Small Business Green Recovery Fund to power US climate transition

Addisu Lashitew
Nonresident Fellow – Global Economy and Development

March 1, 2021

The U.S. private sector faces the twin challenges of recovering from the devastating effects of the pandemic and transitioning to a low-carbon economy. The Biden administration’s plan for “building back better” underscores the need to support small businesses and advance racial equity, to which it has proposed a $30 billion Small Business Opportunity Fund. There is, however, a need for cross-cutting policy initiatives that exploit the unique opportunity presented by the pandemic to simultaneously advance sustainability and rapid economic recovery. This proposal calls for a $50 billion federal “Small Business Green Recovery Fund” that promotes green innovations and investments among small businesses that advance climate change mitigation, adaptation, and other sustainability solutions.

The fund will cater to the diverse financial needs of small businesses by offering financial support in the form of green grants, green loans, and green bonds. The green grants scheme aims to bolster the ability of the Small Business Administration to support green innovations and investments to small businesses that face limited and costly access to financial markets. The remaining components of the Fund are to be channeled on a commercial basis through intermediary financial institutions by building on the experiences of the Paycheck Protection and the Mainstreet Lending Programs. The green loans scheme will provide financing for green projects that small businesses would otherwise struggle to implement due to their high upfront and borrowing costs. The green bonds scheme will avail financing for green bond issuances by small and medium financial institutions that offer climate financing for small businesses. Identification of green projects that are eligible for funding, and assessment and verification of their environmental impacts will be based on decentralized, market-based screening and verification protocols. Overall, the proposed Fund will boost competitiveness and sustainable recovery, simultaneously contributing to the Biden administration’s multipronged agenda to advance racial equity and inclusion, to revitalize American industries (“Made in all of America”), and to achieve carbonneutrality by 2050 through “clean energy revolution and environmental justice.”

Challenge

Small businesses with 500 or fewer employees numbered 30.2 million in 2018, making up 99.9 percent of the total number of businesses in the U.S. They employed 58.9 million workers,1 equivalent to 47.5 percent of the U.S. workforce, and contributed to 43.5 percent of non-farm GDP in 2014.2 They also registered faster growth, paid higher wages, and contributed to 30 percent of total merchandise exports. Just above 28 percent of small businesses were owned by minorities and 33 percent by women in 2018, which makes them key drivers of inclusion and local economic growth. The vast majority of them operate in services industries such as real estate, accommodation and food services, wholesale and retail trade, construction, and professional services, where they contribute to at least to half of total employment.3Estimates from OECD economies with similar economic structures to the U.S suggest that small businesses contribute to 60-70 percent of total industrial pollution. Achieving climate transition will thus require new investments and technological innovations to overhaul production processes, consumption patterns, and supply chain linkages in the small business ecosystem. The Biden administration’s plan to achieve 100 percent clean energy and net-zero emissions by 2050 is thus unlikely to be met without measures that incentivize small businesses to make these investments. Climate transition can also provide businesses with vast growth opportunities through innovations and investments that improve energy efficiency and by providing access to the growing market for sustainable goods and services. One of the goals of climate policy should hence be enabling small businesses to get ahead of the climate transition curve to take advantage of it for improving their productivity, growth, and competitiveness.

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