Achieving building decarbonization goals

How to leverage new tax incentives and technical expertise to achieve building decarbonization.

upward view of the exterior of a building

As the climate crisis intensifies, the imperative to decarbonize buildings and building stock has never been more urgent. Here's how leveraging new tax incentives and technical expertise in this sector can make this task achievable and economically viable.

The urgency of building decarbonization

Decarbonization is the process of removing the use of fossil fuels in the process of energy usage and generation for the built environment. Decarbonizing buildings is essential for addressing climate change and achieving sustainability goals. Buildings are significant contributors to greenhouse gas emissions, accounting for a substantial portion of global carbon dioxide emissions. By decarbonizing buildings, we can reduce their carbon emissions, mitigate environmental impacts, and enhance community health and wellbeing. 

This process of decarbonization involves transitioning away from fossil fuel-based energy sources, such as natural gas and oil, towards cleaner and renewable alternatives like solar, wind, and geothermal energy. Additionally, improving energy efficiency in buildings through insulation, efficient heating and cooling systems, and smart technologies can further reduce energy consumption and associated emissions. Decarbonizing buildings not only helps combat climate change but reduces long-term energy and building maintenance costs.

The purpose of this article is to inform public sector and nonprofit organizations that are managing building stock that include buildings, and potentially onsite power generation, about innovative and cost-effective ways to achieve building decarbonization goals. This includes government facilities, higher education campuses, and healthcare facilities. 

Decarbonization drivers

There are several drivers for decarbonization. These include government policy, societal pressures, and environmental change. In April 2024 the Department of Energy released A National Blueprint for Decarbonizing the Buildings Sector. Additionally, local municipalities and states across the country are beginning to introduce specific legislation to require building decarbonization in certain sectors by targeting energy efficiency improvements and emissions caps. These include requirements for net-zero buildings, electrification mandates, and emissions reduction targets for existing buildings. However, there are multiple ways to achieve building decarbonization goals.   

Approaches to decarbonization

The process of decarbonization involves reducing the energy consumption of buildings using energy efficient materials and equipment, and then replacing the remaining energy needs with renewable energy sources. There is no one size fits all approach to this process, but options will include a combination of the following:

  1. Energy efficiency improvements: This includes implementing energy efficiency measures such as upgrading insulation, sealing air leaks, installing energy-efficient windows and doors, and upgrading lighting and appliances to ENERGY STAR-rated models.
  2. Electrification of heating and cooling systems: Transitioning from fossil fuel-based heating systems (such as natural gas furnaces) to electric heating systems powered by renewable energy sources can help reduce carbon emissions. 
  3. Renewable energy integration: Installing renewable energy systems, such as solar panels or wind turbines, on buildings or nearby sites that generate clean electricity to power building operations can also help reduce emissions. 
  4. District energy systems: District thermal systems, which supply energy to multiple buildings from a centralized plant, can help reduce emissions by utilizing renewable energy sources such as geothermal energy and heat harvesting.
  5. Energy storage solutions: Integrating energy storage technologies, such as batteries or thermal storage systems, can help optimize the use of renewable energy and enhance the resilience of building energy systems. 
  6. Building design and passive strategies: Incorporating passive design strategies – such as orientation, natural ventilation, daylighting, and high-performance building envelopes – can reduce the need for mechanical heating and cooling, and lower overall energy demand.
  7. Demand-side management and building controls: Implementing advanced building controls, smart thermostats, and demand response strategies can optimize energy use and reduce peak demand, thereby lowering carbon emissions and improving energy efficiency.

The financial challenge

The estimated cost to decarbonize buildings can vary widely depending on factors such as building size, type, location, existing infrastructure, and the extent of decarbonization measures implemented. 

Additionally, a report by the U.S. Green Building Council (USGBC) and the Green Business Certification Inc. (GBCI) suggests that achieving net-zero carbon emissions in new buildings could result in an upfront cost premium of approximately 11% compared to conventional construction. However, this is expected to decrease over time as technology advances, economies of scale are realized, and energy efficiency measures become more cost-effective. Beyond the financial costs, many organizations are also considering their reputational costs and the need to align themselves with the decarbonization goals of their stakeholders.

For individual building stock owners this challenge requires identifying funds that can pay for upfront construction costs as well as long term operational costs for these investments. In a budget-constrained environment this can present real challenges. However, there are a number of solutions.

Financing decarbonization through tax credits

The good news is that there are now many incentives to encourage investment in decarbonization projects that can defray upfront costs and enhance financial feasibility. These incentives are available at local, state, and federal levels. 

The Inflation Reduction Act (IRA) is proving to be a significant catalyst for a range of decarbonization projects. Perhaps one of the most innovative aspects of this legislation was the introduction of Elective Payment for both tax-exempt and non-federal governmental entities. As per the White House, “tax-exempt and governmental entities will, for the first time, be able to receive a payment equal to the full value of tax credits for building qualifying clean energy projects”. This means that governments and nonprofits can now participate in programs that they were previously not eligible for as non-taxed entities.   

However, the provisions of the IRA and the associated tax code provisions can be complex and subject to change. For example, the eligibility of certain components is changing between 2024 and 2025 when a technology-neutral zero emissions requirement takes effect. A significant increase in the amount of tax credits is also available for complying with prevailing wages and apprenticeship goals, domestic content requirements, and other status specific components. However, one should be aware that the tax credits can also be reduced by events of noncompliance, for example by falling short of the domestic content criteria. These rules are evolving, and at this time we are awaiting more guidance from the IRS in this area. 

Many states also offer incentives and rebates for clean infrastructure investment. In practice, building stock owners will need to identify funds from a range of sources that could include annual revenues, grants, and one-off contributions. Once these funds have been identified and secured, they need to be brought together in a comprehensive package to provide financial feasibility to the project. 

How can we make sure we get what we pay for?

There is tremendous activity in building decarbonization as public and private entities look to innovative opportunities to deliver on their goals. However, with multiple levels of complexity in delivery, and the compliance associated with funding, the need for expertise becomes paramount. A combination of technical, financial, and commercial capabilities can help ensure that the decarbonization goals can be achieved in a financially sustainable and risk-mitigated way. This is achieved by taking a comprehensive approach that includes the following areas during the planning process:

  1. Clearly defined project: A clearly defined project, including detailed technical specifications and major project components, is necessary.
  2. Risk mitigated procurement: Project delivery risks can be mitigated and managed by carefully analyzing the project risk profile and assigning risks to the appropriate owners. This can be achieved using different types of contractual structures. 
  3. Cost control and budgeting: A well-defined commercial and financial structure can facilitate accurate cost estimation, budgeting, and financial planning throughout the project lifecycle. 
  4. Financing and funding: A sound commercial and financial structure that efficiently enables access to appropriate sources of financing and funding is necessary for project implementation. This may include securing debt financing through loans, bonds, or public-private partnerships (PPPs), as well as leveraging public funds, grants, or subsidies within a structure that incorporates tax credits but also which doesn’t cause one source of funds to counteract another. 
  5. Revenue generation and sustainability: Revenue-generating mechanisms can help enhance financial sustainability to support ongoing operations, maintenance, and debt service obligations. 
  6. Stakeholder engagement and public confidence: A transparent and equitable commercial and financial structure enhances stakeholder confidence and public trust in public infrastructure projects. 

Overall, a sound commercial and financial structure is fundamental to the effective delivery and sustainable operation of built environment decarbonization goals. By establishing a solid foundation for project governance, procurement, and financing, building owners can mitigate risks, optimize resources, and achieve their decarbonization targets.   

Getting started

Often, getting started on the decarbonization journey is the hardest part of the process. Six simple steps can help evolve your goals into a well-defined and affordable project. This process will help articulate your decarbonization strategy and turn it into a business case that supports a deliverable project. 

  1. It is first important to set out the strategic plan. This work will encompass understanding the regulatory environment, and establishing goals and performance drivers for your estate, i.e. what is your organization trying to achieve with regard to decarbonization?
  2. Based upon the strategic document, a detailed plan to determine the technical solution (e.g., the decarbonization measures that can be implemented to achieve the goals) can be undertaken.
  3. Once the technical solution is identified the proposed solution can be costed out and applied to a schedule.
  4. Analysis to determine the funding and procurement structure can be undertaken with the goal of identifying a financially feasible funding package. Delivery analysis will identify the optimal procurement and contractual structures.
  5. If financial feasibility cannot be achieved then further iterations may be required to re-analyze or re-scope the technical solution. This can be repeated until a financially feasible technical solution is identified. 
  6. Once the financially and technically feasible solution has been identified this can be presented in a business case. This will allow leadership and decision makers to approve the plan and allow it to proceed into procurement. 

Subject matter expertise

View All Specialists

Lester Kao

Director, Project Finance and Consulting
Christopher Livingstone

Christopher Livingstone

Principal, Project Finance and Consulting

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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.