Federal Climate Policy 106: The Buildings Sector

The buildings sector, which includes residential and commercial buildings, contributes about 12.5 percent of total US greenhouse gas emissions (Figure 1) through the direct use of fossil fuels for heating, cooling, and cooking. When electricity use in buildings is included (emissions from electricity generation typically are included in a separate category; see “Federal Climate Policy 103: The Power Sector”), energy consumption in buildings contributes over 30 percent of US greenhouse gas emissions. Emissions from buildings have been on the rise in recent years and reached a new high in 2019.

This explainer provides an overview of the tools available for policymakers to reduce emissions from buildings.

Residential and commercial buildings contribute to emissions directly and indirectly. Direct emissions primarily come from burning fuels like natural gas and oil for space heating, water heating, and cooking. Indirect emissions come from power plants that burn fuel to generate electricity, which then is distributed to homes and businesses and provides a broad range of energy services within the buildings.

Emissions from buildings can be reduced in two primary ways. The first is through improvements in energy efficiency, which reduce the amount of energy it takes to provide services (such as heating, cooling, or cooking) and thus reduces emissions. This method can reduce both direct and indirect emissions from buildings. The second is to substitute clean energy technologies—such as electricity that’s generated using clean sources—for appliances that use fossil fuels which reduces direct emissions. Importantly, the emissions reductions from electrifying building appliances will depend on the extent to which the electricity system is decarbonized.

Reducing emissions from buildings can be challenging for a few reasons. First, the vast number of residential and commercial buildings of varying ages and construction across different climate zones, as well as the diversity of energy-consuming appliances and devices inside them, makes designing policies to reduce emissions a daunting task. Second, many of the solutions currently available to reduce emissions from buildings involve reducing energy consumption through investments in energy efficiency, and these investments can carry significant up-front costs and uncertain energy savings. Lastly, building owners have little control over their indirect emissions resulting from electricity production, other than the ability to reduce consumption or procure clean electricity, either directly from clean suppliers or by installing renewable energy.

The policy options that follow target reductions through both energy efficiency improvements and electrification.

The Basics

Building energy codes require that new and renovated buildings adopt certain energy-efficient features in the building’s design and construction. Building energy codes can include requirements for features such as the building envelope (walls, insulation, windows, and roof); heating, ventilation, and air conditioning systems (HVAC); and lighting. Notably, these requirements are for the design and construction of the building itself and not typically for appliances used inside the building, which are regulated under separate standards. (See “Appliance Standards” below.)

Benefits and Challenges

Building energy codes promise significant energy savings and associated reductions in the environmental impact of energy use in buildings, along with energy cost savings for building owners. However, empirical studies of the long-term effects of these policies find mixed results.

While building energy codes can be useful for reducing energy use in new buildings, they do not address energy use from existing buildings (apart from those being renovated), which still represent the majority of buildings and thus constitute the majority of emissions from the sector. Additionally, building codes are limited in their potential energy savings, because codes do not necessarily affect how much energy is used by appliances within the buildings. Moreover, it is difficult to estimate energy savings because the calculation requires comparing actual energy use to hypothetical energy use—energy that would have been used without the code in place.

Key Considerations

A key consideration for building codes is which code to adopt and how often to update the code. Most states use versions of building energy codes that are developed by two private organizations—the American Society of Heating, Refrigerating and Air-Conditioning Engineers and the International Code Council—while others, like California, have developed their own.

Past, Current, and Proposed Building Energy Codes

Most states have statewide building energy codes for commercial and residential buildings, and the few without statewide requirements typically have municipal requirements. The United States currently does not have a national building energy code in place.

The Basics

A building performance standard (BPS) sets an energy performance target for buildings to meet with increasingly stringent goals over time. The performance target itself varies across policies and can be based on a variety of metrics, such as emissions, energy use, energy intensity, or emissions per square foot. These programs build on the requirements for building-level energy-use benchmarks and disclosures that have been implemented by many cities and some states to cover large commercial buildings.

A BPS can be designed to be market based and allow for trading: under this type of policy, buildings that reduce energy usage or emissions above their performance target can sell their excess savings to other buildings, where costs are higher to reduce energy use. This design, which is similar to emissions cap-and-trade programs used in the electricity sector, can improve the program’s efficiency and reduce compliance costs.

Benefits and Challenges

A BPS targets energy use or emissions performance directly, rather than setting efficiency standards for particular technologies. As a result, a BPS provides greater certainty that the program will yield emissions reductions relative to mandates for specific technologies or building designs. Additionally, a program that allows trading is more flexible—and therefore more efficient—than one that requires all buildings to comply with the same standard. The ability to trade credits provides incentives for the buildings with the lowest abatement costs to reduce emissions beyond what the standard requires, while older, less efficient buildings can avoid or delay potentially costly investments in the early years. Relative to the less flexible, prescriptive policies discussed here, a performance-based policy like a BPS can also encourage innovation and enable buildings to meet the requirement using innovative methods and technologies.

While a BPS can be an efficient and more measurably effective policy option relative to uniform building or appliance standards, however, it can also be administratively complex and costly due to the vast number of buildings it covers. Additionally, BPSs typically are used to reduce emissions only in large commercial or residential buildings; they do not address emissions from single-family homes.

Key Considerations

An important factor to consider when designing a BPS is which buildings will be covered by the policy. The more buildings covered, the higher the administrative costs of the policy. For this reason, many existing BPS programs have thresholds that determine whether buildings are subject to the standard—usually minimum square footage requirements or minimum emissions levels. An RFF report on building performance standards highlights the trade-offs between using building size versus emissions to set this threshold. A size-based threshold is simple to implement and covers the same buildings over time, but this option can increase the administrative burden relative to emissions reductions achieved if the threshold ends up including low-emitting buildings. By contrast, an emissions-based threshold more efficiently targets high-emitting buildings, but this option requires establishing a method for estimating baseline energy use or emissions, which can be complicated.

Another factor is which metrics to use for evaluating building performance. An absolute standard—where buildings reduce emissions relative to their own benchmark—can be unfair to more efficient buildings, but this option can make trading simpler and enable greater program efficiency. An intensity standard, on the other hand, can be more equitable for buildings of different efficiencies, but this option can make trading more complicated.

Lastly, as is the case with any policies that allow trading, equity could be an important concern in policy design. Buildings that take greater advantage of efficiency improvements to comply with the standard can benefit in many ways; for example, through lower energy bills for apartment residents and improved indoor air quality. Thus, it is important to ensure that benefits do not accrue solely to buildings in wealthier areas.

Past, Current, and Proposed Building Performance Standards

Currently, no national building performance standard is in place. Several cities in the United States have implemented or proposed building performance standards, which vary in design. Washington, DC, for example, enacted an energy intensity standard for privately owned buildings larger than 50,000 square feet (in the program’s first round) and District-owned buildings larger than 10,000 square feet; the city does not allow trading to meet targets. New York City’s building performance standard, which will begin compliance in 2024, requires that buildings larger than 25,000 square feet reduce their carbon-emissions intensity per square foot over time.

The Basics

An energy efficiency resource standard (EERS) requires that electric or natural gas utilities achieve an energy savings target—typically a percentage of sales—by a given future year, with incremental goals in the interim. Utilities meet their goals by encouraging customers to adopt more efficient equipment and, in some cases, providing incentives for customers to do so. Examples of incentives include free energy audits that help customers identify ways to reduce energy and save money, rebates on efficient equipment or building upgrades, and the use of energy “nudges” (home energy reports that compare a customer’s usage with a similar home) to encourage conservation and efficiency investments. If the program allows for trading, utilities can purchase certificates from others in the same state that represent electricity or natural gas not consumed.

Benefits and Challenges

Unlike the other policies discussed here, an EERS places the burden of compliance on energy suppliers, rather than consumers, and leaves utilities to figure out how to encourage their customers—the building owners—to reduce consumption. This approach raises concerns about how to treat decreases in energy consumption that result from reduced demand (due to factors such as economic recessions or business relocations) rather than increased efficiency.

Nonetheless, an EERS can be a useful tool for reducing electricity and natural gas consumption in buildings. First, because the policy is applied at the utility level, rather than at the individual building level, it can be much easier to administer. Second, if the policy is market based and allows for trading among utilities in a given region, then it can reduce energy usage—and thus emissions—for a lower cost than if each building were required to reduce its own consumption.

Key Considerations

The design of an EERS requires the choice of a baseline to measure reductions against, given as a particular year’s energy consumption or base average over a multi-year period. The policy’s achievements will depend entirely on the energy use in the base year chosen: future targets will require more reductions if the initial base year has low energy consumption compared to other historical years.

Past, Current, and Proposed Energy Efficiency Resource Standards

More than half of US states currently have mandatory or voluntary EERSs in place for their electric or natural gas utilities (or both).

No standard has been adopted at the federal level thus far. In 2019, Senators Tina Smith (D-MN), Angus King (I-ME), and Jeff Merkley (D-OR) introduced The American Energy Efficiency Act of 2019, an EERS policy that would have required electric and natural gas utilities to reduce consumption by 22 percent and 14 percent, respectively, by 2035 relative to a baseline drawn from the average consumption of the three years prior to the first compliance year, but the bill did not pass.

The Basics

Appliances contribute to building emissions through direct or indirect use of fossil fuels. Appliance standards, which require end-use technologies to achieve certain energy efficiency ratings or to use a certain fuel, are a policy option for reducing energy use in buildings. Appliance standards that improve energy efficiency include minimum efficiency standards for appliances like air conditioners, dishwashers, and washing machines, which can help reduce electricity or natural gas consumption. Additionally, appliance standards can encourage fuel switching to reduce emissions.

Recently, the strategy of increasing electrification standards for household appliances that typically use fossil fuels has been suggested to decarbonize home energy use. Such standards would require manufacturers to produce a minimum percentage of a particular type of appliance (e.g., water heaters, stoves) that relies on electric power, and for that percentage to increase over time.

Benefits and Challenges

Appliance standards have been an important approach for encouraging reduced energy use in buildings. Standards can produce substantial energy savings compared to a scenario without the required technology improvements—particularly when consumer use of the appliance is unlikely to vary with its efficiency rating. The federal government estimates that cumulative energy savings from appliance standards since 1987 will produce savings of nearly $2 trillion in the United States by 2030.

Because appliance standards do not cover how consumers use technologies, however, substantial uncertainty can revolve around their associated energy savings. For example, one unintended consequence of appliance standards is the potential for the rebound effect: because more efficient devices cost less to operate, consumers may use them more frequently than they would otherwise, which can undermine the energy and emissions goals of the standards. The extent of this rebound effect depends on how variable consumer use of the appliance may be.

Key Considerations

A key consideration for appliance standards is how to set standards, which for appliances are required by law to lead to a “significant conservation of energy” and can be interpreted differently by presidential administrations. Part of the standard-setting process is establishing a procedure that new appliance manufacturers must use to demonstrate that appliances comply with the standard. For electrification standards, additional considerations may apply, such as requiring communications technology that could help align electrical charging times for devices with storage capacity, such as hot water heaters, with periods of abundant renewable energy supply.

Past, Current, and Proposed Appliance Standards

The federal government currently has appliance standards in place for appliances in 60 use categories. The US Department of Energy is required to revisit the standards every six years to make updates if necessary. To further reduce emissions, appliance standards can be expanded to cover additional types of equipment and devices, and existing standards can be strengthened.

The Basics

Efficiency subsidies—which can be in the form of tax credits, rebates, or subsidized loans for efficient equipment or retrofits—provide government funding to reduce the up-front costs associated with energy-efficient technologies and building retrofits. By encouraging greater adoption of efficient technologies or encouraging consumers to pursue energy retrofits, subsidies can lead to reduced energy use in buildings.

Benefits and Challenges

Efficiency subsidies can encourage the adoption of more efficient technologies or building weatherization, which can reduce energy consumption and emissions in buildings. By reducing the up-front cost to consumers, efficiency subsidies can increase access to efficient equipment for lower-income households.

Because they are typically technology based rather than outcome based, however, efficiency subsidies cannot promise energy savings and can be victim to the rebound effect. Additionally, subsidies can create a “free-rider” problem: they may subsidize purchases made by consumers who would have purchased energy-efficient appliances even without a subsidy. Consequently, efficiency subsidies can be less cost-effective with respect to emissions reductions relative to other policies included here.

Key Considerations

A key consideration for the design of efficiency subsidies is the size of the subsidy. A subsidy is effective only if it provides enough of an incentive for consumers to make the purchase. However, a subsidy that is too large will cost too much relative to the emissions reductions it achieves.

Past, Current, and Proposed Appliance Subsidies

Many electric, gas, and water utilities offer subsidies in the form of rebates for energy-efficient equipment. (See the Database of State Incentives for Renewables and Efficiency for a list.) The federal government offers tax credits of up to $500 on certain appliances, along with subsidies for low-income households to weatherize homes. Other tax credits have been proposed at the federal level, but have not passed. In 2019, Senator Ron Wyden (D-OR) and colleagues introduced the Clean Energy for America Act, which would have provided performance-based tax credits for new homes that are designed to be 25 percent more efficient than the 2015 International Energy Conservation Code baseline and existing homes that invest in energy-efficient equipment or energy retrofits.

This explainer was featured in the 207th issue of Resources magazine.