Being green is not easy, but is it costly? Our recent paper attempts to answer this question for the U.S. federal government. The federal government is the largest consumer in the world, spending more than $650 billion buying products and services from firms in the private sector each year. Government contracts are considered green if the contract contains a sustainability clause, which is public information available in the federal procurement data system, FPDS.gov. We estimate that a green contract is typically 20% more expensive than a similar regular contract (a contract for an identical product or service but without any green requirements).
Procurement by the U.S. federal government provides an ideal setting for an empirical analysis of the cost of being green. The federal government faces a green mandate, and it is relatively easy to observe which products are green. Our sample consists of 4,991,844 competitive contracts from 2001 to June 2020, amounting to $164.5 billion. Of those contracts, 1.26% (4.6% if dollar-weighted) contain at least one sustainable clause.
We investigate the relation between the green contract requirements and the price of a federal government contract. Our main outcome variable is the competitively-determined price that is initially agreed upon between the government and the contractor. Our main independent variable of interest captures whether a contract has one or more of the following five clauses that indicate a green requirement: bio-based, energy efficient, environmentally preferable, FAR 52.223-4, or FAR 52.223-9. The results suggest that imposing green requirements increase the cost of contracts by 20 to 32%.
Perhaps, green contract requirements spur positive externalities? In fact, one of the goals of green government contracting is to stimulate growth in jobs associated with green products, services, and technologies as stated in the recent Executive Order, “Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability”:
In responding to this [climate] crisis, [the US] has a once-in-a-generation economic opportunity to create and sustain jobs, including well-paying union jobs; [..] This order will require bold action to transform Federal procurement and operations and secure a transition to clean, zero-emission technologies.
Unfortunately, our results suggest the contracts fail at this objective. The higher cost of green contracts does not lead to an increase in employment at the contracting firms.
Moreover, we find that the green contracts are generally of worse quality. They have more modifications, greater cost and time overruns, and are more likely to be cancelled. We document that green requirements in contracts do not appear to reduce a number of bids per contract, a possible explanation for the higher prices and lower contract quality.
Green contracts do spur green innovation, but at a high cost. Doing a back of the envelope calculation, we estimate that the cost per patent is $85 million. From a public policy perspective, our analysis calls into question the cost-benefit analysis of the government leading the green revolution.
While going green is a noble cause, it is important to document its costs. All else being equal, all contracts should be green. The problem is that all else is not equal. We document that being green incurs large direct costs and produces little in observable positive externalities. Whether taxpayers should be footing the bill for such activities deserves an honest discussion based on the findings we outline in this paper.
Jonathan Brogaard is the Kendall D. Garff Chaired Professor in the Finance department at University of Utah’s David Eccles School of Business.
Nataliya Gerasimova is an Associate Professor in the Finance department at BI Norwegian Business School.
Daniel Kim is an Assistant Professor in the Finance department at BI Norwegian Business School
Maximilian Rohrer is an Assistant Professor in the Finance department at Norwegian School of Economics.
This post is adapted from their post, “It’s Not Easy Being Green,” available on SSRN.
