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Californias small businesses barely affected by AB 32

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"Californias small businesses barely affected by AB 32"


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Report: Year’s worth of tortillas to cost mere pennies more

Study after study shows that AB 32, California’s landmark climate change law, will benefit the economy and help business.  A new report from The Brattle Group shows that AB 32 and a Renewable Energy Standard will have a minimal effect on most businesses while fostering innovation and investment in clean tech industries that will ultimately create more jobs.

PRNewswire has the story:.

The message of the report is clear: “we find that even making extreme assumptions about the range of possible energy price increases that might result from AB 32 the impact on a typical California small business remains negligible.” In fact, the potential cost impact of AB 32 was found to be well within the range of year-to-year variation in historic energy costs.  Inflation will cause far more significant price increases than meeting emissions targets and implementing a statewide Renewable Energy Standard or carbon trading system.

The Brattle study calculated the potential implications of emission reduction targets and an RES on energy prices on revenue streams and profit margins of small businesses.  This is an updated version of a report completed in 2009 that uses newly released energy price data to provide the most accurate projections under different scenarios.

AB 32′s Potential Effect on Energy Prices

On average, California’s 700,000+ small businesses (those generating maximum annual revenue of $7 million) are currently spending 1.4% of their revenues on energy. If AB 32 were suspended with the passage of Proposition 23 in November, the price of electricity, transportation fuel and natural gas are still expected to increase significantly between 2010 and 2020 due to inflation, scarcity and other factors.

Average electricity rates are expected to increase from 13.3 cents per kWh in 2008 to between 20.6 cents and 21.8 cents by 2020 (in nominal terms assuming 2.5% annual inflation), representing an increase of 55% to 64% without implementation of an RES.  By contrast, enforcement of the a 33% RES is predicted to result in an additional average rate increase of only 1.21 cents per kWh, or a 9% increase relative to 2008 rates. The effect of inflation and other “normal” market forces generate price increases that are five to six times as severe as the imposition of an RES.

Mercado International 2010: A Case Study

Brattle chose to examine Mercado International as a case study example precisely because its higher-than-average energy intensity to illustrate the negligible effects of AB 32 on small grocers and food vendors, a very competitive business sector with razor thin profit margins.  The case study showed that, “Even using pessimistic assumptions about energy price increases, the entire impact of AB 32 on the grocery store can be completely offset by retail price increases of, at most, 0.1 percent””so small as to be virtually unnoticeable to customers.”

Mercado International, located in Chula Vista, is a Mexican food and beverage store that sells meat, produce, and other products in addition to preparing specialty menu items. Average energy intensity for the food and beverage sector in California is 2.1% of revenue, slightly higher than the state average of 1.5%. Based on the study’s projections, Mercado’s energy costs will increase from 1.9% of revenues in 2009 to 2.7% in 2020, reflecting higher inflation in energy costs, in particular of gasoline and electricity, in the absence of AB 32. Implementation of AB 32 is projected to add an additional 0.08% to 2.67% according to the conservative case; and an additional 0.55% to 3.14% in the extreme case.

The store can easily recover these minor cost increases without alienating customers or sacrificing competitiveness because rival grocers will be equally affected by increasing energy prices. For example, Mercado currently sells a pound of tortillas for 59 cents; customers who buy a pound each week will spend roughly $30 per year. Mercado can recover the additional energy costs created by AB 32 by charging customers an additional 3 cents per year. This tiny price increase pales in comparison to the effect of inflation. A typical increase in inflation of 2 percent per year would add $6.57 to the customer’s annual $30 tortilla expenses between 2010 and 2020.

The Bottom Line

Contrary to the gloom and doom forecasts touted by the oil companies that support Proposition 23, The Brattle Group finds that AB 32 will increase electricity rates by a mere 2.46 cents per kWh (11.9%) by 2020. Price increases resulting from these policies will only be between 1 to 5 cents in a given year, an increase that will go unnoticed to consumers. Even under the extreme scenario, the potential cost impact of AB 32 is well within the range of year-to-year variation in historic energy costs.

Opponents of AB 32 (mostly state oil companies) claim that AB 32 will cause irreparable economic damage that will plunge California into a deeper recession with skyrocketing unemployment.  Proposition 23, dubbed by its creators as the California Jobs Initiative, will effectively kill AB 32 by preventing its’ mandates from taking effect until statewide unemployment rates drop to 5.5% for four consecutive quarters.  This has only happened four times in the past 30+ years and current unemployment rates are hovering around 12 percent.

Economists and business leaders agree that clean tech investments will power economic growth in the 21st century.  California’s landmark climate legislation serves as a guiding light for the rest of the nation (unless you are a wealthy oil tycoon trying to protect your market share). AB 32 will lay the framework for the creation of vibrant new industries that will solidify California’s place as a leader in the global economy.

Here are five things you can do to win this fight:

  1. Visit the “No on 23″³ website, learn the facts & sign up:  www.StopDirtyEnergyProp.com.
  2. Educate yourself on how California’s climate & energy laws have created companies & jobs:  www.CABrightSpot.com.
  3. Tell your friends by email, on Facebook, at work, & everywhere else.
  4. Participate in the debate. Write letters to the editor and post comments on blogs & websites.
  5. Contribute (click here). The other side’s leader, right-wing California Assemblyman Dan Logue, has publicly said he expects the oil companies to spend $50 million.


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2 Responses to Californias small businesses barely affected by AB 32

  1. Meanwhile, as Rick Piltz points out, Climate Change could slip down the education agenda in California:

    California’s new state-issued energy textbook avoids climate change, puts coal on par with solar and wind

  2. Jim Groom says:

    The major driver of Prop 23 is the idea that AB32 can’t be put into effect until a full year goes by with California unemployment at a rate of 5.5% or less. Why such a number you might ask? If choosing that number seems capricious, arbitrary and dishonest–it is. If you look at the history of unemployment in California the reasoning becomes clear–sort of.

    Since 1967, the last 43 years, the total number of years at 5.5 or less is 11. Less than 26% of those years could AB32 be applied. Since 1976, 34 years, there have been 8 when 5.5 was achieved and 6 at 9% or above. The average from 1976-2008 has been 6.96%. I’ve left out 2009 and the current year or the figures would have been much worse.

    The chance of our reaching 5.5% again anytime in the foreseeable future are slim, next to none and the money men of Prop 23 are well aware of that fact. The fact that 91% of the funding for Prop 23 comes from out of state is very telling indeed.

    As a side note during the period of 1967-2009 there have only been a handful of times when unemployment in California has been less than the country at large. Not surprising considering the size and nature of California’s make up.

    Recent polls indicate that at this time the public is not falling for the ‘job-killer’ nonsense being pushed by the Prop 23 people. However, one can never tell what the voters will do in the booth. We can always hope they do the right thing. As Churchill said so many years ago..’You can always depend upon the American people to do the right thing, after they have tried everything else.’ Thanks Winston.