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AB 32 emissions law will have minimal economic effect on small businesses, report says

December 9, 2009 | 10:00 pm

A new report suggests that AB 32, the law signed in 2006 to reduce California’s greenhouse gas emissions, will have a minimal economic effect on the state’s small businesses.

Even when regulations connected to the law are developed and enforced, the effect on small businesses will still be more manageable than historic fluctuations in prices, according to a study to be released by the Union of Concerned Scientists.

AB 32 mandates that California reduce its emissions to 1990 levels by 2020, and then attempt an 80% drop from 1990 levels by 2050.

The report, which will be released tomorrow at a panel hosted by the Sustainable Business Council of Los Angeles, looked into how the legislation would affect small businesses in both conservative and extreme cases.

But most small businesses will not be directly regulated under AB 32 and will not need to cut their emissions or pay fees for them, according to the economics and finance consultancy the Brattle Group, which conducted the study.

Instead, they will most likely be affected indirectly as the law causes energy costs to rise. But according to the study, energy costs account for less than 2% of revenue for 74% of the state’s small businesses.

Even if food, supplies and services also become more expensive as a result of AB 32, and even if business owners do not take advantage of eco-incentives or energy efficiency tactics, the effect will be modest, the report says.

After all, most of the costs will hit upstream, at electricity producers, natural gas suppliers, oil refineries and others. Any extra expense that filters down to small businesses will likely be passed on to their customers. All competitors would be dealing with the same increases.

The overall effect of the legislation on the average price level in the California economy over a 10-year period would be at most a 0.1% increase in conservative cases and 2% in extreme cases, according to the report.

The Brattle Group also conducted a case study involving Border Grill, an upscale Mexican restaurant in Santa Monica that has operated for two decades.

Restaurants employ more people than any other small business and tend to have higher energy-related costs. Border Grill has 79 employees and siphons 2.8% of its revenue -- under $7 million annually -- off to energy costs.

The conservative conclusion assumed that after AB 32 goes into effect, the restaurant would invest in energy-efficiency measures such as replacing incandescent lighting with energy-efficient bulbs as well as the nine refrigerators that are more than a decade old.

But even then, the energy-related cost after 10 years would eat up only 1.8% of annual revenue, compared with 1.6% currently. Any price increases caused by the legislation would involve an extra 7 cents on an average $51 dinner bill, making them nearly unnoticeable to customers.

In an extreme case, where the restaurant made no energy efficiency upgrades and swallowed the price increases without passing them on to customers, the energy-related costs would rise only to 2.2% of annual revenue.

Even then, the study said, Border Grill could manage the changes and continue to generate a healthy profit.

-- Tiffany Hsu