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The Next Economy
Low-Carbon Retrofits are Becoming a Climate Priority for Cities, Fast

Cities and states are incentivizing retrofits because buildings are major emitters — and because retrofit investments offer significant long-term ROI through energy savings alone.

In the US, building operations account for almost 40 percent of national carbon emissions.

As a result, a growing number of cities and states are tackling emissions from their real-estate portfolio by incentivizing building owners to perform low-carbon retrofits — building upgrades that reduce operating emissions while also, over time, saving money through energy-efficiency paybacks.

In North America, it's estimated that the rate of buildings retrofitted, currently at about 1 percent, needs to at least triple in order to meet the climate goals outlined in the Paris Agreement. An estimated $3 trillion in investment will be required — making the low-carbon retrofit economy a major new source of economic growth, jobs and labor development in the next two decades.

As a result, policymakers are prioritizing low-carbon retrofits as a way to meet emissions targets, while also creating jobs and growth.

For example, in 2019, the City of New York (where buildings account for 68 percent of all emissions) passed Local Law 97 — which sought to aggressively reduce the city’s footprint by requiring building owners to decrease emissions in all buildings larger than 25,000 square feet by 25 percent by 2024, and 40 percent by 2030.

To support these efforts, the city also opened a “retrofit accelerator” — where building owners get expert technical advice, learn about incentives and financing options, and more.

Low-carbon retrofits can seem like just another cost to businesses, especially commercial real-estate portfolio owners and retailers — many of whom are still recovering from demand shifts that began during the pandemic, when remote work and online shopping trends accelerated. But in reality, these investments can offer significant return on investment and reasonable payback periods, once incentives and cost savings are accounted for.

Catalys Labs — a Canadian AI company that helps retailers and other building owners develop low-carbon retrofit plans for their portfolios — says that given the technical complexity of low-carbon retrofits, many building owners delay investments or make investments that aren't optimized, leaving money on the table.

“Reducing energy and carbon emissions is one of the most reliable investments a retail organization can make,” said Catalys CEO Luke Ferdinands. “But it’s an incremental process — and relies on the accumulation of dozens of small changes in equipment, operating parameters and policies. These add up quickly to deliver avoided costs, reduced maintenance expenses and higher operating efficiencies. Low-carbon retrofits also generate a very strong return on investment; one of the best in the current market,” he added.

As a result, other North American jurisdictions are following New York's lead, with their own tailored retrofit policies.

In Vancouver, British Columbia, 55 percent of emissions comes from buildings; and new legislation is targeting existing commercial and multi-family residential buildings with the goal of reaching net zero emissions from buildings by 2040. The city, similar to New York, is limiting the emissions "intensity" of buildings and will impose penalties on properties when the emissions per square foot exceed a prescribed limit. This improves the business case, and increases the time pressure, for investment in low-carbon retrofits.

Vancouver is also requiring all building owners to report their emissions and energy use by January 2025 for all multi-family buildings over 100,000 square feet, and by January 2026 for all buildings over 50,000 square feet.

Back on the east coast, Toronto has plans for similar policies. The city's long-term financial plan recommends a law that existing buildings meet emissions-performance standards aligned with the city’s climate targets. Building owners and operators who don’t meet those targets will be fined, with the revenue directed to further municipal climate action. Toronto's buildings account for 61 percent of the city's carbon emissions.

Cities and states are targeting buildings because they are major emitters — and also because retrofit investments can pay for themselves through energy savings over time, with significant long-term ROI possible for many building owners.

However, for larger portfolio owners, emissions-reduction planning can be technical and involve complex tradeoffs and new skillsets. Building owners may want to both improve building resilience and add other beneficial customer-facing upgrades such as EV charging or onsite renewables that demonstrate their commitment to sustainability to their customers and other stakeholders, but may not know where to start.

Waiting can create costs — as the most lucrative financial incentives for retrofits are coming online now to promote early adoption and may not be as generous in 5-10 years — while emissions penalties are increasing quickly.

It’s essential to take a proactive approach to retrofits — ideally, with a portfolio-wide strategy that takes full advantage of incentives and financing opportunities and seeks to offset any potential penalties in the most cost-effective way possible.

Those who are prepared to access support when it is first made available will see the greatest rewards — as some programs, like Vancouver’s support for multi-family building retrofits, have caps on the number of participants and limits to the amount of funding available.

As Ferdinands says, “The time to act is most definitely now.”