New York jump-starts the "building decarbonization" trend

Why it matters: Residential and commercial buildings emit 13% of harmful carbon emissions, according to the EPA — far more in cities, where they are concentrated — and are a major contributor to climate change.

• Environmentalists praise the building decarbonization movement as a key element of the burgeoning effort to tamp down cities' contributions to global warming.
• But developers and landlords are bracing for the new requirements, fearful of the massive costs involved in ripping out gas-burning heaters and retrofitting older structures.

Driving the news: New York City's new law — known as Local Law 97, or LL97 — is considered a landmark in such policies, which cap emissions or energy consumption and require building owners to improve energy and water use.

• It goes into effect Jan. 20, applies to all 50,000 city buildings over 25,000 square feet, and includes progressively stricter emissions standards over the next 16 years.
• Buildings "account for approximately two-thirds of greenhouse gas emissions in New York City," according to the law, which was passed in 2019 (making it the second such ordinance to pass, after Washington, D.C.'s).
• For owners of older buildings, it could prove very expensive, requiring massive retrofits and the replacement of gas-burning furnaces with pricy heat pumps and other technology. (Federal and state tax incentives are available, but landlords say they only go so far.)

What they're saying: Local Law 97 "is the biggest driver of investment in decarbonizing buildings in any city in this country," says Cliff Majersik, senior adviser at the nonprofit Institute for Market Transformation.

• The law "applies to the biggest city in the country, and it has ambitious goals."
• Building owners everywhere "are increasingly viewing building performance standards as a fait accompli" and planning accordingly, Majersik tells Axios.

How it works: Decarbonizing a building can involve insulating and air-sealing it, replacing heating and cooling systems with non-gas alternatives, and installing LED lighting.

• Some landlords will have to make major improvements, like replacing old boilers with heat pumps and replacing water pipes with ductwork that distributes hot and cold air.
• For violators, annual financial penalties are set at $268 per ton of CO2 equivalent over an individual building's limit, based on 2024 energy usage and emissions.

Where it stands: In New York City, 91% of building owners are in compliance with the decarbonization rules about to kick in.

• Those remaining can avoid penalties by taking various steps (to the dismay of environmentalists, who advocated for tougher enforcement).
• "Where it really will begin to bite will be in 2030," when 40% reductions of greenhouse gas emissions will be required, Majersik says.

State of play: There's dismay within New York real estate circles about the mounting expenses associated with the law — which comes on top of high office vacancies and proposals to convert office buildings to apartment houses.

• "Right now in New York, it is probably cheaper to tear a building down than to re-use a building — and I think that's true in lots of markets," says Jon Meyers, a partner at real estate developer HR&A Advisors.
• While retrofitting buildings is far more climate-friendly than demolishing and rebuilding, the unfortunate reality is that the latter can sometimes make more financial sense.

• Residents of some co-op and condo buildings are livid about their compliance expenses, while some fear that electric heat isn't as effective as gas.
• A lawsuit aimed at blocking Local Law 97 was dismissed in October.

The other side: Some landlords and building owners are embracing the changes, looking forward to saving money through energy efficiency.

• "They're spending less on their utility bills, and making themselves more attractive to tenants," Majersik says.
• "There is a real return on investment for positioning your building as a high-performance building."

Meanwhile: Some are making rosy predictions for what could happen if NYC's Department of Buildings keeps pushing decarbonization.

• "Such a focus will unleash a massive investment in building envelope upgrades and heat pumps, creating thousands of local, high-quality jobs, maximizing uptake of federal incentives, and reducing harmful air pollutants, all while improving comfort and quality of life for residents," reads a joint statement from the Regional Plan Association, Urban Green Council and other groups.

Zoom out: The federal government set its own building performance standards in 2022, requiring agencies to cut energy use and electrify equipment in government-owned properties.

• The Securities and Exchange Commission's climate disclosure rules, which are not yet finalized, would require public companies to disclose greenhouse gas emissions from their buildings and other operations.
• The Biden administration also set up the National Building Performance Standards Coalition, comprised of roughly 40 state and local governments that want to adopt laws like New York's.

What's next: Developers of future buildings are already looking toward the use of low-carbon building materials — and even carbon-negative ones — after having paid very little attention to the issue until recently.

• "With new construction, there's an opportunity to build carbon management into the building," says Greeshma Gadikota, a professor of civil and environmental engineering at Cornell University.