Legal Bulletins

On May 15th of this year (2023), the Maryland Department of the Environment (MDE) released a draft of new regulations that will require the owners of large buildings in Maryland to annually report greenhouse gas emissions and the energy efficiency of the buildings, as well as paying significant fees and penalties for failing to meet specific emission and efficiency goals. The draft regulations are currently being published to seek stakeholder comment and may, or may not, be altered before final publication.

The regulations are MDE’s effort to implement a requirement in Maryland’s Climate Solutions Now Act of 2022 (The Act) for Building Energy Performance Standards (BEPS). The Act concluded that decarbonizing covered buildings will help Maryland meet its aggressive greenhouse gas (GHG) reduction goals. The goal requires “covered buildings” to reduce net direct greenhouse gas emission by 20% by 2030 and achieve the ambitious goal of net-zero emissions by 2040.

A “covered building” is any commercial, multifamily residential or state-owned building that is 35,000 square feet or larger (excluding the parking garage area) with certain specific exceptions. The exceptions include some historic properties, public and nonpublic elementary and secondary schools, manufacturing buildings, and agricultural buildings. MDE estimates that there are approximately 9,000 buildings that meet this definition and are spread across every county in Maryland.

Emission Limits and Energy Efficiency

The Climate Solutions Now Act primarily focused on direct GHG emissions from buildings – generally defined as emissions resulting from the burning of fossil fuels on site. The requirements were expected to, over time, force covered buildings to replace natural gas, propane, and heating oil with fully electric alternatives. The Act contemplated “alternative compliance fees” that would gradually increase the pressure on building owners until the transition was implemented.

However, the Act also included a requirement that the new draft regulations include “energy use intensity targets by building type” (emphasis added). MDE has used that language to create what the draft regulations refer to as “Site EUI [Energy Use Intensity]  Standards” (emphasis added) per square foot of buildings.

Unlike the direct GHG emission requirements, the EUI includes energy delivered to the building from off-site generation. Also, unlike the emissions requirements, there are no alternative compliance fees for failing to meet the EUI standards. The draft regulations appear to make the standards mandatory by specifying that the buildings “must” meet the EUI requirements. Therefore, failing to meet the standards would subject building owners to potential fines of up to $25,000 a day.

Reporting Requirements

Each calendar year beginning in 2025, or the first calendar year after which a newly constructed covered building is occupied, a building owner is required to collect and enter all benchmarking information into the EPA’s ENERGY STAR Portfolio Manager – a website-based software system. The ENERGY STAR webpage was originally designed as a voluntary tool, but the draft regulations would turn it into an enforcement mechanism.

The data required by the benchmarking tool can vary by building type but will generally require the gross floor area, occupancy, year of construction and operating hours as well as the energy use based on meter readings. Electric and gas companies are required to provide accurate accounting of meters for covered buildings to the building owners.

Although the Climate Solutions Now Act only required reporting, MDE’s draft regulations also require “third party verification” of the accuracy of the benchmarking reports every five years. The draft does not indicate what qualifies as a “third party” but does specify the steps that verification must include and requires the verification to be submitted to MDE.

While building owners will be responsible for much of the reporting requirements, a tenant of a covered building is required, within 30 days of a request by the building owner, to provide all requested benchmarking information that cannot otherwise be acquired by the building owner from other sources.

The Climate Solutions Now Act also included a requirement that MDE “include special provisions or exceptions” for district energy systems. A district energy system is a centralized system for the distribution of steam or chilled water for heating and cooling. The “special provision” in the regulation will require buildings connected to a district system to add a portion of the off-site centralized facilities emissions in the building’s direct on-site emissions. The requirement that the building owner report and account for those off-site emissions will surely be surprising to building owners who rely on a district system.

Baselines and Standards

The benchmarking data is first used to establish a “weather normalized numeric value of net direct greenhouse emissions and site EUI.” The data used for the baseline will be drawn from 2025 for existing buildings or the first year in which the building was 50% occupied for at least 180 days for building constructed after 2025.

Starting in 2030, covered buildings will be required to show significant improvements in net greenhouse gas emissions, eventually reaching net zero by 2040. The Climate Solutions Now Act called for a 20% reduction in net direct greenhouse gas emissions by 2030 compared to the 2025 levels for “average buildings of similar construction.” The assumption was that the baseline data gathered in 2025 would assist in determining the required reductions. However, the draft regulations include a table establishing “interim standards” for multiple building types.

The same table establishes site EUI standards for each type of building for 2040 and thereafter. Interim Site EUI standards must be calculated using a “straight-line trajectory” from the baseline to the final 2040 compliance standards.

Special provisions are made for a “campus”, defined as two or more covered buildings connected by a district energy system, the same electric or gas meter or the same heating and cooling system. A campus can report aggregate data for the entire campus.

Alternative Compliance Fees and Penalties

The Climate Solutions Now Act provided that building owners could pay an alternative compliance fee in lieu of meeting the direct GHG emissions standards. The Act provided that the fee could not be “less than the social cost of greenhouse gases” adopted by the EPA.

The “social cost” is an EPA estimate of the global impacts on a ton of greenhouse gas emissions. Many consider that estimate to be largely subjective and, indeed, EPA estimates have varied greatly as administrations changed. The Obama Administration set the estimate at $43 a metric ton, but the Trump Administration set it at between $3 and $4 a ton. The Biden Administration’s current number is $51 a ton but has proposed an increase to $190 a ton with the possibility of increases over time.

MDE proposes to set the compliance fees at a much higher level than the current EPA number. The draft regulation sets the fee at $230 a metric ton in 2030 and then has it increase annually to $270 a metric ton by 2040.  MDE also proposes that the fee be adjusted for inflation.

As noted, there is no provision for alternative compliance fees for failing to meet the EUI standards. However, failing to meet the EUI standards would appear to be a violation of the regulations.  The Environmental Article provides that violating an MDE regulation is subject to an administrative fine of up to $2,500 per day or a civil penalty of up to $25,000 a day. It is not clear whether failing to meet an annual EUI standard would be a single violation or a violation of several days’ duration.

Therefore, the costs of failing to meet the EUI are potentially many times higher than the costs of failing to meet the greenhouse gas targets. This is surprising since the Act focused on reducing net greenhouse gas emissions and included only a few words referencing EUI.

Required Disclosures and Ownership

Although the Climate Solutions Now Act was silent about the purchase or sale of buildings, the draft regulations require disclosures when a covered building is sold.  

Specifically, the building owner must transfer the following items to the prospective buyer:

• A copy of the complete benchmarking record from the benchmarking tool.
   
• Documentation of data verification.
   
• Documentation of any alternative compliance payments made to the Department; and
   
• Any other records relevant to maintain compliance with these regulations.

A building owner must also provide the prospective buyer with the performance baseline and interim and final performance standards.

If building ownership changes in 2030 or any subsequent calendar year, then the building owner of the building on December 31 of that year is responsible for regulation compliance, for paying alternative compliance fees (if any), or for penalties for the calendar year ending on December 31 and every calendar year thereafter until that person is no longer the owner of that covered building.

Summary

Several of the provisions in the draft regulations appear to be beyond the scope contemplated in the Climate Solutions Now Act and impose significant obligations, and potential liabilities, on business owners. If not altered before final publication, building owners will need to make plans to accommodate the new mandates.

This bulletin only addresses certain provisions that may be relevant to you. For any further inquiries, contact:

Michael Powell
410-576-4175 • mpowell@gfrlaw.com

Max Cooke
410-576-4141 • mcooke@gfrlaw.com