The Real Estate Board of New York to The New York State Senate Finance and Assembly Ways & Means Committees Joint Legislative Budget Hearing on FY 2023-24 Executive Budget: Topic Environmental Conservation

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REBNY appreciates the opportunity to submit testimony concerning the environmental proposals in the FY2023-24 Executive Budget.

Reducing emissions from the built environment is critical if we are to realize the goals of the State's Climate Leadership and Community Protection Act (the Climate Act). Across the State, building emissions are a significant share of overall greenhouse gas emissions, and due to density and reliance on mass transit, building-related emissions account for the majority of greenhouse gas emissions in New York City. At the same time, this dynamic – a dense urban environment with significant reliance on mass transit – means that New York City has among the lowest per capita emissions anywhere in the country.

REBNY members share the goals of the Climate Act and are committed to achieving its goals. For example, our members are participants in several leading programs including NYSERDA’s Empire Building Challenge, a $50 million initiative that seeks to transform New York’s buildings. Many of the key lessons of this initiative were recently unveiled as part of Empire Building Playbook initiative, which is based on the successful efforts of companies including Empire Realty Trust, the Durst Organization, Vornado Realty Trust, and Hudson Square Properties. A good example of this can be seen at Hudson Square, where Hines and Trinity Church Wall Street are developing LEED Platinum buildings that utilize innovative green technology that will exceed New York’s 2030 carbon emissions targets by 46%. This project is laying the groundwork for wider adoption of high performing, electric buildings in New York City.

Based on this work, REBNY is eager to partner with State leaders to develop effective and efficient policies that will further the Climate Act’s goals. In doing so, policymakers should keep two general themes in mind:

First, regulation across the State and City needs to be consistent in order to efficiently and effectively achieve the desired policy outcomes. This is particularly critical given that New York City’s local building emissions law, Local Law 97, is not consistent with the proposals put forward in the Executive Budget relating to building emissions reductions. The lack of consistency will ultimately make it harder for the State to realize its goals.

Second, the transition to a decarbonized building stock will be costly for homeowners, renters, and businesses alike. It is no secret that electricity costs in New York are already high, and as our electric grid transition is largely being funded by ratepayers, these costs will only rise in the coming years. In addition, as detailed in NYSERDA’s recent Carbon Neutral Building’s report, the investments required to transition the building stock have substantial upfront and ongoing costs. Finally, many buildings are facing the prospect of annual penalties and/or compliance costs under New York City’s local law.

State policymakers should focus on helping New Yorkers manage these costs in order to encourage a faster and more manageable transition to a decarbonized building stock. In general, building decarbonization policy has generally relied upon mandates and penalties and has failed to include adequate tools to help ensure New Yorkers have the funds available to decarbonize their properties. For this reason, policymakers should prioritize the development of incentive programs, including through programs like a property tax abatement, that will help manage these costs and more rapidly achieve our shared goals.
Informed by these key considerations, comments about several of the specific proposals in the Executive Budget can be found below.

On-Site Emission Standards in New Construction (Part WW)
REBNY agrees that the elimination of fossil fuel systems in buildings should begin with new construction and should be phased in based on building size and typology, as proposed in Part WW. For that reason, we support the provisions of Part WW that would require new construction to be developed without the use of on-site fossil fuel systems by December 31, 2025 and December 31, 2028 depending on the size of the building. Importantly, this proposed timeframe is generally consistent with the timing established in New York City Local Law 154 of 2021, which has similar requirements that phase in beginning on December 31, 2023 and July 1, 2027 depending on building size.

In addition, REBNY believes it is prudent that regulation in this space focus on removing on-site fossil fuel combustion in new buildings rather than require new buildings to be all-electric. Doing so would ensure that buildings can continue to take advantage of the existing district steam network and any potential thermal utility networks that may be developed in the future as a result of State legislation enacted last year. Further, with significant investment and innovation underway in low- and no-carbon fuels, it is possible that in the coming years new buildings could utilize other energy sources and have no on-site emissions. An all-electric requirement would foreclose these options and leave buildings vulnerable to the reliability and cost of the electricity system without any other options.

Fossil Fuel Replacement (Part WW)
In addition to requiring that new construction be free of on-site fossil fuel systems, Part WW would also prohibit the replacement of heating and hot water fossil fuel systems in existing buildings beginning January 1, 2030 for smaller buildings and January 1, 2035 for larger residential and commercial buildings. In general, REBNY appreciates that this proposal sends a clear signal to building owners while generally providing time for buildings to plan for this significant transition.

Capital projects to remove fossil fuel systems and convert to electricity or other clean options require significant planning and can be very costly to implement. For example, a recent study from NYSERDA found that it currently costs around $20,000 per unit to efficiently electrify a seven story pre-1980 building in the downstate area and that paybacks do not materialize for several decades. As such, buildings will need significant time to budget and plan for the costs of this work.

In addition to ensuring that buildings have adequate time to plan for these projects, policymakers should consider several issues when designing this type of policy:

• As a matter of health and safety, policymakers need to ensure that if someone’s heat goes out in the winter, for example, that heat can be immediately restored to the building. For many buildings, implementing an electric-conversion project is time intensive and requires that significant work be done to improve the electrical capacity of the building and potentially the local distribution network outside the building. As such, if a building system goes out and cannot be replaced with a temporary system, residents could be left living in unsafe conditions for a significant period of time. Other health and safety issues should likewise be addressed, like a gas line which requires replacement or repair, which the statute seems to prevent after 2030. Existing infrastructure must be able to be safely operated, even if it is in transition. Policymakers will need to ensure that sufficient flexibility is available to address these types of critical challenges.

• In order to facilitate this transition away from fossil fuels, the electricity system needs to be ready to reliably deliver carbon-free power to all buildings. While the upstate electricity system is largely decarbonized, that is not the case in the downstate region and the New York Independent System Operator has already indicated that there are significant risks to grid reliability in New York City.2 As such, this policy must be implemented in close coordination with the power sector in order to maintain electric system reliability and realize the emissions reduction benefits the policy seeks to achieve.

• As mentioned previously, the Executive Budget proposal appropriately recognizes that building owners will need time to make the transition away from fossil fuel systems given the time, complexity, and cost of the work that will be required. In addition, it will take time for the building industry, manufacturers, suppliers, installers, and workers to be able to conduct this work on the scale that is required across the building stock.
  
  The benefits of this phased-in approach stand in stark contrast to New York City’s Local Law 97, which imposes annual compliance obligations, and potentially very high annual penalties, on building owners on a much faster time frame. According to REBNY’s research, as many as 3,500 buildings in New York City are at risk of paying over $200 million in penalties beginning in 2024, rising to 13,000 buildings paying over $900 million in annual penalties beginning in 2030. Unfortunately, even promptly making significant investments in energy efficiency and electrification will not allow all buildings to comply.
  
  In short, the transition to a decarbonized building stock will be more costly and less effective if policymakers fail to create a uniform policy framework on a timeframe that can be achieved based on the ability of the electric grid to reliably deliver clean electricity and the industry to meet the scale of the challenge.

Cap-and-Invest (Part AAA)
Building on the Climate Act Scoping Plan, the Executive Budget includes a proposal to create a “cap-and-invest” program that would set an economy wide limit on carbon emissions and require certain emitters to purchase an ever-decreasing amount of emission allowances. In doing so, the proposal seeks to raise the costs associated with using fossil fuels to drive down overall emissions. REBNY offers the following comments on this proposal:

Energy Prices
REBNY is concerned that the cap-and-invest program will raise already high statewide energy costs. Although the proposal contemplates rebates being provided to some New Yorkers, those benefits are unknown, while it is likely the cost increases will be significant. This poses a challenge to many New York businesses and homeowners as our economy recovers from the COVID-19 pandemic.

Use of Funds
The revenue generated from a cap-and-invest program should be used to help advance building decarbonization. As previously mentioned, building owners will need to make significant investments in order to decarbonize. These are not just significant upfront costs to pay for the construction and equipment but also ongoing costs given that electricity remains more expensive than natural gas. Consequently, a prudent approach is to utilize revenue from the cap-and-invest program for building decarbonization across all segments of the building stock, with a particular focus on buildings that are either particularly difficult to electrify and assisting those early-adopters whose actions can help drive down market costs overall.

Thank you for the opportunity to comment on these issues raised in the Executive Budget.