Spring 2010
By Erin Rogers
In 2006, California passed into law Assembly Bill (AB) 32, the Global Warming Solutions Act, which requires the state to reduce its heat-trapping emissions approximately 12 percent below current levels by 2020. The state is currently designing a mix of policies to reach this target, including: a renewable electricity standard that requires utilities to expand their supplies of clean power; a reduction of global warming pollution from vehicles and transportation fuels; higher energy efficiency standards; and a cap-and-trade program that would limit emissions from power plants and other industries.
| In this issue of Catalyst:
> Securing the Skies |
Several economic studies have shown that California's economy will benefit from AB 32. However, in an effort to stop these policies from taking effect in 2012, many of the state's large polluters and their lobbyists claim that emissions reduction policies will harm California's more than 700,000 small businesses. To provide some clarity in this debate, UCS commissioned The Economic Impact of AB 32 on California Small Businesses, a first-of-its kind, peer-reviewed economic analysis.
Working with independent consulting firm The Brattle Group, we found that even if California's small businesses do nothing to decrease their energy use between now and 2020, they are likely to experience only a small and manageable impact from emissions reduction policies, while also reaping the benefits of new technologies and jobs created by a low-carbon economy.
Low Cost, High Returns
For the analysis, the Brattle Group reviewed empirical data on the energy intensity (i.e., the percentage of revenue spent on heating, electricity, and transportation fuel) of hundreds of types of small businesses. One of the most surprising findings to emerge from the data is that the average small business in California spends only 1.4 percent of its revenue on energy-related costs. Since most of these businesses do not emit enough pollution to be directly regulated by AB 32, they will only be affected by the policies listed above indirectly (to the extent that energy prices change as a result of AB 32). The analysis therefore concludes that California's global warming policies will only increase the amount its small businesses must spend on energy to 1.7 percent of total revenue—an increase of a mere 0.3 percentage points—in 2020.
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Border Grill: A Case Study The only extra heat this restaurant wants is in its spicy entrees. Border Grill, a Mexican restaurant in Santa Monica owned by chefs Mary Sue Milliken and Susan Feniger, has been in operation for nearly 20 years and currently employs 79 people. Because it relies on gas flames for cooking and lots of electricity for refrigeration, lighting, and air conditioning, the restaurant uses more energy than the typical small business. This, along with the fact that restaurants and bars account for the largest share of employment in any small-business category (10 percent of the statewide total), made Border Grill a good case study for the analysis of AB 32's economic impact on California's small businesses. Milliken and Feniger generously provided us with detailed information on the restaurant's equipment, lighting, energy use and costs, and financial performance over the past five years. The Brattle Group developed a 10-year cash-flow projection based on these data, factoring in projected energy price increases resulting from AB 32. Assuming that Border Grill would pass on to its customers any incremental changes in its energy costs due to AB 32, the cost of a typical dinner would only rise about 0.1 percent by 2020—or less than three cents for every $20 spent. That pales in comparison to the effect of inflation over 10 years: a typical increase of 2 percent per year would add $4.38 to a $20 bill. "Such a minuscule increase, even if noticed, would not cause our customers any heartburn," Milliken and Feniger said in a joint response to the findings. "We're known as the 'Too Hot Tamales' [from their television series of the same name] and we're worried about a Too Hot Future. Our customers are just as worried as we are, and would be more than willing to pay an extra three cents to help avoid the most catastrophic impacts of global warming." |
This estimate is actually quite conservative because the report does not factor in the full range of cost savings that small businesses could see after investing in energy efficiency. For example, by replacing older appliances and heating equipment with newer, highly efficient Energy Star-rated models, using compact fluorescent and LED lighting instead of incandescent bulbs, or improving insulation, most businesses could lower their energy use significantly and offset the small increases in energy costs stemming from AB 32.
Furthermore, the 0.3 percentage-point increase in energy-related expenses we project for small businesses (assuming they make no investment in energy efficiency) pales in comparison to the effect of inflation. For a specific example of the significant difference in impact that AB 32 and inflation would have on a California small business over the next 10 years, see the sidebar.
The 0.3 percentage-point increase also falls well within the range of historic cost variation most small businesses face every day regardless of climate policies. The analysis found that the likely increases in electricity, gas, and transportation fuel costs due to AB 32 would be lower than recent increases caused by factors wholly unrelated to environmental regulations. In addition, these higher energy prices will have only a modest impact on the cost of products used by small businesses (e.g., food, supplies, services).
An Investment in a Lower-Carbon Future
If global warming is allowed to continue unchecked, its harmful impacts are expected to cost the United States hundreds of billions of dollars by the end of the century. Many businesses—including those in the recreation, tourism, agriculture, real estate, and forestry sectors—could suffer severe financial damage (in California and other states as well).
Conversely, policies aimed at cutting global warming pollution can benefit businesses by acting as an economic driver, creating jobs and new industries, attracting venture capital and other sources of funding, and making businesses more efficient and more competitive. Implementing policies such as AB 32 is therefore a win-win-win for businesses, consumers, and the environment.
Erin Rogers is the Western Region climate program manager at UCS.
Photos: © iStockphoto.com (L.A. skyline, office workers, mechanic); © Fran Gealer (Milliken/Feniger)
