Dec. 02, 2024
Chemicals
The challenge for green procurement is that several major commodities&#;natural gas, cement, and iron and steel&#;have high GHG intensity and account for a large share of GHGs but are not typically a part of green public procurement programs. This report has reviewed green procurement programs (both nascent and ongoing), new legislative action, the academic literature, and reports from nonprofits, foundations, and government agencies. It has developed a conceptual framework for considering how the design of such programs might contribute to achieving their goals in several dimensions, used that framework to develop hypotheses about program success, and tested these propositions against academic findings and observations. This last section presents conclusions and recommendations for developing successful GPP programs for these commodities.
The section is organized around several themes: defining green, program scope, choosing winners, administrative impediments, drivers of success (market, industry, product, and program characteristics), and external drivers.
Which pollutants are covered and how are they measured? What standard or benchmark defines &#;superior performance&#;? How superior must performance be to qualify as green?
The pollutants targeted by green procurement programs are the greenhouse gases, including methane for natural gas, but mostly CO2 for cement, iron, and steel. Some programs also consider other emissions, such as fine particulate matter (PM2.5). We ignore this complication here to focus on the novel concerns. Measuring CO2 is relatively easy, but to measure intensity, one needs a denominator to normalize the emissions over different plants.
For cement, the ENERGY STAR program uses a metric of MMBtus per ton of clinker produced.
For iron and steel, it could be tons of production, but different products would need to be distinguished. Another metric used is tons of CO2 per dollar amount of shipments, which obviates the need for many individual product classifications but makes it difficult to compare actual performance. When plants in a sector or subsector produce the same collection of products, the latter approach is reasonable. But to the extent the product mixes are different and different products sell for very different prices, this intensity metric may unfairly advantage some plants over others.
For natural gas, methane emissions are the main concern, but measuring life-cycle emissions and accounting for superemitters present major challenges.
There are two dimensions to the type of standard. One is along the continuum of technical standards versus performance standards. A technical standard, perhaps based on ASTM, sets specific requirements on plants&#; eligibility. For example, it might specify that cement be produced using a particular low-carbon process. A performance standard would directly target the pollutant but give plants flexibility in meeting the standard. For example, it might specify a maximum emissions intensity for the product. Performance standards generally result in cheaper attainment of a given emissions standard and may incentivize innovation.
The second dimension is internally versus externally generated standards. ENERGY STAR is an example of an internal standard, where industry performance is measured on a disaggregate basis and the top 25th percentile is defined as superior performance. Such a standard means that 75 percent of the industry will always be ineligible for certification, no matter how much the industry improves its overall performance, although for a procurement process, the level could be lowered to say, the 60th percentile to broaden the pool of available suppliers. An external standard would define superior performance as a particular emissions intensity and not change with improvements
in industry performance. It provides an incentive for even the poorest performers to improve, and the standard can always be raised. Of course, an external standard would be informed by data on industry performance, but not in any strict way. Note that this use of the terms internal and external is not about where the ideas, standards, or tools originate. It is strictly about whether a distribution of industry performance is estimated and used to define superior performance, or whether superior performance is defined without direct, mathematical use of a performance distribution. As noted above, superior performance in methane control has been defined in the natural gas sector but not in the other sectors.
The stringency of superior performance in the programs reviewed above ranges from the average (median) to the top 25th or even 10th percentile. Programs based on average performance or externally set benchmarks based on reasonably available technology are sometimes criticized for not pushing innovation.
Another issue is whether superior performance should be defined as one level or many levels, If a CO2 footprint were used, for instance, which doesn't actually define superior performance performance is measured as a continuum. Setting a percentile standard is a single metric for superior performance. In between, one could imagine several performance "tiers." A two-tier system, for example, would award points for good performance and more points for superior performance, Or still ore points for innovation breakthroughs. Most economists would argue that the continuous measure, like a CO2 footprint metric, is most efficient and would also stimulate innovation to reduce emissions intensity.
A final issue for defining greenness that applies to both the baseline and the standard is whether life-cycle emissions are counted. California&#;s program, for instance, explicitly does not count fabricator (i.e., downstream) emissions for steel and does not count upstream emissions for steel. No programs count downstream emissions&#;the CO2 when natural gas is burned. Because most programs that envision procuring green cement or steel are defining the commodity as the building or road or bridge, the analysis should include upstream and downstream inputs.
The issue of life-cycle assessment is tied to the issue of the scope of products. One approach is to procure the green cement or steel directly; another is to design the program around green infrastructure and have bidders provide information on the greenness of infrastructure inputs. We favor the latter approach because it gives the bidder the flexibility to make trade-offs between materials with different carbon intensities and other attributes, such as cost, durability, strength, and resilience, and more closely aligns with how most procurement takes place today..
A second, related issue is consideration of substitute materials. If cement, for example, is subject to procurement standards but wood is not, wood has a competitive advantage that is not necessarily warranted based on carbon intensities. If bidders for construction must meet a performance standard for embodied CO2 in steel but aluminum is exempt, aluminum could have a cost advantage. The substitute materials might actually have a larger CO2 footprint or have other disadvantages, such as less durability or fire resistance, which lowers the social value of the project. One remedy is to write comprehensive standards for materials. Another is to require whole-structure life-cycle analyses and then put the responsibility on the bidders to develop the best mix of input materials from both a CO2 standpoint and other dimensions.
Substitution of sources is a third issue: if US government agencies have procurement standards for a commodity but trading partners have less stringent standards, then foreign suppliers might, depending on the attention paid to program differences, have a competitive advantage not necessarily based on lower carbon intensity. This situation could result in leakage of high-carbon products into the United States (without border adjustments) and cause difficulty for US firms selling abroad. Alternatively, if the importing country has such standards, the reverse would apply, in that US firms could become more competitive than foreign manufacturers not operating under those standards. Consider the situation for natural gas sold into the EU market (as liquefied natural gas). The European Union is well on its way to implementing standards on methane emissions and requiring US exporters to sell low-methane natural gas. https://www.resourcesmag.org/common-resources/future-natural-gas-balancing-economics-and-climate-change/ If the US government had a comparable requirement, it might be relatively easy for US natural gas to compete in EU markets.
Once performance has been measured and compared against the standard, how is one bid chosen over another? Here are several interesting models. One is to recognize the multi-attribute nature of commodities and add CO2 intensity to an already complicated decision process. Another is to provide numerical ratings based on performance. A third option is to price the CO2 intensity and product quantity using the social cost of carbon and add that, notionally, to the cost-based bid and make awards on the &#;social&#; costs of the project. Similarly, the monetized reduction of CO2 emissions (relative to some standard) could be subtracted from a bid to reflect it's social cost, rather than only its private costs. Yet another way is to develop whole-building metrics and compare CO2 performance on that basis. A final option is to set minimum standards for carbon performance and limit further consideration to the set of bidders meeting those standards. For example, a government agency might require ENERGY STAR certification for cement and steel makers as a proxy for CO2 emissions, and then consider only ENERGY STAR&#;certified bidders for the specific material inputs.
The drivers are divided into market, industry, product and program characteristics.
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Suggested reading:Market characteristics. Government procurement doesn&#;t exist in a vacuum. It reacts with all the other market demand, which, together with the suppliers, determines prices. If government demand for a product is small relative to market size, it will have less effect on changing that market (e.g., the suite of products offered, their prices) than if it is a dominant player. Markets can be regional or even local, however, so what really matters is the size of a government&#;s demand in the associated national, regional, or local market for a particular product.
Cement probably has the most regionalized markets because the costs of transporting it are higher relative to its product value than for either steel or natural gas. This suggests that, other things equal, local and regional governments can be more dominant in cement than in the other two markets.
Industry characteristics. Industry characteristics that may affect the success of a GPP include the rate of innovation, the commitment to greening the industry, the degree of heterogeneity in the industry in terms of cost structures, and attitudes toward innovation and greening. The less heterogeneity, the more difficult and less useful it will be to single out certain plants or companies for procurement purposes. The heterogeneity in green cement can be seen in the analysis of EPDs across plants and countries, for example.
We have seen that the iron and steel sector is more homogeneous than cement in energy use and CO2 intensity. The natural gas sector is also likely to be relatively homogeneous.
Product characteristics. Product characteristics that affect GPP success include cost differences between green and traditional products (both real and perceived), the existence of performance standards and certification processes, the availability of computer programs and other tools to measure product performance, and uncertainties about performance of new, green technologies.
The links to GPP success are obvious for these characteristics: the larger the cost differences and the greater the uncertainties about products made with new technologies, the more difficult it will be to justify green procurements. And if standards, certification processes, and measurement protocols and tools don&#;t exist, they have to be developed&#;a costly and time-consuming process that may not garner industry support. Some tools and certification processes are ready to draw on, however. The ENERGY STAR tool is well developed for cement and a few steel products. Other tools are available in the Netherlands. And firms to help companies develop EPDs are operating around the world. For natural gas, measurement protocols are an active area of industry and regulatory engagement. So perhaps developing the basis for GPP is not a huge barrier.
As for differentials in the cost of producing green products, green gas may be less costly than green iron, steel, and cement (sectors where the low-hanging fruit has already been plucked). Markets for green natural gas are gaining momentum (Krupnick and Munnings ) relative to those for cement, iron, and steel, yet no procurement programs appear to be in the works for natural gas, even though iron, steel, and cement are covered in some GPP programs.
Program characteristics. Probably the most important driver for GPP success is the program itself: its design, funding, industry engagement, strength of legal justification, staff, and leadership commitment. As Hasanbeigi et al. () noted, the best programs have been found to reduce embodied CO2 in key commodities.
The goals of the program set its tone. Is the goal merely to increase transparency in reporting, or is it to have a measurable effect on GHGs from the natural gas, cement, and iron and steel sectors? Does the program emphasize innovation, which the academic literature confirms as a possible outcome, or is the focus more on rewarding good actors (the 25th percentile again) or improving performance but not necessarily through innovation? Does the program seek to bring down the costs of green products, or is the government willing to pay the cost differential?
How bids are evaluated is important. Is there monetization and subtraction from bids? Are index and point systems used and added to the multidimensional decision problem? Are minimum standards used (e.g., taking ENERGY STAR certification as a marker for a green product)? Adapting ENERGY STAR&#;s approach to cement and steel would be a quick way of undergirding a procurement program for green cement and steel. And are requirements adjusted for small projects and small businesses?
As noted above, programs that can provide bidders with tools to assess their and their suppliers&#; green performance will undoubtedly do better than those without such tools.
From an environmental perspective, continuous improvement in lowering GHG emissions is highly desirable if GHG goals are to be met. This implies that benchmarks for judging which products and manufacturers qualify for GPPs should be continually tightened.
The maturity of the program is obviously important, as noted above.
Where certification programs and standards do not exist, how will they be developed? EPA&#;s EPP program works closely with industry and other stakeholders to develop standards and tools for gauging sector performance. ENERGY STAR even awarded recognition to PCA for collaborating to develop standards and tools for certification. It is worth noting that voluntary standards developed by industry could potentially be applied to competing imports, eliminating this future competitive concern. More generally, such standards could result in global harmonization.
The jurisdictional level of a program may be critical as well. Is there any particular reason to favor development of federal versus state and local programs? Although policymaking for reducing GHGs is a proper role for the federal government because of the global nature of the pollutant, some states and localities have developed their own programs. This raises concerns about differing programs and conflicting requirements for firms that operate at more than one government level or in more than one regional market. It follows, then, that it would be better administratively if the federal government or the government of a major state (e.g., California) set the GPP template to be adopted by other governments. And GSA can develop multiple award schedules that local and state governments could use to simplify procurement.
If the federal government has a robust program for natural gas, cement, and iron and steel, who would administer it? GSA is already being encouraged to develop guidance for cement and steel, but DOD is the greater demander and EPA&#;s EPP and ENERGY STAR programs have the most experience. At the same time, congressional committees and legislation describe a future federal program administered by EPA with input from the Department of Energy and the National Institute for Standards and Technology.
To reduce GHG emissions from natural gas, cement, and iron and steel will require a combination of many types of policies&#;a carbon tax, tax credits, research and development programs, and others. Implementation of some of these would be a heavy lift. But green public procurement policies for these three sectors would establish the foundation for bigger and broader policy initiatives, such as tackling the performance measurement issues and developing certification protocols. This paper is therefore sanguine about the benefits GPP programs could have in ushering in more rapid decarbonization in these industries. Indeed, some governments already have functional, successful programs for cement and steel. Future US programs need to be designed with as much industry cooperation as is consistent with meeting decarbonization and other goals. Their progress should be watched closely and analyzed carefully so that green procurement can be a powerful a tool for arresting climate change.
With a change to the Biden administration, the federal government can again show leadership on green procurement and address fully the CO2e implications of government procurement programs. Both Executive orders and legislation can work in a complimentary way to advance these ideas. The federal funding to state road building projects is the most obvious way of providing harmonized, well thought out programs on the procurement of green cement (and possibly steel for bridges, cement reinforcement and the like). More broadly, such programs could set an example for states to follow. California's Buy Clean program can also be an example, as well as European programs. An Executive Order, for instance, could create an interagency task force to build on and to the appropriate degree harmonize all the green procurement programs across agencies for the key materials discussed in this paper.
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