24 Jan 2023

California’s Sweeping Climate Change Initiative Will – Eventually – Have Profound Impacts on the Built Environment

By: Stephen Del Percio, AECOM

National governments globally are struggling to enact legislation that will bind them to the world’s carbon dioxide and other greenhouse gas emissions reduction targets, and unfortunately in some cases even reach consensus on the scope and scale of the climate crisis—let alone deciding what must be done.

BUT THANKS TO A MASSIVE NEW PIECE OF RECENT LEGISLATION, California has stepped squarely into the global climate leadership void by pledging to become entirely carbon neutral by 2045—an aggressive goal, to be sure, that will have dramatic repercussions for the Golden State’s built environment over the next few decades. This article provides an overview of what has been dubbed the California Climate Commitment, highlighting the components of the legislation that will most impact construction, real estate, and infrastructure in the world’s fifth largest economy.

Governor Gavin Newsom signed this sprawling set of laws on September 22, 2022, fresh on the heels of a separate $308 billion state budget he signed in June that allocated $54 billion to climate. That budget directed $6.1 billion in spending on electric vehicles (including battery-powered school buses and EV-charging infrastructure); $14.8 billion for transit and port projects (including the California High Speed Rail initiative, a project which is slowly advancing in the state’s Central Valley); $8 billion for electric grid stabilization; $2.7 billion on wildfire mitigation; and $2.8 billion on water projects. Coupled with the Climate Commitment, these efforts are positioning California at the vanguard of climate action, which (as is frequently the case with Golden State legislative accomplishments) will likely wend their way into legislation in other jurisdictions, making their review just as salient for observers and practitioners in those geographies, too.

The California Climate Commitment is actually the compilation of 40 separate bills addressing a broad range of climate-related topics, from EVs and embodied carbon in building materials to oil drilling regulations. According to the governor’s office, it will create four million new jobs, cut air pollution by 60%, reduce the state’s consumption of oil by 91%, cut refinery pollution by 94%, and prevent $23 billion in environmental degradation from pollution. Critically, the legislation is also projected to reduce the use of fossil fuels in buildings and transportation by 92%.

In terms of impact on the built environment and implications for real estate, there are several bills within the Climate Commitment that should be of particular interest to California’s construction, real estate, and infrastructure industries: AB 1389¹ (Clean Transportation Program); AB 2061² and AB 2075³ (setting standards for the electrification of buildings and developing/deploying EV charging networks); AB 2446⁴ (Embodied Carbon Emissions: Construction Materials); SB 379⁵ (Residential Solar Energy Systems; Permitting); and SB 905⁶ (Carbon Sequestration; Carbon Capture, Removal, Utilization, and Storage Program).

But the heart of the Climate Commitment are AB 1279⁷ (California Climate Crisis Act), and SB 1020⁸ (Clean Energy, Jobs, and Affordability Act of 2022). These two laws establish as state policy the achievement of net-zero greenhouse gas emissions by no later than 2045, maintenance of net negative emissions from that point forward, and net emissions reductions of 85% from 1990 levels by 2045. SB 1020 also creates interim milestones, targeting a 90% clean electricity grid by 2035, 95% by 2040, and 100% clean retail electricity sales by 2045.

Here is a closer look at each of these key pieces of the Climate Commitment, which are likely to have the most impact on the state’s built environment and development patterns over the next few decades.

AB 1279: California Climate Crisis Act.⁹ In addition to the emissions reduction targets noted above and set forth in SB 1020, this law gives the California Air Resources Board (CARB) a broad mandate “to identify and implement a variety of policies and strategies that enable carbon dioxide removal solutions and carbon capture, utilization, and storage technologies in California.” (The California Global Warming Solutions Act of 2006 had previously designated CARB as the state agency responsible for monitoring and regulating the various sources of greenhouse gases in California.)

SB 1020: Clean Energy, Jobs, and Affordability Act of 2022.¹⁰ The headline bill for the Climate Commitment, this piece of legislation is what mandates carbon neutrality for the entire state by 2045. By December 31, 2035, 90% of all retail electricity sales to end users in California must come from renewable and/or carbon neutral resources; by December 31, 2040, that figure rises to 95%. For California state agencies, the requirements are even more stringent; all electricity they use must be clean or carbon-neutral by December 31, 2035. SB 1020 goes a step further by mandating certain requirements for any new procurement commitments made by state agencies for new clean energy capacity after June 1, 2022. For example, it requires those commitments to be tied to new facilities that must enter commercial operation after January 1, 2023. It also directs project labor agreements for the construction of those new facilities and further requires agencies “to give preference to resource options expected to yield maximum long-term employment, stimulate new economic activity, generate local and state tax revenues, and assist with the development of new industries.”

AB 1389: Clean Transportation Program: Project Funding Preferences.¹¹ This law requires California’s existing Clean Transportation Program (which provides competitive grants, revolving loans, and other funding to, among other things, transit fleet owners, businesses, and public-private partnerships) to develop and deploy innovative technologies and alternative and renewable fuels in the marketplace. The amendment incorporates a list of criteria that the State Energy Resources Conservation and Development Commission must use to evaluate projects slated to receive more than $75,000 from the Commission. These include a project’s ability to “drive new technology advancement for vehicles . . . and promote the deployment of that technology in the marketplace.” It also outlines 13 different types of projects that are eligible for funding, including “infrastructure projects that promote alternative and renewable fuel infrastructure development connected with existing fleets, public transit, and existing transportation corridors.” For example, these types of projects could potentially include “on-demand,” software-powered shared transit applications or micromobility solutions such as e-bikes and scooters.

AB 2061: Transportation Electrification: Electric Vehicle Charging Infrastructure.¹² This statute requires the State Energy Resources Conservation and Development Commission to develop uptime recordkeeping and reporting standards for electric-vehicle chargers and charging stations by January 1, 2024. (While California has already spent billions subsidizing EVs generally, including charging stations, it has not collected data on how that infrastructure is performing.) The law also amends existing California transportation electrification laws, which require the state’s public utilities to reduce greenhouse gas emissions to 40% below 1990 levels by 2030 and to 80% below 1990 levels by 2050. However, AB 2061 only applies to EV chargers and charging stations that receive incentives from the state.

AB 2075: Energy: Electric Vehicle Charging Standards.¹³ This statute directs relevant state agencies (including the California Building Standards Commission and the Department of Housing and Community Development) to develop and publish guidance and best practices in order to help building owners, the construction industry, and local governments “overcome barriers” to the electrification of buildings and EV charging equipment. This guidance includes replacement of common fossil fuel-powered equipment within buildings; whole building electrification plans; and model permit applications for building electrification, storage, and EV charging installation projects. AB 2075 also requires the state Energy Commission to adopt, approve, and codify mandatory building standards for the installation of EV-charging infrastructure for parking spaces in multifamily residential and non-residential development. (Interestingly, the Commission is directed to use the existing California Green Building Standards Code as the starting point for establishing these standards, and AB 2075 will ultimately complement similar standards that exist for energy efficiency, water efficiency, and rooftop solar installations.)

AB 2446: Embodied Carbon Emissions: Construction Materials.¹⁴ The California Global Warming Solutions Act of 2006 had previously directed CARB to monitor and regulate sources of emissions of greenhouse gases in California. AB 2446 goes a step further by requiring the Board to develop, by July 1, 2025, a framework for calculating the average carbon intensity of building materials used in new construction. This reduction must occur against a baseline calculated from a report to be produced by 2026. From there, it will require the state’s building industry to reach a 40% reduction in greenhouse gas emissions from those building materials by December 31, 2035 (with an interim 30% reduction required by that same date in 2030). That framework must include a requirement for “entities undertaking the construction” of projects larger than five new residential units or 10,000 square feet of nonresidential building space to submit a life-cycle assessment of the carbon intensity of the project’s building materials. The bill acknowledges California’s struggles to develop new housing units (“California is currently facing a housing shortage”) but that meeting the state’s housing goals “should not come at the expense of California’s climate goals. It is the responsibility of the state to find solutions that allow housing and climate targets to reinforce one another.”

SB 379: Residential Solar Energy Systems: Permitting.¹⁵ This law requires every California city, county, or city and county to launch an online automated permitting platform for residential solar systems (up to 38.4 kilowatts). Only cities with fewer than 5,000 in population and counties with fewer than 150,000 in population are exempt. The state’s justification is that, in order for California to reach its climate goals, it will ultimately need to generate six gigawatts of electricity from renewable energy sources per year, while also building out complementary storage capacity. Streamlining the permitting process for rooftop solar should make it easier for residential homeowners to install these types of systems, helping to boost the state’s overall renewable capacity.

SB 905: Carbon sequestration: Carbon Capture, Removal, Utilization, and Storage (CCUS) Program.¹⁶ This statute directs CARB to establish this program, which by January 1, 2025, must adopt regulations for a unified permit application governing the construction and operation of carbon dioxide capture, removal, and sequestration projects. These projects are defined in the law as projects that use “a process to separate carbon dioxide from industrial, commercial, or energy-related sources, other than oil or gas production from a well, and produces a concentrated fluid of carbon dioxide with the intent of preventing emission of the carbon dioxide into the atmosphere” or carbon dioxide capture or removal projects that “seek to provide for the long-term isolation or utilization of the carbon dioxide from the atmosphere through storage in a geologic formation.” But implementing this law will be a challenge; California has yet to open a CCUS facility and environmental groups in the Central Valley are actively—and vehemently—opposing multiple CCUS applications pending before the EPA (with at least a dozen more in the pipeline as of June of 2022).¹⁷

What Do These Laws Mean for California’s Construction, Real Estate, and Infrastructure Industries?

Eventually they will be transformative. But in the short term the Climate Commitment will remain in essence a mandate for a variety of California regulatory agencies. Practitioners and industry observers will therefore need to keep a close eye on it as the teeth of the legislation is hammered out in the halls of Sacramento. Indeed, its open-ended, aspirational structure has been one of the criticisms of the Climate Commitment, which echoes similar critiques of the federal Infrastructure Investment and Jobs Act (IIJA), the Biden administration’s infrastructure bill, which the president signed in November of 2021, creating more than 125 new grant programs, but whose funding has rolled out slowly.

Nevertheless, it is inevitable that certain pieces of the Climate Commitment will ultimately have a larger impact on the construction, real estate, and infrastructure industries than others. For example, AB 2446¹⁸ takes the existing Buy Clean California Act of 2017, which required contractors bidding on public projects to disclose data about embodied carbon in certain materials, including glass and steel, a step further, mandating that project teams prepare a full life-cycle analysis of embodied carbon for all new building materials. (This means that all of the greenhouse gas emissions caused by those materials’ manufacture, transportation, installation, maintenance, and ultimate disposition must be accounted for in the analysis, ultimately creating a significant compliance hurdle for every real estate development and construction project.)

It is also important to consider the Climate Commitment in context: today, 41% of California’s greenhouse gas emissions come from automobiles (compared to 27% of the rest of the country’s). The goals of the Climate Commitment should thus be viewed in significant part from that perspective; reaching its goal of carbon neutrality by 2045 will require California to wage in an outsized effort at reducing the climate impacts of the car.

To that end, in September, the California Energy Commission—together with Caltrans, the California Department of Transportation—announced that it had reached an agreement with the federal government to tap $56 million in funds from the IIJA in order to begin installing EV-charging stations.¹⁹ This is just a first step towards meeting the Climate Commitment’s goal of creating a 6,600-mile network of chargers across the state by 2030. That network will eventually include 1.2 million EV chargers for light-duty cars and 157,000 chargers for medium- and heavy-duty vehicles, to be installed in both public locations (parks, shopping centers, hotels, etc.) and private, but shared, locations in multifamily residential buildings and workplaces.

Ultimately, the state will receive $384 million from IIJA over the next five years, complementing the $10 billion that the governor’s 2022 budget previously allocated to EVs. Yet much more funding will likely be necessary if California is to follow through on its ban of the sale of any new fossil fuel-powered automobiles by 2035, as CARB voted for in August of 2022.

Yet if every existing gas-powered car in use in the United States was instantly swapped out for an EV or ZEV (zero-emission vehicle), and Americans drove as much as they do today, the country’s electricity demands would increase in kind dramatically, by nearly 30%.²⁰ The Climate Commitment recognizes this reality and, controversially, also includes a provision extending the life of the Diablo Canyon Nuclear Power Plant for another five years. (In 2018, the California Public Utilities Commission had voted to shut down the plant, which features two 1.2 gigawatt generators.) But this component of the Climate Commitment underscores the reality of California’s climate ambitions. While it is critical that we stop burning fossil fuels, electrify our transportation networks, and make the transition to a clean economy, electricity must still come from somewhere. And renewable energy sources face challenges—from the intermittent nature of how they are generated to questions over the efficacy of their storage—all of which are thorny political and practical problems to solve at scale.

Still, in December 2022, the Biden administration took a step towards helping California meet those challenges head on. It announced that the Bureau of Ocean Energy Management (BOEM) would hold the first-ever Pacific Ocean offshore wind farm lease auction for floating wind turbines that could eventually generate 4.5 gigawatts of clean wind power (a significant portion of the additional six gigawatts of renewable power that the state needs to meet the Climate Commitment’s goals). BOEM has already held 10 competitive auctions and issued 27 wind leases on the East Coast, but this will be the first on the West Coast, covering nearly 375,000 acres in five continental shelf areas off the coasts of central and northern California.²¹

Finally, from EV charging to carbon capture and sequestration to renewable energy projects, it is likely that California will increasingly need to deploy innovative project delivery methods in order to reach the Climate Commitment’s carbon-neutral goals. These types of methods—including collaborative contracting methods like public-private partnerships (P3s), progressive design-build, and pre-development/progressive P3s—are proliferating nationally for a variety of reasons, including a lack of underlying technical expertise within the agencies charged with executing large and complex infrastructure projects. For example, in addition to renewable energy systems, EV-charging networks and CCUS concepts in particular have attracted significant interest from investors who are experienced in project finance because these asset classes have the potential to create their own funding sources (through user fees or carbon offtake arrangements). Leveraging their experience in developing an asset class, these investors will take those revenues from the asset once it is operating in order to pay back the loans and provide a return on the equity that was raised in order to design, develop, and construct the project in the first place.

We do not yet know what the impacts of climate change will hold for any of us. But it is a safe bet that the Climate Commitment will be fraught with fits, starts, and possibly even litigation over its more controversial elements as California begins to implement its vision for a carbon neutral future. For all of these reasons—and of course the health of our planet—it will be a critical piece of legislation to monitor closely in the months and years ahead.

Stephen Del Percio is VP & Assistant General Counsel at AECOM. He is an experienced infrastructure industry lawyer, focusing on design-build, P3, and alternative delivery transactions and projects.

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California’s Sweeping Climate Change Initiative Will – Eventually – Have Profound Impacts on the Built Environment

What Do These Laws Mean for California’s Construction, Real Estate, and Infrastructure Industries?

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