kathryne cleary is a senior research associate at Resources for the Future, a Washington-based environmental think tank.
Published January 24, 2022
When President Biden committed his administration to an urgent effort to decarbonize the American economy, most people focused on his ambitious initiative to switch to clean energy — in particular, to wind and solar energy. But more needs to be done in order to get from here to there quickly, as the White House acknowledged in announcing plans to reduce CO2 emissions from commercial and residential buildings as well as a program targeted at federal buildings. How important is this piece of the climate policy puzzle?
Scraping the Skies With Carbon
Turns out, very important. Buildings do more than provide shelter to enterprises and households. They release enormous amounts of CO2, among other pollutants. Indeed, as of 2019, energy use in commercial and residential buildings in the U.S. contributed over 30 percent of the nation’s greenhouse gas emissions.
Buildings are, of course, large consumers of electricity for lighting, cooling and, in some places, for heating. So a lot of their emissions come indirectly from the power grid — for which climate reduction prospects are promising. Thanks to falling natural gas prices (allowing gas to displace coal) and cheaper renewables, emissions from electricity have fallen significantly over the past decade. Aggressive state (and now federal) policies and goals geared toward decarbonizing electricity, coupled with clean energy commitments from large companies and utilities, will almost certainly ensure that these downward emissions trends will continue. Accordingly, the indirect emissions from buildings will decline, too.
But here’s where the story gets complicated. Addressing emissions from electricity, where the players are mostly large generators and utility companies, is one thing. Addressing emissions from millions of residential and commercial structures that use fossil fuels for water and space heating, cooling and cooking is significantly more challenging — and yet necessary for meeting a net-zero-by-2050 climate goal. That’s because these direct uses of oil and natural gas in buildings still account for a whopping eighth of total U.S. greenhouse gas emissions.
Where to Even Begin?
From a technical standpoint, numerous options are available to reduce emissions from buildings. How a building performs energywise depends on both the structure and the various appliances and energy-consuming devices inside it. With respect to the former, buildings can be designed or retrofitted to consume less energy. These measures include insulation, more efficient windows and highefficiency lighting, among others. Some options — weatherizing homes by sealing window frames and the like — can generate a hefty and immediate return, which explains why many states and localities are encouraging building energy audits. Several private certification programs, notably the LEED rating system of the U.S. Green Building Council, also provide guidance on design for achieving high energy performance — not to mention an opportunity for owners to show off their green credentials.
New or existing buildings can also install distributed generation, like solar panels, that will reduce their demand for electricity from the grid. California now requires that all new single- and multi-family homes be constructed with solar panels — and that the systems be sufficient to meet the whole electricity demand of the building.
Inside buildings, energy-consuming devices can be replaced with more efficient equipment or equipment that uses cleaner fuels. Electrification, the process of replacing fossil fuel-consuming devices like stoves and space heaters with ones that run on electricity, can also reduce emissions, as long as electricity is generated using clean resources. And thanks to dramatic strides in improving the energy efficiency of appliances and devices, a lot of these measures can also make economic sense for the building owner or tenant.
The Fine Print
For the most part, policymakers have focused on reducing the energy consumption of buildings through minimum efficiency standards for appliances, utility rebates for installing energy-efficient equipment, and adding energy-efficiency mandates for new construction to local building codes. Yet, while these policies can reduce energy consumption, they aren’t sufficient to make a significant dent in emissions from the sector.
Including efficiency standards in building codes for new structures and incorporating electrification standards such as requiring electric heat are a start. But building-energy codes don’t apply retroactively, meaning that most of the stock of buildings is unaffected.
The U.S. and many other high-income countries have embraced appliance standards, which ensure that new devices consume less energy to perform the same task. But again, time is not on the side of those who see such upgrades as a major part of the fix. Since appliances typically have long lives, efficiency standards may not affect the energy consumption of the majority of homes or businesses for many years. Moreover, the higher cost of new, more efficient appliances may discourage turnover of old ones. As in, why not pay $200 to repair the decade-old washing machine rather than pay $1,200 for a new energy-efficient one?
Another limitation — which is also true of building codes — is that appliance standards focus on technological mandates for better equipment and do not account for the way the appliances are actually used. Energy-efficiency studies talk about the “rebound effect,” the phenomenon in which improvements in energy efficiency make operating those devices less expensive and thereby lead to more use. Think about it: If it costs you a lot less to run your air conditioner, wouldn’t you be more likely to set the thermostat at 72 degrees instead of 75?
Consider, too, that most appliance standards only focus on improving the efficiency of the device, not switching to climate-friendlier fuel. So standards like this can only achieve so much.
In an Ideal World
If those policies aren’t getting us to where we need to be, what would? If the technical potential is there, the challenge is designing a policy that will target outcomes and encourage the lowest-cost solutions to meet those objectives. To achieve desired reductions from buildings, policies will have to target either energy-efficiency or emissions outcomes — and set the bar high.
Of course, a high, economy-wide carbon price would lead to emissions reductions in the buildings sector by raising the cost of carbon- polluting fuels relative to lower-carbon or zero-carbon options. For example, carbon pricing would raise the cost of natural gas or oil more than it would raise the cost of electricity made from renewables, so consumers would be more likely to switch to electric technologies.
Another benefit of a hefty carbon price is that, depending on the design, the approach could raise revenue that could be invested in buildings to make them climate-friendlier. For example, if the carbon price were not set high enough to incentivize consumers to switch from gas water heaters to electric heatpump water heaters, then the revenues could be put toward rebates for the climate-saving equipment.
The reality, though, is that carbon pricing, particularly at high enough levels to achieve substantial decarbonization on its own, is unlikely to be adopted at the federal level anytime soon. And in the absence of such a policy, the best option is a policy that gets the job done less efficiently.
When the Best Isn’t in the Cards
So what walks and talks like a carbon price but doesn’t come with the same political baggage? In a word — well, in three words — tradable performance standards. In broad terms, the idea is to set minimum standards in environmental performance, such as reducing energy use or emissions or incorporating more clean resources, and allow those being held to the standard to pay other covered entities with lower compliance costs to make performance adjustments in order to cover their own obligations. And, happy days, it seems this approach is a lot more popular than carbon pricing.
In the electricity sector, these performance standards take the form of clean electricity standards or renewable portfolio standards, which require a certain percentage of electricity sales to come from renewable resources. In transportation, these include CAFE standards, which require improvements in fleetwide average fuel economy of manufacturers over time, and low-carbon fuel standards, which require lower carbon-intensities of oilbased fuels over time. In the buildings sector, this politically acceptable, carbon-price looka- like policy is called the “building performance standard.” Building performance standards have been gaining traction globally as cities search for new ways to meet environmental targets.
A BPS requires facilities covered by the policy to meet specific energy-efficiency or emissions standards (typically given as intensities and measured per square foot in either emissions or energy use) that increase in stringency over time. With trading allowed, buildings that overperform relative to the standard can earn credits, while those that underperform can purchase credits on the free market to comply. This means that the buildings that can cut emissions or energy use for the lowest cost will, while those that can’t manage this for a reasonable cost have a way out — paying someone else to do it.
Another elastic design feature would be to allow for flexible compliance for a building across time. So, a building could overperform in one year and bank the credits to be used in subsequent years. This feature is particularly important given that certain energy efficiency investments yield high savings upfront.
Designing a BPS requires the specification of multiple dimensions of compliance, along with consideration for what works best for the region covered — which can make the whole proposition administratively complex. The building stock in the U.S. is highly diverse in age, type, location and energy profile (among many other factors), so a one-sizefits- all policy isn’t really going to make sense even at the local level.
One way to make a BPS simpler to administer is to limit its scope (at least initially) to the largest buildings, which are typically also the largest energy consumers and account for most of the total building energy use in aggregate. This method enables regulators to get the biggest bang for their buck upfront.
Also, when thinking about setting the standard, regulators have a choice between taking a building-specific approach or setting uniform targets by building type. Each approach comes with trade-offs. For example, a building-specific approach that requires every structure to reduce its emissions or energy consumption relative to its own baseline offers leeway for almost all to improve performance to some extent. But that approach may not be considered fair for efficient buildings that are ahead of others at the starting line. On the flip side, a uniform target by building type might seem more equitable but could prove exceptionally difficult for some buildings to meet.
A BPS is not pie in the sky. New York City and Washington, D.C. (among others) are both in the process of implementing building performance standards for commercial and multi-family buildings, and both programs include coverage and standards phase-ins that will enable flexible compliance.
New York’s building performance standard program, which was enacted in 2019, sets emissions-intensity limits (tons of carbon emissions per square foot) on buildings greater than 25,000 square feet with standards becoming more stringent every four years. The standards in the first compliance period, which starts in 2024, will only touch the highest-emitting buildings, while the second compliance period, starting in 2028, will cover about 75 percent of the covered buildings in the program.
Rather than differentiating by emissions intensity, D.C.’s program phases in compliance by building size. Starting in 2026, buildings over 50,000 square feet are covered. Four years later, buildings over 25,000 square feet enter the program. And in 2031, buildings over 10,000 square feet will be folded in. These phase-ins in New York and D.C. are examples of how programs can be designed to make compliance more flexible for early adopters (largest polluters need to comply first) or to provide ample notice for smaller buildings.
Putting a BPS to Work on Federal Buildings
Biden’s plans call for a BPS for federal buildings. Would it have much impact?
Well, it could, for a few reasons. First, the federal government owns or leases an enormous amount of space — over 1 billion square feet in some 100,000 buildings across all 50 states. And those figures don’t include structures used by the Department of Defense.
All this energy consumption is expensive: the U.S. government spends about $6 billion annually on energy for facilities alone, at least in part because, on average, federal buildings are relatively old and thus not energy-efficient. So, at the very least, a BPS targeted at federal real estate could produce significant energy savings — and probably cost-savings — for taxpayers.
But more importantly, a successful federal BPS could serve as a blueprint for states, localities and even other countries. Think of the federal building stock as a pilot for new program design — one in which policymakers can test the idea before asking the private sector to join in.
Consider, too, that while some cities have already adopted BPSs, their experiences may not serve as a good model for programs that span across climate zones. The federal program, by contrast, will test how the same BPS program can reduce energy use in buildings from Alaska to Hawaii to Maine to Florida. To that point, colleagues and I at Resources for the Future are exploring options for designing the federal BPS. And we think a buildingspecific approach rather than a uniform target would make more sense, in large part because the BPS would cover multiple regions.
Building Better Building Policies
Like a lot of aspects of climate policy, flexibility is critical. While carbon pricing might be the best option from an efficiency perspective, alternative approaches that focus on outcomes can be nearly as effective and lead to significant change. A building performance standard has the potential to make a real dent in emissions from existing buildings, particularly if the federal government takes the lead in design and implementation.