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Environmental, social, and governance risks and opportunities

Colorado Law Will Lead the Nation in Reducing GHGs from Buildings

The strategies developed will be a model for the country

Last week, Colorado established mandatory energy performance standards for large buildings. Buildings are one of Colorado’s top five sources of greenhouse gas emissions.

As directed by a state law enacted in 2021, as HB 1286, the Colorado Health Department’s Air Pollution Control Division developed the newly finalized standards.

The building performance standards law applies to more than 8,000 buildings across Colorado and make no mistake compliance with this new regulatory scheme will cost building owners Billions of dollars, which will result in higher rents and ultimately higher costs to consumers who patronize or live in those buildings.

Most commercial including multifamily buildings 50,000 square feet or larger are subject to this GHG emission reducing mandate. The law only provides for exceptions for single family homes, duplexes, triplexes, storage facilities, standalone parking garages, airplane hangers, or buildings where more than half of the space is used for manufacturing, industrial, or agricultural purposes. 

This week’s regulation will drive Colorado’s statutory GHG emission reduction targets of 7% by 2026 and 20% by 2030 for the buildings covered in the program, as compared to 2021 levels. Newer, more efficient buildings may already meet the standards. As part of its target methodology, the state determined about 40% of the 8,000 buildings covered under the program already meet standards for the 2026 target. About 20% of the buildings already meet standards for the 2030 target.

That burden needs to be considered against the backdrop of Energize Denver, a previously enacted Denver ordinance that will require all commercial and multifamily buildings in the city to gradually replace their heating and cooling systems with all electric.

Owners of buildings that do not meet the new state standards will need to use less energy or reduce GHG emissions. However, the regulation is being applauded for providing flexibility for building owners and various pathways for meeting the standards. For example, building owners could optimize energy use in the building, repair or replace inefficient equipment or systems, replace natural gas appliances and heating and cooling equipment with electric only equipment, or use renewable energy. Building owners who can’t meet the standards, and some older buildings will simply not be able to reasonably do so, may pursue a percent reduction pathway or request a timeline or target adjustments through the Colorado Energy Office. Key to protecting the program from being draconian in its application are its waiver and exemption components.

“On top of the potential long-term cost savings and measurable reductions in harmful greenhouse gas pollution, the standards can also help improve safety and indoor air quality in older apartment buildings,” said Michael Ogletree, director of the Air Pollution Control Division. “It’s a major step forward in protecting both public health and clean air.” 

Of import, building owners can apply for robust local and state government financing opportunities, grants, tax credits, and other incentives to assist with some costs of implementation. Owners must track their buildings’ energy usage and emissions on an annual basis and make any necessary improvements to comply with the 2026 and 2030 statutory greenhouse gas reduction targets.

One of the few knocks on what is otherwise being heralded as “the” way government needs to move in the future on GHG emissions is that this program exempts nearly all public buildings including school buildings except in the most extreme of renovation projects. Omitting government structures from climate change solutions is not only disingenuous but has the resultant impact of burdening the private sector to further make up for those large number of buildings that will continue to have unabated GHG emissions. The reliance on Energy Star Portfolio Manager as a reporting tool has also been criticized.

There is some irony as this law pushes buildings toward all electric power when Colorado burns more coal than the national average, generating 37% of its electricity from coal (natural gas is the next largest source of power); such that this enactment will result in more coal being burned to keep the lights on and heat warming Colorado, with the unintended consequence of increasing GHG emissions.

The first round of GHG emission reporting had already been made to the state, reportedly giving rise to a new cottage industry of third party reporting on energy data has sprung up largely out of concern for data security and possible cybercriminal activity from ransomware to other malware and the like, including so that there is no direct Internet connection from building owners to either the federal or state government. 

While several cities and local jurisdictions have similar enactments, Maryland has the only other statewide GHG emission reduction law. Not only will the new regulations result in Colorado’s law to be the first enforced, but commentators point to the flexibility including alternative compliance paths and waivers not only making this dramatically more efficacious but also significantly more environmentally just than Maryland’s proposed GHG reduction regulations that have alos been characterized as risking stalling the state’s economy.

As society moves quickly to imagine and implement new regulatory frameworks to respond to climate change, like energy performance standards, we have advised clients that own real estate in striking a careful balance between the aspirational and implementable, cognizant of what is technologically feasible and fiscally responsible, not to mention the all but certain unintended consequences of humans trying to alter the course of mother nature.

The Colorado building sector will not only lead the nation in GHG emission reduction but also, the strategies developed to implement the Centennial state’s law will be a model for the nation as businesses do their part to repair the planet.

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