Carbon Pricing and Induced Small Business Innovation in California: How the Global Warming Solutions Act Impacted Entrepreneurial Opportunities in Green Energy

Abstract

This is a study of the California Global Warming Solutions Act (GWSA) and the related laws passed to support it. The GWSA established a whole-economy cap on greenhouse gas emissions and established a series of emissions allowances which can be traded between companies and individuals on the private market. Using Limited Liability Company (LLC) registration data across 80 economic quarters spanning the years 1996-2016 inclusive, this study sought to test the theory that establishing a price on carbon emissions will induce innovation within the energy sector. This study was conducted as a time-series observation study of the rate of successful new LLCs registered in either the green energy or carbon energy industries, controlled for the historic failure rate of businesses and specific federal and state grants such as funding through the Million Solar Roofs program, or the American Recovery and Reinvestment Act. The study found that there was a substantial increase, both in the raw number and in proportion of total new businesses, of successful green energy businesses after the passage of the GWSA. However, most of the new green energy LLCs were solar energy companies, which were likely bolstered by the US$3 billion in tax incentives and other subsidies from the Million Solar Roofs program. When non-solar green energy companies were regarded separately, the study found that the GWSA had only a modest positive impact on inducing small business innovation. This study concludes that a carbon price alone will probably not be sufficient to induce innovative solutions to achieve carbon neutrality goals, unless the revenues collected are used to directly subsidize green energy implementation.