(August 12, 2009) Implementing the AB 32 climate change law will cost California small businesses $49,691 per year, significantly more than estimates by the California Air Resources Board (ARB), according to a recent study.

The analysis of the state scoping plan for implementing AB 32 was led by Sanjay Varshney, dean of the College of Business Administration, California State University, Sacramento (CSUS), and Dennis H. Tootelian, Ph.D., professor of marketing and director, CSUS Center for Small Business.

The study focuses on the costs to be incurred by consumers in five areas: housing, transportation, natural gas, electricity and food. Using three scenarios to measure the economic costs, the authors found that the potential loss of output, jobs, indirect business taxes and labor income is substantial and significant.

While the ultimate goals of AB 32 are not in question, the findings of this study suggest that the costs associated with implementing the AB 32 scoping plan will have significant adverse impacts on California’s economy, consumers and small businesses.

Cost to Consumers, Business

The Varshney-Tootelian study concludes that when the scoping plan is fully implemented:

• California families will be facing increased annual costs of $3,857 and consumers will be forced to cut discretionary spending by 26.2 percent in order to cope with the increased costs generated by the scoping plan.
• The average annual loss in gross state output from small businesses alone would be $182.6 billion, approximately a 10 percent loss in total gross state output. This will translate into nearly 1.1 million lost jobs in California. Lost labor income is estimated to be $76.8 billion, with nearly $5.8 billion lost in indirect taxes. The decline in revenues will have a severe impact on future state budgets, the authors said.

The study pointed out that small businesses drive the economic engine in California. They comprise 99.2 percent of all employer firms and 99.7 percent of all firms, account for more than half the employment, more than 90 percent of net new job creation, and 75 percent of the creation of gross state output. Therefore, the authors believe that costs borne by small businesses due to the implementation of AB 32 must be carefully evaluated for a full understanding of the significance and impact of those costs on the state and residents.

An adverse impact on small business is bound to have an adverse impact on the production of goods and services in California, the risk tolerance of entrepreneurs and investors, the productivity of labor, the quality of life, and the overall well-being of the state and its citizens, the report found.

The study’s cost analysis was based on the ARB’s own findings, which revealed significant cost increases. The study’s findings are consistent with the Peer Review analysis commissioned by the ARB, the Legislative Analyst’s Office review of the scoping plan and an analysis conducted by the Los Angeles Economic Development Corporation. These independent analyses concluded that the cost of the AB 32 scoping plan would be significant, and that the ARB had significantly underestimated these costs.

Staff Contact: Robert Callahan