Colorado Air Quality Control Commission members on Thursday approved the state’s first building performance standards, setting requirements for large property owners to cut energy usage and greenhouse gas emissions despite warnings that compliance costs will be significant.
The building performance standards mandate a 7% reduction in greenhouse-gas emissions from the sector by 2026 and a 20% reduction by 2030. They apply to covered buildings of at least 50,000 square feet gross floor area — a designation that will affect about 8,000 structures.
The rules, required by a 2021 law, are the next step in the state’s multifaceted approach to reducing greenhouse gas emissions, which already has produced regulations for sectors such as transportation and energy. They are the AQCC’s first attempt to lower emissions produced by buildings, and they come as the office sector in particular is reeling from pandemic-spawned vacancies that are driving down the value of properties.
Commissioners acknowledged the precarious financial state of the industry during a two-day hearing and made several changes to the original regulatory proposal to give building owners more ways to achieve compliance. However, they rejected pleas from several groups to hold off any vote on the regulations or to pare them back significantly, saying that the challenge that the new rules may present must be balanced with its benefits to the environment.
A “necessary” rule
“This is a major new requirement for a previously unregulated sector, and the concerns are real,” commissioner Patrick Cummins said. “But I also understand there’s a tremendous amount of know-how from those folks about how to get it done … And this is necessary in my mind, not just required. We have a climate crisis. We have to do these things, even if they’re hard.”
Buildings that rise over downtown Denver are among the 8,000 that will be affected by the state’s new building performance standards.
Colorado is not the first government to put such requirements into place — numerous states and cities, including Denver, are establishing building-performance standards. But, as Sharon Jaye — building performance policy manager for Colorado’s largest city, which has begun implementation of its Energize Denver ordinance that affects buildings of 25,000 square feet or more — noted, no jurisdiction is far enough into the program to produce conclusive results yet.
Under the newly approved regulation, Colorado building owners have three primary pathways by which they can comply with the new standards. They can meet energy-use intensity or greenhouse-gas intensity targets that are broken down by 55 building types, or they can achieve a standard performance reduction of 13% versus 2021 benchmarks of either of these measurements by 2026 and then 29% by 2030.
Buildings can use a variety of methods to reduce energy usage or greenhouse gas emissions, such as energy-efficiency improvements, electrification and replacement of fossil-fuel-based heating and cooling systems with sustainable equipment such as ground-source heat pumps. Still, owners argued some older buildings can’t electrify fully, and an engineer testified that heat pumps are not as effective in cold-weather, high-altitude locations because they require equal days of heating and cooling.
Exceptions to building performance standards
Publicly owned buildings must benchmark their energy-usage and greenhouse-gas-emissions intensity but will not face the same penalties for noncompliance as private buildings in 2026 and 2030 under the new rules. Only after they exceed a certain spending threshold for renovations must they meet the intensity-reduction goals.
Colorado Energy Office leaders said in a filed statement that they will not count energy used for electric-vehicle charging systems against building owners in determining their goals for energy-usage intensity. Automobile dealers and some building owners worried that the regulation may force them to eliminate planned charging stations on their property, despite the state’s push for transportation electrification as another major way to reduce greenhouse gas emissions.
Colorado Air Quality Control Commission members discuss proposed building performance standards on Thursday.
Buildings that fail to comply with the designated standards face penalties of $2,000 per month for their first violation and $5,000 for future violations.
An Air Pollution Control Division analysis estimated that while the new regulations will cost building owners $1.77 billion to implement, they will produce energy savings of $5.15 billion by 2050, explained Leah Martland, regulatory development and engagement unit supervisor for the Colorado Department of Public Health and Environment. A separate analysis from the U.S. Environmental Protection agency estimated a $7.55 billion net savings from new buildings, though it noted that about 29% of buildings are expected to pay more for compliance than they save, at an average cost of $4.37 per square foot, she added.
Numerous concerns about regulations
Even as they approved the new regulation, several commissioners expressed concerns that there will need to be a significant boost in Colorado workers capable of retrofitting buildings to handle thousands of simultaneous upgrades. Gary Arnold, who is also business manager for Denver Pipefitters Local #208, noted the new requirements come as there are many major construction projects happening throughout the Rocky Mountain region and added that even if a flood of new workers enter the trades, it takes four to five years to complete apprenticeships.
The biggest concerns, however, came from the Colorado Real Estate Alliance, a coalition of 15 organizations from general business groups like Colorado Concern to construction groups like Associated General Contractors to the Colorado Building Owners and Managers Association. While the group didn’t ask for rejection of the proposal, it did request adoption of a more lenient alternative proposal from the city of Denver and the addition of more compliance pathways and resource help for building owners.
Costs of compliance will be extremely significant — an average hospital must spend $45 million to hit the new targets, according to a report — during a time when the real estate industry is in “turmoil” from office vacancies and depressed property values, said Tyler Carlson, CEO of Evergreen Development. Those building owners who can get the financing to make major improvements won’t be able to recover the investment from rental or industrial tenants who are on long-term leases, meaning that the burden of costs will fall on building owners and on the tenants with the shortest-term leases — apartment renters, Carlson said.
“We’re not here to oppose a rule that reduces greenhouse gas emissions from buildings,” said Jim Martin, the senior counsel with Beatty & Wozniak P.C. representing the alliance. “But we believe the end rule should provide cost-effective and achievable pathways.”
Large buildings crowd the intersection of 16th Street and Broadway in downtown Denver.
Renewable energy as a compliance pathway
The alternative proposal submitted by Denver, which mirrors its existing policy, featured more easily achievable targets for energy-usage and greenhouse-gas intensity and would let building owners wait to replace boilers and other central systems until their lifespan had ended. It also was more lenient than the state’s plan in allowing building owners to count toward their compliance the amount of renewable energy that they purchase from utilities via subscriptions.
Commissioners voted to conform their rules with Denver’s regarding building owners’ ability to use generation or purchase of renewable energy as another path to compliance if they file for a retail-distributed generation contract by the end of this year, despite opposition from groups like Environmental Defense Fund. However, before they can use that pathway, building owners must submit an energy audit demonstrating that they’ve exhausted any cost-effective energy-efficiency and electrification measures for the structure.
Colorado officials have estimated that 40% of affected buildings already have met their 2026 targets and that 20% have met 2030 targets. Carolyn Elam — energy sustainability manager for Boulder, which has its own building performance standards — warned that it’s unlikely that almost any of the buildings that haven’t yet hit their targets will be able to do so in three years, however, because of the short time span.
Effects of rules on emissions
Such comments spurred Commissioner Elise Jones to ask the Colorado Energy Office, which will consider any target-adjustment requests from building owners, whether the state can hit the greenhouse gas emissions reduction goals if it intends to allow flexibility in compliance.
CEO Executive Director Will Toor said the inclusion of the percentage-reduction compliance pathway was added so that more buildings could go that route without having to seek target adjustments, lessening the impact on overall emissions from the flexibility his office gives. And even percentage-reduction goals are more stringent that the overall percentage of emission reductions that the state needs to get from each building to reach sector goals, he added.
Colorado Energy Office Executive Director Will Toor speaks at a news conference at the Colorado Capitol.
That said, the AQCC has the ability, beginning in 2029, to consider whether it needs to reduce the energy and emissions targets further or to set targets for smaller buildings, Toor noted.
The new regulation received approval from the AQCC by a margin of 6-1. The only dissenting vote came from commissioner Randy Ahrens, who said he worries about the financial effect of the rules at a time of building’s financial instability and soaring inflation.
Next for building performance standards
For now, the CEO will concentrate on educating building owners about the new rules and providing resources to help them achieve compliance. Despite the warnings of businesses and hospitals having to shut down due to excessive compliance costs, Toor said he believes that the variety of pathways to compliance will offset initial concerns.
“You heard owners of buildings say there are pathways, but they are expensive,” said David Beckstrom, an assistant attorney general and counsel to the Colorado Energy Office. “But I think there are pathways that can work for everyone.”
Kathie Barstnar, executive director of commercial real estate association NAIOP and a member of CREA, said after the final vote, however, that she continues to expect implementation of the rule to be difficult, particularly in the short timeframes it has set.
“The Colorado Real Estate Alliance appreciates that the commission adopted several provisions to provide flexibility for building owners to comply with this new rule,” Barstnar said in an email to The Sum & Substance. “However, we remain convinced this rule will be challenging to implement in a time of high interest rates, a recession in the commercial office space sector and the very likelihood that this will adversely affect housing affordability.”