Adapting to the ISR: What Every 3PL Operator Needs to Know
California warehouse operators have recently become familiar with two acronyms that are making their lives harder: ISR and WAIRE. They stand for Indirect Source Rule and Warehouse Actions and Investments to Reduce Emissions. In plain English, these are tax rules being implemented to reduce carbon emissions and air pollution. But, unfortunately, that means 3PL owners are picking up the tab.
Only those 3PL owners working in or near the Inland Empire region of Southern California are currently being affected. However, these regulations generate a lot of revenue for the local government, and other port cities nationwide, such as San Diego, are starting to implement similar programs.
As a 3PL owner, you must understand how these rules will affect your business. In this blog post, we will explore the implications of ISR/WAIRE on 3PLs. First, we’ll highlight the challenges and opportunities arising from these regulations. Then we will discuss strategies for navigating this new regulatory landscape, helping you make informed decisions that balance environmental responsibility with the economic sustainability of your business.
How The Indirect Source Rule (ISR) Works
What is the Indirect Source Rule (ISR)?
The Indirect Source Rule (ISR) is a regulatory strategy intended to combat air pollution. Indirect sources refer to activities or developments that generate or attract mobile pollution sources (e.g., cars and trucks) without directly causing pollution. As its name suggests, the regulation seeks to put a price on indirect sources of carbon emissions, by linking them to specific transportation activities and land uses.
The ISR is not new and has been around in California since the late 1990s. However, amendments to the ISR regulation as recently as 2021 are being phased in and becoming increasingly more stringent. As a result, other states and metropolitan areas across the US are watching how California’s program performs. Many similar proposals are making their way through various local and state dockets, such as ISR Rule 56 in San Diego.
How ISR Works
In the context of 3PL owners, warehouse actions and investments to reduce emissions focus on minimizing the environmental impact of logistics and distribution activities. According to ISR regulations, warehouses are significant emission sources due to the high energy demands of powering and cooling the buildings and the transportation required for moving goods in and out of the facility.
Potential Issues with ISR
ISR promises to keep the environment clean and combat climate change. In reality, the mechanism by which this is done means increasing tax burdens on 3PL operators in California. As it is already, 3PL operators work with tight margins, putting additional pressures on these companies and their P&L’s on top of the already daunting increases in commercial real estate rent prices seen as of late.
With ISR rules in place, 3PL operators have no choice but to raise the price of their services, passing along the charges to their clients, who will ultimately charge the American end consumer for the increased cost of doing business, contributing to inflation.
In an ironic twist, the ISR and WAIRE rules may also push businesses farther away from the coasts. Transporting goods over land requires carbon-emitting trucks, which may negate many of the positive impacts of the regulations, leaving the end consumer paying out of pocket.
Despite the debatable effectiveness of this regulatory strategy, additional port cities will likely be implementing similar programs. This is because climate change and air pollution concerns are not going away. Furthermore, many port cities see the regulations as a great way to generate more revenue.
“The ISR has no hope of reducing pollution. [ISR will only] burden warehousing with a heavy tax and force increased length of haul as shippers avoid warehousing in the district and ship into Southern California from outside the area.” – B.J. Patterson, CEO of Pacific Mountain Logistics, LLC.
How Warehouse Actions and Investments to Reduce Emissions (WAIRE) Works
How exactly does a governing body measure the extent to which warehouse operators are complying with ISR? First, they need a rubric on which 3PLs can be graded for their performance. That’s where the Warehouse Actions and Investments to Reduce Emissions (WAIRE) program is. This is part of the ISR, which directly impacts 3PL owners.
What are Warehouse Actions And Investments to Reduce Emissions (WAIRE)?
The Warehouse Actions and Investments to Reduce Emissions (WAIRE) program is a regulatory initiative to reduce emissions generated by warehouse operations and logistics activities.
WAIRE aims to promote specific practices within the warehousing and logistics industries by encouraging the adoption of energy-efficient technologies, cleaner transportation options, and improved operational strategies. This includes investing in zero-emission vehicles, installing charging infrastructure, using on-site solar panels, and installing MERV 16 or greater filters in certain buildings.
Interestingly, only warehouse operators in buildings greater than 100,000 square feet in size are currently affected. But don’t get distracted by this figure – there is a very good chance these rules will be expanded to cover warehouses as small as 15,000 square feet if some of the proposals being considered in California are any indication. Practically speaking, this means if you’re operating in a 20,000 square foot section of a 101,000 square foot building, you might need to start accumulating WAIRE points.
Those warehouses which are affected are required to earn WAIRE Points. More on that in the section after the next. Before that, we’ll need to address a common point of confusion.
How WAIRE Points Work
Adopted on May 7, 2021, Rule 2305 governs warehouse operators and is used to measure how well 3PLs (and other industrial companies) meet ISR standards. This is done through the WAIRE Points system. Warehouse operators accrue points to demonstrate compliance with the regulation.
How many points does your 3PL need? The calculation is complex and specified in (d)(1). It’s highly variable depending on how big your warehouse is and where it’s located.
To figure out how WAIRE points are earned, you will need to check sections (d)(3), (d)(4), and (d)(5).
In (d)(3), the methods by which WAIRE points can be accrued are outlined. In addition, some operators may be able to establish a Custom WAIRE plan, as defined in (d)(4). And then there’s this part, specified in (d)(5):
In lieu of earning the required number of WAIRE Points in paragraph (d)(3) or (d)(4) a warehouse facility or land owner, or operator may choose to satisfy all or any remaining part of their WAIRE Points Compliance Obligation through payment of a mitigation fee in the amount of $1,000 for each WAIRE Point.
Ouch. Long story short, warehouse operators can accumulate WAIRE Points by either going green or paying a hefty mitigation fee. This started in 2022. The fees went up in 2023 and will continue to do so every year until 2026, when the full system is in effect.
Points can be banked and transferred up to three years after the operator’s initial compliance period. Furthermore, WAIRE Points can be exchanged between warehouse facilities, landowners, and warehouse operators within the same three-year timeframe.
Complying with WAIRE
To demonstrate compliance, warehouse operators must submit an Initial Site Information Report and follow up with Annual WAIRE Reports. Recordkeeping must be maintained for at least seven years and made available upon request.
Exemptions apply to operators with warehouse activities, primarily for facilities covering less than 50,000 square feet. In unforeseen circumstances, operators can apply for partial or complete exemptions.
Warehouse operators can earn WAIRE Points through the WAIRE Menu, Custom WAIRE Plans, or by paying a mitigation fee. If you run a 3PL in an affected area and wish to avoid fees, some specific ways you can earn WAIRE points include but are not limited to acquiring or working with companies that use zero or near-zero emissions vehicles, installing zero-emission vehicle chargers, and adding solar panels to rooftops and carports.
How WAIRE & ISR Will Affect 3PLs
If you spend a lot of time reading about WAIRE or ISR, it’s easy to get lost in the details and miss the parts most likely to affect you directly. So here are four ways these regulations will affect you when they catch on beyond California.
1. Your operational costs will go up.
As 3PL owners invest in alternative energy, alternative-fueled vehicles, and other emission-reduction strategies under the ISR/WAIRE regulations, they will face increased operational costs. There is no way around this.
For warehouse operators, the ISR/WAIRE implementation can translate to an extra tax burden of approximately $.80 – $1 per square foot annually, stemming from their role as indirect sources of emissions.
2. You will spend more time on compliance, reporting, & recordkeeping.
If you are operating warehouses within the South Coast AQMD jurisdiction, within a building that is 100,000 square feet or more, you must earn WAIRE Points. That means that even if you have 20,000 square feet in a 100,000 square foot building, you still have to report. This may necessitate investments in cleaner vehicles, alternative energy generation equipment, or electric charging infrastructure, among other options.
Complying with the various reporting and recordkeeping requirements outlined in the ISR/WAIRE regulations will lead to more administrative work for 3PL owners. Moreover, developing new systems or processes for data collection and reporting may also be required, adding complexity to daily operations.
That said, if you have to work with ISR/WAIRE, you should do it right. Keep excellent records and track all your WAIRE points. Document everything when it comes to actions and investments that can accrue points. That way, you wind up paying as little tax as possible.
3. You will need to choose between moving or complying.
For 3PL owners facing the implementation of ISR/WAIRE regulations, difficult decisions lie ahead. Many will choose to relocate to areas without such stringent rules in the first place (which may negate the environmental benefit of the program in the first place).
Should you decide to move, be sure to consider the cost of moving. Of particular importance are drayage costs, which will obviously increase as you move farther away from ports.
Should you find yourself unable or unwilling to move, you will need to focus on complying. It’s tempting to think you may be exempt if you operate a warehouse under 100,000 square feet in size. Downsizing might even seem like an option. However, it bears repeating that there are alternative versions of WAIRE floating around that will apply to much smaller warehouses, possibly as small as 15,000 square feet.
If you’re seeking to stay in place and comply, you can do so by using or working with companies that use zero-emission or near-zero-emission trucks, as the rule offers more WAIRE Points for their use. However, it is essential to weigh compliance costs against the potential negative consequences of relocating.
4. Landlords will need to help 3PLs meet WAIRE regulations.
Many of the methods used to accrue WAIRE points involve making improvements to the warehouse. Some of the actions mentioned previously in this post such as installing solar panels, EV chargers for parking lots, and energy-efficient filtration systems are all great examples.
While the burden of complying with ISR by accumulating WAIRE points falls on 3PL owners, landlords have the available capital and a strong incentive to work with their tenants on compliance After all, making eco-friendly improvements increases the value of their property and makes it more attractive to future tenants.
The mitigation fee for not accruing enough WAIRE points is high. So working with your landlord to make environmental improvements to the warehousing space might be the smart move. Remember that commercial rent prices have more than doubled in the last few years, and that requesting assistance compliance with state regulations is reasonable.
Best Practices for WAIRE Compliance
A lot of 3PL owners don’t have the luxury of moving, so complying with WAIRE is necessary. As we’ve mentioned, though, many of the improvements needed to accrue WAIRE points are expensive, more so than paying a mitigation fee in some cases.
In this case, your goal would be to maximize your compliance with WAIRE without breaking the bank. To that end, the first thing you will want to do is find a way to tally up your WAIRE points. For that, the South Coast Air Quality Management District has an online calculator that can help you do that. Once you access the calculator, this can help you determine, with concrete figures, what is likely to result in a high ROI for you.
After doing that, it may make sense to pursue the WAIRE compliance method recommended by Revel Energy, a solar energy firm based in California. According to the firm, one of the best ways to earn WAIRE points is to install rooftop solar panels and an energy storage system. This, in turn, allows 3PLs to procure a surplus of energy which can be used to power EV chargers. While the upfront cost is onerous, it’s not only possible to earn sufficient WAIRE points through this method, but also reduce energy costs in the process.
Still, if this sounds like too much to take on, in our own experiences at Growe, we’ve found that some warehouse operators consider carport solar panels to be an especially effective way to accumulate WAIRE points. Even taking this intermediate step can go a long way toward WAIRE compliance.
Final Thoughts
Any way you look at it, ISR/WAIRE regulations are complex. They introduce a lot of new challenges for 3PL owners. But that doesn’t mean you have to be helpless.
If you can manage it, choose real estate where you will be outside these strict regulations’ jurisdiction. If you can’t, keep great records and look for inexpensive investment opportunities in green technology. We can even help you navigate the conversation with your landlords to ensure they do their part in helping your business comply with WAIRE.
The most important thing is to be diligent and proactive. The worst thing you can do is let ISR/WAIRE sneak up on you. Keep an eye on your industry news, as regulations are constantly changing. If you’re not in Southern California, watch this blog. If we see regulations like this in other cities, we’ll discuss that here.
