Though President George Bush has opposed the U.S. Senate's bipartisan “cap and trade” climate control legislation and Senate Republicans blocked the bill in June, legislation to reduce U.S. carbon emissions isn't dead. The bill would cap the amount of greenhouse gases that U.S. businesses could emit and allow them to trade with, or buy from, others if they exceed their cap.

And when the bill is resurrected, it will affect commercial property owners throughout the United States. Energy costs will likely rise, prompting new tenants to seek buildings with high-energy performance and long-term tenants to push their landlords to improve their current building's energy efficiency.

That means cap and trade legislation is something every commercial property owner needs to understand and to watch for again in the future.

The killed bill

The dead Senate bill would have capped greenhouse gas emissions from power plants, refineries, and other pollution-emitting facilities starting at 4% below the 2005 emission level in 2012, gradually lowering until it hits 71% below the 2005 level in 2050. It would have also set up a system to trade carbon allowances.

Senate Republicans and President Bush argued the bill would raise utility and gas pries and create a new bureaucracy to track companies' emissions.

“The bill would have pushed utilities to have more effective energy-efficiency programs,” explains Roger Platt, senior vice president and counsel at the Real Estate Roundtable, a Washington, D.C., trade group. It would have also required states to meet energy-efficient code performance standards by set deadlines.

If that had occurred, many owners would likely have been forced to upgrade their properties' mechanical, electrical, and plumbing systems to meet the new standards. “For building owners who already have leases with tenants,” says Platt, “it's often very hard to find the initial capital to invest in energy efficiency even though it may improve the building's economic performance and reduce tenants' costs.”

That reality prompted the Real Estate Roundtable to lobby senators to add incentives for owners who demonstrated significant, measurable advances in energy performance. In May, the Senate amended the legislation to include incentives valued at $51 billion over 38 years.

The form of the bill's incentives remained vague. “The bill referred to the U.S. government's Energy Star program and suggested that existing buildings that improved their energy performance by something like 30% would qualify for some kind of incentive,” explains Platt.

Owners of older buildings would have benefited most. “Those [owners] that produced energy performance greater than the minimum would have got a larger incentive,” adds Platt.

Credits lauded

Industry experts were pleased that Congress sought to reward property owners for upgrading building systems. “If the bill had passed, property owners would have had the opportunity for a double reward,” says Iain MacSween, an attorney at Brooks Pierce McLendon Humphrey & Leonard in Greensboro, N.C. MacSween was counsel to a multinational energy company that took part in a European cap and trade program.

First, property owners with energy-efficient buildings attract more tenants. “My experience in Europe suggests that if a cap and trade policy is introduced, energy costs will go up and customers will look at how energy-efficient their properties are,” says MacSween.

Second, had the bill become law, owners of efficient buildings would have been able to trade credits they earned under the cap and trade system.

Robert Simon, president of Corporate Realty Associates in Birmingham, Ala., also favored the incentives. “When you can be rewarded for taking a mechanical system that's close to the end of its useful life and doing something that provides long-term benefits,” he explains, “that, to me, is the way things should work.”

It's unlikely the legislation will be resuscitated this year. But odds are that Congress will pursue similar legislation in '09. “Both parties' presidential candidates favor legislation along the lines of what was discussed in June,” says Platt.

G.M. Filisko is a reporter and attorney based in Chicago who writes regularly on legal and real estate issues. She can be contacted at gabifil@rcn.com.