Public Procurement and the Private Supply of Green Buildings

Government purchasing policies can break deadlocks that emerge when coordinated investments are required to adopt a common standard.

In recent decades, a number of federal, state, and local government procurement programs have been implemented to promote increased use of "green" products, with the dual goal of helping the environment and boosting market demand for environmentally friendly products. In Public Procurement and the Private Supply of Green Buildings (NBER Working Paper No. 18385), co-authors Timothy Simcoe and Michael Toffel conclude that municipal policies requiring construction of green public buildings do more than just create demand for certain green construction products. These policies have spillover effects in stimulating private-sector adoption of the standards used to define green government buildings -- in this case, the Leadership in Energy and Environmental Design (LEED) standard -- and the policies induce supplier investments in professional expertise in green-building related practices.

Previous studies have documented that governments use their formidable procurement powers to increase demand for all sorts of environmentally friendly products, including paint, paper, lumber, cleaning supplies, fuel types, and even electricity. More recently, government agencies both in the United States and Europe have expanded procurement policies to include construction of entire green public buildings. With 26.3 percent of all U.S. real estate spending on "maintenance and repair construction" coming from federal, state, and local governments, the potential impact of green-building policies on private-sector demand and supply chains can be substantial.

The authors investigate whether government green-building policies have a spillover effect on the private sector's investment in green-building expertise and use of green--building practices. LEED, which was developed in 1998 by the non-profit U.S. Green Building Council, awards points for incorporating specific design elements in the construction and renovation of facilities. LEED was still emerging as an industry standard early last decade when government agencies began adopting green-building policies, many of which referred to LEED requirements, for government buildings.

The authors collected data on 735 California cities from 2001 to 2008 using information from a variety of public and private sources, then analyzed the spread of LEED projects and LEED-accredited professionals such as architects, contractors, and consultants. They conclude that government green-building procurement policies effectively "jump started" standards adoption by private-sector players. "Overall, our findings suggest that government purchasing policies can break deadlocks that emerge when coordinated investments are required to adopt a common standard and that this stimulates the private-sector market for the goods and services targeted by government green procurement policies," they write.

They also find that LEED standards diffused nearly twice as fast among private-sector developers in cities that adopted green-building policies, compared to other cities of similar size, demographics, and environmental preferences. Perhaps more significantly, the evidence shows that private-sector adoption of LEED standards spread to cities neighboring those with green-building policies, indicating that LEED spillovers resulted from broader industry acceptance of green-building standards. Indeed, there were spillover effects on private real estate development that occurred even when municipal green building procurement policies did not provide explicit rules or incentives to encourage private adoption.

--Jay Fitzgerald