Climate change could soon be priced into everything the federal government buys, from cement to power to office space.
The Biden administration’s upcoming changes to federal acquisition regulations aim to shrink the U.S. government’s carbon footprint. But they may also prompt companies to reduce emissions from their own operations and from suppliers as they vie for a share of the hundreds of billions of dollars in government contracts Washington doles out each year.
It’s a market signal that could be felt worldwide, experts say.
“When you consider the purchasing power of the federal government, it has the potential to radically shape supply chains globally,” said Nicole Darnall, a professor at Arizona State University and the director of the Sustainable Purchasing Research Initiative. “While the primary source of those contracts is going to be a U.S. company, they’re sourcing their product inputs from all over the world.”
President Joe Biden signaled his intent early on in his term to use the federal government’s status as the world’s biggest purchaser as a tool to combat climate change. But his May 2021 executive order on “climate-related financial risks” was overshadowed by other priorities, like last year’s successful quest to enact a climate bill and EPA’s coming regulatory assault on carbon emissions.
Biden’s executive order tasked the General Services Administration, the Department of Defense and NASA to amend federal acquisition regulation, or FAR, to highlight the climate performance of would-be contractors.
The plan is a one-two punch for climate procurement. The administration has already proposed a rule that would require larger federal suppliers to publicly disclose their emissions and climate-related financial risks, and to set reduction targets. That will be followed this spring by a rule “requiring the social cost of greenhouse gas emissions to be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.”
The three agencies, which make up what is known as the FAR Council, have already done their homework for the first requirement.
Last November — as top Biden officials were at the U.N. climate summit in Egypt — the council proposed a tweak to procurement regulations. The updated rule would require contractors that receive at least $7.5 million from the federal government to inventory and disclose greenhouse gas emissions from their own operations and from the energy they use — known as Scope 1 and 2 emissions.
The same rule would create additional requirements for companies with contracts totaling $50 million or more. Those “major” contractors would have to tally and report emissions from their suppliers, known as Scope 3 emissions. The proposed rule would also require them to develop net-zero emissions goals that align with the temperature goals of the Paris Agreement, and to get those goals validated by a voluntary scientific integrity body known as the Science-Based Targets initiative.
The proposal has much in common with a Securities and Exchange Commission draft rule for securities, which would force companies to calculate and disclose their climate-related costs (Climatewire, Feb. 6). And like the SEC rule, the procurement proposal is controversial. The law firm DLA Piper LLC analyzed more than 250 public comments submitted through January on the rule and found that most sought tweaks to the rule or opposed it outright.
Iowa Sen. Joni Ernst, the top Republican on the Senate Small Business and Entrepreneurship Committee, said the rule could burden small businesses that lack the staffing and analytic capabilities to inventory and report their emissions. Those firms may be forced to hire consultants and pass those costs on to the taxpayer, she argued in a letter to the FAR Council.
“This proposed rule amounts to little more than additional cost and red tape for small contractors and will almost certainly result in the loss of these valuable companies from the federal marketplace,” Ernst wrote.
The National Association of Manufacturers objected to the involvement of the Science-Based Targets initiative. Known as SBTi, it is a project of the United Nations Global Compact, a voluntary initiative to support sustainable business practices, and the nonprofits CDP, the World Resources Institute and the World Wide Fund for Nature.
By requiring “major” contractors to have their emissions goals validated by SBTi, the proposal “’entrusts the entire regulatory scheme’ to non-governmental entities, an unlawful delegation of federal authority,” NAM said in comments to the FAR Council.
In a letter to the FAR Council last week, GOP members of the House Science, Space and Technology Committee noted that SBTi doesn’t currently validate goals for oil and gas companies — a fact they argued would be a barrier to their receiving contracts (E&E Daily, March 15).
A pivot to mandates
The administration is still planning its most significant amendment to procurement rules — one that would give lower-emission suppliers a leg up in competing for contracts.
In May, it plans to release a proposal to ensure agencies’ major purchases “minimize the risk of climate change” and require agencies to consider the social cost of greenhouse gas emissions in major procurement decisions, according to the administration’s regulatory agenda.
That’s something new. While the Obama administration considered climate disclosures, the government has never formally weighed climate performance in awarding contracts.
“What they tried to do here is build the foundation on assessment, disclosure and targeting, and then follow up with, in effect, ‘How do we turn that into procurement decisions?’” said Steven Schooner, a procurement official in the Clinton White House who now teaches at George Washington University Law School.
Schooner said he disagreed with that sequencing, which all but ensures that greenhouse gas emissions won’t be a factor in contracts at least until 2025 — after Biden’s first term has ended. Disclosure on its own has never been an effective motivator for change, he said.
November’s proposal, which will be final by early 2024, is mum on how contractor emissions data would be used in awarding contracts.
“It’s binary,” Schooner said. “Everybody has to disclose, but I can disclose that I’m an extractive firm that kills babies.”
Questions still abound about how the FAR Council will propose to factor carbon performance in to contracting decisions. Experts say the May proposal is likely to offer several options for an eventual rule, including for the scope of emissions covered and how climate performance metrics would be weighed against other purchasing priorities like price, quality, past performance, and boosting minority-owned or small businesses.
Senate Budget Chair Sheldon Whitehouse (D-R.I.) believes the use of the social cost of greenhouse gases could amplify the effect of the final rule. The metric puts a price on the economic damage of planet-warming emissions. EPA has proposed a $190 per ton value for carbon, up from the $51 per ton that the Biden administration has used to date. While greenhouse gas metrics haven’t historically driven policy, Whitehouse said government spending could be an exception (Climatewire, March 9).
“If you plug the social cost of carbon into procurement … you engage the government’s immense purchasing power to decarbonize steel, cement, asphalt, vehicles, and so much more,” Whitehouse told E&E News by email.
GSA, which is the nation’s largest real estate entity and a clearinghouse for federal contracts, is already giving information technology contractors a leg up on contracts when they voluntarily disclose their carbon emissions and those of their suppliers on their own or a third-party website.
A policy GSA adopted in January for governmentwide IT contracts offers would-be suppliers “points” for disclosing emissions. Some government contracts — though not all — are awarded via a points system, with companies earning points for factors like relevant experience and good performance on past contracts.
The GSA policy offers 3,500 points for emission disclosures, out of the 94,700 maximum available. The 60 suppliers with the highest number of points overall will receive the contracts.
“Although receiving roughly 4 percent of available points for disclosure of greenhouse gas emissions may not seem like a massive advantage, it is important, especially when a company is competing against potentially hundreds of offerors for a maximum of 60 awards,” said Tom Daley, an attorney at DLA Piper who specializes in contracting issues.
It’s the same amount of points companies receive for having a top-secret security clearance, for example.
But some experts have reservations about the use of government purchasing to tackle emissions.
Steven Rose, a principal research economist at the Electric Power Research Institute, argued that basing procurement on carbon emissions is not an efficient way to drive decarbonization.
Commodities that would be covered by the FAR policies — from vehicles to power to steel — are likely to be covered by other policies that carry a de facto carbon price at the production stage, he said. Everything from state renewable energy policies to Energy Department efficiency standards to greenhouse gas rules give lower-carbon technology an advantage, he said.
A procurement policy that penalizes carbon-intensive goods would amount to “double-pricing,” he said, and would pile on costs without achieving additional reductions.
The FAR Council’s climate disclosure proposal could face legal pushback.
Attorneys general for 22 states led by Kentucky and West Virginia filed comments to the proposal’s docket warning that “purchasing power is not a substitute for statutory authority.”
The attorneys general argued the Biden administration’s bid to use the Federal Property and Administrative Services Act to combat climate change would meet the same fate as its Covid-19 vaccine mandate for federal contractors, which cited the same procurement law. A federal appeals court in January upheld an earlier decision blocking the vaccine mandate from taking effect in three states, finding that the Biden administration “ignored the limits inherent” in the law.
Other commenters on the proposal pushed back on the provision to make the largest contractors provide detailed information about their suppliers’ emissions. Ernst noted in her letter that those emissions are outside of the contractor’s ownership and control, forcing them to require subcontractors and suppliers to perform detailed emissions analyses as well.
Sarah O’Brien, CEO of Sustainable Purchasing Leadership Council, agreed that quantifying supply chain emissions is complex — though she said the Greenhouse Gas Protocol, which sets widely used greenhouse gas accounting standards, is working to make it easier.
But most U.S. contractors, she said, have more emissions embodied in the components they buy or the services they use than in their own operations.
A policy that excludes carbon emitted upstream and downstream of a contractor would have limited effect, she said, and would blunt the impact of stronger policies that are being adopted by top private-sector purchasers like Microsoft Corp.
“When purchasers of that size and scale take clear and aligned action, then that’s transformative for markets, because then it’s a clear signal that ‘OK, there is a lot of business resting on this, I guess it makes it worth it to engage in these efforts,'” she said.
Darnall, the ASU professor, cited a CDP analysis showing that companies’ products and purchase decisions account for 40 percent of the world’s greenhouse gases.
She said the FAR proposals would catch the U.S. government up to sustainable procurement trends that have already taken root abroad, at the state and municipal level, and with certain large corporations.
“I think the irony is that the train has left the station, and for these larger companies that want to do business in other parts of the world, the requirements are already there,” she said.