United States: New York City Local Law 97 Has A Mechanism To Help Small Building Owners

New York City's Local Law 97 is an ambitious program to reduce greenhouse gas emissions from the City's 1 million covered buildings.¹ These buildings contribute approximately 70% of the greenhouse gases emitted in the City. Reports state that most buildings are poised to comply with the law's emissions caps by the initial deadline of 2024 but that many buildings will have issues complying with the more stringent requirements that go into effect in 2030. These reports also state that while larger real estate companies have the resources to parse Local Law 97's detailed requirements and develop compliance programs, many smaller building owners have had difficulty understanding their compliance obligations and developing plans to bring their buildings into compliance.²

Local Law 97 has provisions that could act as a safety valve by allowing buildings struggling to reduce emissions by the 2030 deadline to avoid hefty fines of up to $268 per ton of emissions in excess of allowable levels while still achieving the law's emissions reduction goals and protecting vulnerable and environmental justice communities. Specifically, Section 28-320.3.6 of the City Administrative Code allows the Department of Buildings to approve the use of renewable energy credits (RECs), greenhouse gas emissions offsets or energy generated by clean distributed energy sources as deductions against a building's 2030 greenhouse gas emissions cap.

The Department of Buildings has yet to promulgate rules necessary to implement the program; however, the statute already includes some of the necessary program components, especially with regard to the use of RECs as offsets. These key components include:

• The definition of a REC, which is "a certificate representing the environmental, social and other non-power attributes of one megawatt-hour of electricity generated from a renewable energy source . . ."
• Providing that the credit must be recognized and tradable within the national REC trading market or the New York system for tracking renewable energy credits.
• Allowing the use of other sources of renewable energy as deductions against emissions reduction requirements by including within the definition of a REC certain hydropower generation that is not otherwise included within the New York REC trading market.
• Limiting creditable RECs to those that are owned and retired by or on behalf of building owners and are from sources that are determined by the New York Independent System Operator (NY ISO) to be generated in or directly deliverable to New York City.
• Requiring RECs to be for the year in which they are sought to be used as credits. RECs cannot be banked for use in future years.

Although there is not yet a market in RECs that qualify as offsets under Local Law 97, projects are being implemented now to create such RECs, and there should be an active market well before the 2030 compliance deadline.³ There is no limit in the law on the number of RECs that can be used as offsets.

The remaining categories of purchased emissions reductions and renewable energy usage that can be used as credits against emissions reduction requirements under the law are less defined. The law states that credits generated under other offset standards and purchased by building owners can be used as deductions against emission reduction requirements but provides only general guidelines for acceptable standards. The law does not specify which offset standards would generate creditable deductions against emission reduction requirements. Presumably, offsets validated and registered under the major voluntary greenhouse gas emissions standards, such as Verra⁴ and Gold Standard,⁵ would qualify. Furthermore, the law limits the use of such purchased offsets to 10% of a given building's emissions cap.⁶

Further rulemaking is necessary for the Department of Buildings to specify the greenhouse gas emission offsets that it will accept as creditable against 2030 emissions reductions requirements. The Department of Buildings has convened an advisory board that is reviewing Local Law 97 implementation issues, including carbon accounting and the use of clean energy credits for compliance purposes. A report from the advisory board is due Jan. 1, 2023. The Adams administration has stated that it does not see offsets playing a large role in the City's emissions reduction program.⁷ Nonetheless, Local Law 97 specifically contemplates the use of these mechanisms to achieve compliance.

To the extent that building owners seek to use offsets to achieve their emissions reductions requirements, they will likely need to enter into private agreements to purchase such offsets from credit sources or brokers. There are a number of models for such agreements, including agreements for the purchase and sale of voluntary greenhouse gas emissions reduction credits registered with the carbon credit registries described above and even contracts for the purchase of off-site inclusionary housing certificates. These agreements usually include certain key provisions, such as:

Volume, Price and Payment

The types of credits to be purchased, the vintages (or years) such credits will be generated, the price and payment terms.

Delivery and Default

The mechanism that will be used to deliver the credits and transfer legal and beneficial rights and title, and the rights and obligations of the parties in the event that there is a delivery delay or shortfall in credit volumes.

General Terms

Terms related to governing law and disputes, amendments, costs and expenses, confidentiality, agreement termination, force majeure, change in circumstances, taxes, non-circumvention, liability, compliance with applicable rules, severability, and any other necessary provisions.

How these provisions are drafted can materially impact the ability of building owners to take advantage of the applicable provisions of Local Law 97 and any implementing rules to use RECs and other greenhouse gas emissions credits as offsets against their emissions reduction obligations.

Footnotes

1. Local Law 97 applies to most buildings larger than 25,000 square feet, more than half the built square footage in New York City. See, "New York Developers Rush to Reduce Emissions as Hefty Fines Loom," The New York Times, available at https://www.nytimes.com/2022/08/16/business/new-york-real-estate-climate-change.html, last visited Aug. 18, 2022.

2. See, id.

3. The Public Service Commission has granted contracts under its Tier 4 – New York City Renewable Energy program to generate RECs that originate from generation that will service New York City. See, https://www.nyserda.ny.gov/All-Programs/Clean-Energy-Standard/Renewable-Generators-and-Developers/Tier-Four, last visited Aug. 18, 2022.

4. See, https://verra.org/, last visited Aug. 18, 2022.

5. See, https://www.goldstandard.org/, last visited Aug. 18, 2022.

6. See, New York City Administrative Law Section 28-320.3.6.2.

7. See, "New York Developers Rush to Reduce Emissions as Hefty Fines Loom," The New York Times, available at https://www.nytimes.com/2022/08/16/business/new-york-real-estate-climate-change.html, last visited Aug. 18, 2022.

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