Carbon pricing programs designed for the buildings sector can effectively reduce carbon emissions.
In the context of US climate policy, we are accustomed to viewing opportunities to mitigate greenhouse gas emissions through the lens of sectors encompassing electric power, industry, transportation, residential and commercial uses, and agriculture, as per the US Environmental Protection Agency. But this categorization obscures a big source of emissions with a value chain that accounts for 37 percent of global emissions: buildings.
Fortunately, the buildings sector already has policies in place that are reducing greenhouse gas emissions. For example, Local Law 97 (LL97) is New York City’s flagship building-decarbonization program, which went into effect in 2024. LL97 is essentially a carbon pricing mechanism. Targeting over 60,000 buildings, LL97 is the largest in a generation of building performance standards (BPS) that local and state officials are rolling out across the United States and Canada. In the United States, 16 BPS programs are now in effect across the country. Each jurisdiction has a unique policy approach, some with stronger carbon pricing and carbon market elements than others.
Some BPS programs target emissions directly, while others target energy consumption from buildings. However, all programs start with a baseline tied either to the building’s primary use, historic emissions, or energy consumption, with gradually more ambitious targets put in place over time. For example, Boston sets emissions targets for a dozen different property-use types and ratchets these targets down every five years, aiming for net-zero emissions from buildings in 2050. To minimize complexity, only the largest buildings, which are also the largest emitters, are typically included in a BPS design.
Boston, Massachusetts
Every BPS program comes with a suite of flexibility mechanisms inherited from carbon market designs. New York City considered the idea of allowing program-wide allowance trading (a popular mechanism in cap and trade) but struggled with equity considerations in the allowance auction and allocation models. The city ultimately decided that the other flexibility mechanisms built into its BPS were sufficient.
Where carbon pricing comes in most clearly is with the concept of the noncompliance penalty. Boston; Cambridge, Massachusetts; the state of Maryland; and New York City have all set up penalty structures in dollars per metric ton of carbon dioxide-equivalent (CO2e) emitted above a building’s emissions target: $234 per ton of CO2e in Boston and Cambridge, $230 per ton of CO2e in Maryland, and $268 per ton of CO2e in New York City. Other programs, including those in Colorado and Washington, DC, have set up penalties in dollars per square foot. (In Washington, DC, building owners who have made no progress toward BPS goals by the end of the compliance cycle are fined $10 per square foot.) These penalties are substantially higher than the traded prices in the Regional Greenhouse Gas Initiative, the California carbon market, or even the Biden-era social cost of carbon. The high cost of noncompliance reflects the high cost of decarbonizing buildings.
Programs such as New York City’s LL97 also allow property owners to bank credits from building-retrofit measures taken early in the program, a design element prevalent in carbon markets. Most BPS programs allow a form of campus-level compliance (also referred to as portfolio-level compliance), allowing overperforming buildings to offset underperforming ones. Some of these campuses are actual college campuses and cover substantial building stock: Harvard University and the Massachusetts Institute of Technology (MIT) each have more than a hundred buildings in Cambridge. Cambridge’s BPS effectively creates portfolio-level shadow prices of carbon for the building stock on the MIT and Harvard campuses, as does Boston’s BPS for stock belonging to Boston University and Boston College.
Tokyo, Japan
Examining the design and history of BPS abroad is useful to understand the adoption of BPS policies in the United States. Tokyo, one of the world’s largest cities by population, implemented an emissions-reduction program for its largest buildings starting in 2010. It was the first building-centric carbon market in the world and, until New York City’s came along, it was the largest. Now sixteen years old and in its fourth compliance period, the Tokyo program has exceeded expectations at every step and led to a 31 percent reduction in building-related greenhouse gas emissions in 2023, below the baselines set between 2002 and 2007.
Although the Tokyo carbon market is a cap-and-trade program, the program’s design and success have suppressed trading activity. By design, the program has several flexibility mechanisms, such as renewable electricity procurement and opt-in provisions for smaller buildings. Tokyo’s BPS also allows large portfolios of buildings under common ownership to trade any “under-over” internally, much like Harvard and MIT. This internal trading avoids external transactions of program allowances that would reveal an explicit carbon price. Many buildings also over-complied early, benefiting from emissions reductions from cost-effective investments in energy-efficient lighting. These buildings are now sitting on banks of allowances which they can draw down over time, muting much allowance-trading activity. As US cities design and adopt BPS programs, they can learn from Tokyo’s broad adoption of flexibility mechanisms, such as the banking of early compliance credits, renewable energy crediting, and portfolio-level compliance as substitutes or complements for allowance trading.
The rapid growth in BPS policy has gone largely unnoticed by US federal policy analysts but has two key drivers. The first is that many cities have ambitious decarbonization plans, and with building emissions making up the largest share of emissions in almost all urban areas—accounting for as much as 70 percent of total emissions in Washington, DC, or New York City—buildings are a vital part of any urban decarbonization plan.
The second driver is rooted in the policy tools available at different levels of government. Short of municipalizing their electricity supplies or procuring power on behalf of residents and businesses, cities don’t have strong policy tools to influence grid-decarbonization policies. As cities can regulate the buildings which form their property tax bases, BPS are one of the few ways that cities can reduce building emissions.
For buildings expected to exceed an emissions target, the financial penalty becomes an additional annual operating expense that any investor would have to factor into a real estate transaction. This penalty is, at its core, a carbon price. The presence of a carbon price dramatically changes the decisionmaking for any building-decarbonization project. In a program with regulatory targets, traditional financial metrics such as return on investment or payback periods are no longer sufficient to make investment decisions, and the financial analysis needs to consider avoided penalties. In this way, a BPS impacts present-day decisionmaking on building-efficiency improvements through the shadow carbon price imposed by the penalty structure.
Though BPS have largely been flying under the radar, they are gaining steam in the United States at the state and local levels, and they have the potential to spur investment and reduce emissions from major emitters. A 2023 report estimated that the first eight BPS programs together would abate greenhouse gas emissions equivalent to that of New Hampshire and Delaware combined. The programs in Oregon, Washington State, and California passed since that report was published have undoubtedly increased the overall climate impact of this policy instrument.
This blog post is based on commentary originally published by the Pricing Carbon Initiative. Resources for the Future acquired the Pricing Carbon Initiative in October 2025.
