A new report released today by the Union of Concerned Scientists suggests that fears about a negative impact on small businesses from a carbon cap have been largely overblown.
The report focuses on the likely impacts of California’s Global Warming Solution Act (AB 32), but it holds lessons for federal climate legislation as well.
Since passing in 2006, California’s Global Warming Solution Act (the state’s answer to a lack of federal climate legislation) has sparked concerns over its impact on the cost of doing business in California, particularly its effect on small businesses, which are less equipped to handle sudden increases in their costs.
The new study, conducted for the UCS by economics consulting firm The Brattle Group, used conservative estimates of the legislation’s costs, in some cases overestimating them to create a worst-case scenario. As it turns out, the worst-case wouldn’t be so bad.
“First, most small businesses will not be directly regulated under AB 32," the Brattle Group found. "They will not be required to make emissions cuts or to buy allowances or pay fees to cover their emissions. AB 32 will affect small businesses only indirectly, through increases in energy costs."
This is true of currently proposed federal climate legislation as well.
Since most small businesses in California are not energy-intensive, energy-related costs represent only a small fraction of total revenue, the authors note. In fact, they found that the average small business in California spends less than 1.5% of its revenues on energy-related costs.
“Any increase in the price of energy (electricity, natural gas and transportation fuels) will have only a modest financial impact,” the report, "The Cost of Doing Business with a Cap on Carbon," concludes.
This also holds true for the potential impacts of federal climate legislation. A 2006 study conducted by the U.S. Energy Information Administration estimated that increased energy costs would increase the consumer price index by just 0.005% per year over 10 years.
Moreover, the Brattle Group researchers suggest that the projected energy increases related to climate legislation, even when looking at a worst-case scenario, are lower than recent increases in the same rates caused by factors wholly unrelated to environmental regulations.
“Small businesses routinely deal with price increases of similar, and larger, magnitudes,” the report points out.
In order to keep their estimates as conservative as possible, the report’s authors did not account for businesses that would take steps to reduce their energy consumption if prices increased or for the fact that most businesses would likely pass any increase in their costs on to their consumers.
In addition to its statistical models, which used data gathered from across sectors around the state, The Brattle Group also deliberately chose a labor- and energy-intensive business for a case study: a Mexican restaurant in Los Angeles called The Border Grill.
Assuming that the restaurant will take moderate steps to reduce its energy consumption (replacing refrigerators that are 10 or more years old with new more efficient models, swapping incandescent bulbs for compact fluorescents), the researchers found that, even when overestimating energy price increases, the potential cost impact of AB32 on the restaurant would be well within the range of year-to-year variation in the Border Grill’s historic energy costs.
For the California economy overall, the researchers found the direct impact of AB 32 would be, at most, a cost increase of less than 2 percent. Moreover, that 2 percent increase occurs over a 10-year period, resulting in five times less than the normal year-to-year variability in inflation.
The cost of doing nothing, on the other hand, has been estimated at tens of billions of dollars annually.
So, it seems the alarm over the effect of climate legislation on small businesses has been unwarranted. What is less certain is whether that legislation will have the effect on greenhouse gas emissions needed to curb climate change, but the next couple of weeks should help to shed some light on that subject.