Building Owners Opt for Fines Over Costly Local Law 97 Retrofits

A new report prepared by the non-partisan Center for an Urban Future contains a stunning revelation: dozens of New York City building owners say they'll pay fines rather than installing expensive building retrofits that would bring them in compliance with the city's climate law, Local Law 97.

The report, New York City's Green Economy Opportunity, states: "Several industry leaders and sustainability advocates assert that the current penalty structure for Local Law 97 compliance lacks the teeth to effectively encourage building upgrades, particularly among larger property owners for whom the costs of compliance will far exceed the penalties."

The law went into effect at the beginning of 2024, and owners of buildings larger than 25,000 square feet, including co-ops and condos, have until May 1 to report their buildings' carbon emissions for 2024. Only 11% of buildings required retrofits to bring their emissions under this first round of prescribed caps. But those caps become significantly more stringent in 2030, so paying the fine of $268 per ton of carbon emissions could become less painful than paying for extensive retrofits.

The report continues: "Interviews with several industry leaders suggest that higher fines are needed to exert greater pressure on capital-rich buildings to enhance energy-efficiency and reduce their carbon footprint. One senior official from a prominent real estate company, who requested anonymity in order to discuss the firm’s internal discussions, says, 'To eliminate the fines, we’d have to invest 15 to 20 times the fine amount. So, like other owners, we’ll probably pay the fine.'"

Joe Guerra of the energy management company Ainsworth is quoted in the report: “The problem is more than the initial payback, as actual energy savings may be small. We have done budgets that are north of $8 to $10 million [for retrofit projects]. Compare that to the small energy savings and say a penalty of $180,000 a year that is projected right now in a sample building. That’s a lot of years to see a payback.”

Eli Dvorkin, editorial and policy director at Center for the Urban Future, tells Crain's: “It’s a tough sell. For many building owners, it just comes down to pretty basic math, and right now the payback period for those investments is long and getting longer with higher interest rates and rising costs for borrowing.”

Beyond paying fines or paying for retrofits, a third option for building owners is to buy renewable energy credits (RECs), which reduce a building's emissions when calculating Local Law 97 compliance, without actually reducing emissions. The money from RECs pays for electricity transmission projects upstate, which contribute to the greening of the state's electric grid, a central component of Local Law 97.

A bill was introduced in the city council last month that would prevent building owners from relying on purchasing RECs instead of making upgrades to the buildings that actually cut carbon emissions. Increasing Local Law 97's penalties would require the city council to amend the law.

Environmentalists oppose RECs for short-circuiting the intent of the law, while the real estate industry opposes stiffening existing fines. Meanwhile, many building owners appear inclined to ignore the politics and the science and just do the math. Their question is simple: What's the cheapest fix for my building?