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Environmental, social, and governance risks and opportunities

Questions from our webinar “Does Your Lease Address New GHG Laws?”

The Decarbonizing Revolution is Just Beginning
ESG law

This blog post is a compilation of responses to the top 10 questions from our webinar last week, “Does Your Lease Address New GHG Laws?” We saw the largest number of attendees at our monthly webinar series and while we answered questions live, we had requests to share the questions.

Our webinar introduced the need for commercial and multifamily leases alike to be amended now as a result of the Building Energy Performance Standards in Maryland Senate Bill 2022 528 (and other similar laws across the country), which law will require landlords to report with data and information that must come from tenants, whole building greenhouse gas emissions annually, achieve a 20% reduction before 2030, and be N​et Zero before 2040.

Also driving change in the landlord tenant relationship requiring continuous cooperation are ESG disclosures by tenants that include GHG emissions which can only be calculated with data and other information from the landlord.

The top 10 questions we received were:

How does a building owner count its greenhouse gas emissions to report to the government under this new Maryland law? We at ESG Legal Solutions can calculate your building’s GHG emissions. Greenhouse gas emissions are not actually measured or counted on a building by building basis, such is not commercially practicable; rather GHG emissions are calculated. Equivalency calculators, like our proprietary NET+ GHG Calculator, convert energy data and other inputs (i.e., utilizing energy bills, building employee census, number of computer screens, etc.) into the equivalent amount of CO2 and other GHGs. And by way of example, every gallon of home heating oil creates about 22 pounds of CO2.

What is the penalty for failing to comply with this new Maryland law? If a building does not meet its GHG reduction targets, then the owner can come into compliance by paying a fee for any emissions that are above target levels. That Alternative Compliance Fee (i.e., the law does not give the authority to assess penalties [although it has been suggested the Maryland Department of the Environment does not agree with that?], but by any name, this fee is a sanction) may not be less than the social cost of GHG adopted by MDE or the federal government (weaponizing the social cost of GHG, a measure intended to be used in cost benefit analysis, not used as it is described in SB 528). Dramatically increased estimates of the social cost of GHG (estimated at $51 per ton when SB 528 was passed in April 2022 to now over $200 per ton) were released in November 2022, by EPA.

You said that Maryland has announced it is moving toward an all electric building code, is the State coming for my gas stove? SB 528 says in relevant part, “it is the intent of the General Assembly that the State moves toward broader electrification of both existing buildings and new construction” and then ordered the Maryland Codes Administration to study mandatory electrification and report back by January 1, 2023. Many have suggested the State’s GHG emission goals can only be met with the elimination of natural gas and the resultant corporate transformations.

Is there an example of an all electric building code? The New Buildings Institute (NBI) has developed a Building Decarbonization Code that can be overlaid on top of the 2021 IECC and result in an all electric IECC. This is a good example of an all electric code that might be adopted in Maryland.

I did not understand your comment about the sources of electric power? The U.S. Energy Information Administration tracks total energy consumption including in Maryland. Many consider ‘consumption’ a better measure than “energy production” which only includes energy produced in the state when Maryland is a net importer of energy. Of import the largest source of electricity used in Maryland is by far natural gas, followed by nuclear, then coal, and only then renewables. So, an all electric building is still mostly natural gas powered. See, U.S. Energy Information Administration – EIA – Independent Statistics and Analysis

You said Maryland enacted the most rigorous state law in the country reducing greenhouse gas emissions? SB 528 explicitly requires the State to reduce statewide GHG emissions by 60% from 2006 levels by 2031, a near term target (that includes more than just buildings) unmatched by any other state.   

Okay, I understand there is a new law and there are yet to be regulations, but when do I have to first do something under this law? The first direct contact many businesses will have with this new law will be the new concept of Building Energy Performance Standards, which will initially require that commercial, including multifamily, building owners report direct 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. As noted above, we at ESG Legal Solutions can calculate your building’s GHG emissions today and we expect that cottage industry to become an increasingly significant portion of the work we do for clients.

Why are the GHG numbers I report in 2025 so important? For a host of reasons it is key to report accurately to the government, including that for many businesses GHG numbers will be part of ESG disclosures that your stakeholders may rely on that reporting, and key in Maryland will be that those numbers will be evaluated for the mandatory reductions in out years, including against similar building types. We can revolutionize your approach to success in GHG disclosures.

Are any building owners exempt from this new law? SB 528 law provides buildings, commercial or multifamily with a gross floor area of 35,000 square feet or more (excluding parking garages), except elementary and secondary school buildings, certain historic buildings, certain manufacturing buildings, and certain agricultural buildings, must achieve a 20% reduction in “net direct” GHG emissions from 2025 GHG emission levels of similar buildings before January 1, 2030, a 40% GHG reduction before January 1, 2035, and be Net Zero before January 1, 2040.

How does all of this work in a condominium? We do not yet have a good answer to how this new law will be implemented for residential condominiums except to say there is no exemption for buildings containing condominium units, however, we expect the soon to be proposed regulations that are to be adopted by June 1, 2023, will attempt to provide guidance. Many other matters should become clearer with the regulations. We expect to offer another webinar on the implementation of Maryland SB 528 after the promulgation of the regulations.

All of that responded to, it is clear that leases, including those with terms and renewals that run through the implementation dates of federal regulations and Maryland statutes, need to be amended now. And yes continuous cooperation in sharing the information necessary for GHG emission calculations must be provided for, however, there is far more that can be done by those that understand what is happening that can and will yield significant external rewards. This entirely new area of government regulation may be the biggest business opportunity in history, .. waiting to be unlocked!       

For more information you can read our blog post from last week, Does Your Lease Need Greenhouse Gas Provisions? | ESG Legal Solutions, LLC

Watch future postings on this blog or Twitter @esglawyers for announcements of the subject and date of our February webinar.

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