to pay for the vast majority of this. There is an increased state contribution to local public school construction for net zero schools, and a smattering of grant and aide pots of money that are all very modest in size and will only exist in years to come. For example, in uncodified language, the bill provides, in fiscal 2024 through 2026, the (next) Governor is to include in the annual budget bill an appropriation of $5 Million to provide grants under a new program, the purpose of which is to reduce GHG emissions from multifamily residential buildings (i.e., but $5 Million could be the cost of retrofitting one existing large multifamily building). 

The Governor had called this a “reckless and controversial energy tax bill.” The 30 page Fiscal Note on the bill recognizes the sweeping nature of the enactment including that “the bill’s provisions result in significant costs” and concedes, “A reliable estimate of the bill’s overall effects on electricity rates resulting from the bill’s requirements cannot be reliably estimated at this time.” All of which is true, but ..

Maryland has enacted the most ambitious GHG emission reduction law in the nation coupling it with a potpourri of other climate change and ESG mandates. Rather than being mired in the old way of thinking, treating this as a mandate, businesses should treat this as an opportunity to gain a competitive edge, embracing the demands of today’s tenants, employees and other stakeholders that in 2022 business be responsible for environmental social and governance stewardship.

If there is a specific action item, beyond viewing this new law in light of the moment of collective awakening about the role of businesses in our society and ESG, businesses that own or occupy real estate in Maryland must immediately begin to understand and quantify their GHG emissions or in the alternative engage someone to assist in the task because they must very soon report those GHG emissions to the state government and public companies and businesses in their supply chains will have even broader GHG disclosure requirement, all as a prelude to a big, hairy, audacious goal of dramatically reducing emissions to repair the planet.

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