Experts Discredit Small Business Studies

In July 2009, consultants Sanjay Varshney and Dennis Tootelian released a report evaluating the costs of AB 32. The
report, “Costs of AB 32 on California Small Businesses,” was commissioned by the California Small Business
Roundtable, a group of 40 California business owners. The report concluded that AB 32 will impose high costs on
businesses. The authors estimated that the total cost of AB 32 will be $49,691 per small business in California, and the
annual cost per household will be $3,857.

In September 2009, another Varshney and Tootelian (VT) report, “Cost of State Regulations on California Small
Businesses,” was released. This report, commissioned by the State of California, was the result of a 2006 law requiring
an assessment of the impacts of state regulations on small businesses. The study found that the total cost of
regulation to the State of California is $493 billion, which is almost a third of the State’s gross product. In addition, the
study claimed that the cost of regulation results in an employment loss of 3.8 million jobs, one tenth of the State’s
population.

Following the release of each study, economists and business advocates have roundly rejected the authors’
methodologies and conclusions.

“Both of the two studies… have major problems involving both data, methodology, and analysis. As a
result of these shortcomings, we believe that their principal findings are unreliable.”

“Our review of [the VT study on the cost of AB 32] indicates that it contains a number of serious
shortcomings that render its estimates of the economic effects of AB 32’s proposed implementation
through the [Scoping Plan] highly unreliable.”

“Our review of [the VT study on the cost of state regulations] indicates that it contains a number of
serious shortcomings that render its estimates of the annual economic costs of state regulations
essentially useless.”
- MAC TAYLOR, LEGISLATIVE ANALYST, LEGISLATIVE ANALYST’S OFFICE i

“…these consultants’ cost estimates are fatally flawed and vastly over-state the expected costs of AB
32.”

“The [VT] report does not include ANY of the potential savings from implementing AB 32.”

“…the VT study ignores the salient fact that any expenditures that California households make to
comply with new AB 32 regulation will create new opportunities for California businesses… VT ignores this
fact and appears to implicitly assume that each household takes $3,857 each and throws this amount
into the Pacific Ocean but this defies the basic logic of how a free market operates.”

- DR. MATTHEW E. KAHN, PROFESSOR OF ECONOMICS & PUBLIC POLICY, UCLA ii

“The report’s findings are derived from a deeply flawed analysis that disregards even the most basic
principles of sound economic research. None of the report’s findings hold up under scrutiny and, as
such, they should not be cited or used to inform policy debates. The only useful purpose this report
serves is as an important reminder that just because a study appears on the surface to have the
elements of economic research does not mean that it actually follows sound methodology and results
in reasonable findings.”

- CALIFORNIA BUDGET PROJECT iii

(over)
“Examination of the Varshney/Tootelian analysis leads to the conclusions that their estimates are highly
biased, are based on poor logic and unsound economic analysis, and are likely to be too large by a
factor of at least 10.”

- DR. JAMES SWEENEY, PROFESSOR OF MANAGEMENT SCIENCE AND ENGINEERING AND

DIRECTOR OF THE PRECOURT ENERGY EFFICIENCY CENTER, STANFORD UNIVERSITY iv

“While it is critical that the interests of California’s small businesses are prioritized as the state moves to
reduce our dependence on fossil fuels and promote a clean energy future, flawed studies such as that
released by [California Small Business Roundtable], do not help to protect our interests. The study
completely ignores the well-known economic benefits of energy efficiency, assumes California – the
land of innovation – will never innovate, and arrives at unfounded conclusions that undermine its
credibility.”

- SCOTT HAUGE, PRESIDENT & FOUNDER, SMALL BUSINESS CALIFORNIAv

“Both studies are unsound and unreliable economic analysis. The losses they project would be serious
economic impacts – if they were real. They are, however, entirely unreal; they should be viewed merely
as daydreams of disaster.”

- DR. FRANK ACKERMAN, STOCKHOLM ENVIRONMENTAL INSTITUTE & TUFTS UNIVERSITY vi

“The results of Varshney and Tootelian are inconsistent with [other economic analyses of AB 32]as well as
with the bulk of the economic literature, which suggests that the overall macroeconomic effects of
climate policy will be relatively modest.”

- DR. CHRIS BUSCH, ECONOMIST, CENTER FOR RESOURCE SOLUTIONS vii

“A new study… estimates that the burden on California’s economy resulting from state regulations
amounts to a shocking $500 billion – nearly one-third of the state’s output. Disturbingly, this result is based
on one of the worst examples of schlock science we’ve ever seen.”

“The illogical results are abundantly clear elsewhere in the report. For example, the results for two of the
other measures - the cost of doing business and the quality of the labor force - imply that California
could increase its economic output by reducing the quality of its labor force and increasing the cost of
doing business in the state. This seems absurd.”

- CHRISTOPHER THORNBERG AND JON HAVEMAN, FOUNDING PRINCIPALS, BEACON ECONOMICS viii

(over)
 “The ‘Cost of AB 32 on California Small Businesses’ study is a complete and overtly biased analysis of the
costs of implementing [AB 32]. Using only the compliance cost estimate for AB 32 Scoping Plan
measures, but none of the estimated economic benefits, such as savings from avoided fuel or electricity
use, the study methods diverge from well-established practices in cost-benefit analyses, and
consequently produce outlier conclusions that should not be considered reliable or even generally
indicative of the net economic effects of fighting global warming in California.”

- DR. JAMES FINE, ECONOMIST, ENVIRONMENTAL DEFENSE FUND ix

“I am not disputing that regulations impose some costs. They surely do. And we should be asking which
regulations are worth the costs they impose. But policy debate is not furthered by grossly exaggerated
numbers that have no basis in reality.

- DR. DAVID NEUMARK, PROFESSOR OF ECONOMICS, UC IRVINE; SENIOR FELLOW, PUBLIC POLICY INSTITUTE OF CALIF. x

i Letter from Mac Taylor, Legislative Analyst, to Assemblymember Kevin De León, March 9, 2010. Accessible at
http://democrats.assembly.ca.gov/members/a45/pdf/LAO%20Analysis%20of%20Varshney.pdf
ii Matthew Kahn, “A Review of Cost of AB 32 on California Small Businesses—Summary Report of Findings by Varshney &

Associates,” UCLA & NBER, September 21, 2009. Accessible at http://www.arb.ca.gov/cc/scopingplan/economics-

sp/matthew_kahn.pdf
iii “Memo: Cost of Regulations Report is Deeply Flawed and Conclusions Should Not Be Used,” California Budget Project, February

22, 2010. Accessible at http://californiabudgetbites.org/2010/02/23/garbage-in-garbage-out/

iv James Sweeney, “Review of Varshney/Tootelian Report “Cost of AB 32 on California Small Businesses – Summary Report of

Findings,” February 16, 2010. Accessible at

http://peec.stanford.edu/docs/policy/research/Sweeney%20Review%20of%20Varshney.pdf
v Small Business California, “New Anti-AB 32 Report Ignores Benefits to Small Business; Assumes No Innovation,” July 14, 2009.

vi Frank Ackerman, “Daydreams of Disaster: An evaluation of the Varshney-Tootelian critiques of AB 32 and other regulations,”

Stockholm Environment Institute, 2009. Accessible at http://ag.ca.gov/globalwarming/pdf/Ackerman_review.pdf

vii Chris Busch, “Climate Policy and Economic Growth in California: A Comparative Analysis of Different Economic Impact

Projections,” December 2009. Accessible at http://www.resource-

solutions.org/pub_pdfs/Climate%20Policy%20and%20Economic%20Growth%20in%20California.pdf
viii Christopher Thornberg and Jon Haveman, “Viewpoints: State rules stymie economy? Don’t trust professors’ study,” The

Sacramento Bee, October 12, 2009. Accessible at http://www.sacbee.com/opinion/story/2246790.html

ix James Fine, “Cost of AB 32 on California Small Businesses—Summary Report and Findings (Varsheny & Associates): Critical Review

Provided to the Small Business Roundtable,” July 2009.

x Cyndia Zwahlen, “Figuring out the true cost of complying with California regulations,” Los Angeles Times, October 13, 2009.

Accessible at http://www.latimes.com/business/la-fi-smallbiz13-2009oct13,0,724317.story

California Business Alliance for a Green Economy, March 24, 2010, www.ca-greenbizalliance.com