By Cindy Ryoo
McNair Center for Entrepreneurship & Economic Growth
As of July 2019, the Trump administration has rolled back or slated to roll back more than 80 environmental regulations. These changes are in keeping with a 2017 executive order directing agencies to avoid regulations that “unnecessarily encumber energy production, constrain economic growth, and prevent job creation.” Although controversial, this initiative may prove beneficial for small business and the U.S. economy. Ninety-eight percent of U.S. businesses have fewer than 100 employees, while small businesses generate 45% of U.S. gross domestic product and historically have created two-thirds of all net new jobs. Because environmental regulations disproportionately burden these small businesses, the administration’s regulatory rollback may be a welcome relief for this cornerstone of the U.S. economy. Current and future regulations should consider the advantages of a robust small business sector as well as the benefits of environmental protections.
Disproportionate impact on small and new businesses
Using environmental cost estimates from the Office of Management and Budget, the National Association of Manufacturers estimated the economic cost of federal environmental regulation between $208 to $329 billion per year. This range is considered conservative due to the lack of cost estimates for some important environmental regulations, such as the Superfund program. Environmental regulations are the most costly category of federal regulation in the manufacturing sector, and the second most costly category across the economy as a whole.
A Small Business Administration study found that these regulations disproportionately affect small businesses. Firms with fewer than 50 employees pay nearly 75% more per year per employee to comply with environmental compliance standards than larger companies (Table 1). As a result, environmental compliance is consistently rated as one of the most problematic legal requirements for small businesses.
Table 1. Annual per employee environmental regulatory costs in small, medium and large firms (2012 costs in 2014 dollars)
|Industry sector||All firms||< 50 employees (small)||50–99 employees (medium)||100 + employees (large)|
|Totals (all U.S. businesses)||$1,889||$3,574||$1,338||$1,014|
Source: Adapted from Crain and Crain, 2014
The burden of environmental regulation on small businesses can make it more difficult for small firms to compete in the broader market. Environmental laws raise production costs and may require expensive, capital-intensive design changes to meet compliance standards. These costs can discourage small business formation, particularly in manufacturing and other environmentally sensitive industries., More and stricter environmental laws also challenge a firm’s experience, capacity and ability to learn, qualities that many new small businesses lack compared to their larger counterparts. Small businesses consequently may find themselves at a competitive disadvantage. A report by the EPA’s National Center for Environmental Economics observed that even when compliance costs for small firms are not disproportionate, new and startup businesses may still be disadvantaged: If compliance with regulations is capital intensive, and it often is, compliance asymmetries may deter the entry of new, small establishments, particularly if they are not offset by regulatory exemptions.
Environmental protection provides a variety of social and ecological benefits including lower rates of illness and mortality, reduced damage to wildlife habitats, improved aesthetics of natural and manmade environments, and an increase in recreational opportunities. At the same time, compliance costs can diminish the positive social and economic effects of entrepreneurship such as job creation and innovation. Current and future environmental regulation should acknowledge this trade-off.
Easing the regulatory burden
Both public policy and market strategies can be used to manage the apparent trade-off between environmental objectives and the social and economic benefits of entrepreneurship. Policy strategies include tailoring statutory exclusions for small businesses, removing technology-forcing rules that prevent small businesses from pursuing affordable compliance technologies appropriate to the scale of their operations, and focusing on pollution outcomes rather than specific pollution reduction measures.
In the private sector, business incubators can assist small firms by offering a training program designed to increase the competitiveness and productivity of small businesses through increased environmental performance. An example of such a program is Canada’s Enviroclub initiative. Each of the 10-15 participating small firms is offered multiple training workshops, recommendations on reducing pollution and increasing business performance, and an opportunity to carry out a pollution prevention project. Firms that participated in Enviroclub were successful in improving business performance by reducing both costs and pollution. A program similar to the Enviroclub initiative could be adapted to the U.S. private sector to provide small firms with opportunities for enhanced environmental and business performance. As public concern for the environment continues to grow, policymakers must balance environmental protection with the need to promote the formation and success of startups and small businesses that grow the U.S. economy and provide a livelihood for many Americans.
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“Regulatory Rollback Tracker – Environmental & Energy Law Program,” Harvard Law School, accessed July 15, 2019, https://eelp.law.harvard.edu/regulatory-rollback-tracker/. See also “Climate Deregulation Tracker – Sabin Center for Climate Change Law,” accessed July 15, 2019, http://columbiaclimatelaw.com/resources/climate-deregulation-tracker/.
 Presidential Executive Order on Promoting Energy Independence and Economic Growth (March 28, 2017), https://www.whitehouse.gov/presidential-actions/presidential-executive-order-promoting-energy-independence-economic-growth/.
Nicole V. Crain and W. Mark Crain, “The Impact of Regulatory Costs on Small Firms” (Small Business Administration / Office of Advocacy, September 2010), https://www.sba.gov/advocacy/impact-regulatory-costs-small-firms.
Nicole V. Crain and W. Mark Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” National Association of Manufacturers, 2014, p. 36, https://www.researchgate.net/publication/280574560_The_Cost_of_Federal_Regulation_to_the_US_Economy_Manufacturing_and_Small_Business.
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