Saturday, September 22, 2012

Public Procurement and the Private Supply of Green Buildings

Abtract: We measure the impact of municipal policies requiring governments to construct green buildings on private-sector adoption of the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) standard. Using matching methods, panel data, and instrumental variables, we find that government procurement rules produce spillover effects that stimulate both private-sector adoption of the LEED standard and supplier investments in green building expertise. Our findings suggest that government procurement policies can accelerate the diffusion of new environmental standards that require coordinated complementary investments by various types of private adopter.
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 The cost of adopting the building practices necessary to obtain LEED certification varies by the type and scale of project and by the certification level. Costs accrue by coordinating the required design elements and using more expensive materials and technologies. The activities required to achieve LEED points range from relatively cheap (such as installing bike racks) to quite expensive (remediating a brown-field site). The administrative costs of LEED certification are small by comparison, amounting to roughly $450-600 to register a project with USGBC and an additional $2,000 certification fee. Some developers hire a consultant to provide guidance on the LEED-eligibility of particular design choices and procurement decisions and to prepare the LEED application.
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The benefits of LEED can accrue from increased rents and occupancy rates and from reduced operating costs. Several studies have found that LEED-certified buildings charge a 3-5 percent rent premium and have higher sale prices and occupancy rates (Chegut, Eichholtz, and Kok 2012; Eichholtz, Kok, and Quigley 2010, forthcoming; Fuerst and McAllister 2011a, 2011b). Evidence of reduced operating costs is mixed, in part because LEED certification emphasizes design elements rather than energy consumption. Engineering studies suggest that LEED certification is correlated with increased energy efficiency (Turner and Frankel 2008; Newsham, Mancini, and Birt 2009; Sabapathy et al. 2010). For example, engineering estimates from a study of 121 LEED-certified projects that volunteered data on energy use suggest that these buildings consume 25-30 percent less energy than the national average for comparable projects (Turner and Frankel 2008), though others have raised concerns that some LEED-certified buildings do not deliver energy savings (Navarro 2009).
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Municipal green building policies vary along several dimensions, including the types of structure affected (by size, owner, and use); whether they cover only new buildings or also renovations; and how they measure environmental performance. [The authors] gathered details on each policy from city websites and the online library of municipal codes. [Their] research indicates that 87 percent of all green building polices contained a purchasing rule—that is, a requirement that new public projects adhere to some type of environmental standard—and that 90 percent of these rules specified the LEED standard.
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The authors find a statistically significant increase of 7.5 private LEED registrations in cities with a green building policy. Since the weighted mean of private LEED registrations is 8.3, this estimate is a 90-percent increase in LEED adoption. The results show that government green procurement policies—as intended—spur greater municipal green building. [They] find an average of 1.6 more government LEED registrations in cities adopting a green building procurement policy. While this is not surprising given that 90 percent of these policies use LEED as the relevant yardstick, it is nevertheless reassuring to see a large and statistically significant direct impact. [The find] an increase of 15.7 LEED Accredited Professionals in green policy adopting cities relative to their matched controls. This is an increase of roughly 38 percent beyond the weighted mean of 40.8, but is not statistically significant. This result is statistically weaker than the private LEED registration result partly because real estate professionals are often based in surrounding communities.
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[They] find a statistically significant increase of 0.9 private LEED registrations among neighbors relative to their matched controls. When normalized by the baseline registration rate of 1.5 buildings per year, this translates to a marginal effect of 61 percent, which is somewhat smaller than the 90-percent marginal effect for green policy adopters.... [They] conclude that the link between government green building procurement policies and the private-sector adoption of green building practices is not solely due to preferential treatment of green buildings by city-level zoning or permitting officials. Instead, [the] results imply that these procurement policy effects reflect a spillover from green policy adopter cities to private developers in neighboring cities....They find a statistically significant increase of 4.1 LEED Accredited Professionals, or roughly 56 percent of the weighted mean for controls. This suggests that the market for architects, contractors, consultants, and others with green building capabilities is regional, with spillover from policy adopters to neighboring cities helping to explain the statistically weaker impact of policy adoption on LEED Accredited Professionals in the policy-adopting cities themselves.
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The ... difference-in-difference models [show] ...  an increase of 2.3 private LEED registrations per year in green policy adopters and 0.15 private LEED registrations per year in green policy adopter neighbors. They also find a statistically significantly increase of 11.0 LEED Accredited Professionals per year in the adopter cities and 1.2 per year in the neighboring cities.
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by Timothy Simcoe and Michael W. Toffel
National Bureau of Economic Research (NBER) www.NBER.org
NBER Working Paper No. 18385; Issued in September 2012

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