Small businesses could be locked out of lucrative government contracts due to massive compliance costs imposed under a proposed Biden administration rule that would require large federal contractors to reduce and publicly disclose their greenhouse gas emissions. tight.
The proposed rule would make the United States the first national government to require federal prime contractors to set climate goals consistent with the 2015 Paris Agreement.
Administration officials say using the federal government’s purchasing power as a cudgel to the private sector could eliminate about 85% of greenhouse gas emissions associated with the federal supply chain. That’s more than double the emissions generated by the 300,000 buildings and 600,000 vehicles the federal government owns, the White House said in a fact sheet.
“Requiring major federal suppliers to disclose emissions and risks strengthens our supply chain and brings us closer to our net zero emissions goals,” Brenda Mallory, chair of the White House Council on Environmental Quality, said in a statement.
But the costs of compliance are enormous. The proposed rule estimates that the federal contracting industry would incur $604 billion in implementation costs in the first year and just over $442 billion annually thereafter.
These costs could place a significant burden on small businesses, which may not be able to comply. Instead, companies can pass on high-income federal contracts, leaving the sector to larger companies that can more easily absorb the costs.
Christoph Mlinarchik, an expert on government contracts and author of three books on the subject, said small businesses may struggle with the proposal.
“The piling up of compliance costs disproportionately hurts small businesses that have razor-thin profit margins and less flexibility to spread those costs over many contracts,” he said. “In contrast, giant government contractors benefit from excessive regulation. These barriers to entry keep out competitors and new entrants, especially small businesses and innovative tech companies that America desperately needs.
The Biden administration has argued that the rules will ultimately benefit businesses, as increased brand awareness and increased innovation will offset compliance costs. Federal contractors who have already started reducing their emissions have reported a combined reduction of 1.8 billion metric tons of carbon emissions and $29 billion in annual savings.
It is unclear how many of these contractors are small businesses or large companies such as Raytheon or General Dynamics, which are among the largest government suppliers.
It’s also unclear how much of the compliance costs have been passed on to taxpayers, who are responsible for federal contracts.
“Ultimately, increased compliance costs are passed on to US taxpayers through higher prices for government contracts. Jumping through compliance hoops burns money that needs to be recouped through higher prices – simple economics. Remember, money spent on government contracts belongs to the taxpayer, not federal agencies or Congress,” Mlinarchik said.
Under the proposal, companies that do more than $50 million in annual business with the federal government would have to set carbon reduction targets consistent with the 2015 Paris Agreement. Those suppliers would also be required to publicly disclose carbon emissions. greenhouse gases that are in their supply chain and that are caused by their products.
This would affect 1,353 entities, of which 389, or 29%, would qualify as small businesses, according to government data.
The rule would also require contractors who receive more than $7.5 million but less than $50 million in business from the federal government to disclose greenhouse gas emissions from their operations, but not supply chains or products. They would not be required to establish emission reductions.
Government data shows that 4,413 contractors would be affected by the proposal. Of these, 2,835, or 64%, would be considered small businesses.
Among companies that do more than $50 million in annual business with the government, only 31% currently disclose their greenhouse gas emissions. Among companies that make more than $7.5 million but less than $50 million in annual government contracts, 10% disclose greenhouse gas emissions, according to government data.
The data does not specify the extent of the disclosures.
Markus Speidel, a lawyer specializing in government contracts, said compliance costs would be significant. He said contractors will need to invest time and money to develop methods for measuring emissions as well as a data reporting system. It would rack up legal and other fees, he said.
But Mr Speidel warned that the proposal was part of a series of moves by the Biden administration to leverage its power as a buyer of billions of goods and services to achieve its climate goals. This means that stricter proposals regarding contractors could be in the works.
“This proposed rule is probably the tip of the iceberg. I think in general there will be more pressure for this in the future and early adopters will have an advantage,” he said. “If you turn away from government contracts to find greener pastures elsewhere, you won’t last too long.”
Earlier this year, the Securities and Exchange Commission proposed a rule requiring all publicly traded companies to disclose their direct emissions to investors. The rule would also require companies to disclose emissions from their products and supply chain if they pose a direct financial risk to the company.
The administration’s new emissions rule proposal does not offer a specific reduction threshold for contractors, which makes it somewhat byzantine. It simply says that companies must meet the goals of the Paris Agreement, which limits warming to 2 degrees Celsius (3.6 degrees Fahrenheit) and pursue a goal of limiting warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit).
The settlement will remain open for public comment for 60 days before the Biden administration can establish and enforce the provisions, which could take weeks or months.