United States: California Lawmakers Propose Legislation Requiring State To Consider Greenhouse Gas Emissions In Awarding Public Works Contracts

Asserting its position as the global leader in climate change policy, California Assembly members Rob Bonta (D-Oakland) and Susan Eggman (D-Stockton) have jointly introduced legislation that would require companies bidding on public works contracts that use certain building materials to report greenhouse gas (GHG) emissions generated through the manufacturing process of such materials. The State of California would, in turn, take the bidders' GHG emissions footprint into consideration using a yet-to-be-developed formula when reviewing and awarding bids.  

The State Contract Act and other existing laws generally require that the awarding department engage in a competitive bidding process whereby bids are awarded to the lowest responsible bidder. AB 262, however, would change the way in which awarding state departments—including the California public university systems—would determine lowest responsible bidders. To wit, if passed, AB 262 would require prospective bidders on public works projects—this could be almost anything from buildings to roads—to disclose GHG emissions generated by the manufacture of certain "eligible materials" to be used in the project. The "social cost" of the eligible materials would then be used to determine who the lowest responsible bidder was, using a formula to be established by the Secretary of Government Operations.

Under the bill, all prospective bidders on state projects using "eligible materials" will be required to disclose the cumulative amount of Scope 1, Scope 2, and Scope 3 GHG emissions generated in the manufacture of those materials in their bids via a standardized form. The bill defines "eligible materials" as "cement, flat glass, manufactured wool, or steel," as well as asphalt starting in 2021, but not aluminum, a common metal used in construction. For context, Scope 1 emissions are direct emissions, Scope 2 are all indirect emissions from consumption of purchased electricity, heat, or steam, and Scope 3 are all other indirect emissions.

The bill would then require the awarding department to use the GHG emissions information to calculate the lowest bid. In doing so, the portion of the bid on the base contract that represents the cost of the eligible materials will be adjusted to incorporate the "social cost" of those materials, pursuant to a formula to be established by the Secretary of Government Operations. The bill is unclear on precisely how the formula is to be calculated, but generally sets out a three-step process for the Secretary to follow in developing the formula to calculate "social cost": First, the Secretary is to consult with the State Air Resources Board to "quantify" the social cost for the emission of one unit of Scope 1, Scope 2, and Scope 3 greenhouse gases. Second, the Secretary is to develop a formula to quantify the emissions associated with transporting the eligible materials from the manufacturer to the project site whereby the fuels used or the miles transported are multiplied by a "standard emissions factor" for fuel type or distance traveled for the particular form of transportation used. Third, the per unit "social cost" is to be multiplied by the amount of GHGs that were emitted in the manufacture of the eligible materials as disclosed by the bidder on the standardized form.

According to the bill's findings and declarations, the bill is aimed at mitigating the "devastating global impacts" of climate change caused by greenhouse gas emissions. California, the bill posits, is in a position to "encourage" companies to reduce GHG emissions, because of the State's "extensive purchasing power." Notwithstanding the bill's stated environmental objectives, the undefined formula to be applied by state departments makes it relatively unclear as to whether and how the bill would, in fact, result in a reduction in GHG emissions.

Although not expressly stated, AB 262 also has an economic objective of making California companies, and in some cases US companies, more competitive for state contracts. Because the bill would impose a premium on eligible materials manufactured with less stringent environmental protocols and transported long distances to the project site, foreign bidders (or bidders that source eligible materials not made in California or in the United States) may be at a disadvantage if the bill takes effect.

Companies that manufacture construction materials, especially cement, flat glass, manufactured wool, steel, and asphalt stand to be among those most affected by the new requirements. There will be the new administrative requirements to provide information on the amount of GHG emissions generated by the manufacture of the eligible materials. For some companies, particularly those located in California, there may be greater opportunities to be competitive on state projects. For other companies, particularly those located a greater distance from California or that are not subject to similar environmental protocols, there may be new challenges to remain competitive. Of course, the State of California itself also must consider the financial implications of AB 262, as the cost of public works contracts may generally increase as a result of accommodating the more environmentally friendly manufacture and transportation of eligible materials.

The last day for the Legislature to pass AB 262 is September 8, 2017. The Governor would then need to either sign or veto the bill by October 15, 2017. Arnold & Porter Kaye Scholer's Legislative and Public Policy team in Sacramento, California is monitoring this legislation closely for political and policy developments, and its Environmental and Government Contracts teams will continue to assess the potential legal implications for clients as the bill makes its way through the legislative process. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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