How will greenhouse gas caps affect California business? The answer might surprise you.

Despite loud complaints from the right that environmental regulations cost small businesses more than they can afford, new research shows that efficiency can lead to savings.

Jurgen Weiss and Mark Sarro of the Brattle Group have just released New Research investigating how California's nascent efforts at reducing its greenhouse gas emissions (AB32) will affect small business. They have produced an excellent case study. For a single grocery store located in Chula Vista, they investigate how each of the following will affect this small firm. They are optimistic that AB32 will not impose serious costs on such small firms.

The proposed policies for reaching the 2020 emissions target include:

• Renewable energy standards
• A requirement to lower global warming emissions from transportation fuels
• Stricter efficiency standards for buildings, appliances, and vehicles
• A carbon cap and pricing program that would limit emissions from the state’s largest global warming pollution sources

In the name of full disclosure, I should state that I am a Senior Advisor at Brattle.

What I really like about the Weiss and Sarro study is how it is data driven. They got down and dirty in collecting unique firm level data. Such microeconomic detail is what has been missing in the "macro" AB32 Economic Scoping plan documents produced by the CGE scholars.

To quote the authors;
"In making financial projections for Mercado, we used the business’s financial records from 2007 to 2010 and publicly available data on energy prices and other relevant factors. We assumed that Mercado would invest in three costeffective efficiency upgrades financed through zero-percent interest loans or “on-bill financing” through the store’s electric utility (with no up-front cost to the owner). All these upgrades would pay for themselves in less than five years .

The upgrades would cover:

• General lighting
• Cooler and freezer lighting, fans, and monitoring equipment
• Refrigeration (including three walk-in coolers, a walkin freezer, and three 40-foot glass-front display cases)"

I really like how the authors are delving into the nitty gritty of how real firms confronted with a new regulatory challenge will re-optimize and search for new strategies to adapt to the new rules. The net effect of this re-optimization and taking a hard look at the firm's business practices will be that the firm will face lower costs of compliance and in fact may discover some cost savings that they were not aware of. I admit that I'm weary of this Porter Hypothesis but this is an experiment that we need to run.

The California Air Resources Board should think about how to commission similar research such as this study for a wide range of California firms. A key point in my original critique of the AB32 Economic Scoping Plan was that it ignored heterogeneity and uncertainty. California's firms differ along a number of dimensions.

Even firms in the same industry differ with respect to their capital stock and the skills of their managers in being nimble and able to respond to new regulatory challenges. AB32 does introduce uncertainty. How will managers of different firms respond? This Brattle Case Study highlights how to do this research and we need to see more of it.

I support AB32. This type of microeconometric research raises my confidence that while this regulation will not be a "free lunch" that California businesses will be able to thrive and continue to prosper as we decarbonize this state's economy.

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