Governments Might Spur Private-Sector Demand for Green Buildings

About whether to increase or decrease the stringency of environmental regulations, it is often overlooked the possibility that government agencies might use purchasing to stimulate market demand for “green” products and services. Nevertheless, several recent US presidents (of both parties) have issued executive orders to require federal agencies to use environmentally preferable products and services whenever possible, as has the European Commission. These procurement policies are specifically aimed to “spur private sector development of new technologies and use” of goods and services that are friendly to the environment, but there has been virtually no industry analysis of whether this strategy actually worked, up until now.

In a new paper, Public Procurement and the Private Supply of Green Buildings, authors Timothy Simcoe and Michael W. Toffel show that there is, indeed, a spillover effect to the private sector. The authors studied what happened after municipal governments in California adopted policies that required public building renovations and new construction to build “green,” which always meant adhering to the US Green Building Council’s Leadership in Energy and Environmental Design (LEED) standard. After local governments decided to pursue LEED certification for their own buildings, there was an uptick in the number of local architects, general contractors, and other construction industry professionals who sought LEED accreditation. Also, the use of the LEED standard increased among private builders in the same local markets.

Leading with LEED

The researchers focused on LEED because of its relative dominance in the industry, and because “the standard resembles a multi-sided platform that facilitates interactions among real-estate developers and suppliers of green-building inputs,” the paper explains.

Toffel and Simcoe collected data on 735 California cities from 2001 to 2008, including LEED registrations, construction starts, and demographic information such as population, median income, and various measures of environmentalism. The team homed in on California primarily because it was (and is) the state with the largest number of municipal green-building policies. But the state also sports a wide range of environmental diversity among its private citizens. The disparity allowed the team to study whether the impact on the private sector differed in cities that were already pretty green, compared with cities that weren’t.

The researchers found that only 4 percent of the 735 cities had passed green-building policies specifically targeting municipal buildings by 2008, but that 15 percent of cities in the state abutted a municipality with a green procurement policy. To assess each city’s intrinsic environmental pulse, they measured the proportion of the city’s population that voted in favor of environmental initiatives on statewide ballots between 1996 and 2000, the percentage of the populous that drove a Toyota Prius in 2008, and the pro-environmental voting record of each city’s delegates to the California legislature.

Spillover results

Overall, the researchers found that cities that adopted green-building policies for their municipal buildings had roughly 90 percent more private-sector green buildings by 2008 than other cities of similar size, demographics, and environmental preferences.

It occurred to the researchers that the results might be due in part to LEED-leading cities showing preferential licensing treatment to those building owners who decided to go green. Toffel said that they thought that maybe the private LEED registrations happened in these cities because although the policy only applied to governments, the zoning process would more rapidly approve private-sector buildings that had ‘LEED’ in their applications. So the researchers also looked at whether there was any greening effect on private-sector buildings in municipalities that were located next to cities with green-building policies but had no such policies themselves, since these would clearly not profit from informal benefits in the zoning process.

In the paper, the researchers chalk up the findings to education; in complying with government policies, builders and architects must school themselves in all things LEED, and they can then pass that knowledge on to private-sector clients.

The government tenant factor

Furthermore, private-sector building developers might embrace LEED in order to woo government tenants. Indeed, in addition to taking up space in city hall and the like, government agencies often lease space in private buildings. In the United States, most commercial leases require tenants to pay the cost of utilities, which reduces a landlord’s incentive to invest in LEED, or in other energy efficiency capital expenditures. However, government lessees are attractive to landlords because they come with predictable budgets and, therefore, reliable rent payments. And in cities where LEED is government policy, government tenants might expect LEED certification from their landlords.

Assessing the paper’s results

Toffel and Simcoe’s findings indicate that the government’s influence promotes a public policy goal of sustainable development, which is beneficial to both public and private interests.

According to the latest figures from the US Census Bureau, the public sector accounts for roughly one-third of the nation’s construction spending, so it stands to reason that the government holds considerable sway over the movement toward building environmentally friendly buildings. However, the authors note that there is no guarantee that LEED is the best standard, and that the adoption of LEED could lock-in its use and chase away competing standards that might be more effective.