Climate disclosure laws miss the mark 

The cost of complying with climate disclosure laws is colossal.

From federal agencies to state governments, climate disclosure laws are sweeping the nation. While these laws aim for transparency, mandated climate disclosures increase costs for businesses and consumers, inhibit environmental progress, and provide marginal benefits for investors. Lawmakers should refrain from following California’s lead and instead implement policies that reduce the cost of doing business.  

Last October, California made history by passing the nation’s first climate disclosure law, which requires public and private companies whose annual revenue exceeds $1 billion to disclose the greenhouse gas emissions of their direct and indirect activities. As the fifth-largest economy in the world, and largest in the U.S., the impacts of this law will reverberate across the rest of the country.  

Modeled after legislation in the European Union, California’s disclosure law has, appropriately, drawn criticism and lawsuits from industries, farmers and businesses.  

The cost of complying with climate disclosure laws is colossal and is effectively a tax on businesses that will be passed onto consumers in the form of higher prices. Quarterly reporting under the EU’s disclosure law cost companies in the bloc an average of over $150,000 in consulting fees and 150 staff days. Complying would be more expensive in the U.S., with the SEC estimating that reporting under its proposed disclosure rule would cost businesses more than $10 billion per year.  

However, a recent study found that the SEC underestimated these fees, pegging the more accurate estimate to be around $25 billion per year. 

At a time when consumers are finally feeling relief after years of record inflation, adding undue costs to businesses — and, subsequently, consumers — through climate disclosures and other new regulations, which are expected to fare upward of $960 million, is misguided and perverse.  

And while California’s law applies only to companies with revenue over $1 billion annually, large businesses would not be the only ones negatively affected. Under this regulation, a farmer in Nebraska who sells his cattle to a processor in California would be required to report his operational emissions to regulators in Sacramento. As seen in Germany and the Netherlands, costly regulations for farmers are unpopular, counterproductive and harmful to rural communities.  

Outside of financial costs, these rules bring political costs to businesses regardless of size. Unfortunately, more states have begun introducing bills that would explore the potential challenges and benefits of mandated disclosures. What’s to stop other states from responding to these regulations by imposing fees or restrictions on businesses that decide to comply with California’s law? The current state of partisanship and federalism could force companies into unnecessary political battles and potential litigation, further hurting consumers and investors alike.  

Importantly, climate disclosure laws such as these are not beneficial for investors. In the EU, they have exacerbated “reporting fatigue” while businesses have pointed out that the rules are unclear and “of little use to investors.” Disclosures based on educated guesses, which many of these would be, could be misleading and ultimately hurt investment decisions more than reporting nothing at all. While lawmakers who support these bills believe that they would be environmentally advantageous, they would instead increase the cost of capital formation and allocate resources that would be spent on innovation to compliance.  

U.S. companies already publish reports on their environmental footprint, often at the request of asset managers or investors. If consumers and investors want more disclosure or sustainability, the market will provide it. Importantly, there are laws on the books that prevent greenwashing and misleading shareholders. It’s in the best interest for companies and investors to understand risk, including climate-related risks, but those can best be assessed through market mechanisms, not government mandates. Private insurance markets, for instance, are an effective tool for investors and businesses to assess risk.  

To make lasting environmental progress, as supporters of disclosure laws claim they want, policy leaders should make it easier for businesses to grow and invest in cleaner technologies and practices. As empirical evidence suggests, there is a strong correlation between the ease of doing business and environmental progress. Business freedom empowers companies to invest in next generation technologies and innovative breakthroughs, rather than allocating precious resources to completing onerous paperwork. Efficient regulations and open trade allow businesses and countries to specialize and create more environmentally friendly products.  

One-size-fits-all climate disclosures are costly and ignore the complexity of America’s diverse economy. Rather than adding undue burdens to businesses and consumers that provide little benefit to investors, lawmakers should look to reduce harmful barriers that inhibit capital formation, innovation and economic growth.  

Jeff Luse is a policy analyst at C3 Solutions.