This blog series is authored by Vivienne Zhang and Illina Frankiv who manage the energy program at WeWork, a global co-working company and CEBA member. The insights shared by Vivienne and Illina are based on their experiences supporting the sustainability goals of WeWork members. This three-part series will be split into blogs on Accountability, Transparency, and Market Solutions.
The landlord-tenant split incentive problem with energy efficiency is well-known: when tenants pay for utilities, landlords invest less in energy-saving designs and appliances. This challenge has now extended to renewable energy access and is especially salient in the space of commercial buildings. Often both the landlord and the tenant have renewable energy goals, but for reasons this post will discuss below, they can find themselves in a quagmire and unable to take action. The stakes are high; collectively, commercial buildings account for 20% of energy used in the United States, a share likely to increase with the service sector continuing to grow. Of this share, leased spaces represent approximately 50% of all commercial building energy use. It is now worth looking into renewable energy access for leased commercial buildings more systematically as a way to lower emissions.
Accountability – Who should buy?
The first and most fundamental question faced by landlords and tenants is whose responsibility it is to cut emissions and who can claim the credit of doing so. To answer this question, we must venture into the wonky world of emissions accounting. The industry standard for carbon emissions accounting is set by the Greenhouse Gas (GHG) Protocol, which classifies a company’s emissions into three different “scopes”. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the supply chain of the reporting company, including both upstream and downstream emissions. For companies to attain sustainability goals such as RE100, they have to eliminate their Scope 2, but not Scope 3 emissions.
For leased assets, the Protocol assigns Scope 2 emissions to the party having “operational control” of the leased spaces, and Scope 3 to the one with indirect control. In theory, the Protocol is rightfully designed to encourage the party with the most control over the source of emissions to act. In practice, however, who has control within leased spaces is difficult to determine. For instance, as a tenant, you could control every appliance in the building, but per your lease (as often is the case), the landlord chooses and pays for your utility, either through bundled rents or as a mandatory service. Do you really have control in this scenario? Do you leave the emissions to be the landlord’s problem then?
The questions get even more complicated with co-working spaces now taking the lions’ share of new commercial leases. In 2018 alone, co-working made up nearly two-thirds of the country’s office market occupancy gains. Co-working companies typically lease a portion of a building and subleases it to its members to offer space-as-a-service. In this case, the co-working company is both the landlord and the tenant, so is its energy use Scope 2 or Scope 3? How do co-working members share energy use in the common areas — lighting, space and heat? The GHG Protocol, first written in 2006, woefully needs updating to pinpoint the responsible parties so that the traditional wisdom of “clean up your own mess” can be applied.
Stayed tuned for the next blog in this series on Transparency.
Interested in learning how to navigate sustainability as a tenant or landlord? Check out CEBA’s LESsor Sustainable Energy Network (LESSEN) for additional resources.
Global Energy Program Manager
Global Energy Program Manager
Supply Chain and International Collaboration, Director
Clean Energy Buyers Association