Abstract
Increasing resource efficiency is considered to yield multiple economic and environmental benefits. However, evidence suggests that resource efficiency is only gradually increasing across regions, countries, and firms. To systematically investigate the incentives and dis-incentives for firms to invest in resource efficiency, this chapter firstly introduces a comprehensive cost-benefit framework to assess the viability of investments in resource efficiency. The framework comprises several components of resource efficiency investments by (i) comparing a business-as-usual scenario with a scenario of scaling up investments in resource efficiency, (ii) covering economic and environmental dimensions, and (iii) considering primary and secondary effects. In a second step, the framework is matched to existing evidence from the literature, followed by an application of the framework to a firm level investment project. Following the insights of the case study, resource efficiency investments are more likely to yield positive net benefits when externalities are internalised, when the cost of ‘inaction’ is accounted for, and the longer the firm’s time horizon is. Overall, this chapter calls for a more comprehensive approach towards resource efficiency investment appraisals to strengthen the incentive for firms to invest in resource efficiency.
This chapter is based on the following article:
Florian Flachenecker, Raimund Bleischwitz, and Jun E. Rentschler (2017) Investments in material efficiency: the introduction and application of a comprehensive cost–benefit framework, Journal of Environmental Economics and Policy, 6:2, 107–120, DOI: https://doi.org/10.1080/21606544.2016.1211557
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Notes
- 1.
The investment project is presented anonymously to comply with confidentiality agreements.
- 2.
Future costs and benefits are typically discounted by using a discount factor δ. For economic costs and benefits, an interest rate in the economy is often taken to represent δ which (in normal economic circumstances) is a positive rate (δ > 0). However, the level of the interest rate is highly debated (e.g. Arrow et al. 1996). For environmental costs and benefits, no universally agreed discount factor exists which is due to the high degree of uncertainty involved in estimating future impacts of GHG emissions (Pindyck 2007). Some institutions apply a range of positive discount rates which illustrates this uncertainty (e.g. U.S. Government 2013). Given the lack of reliable estimates to discount environmental costs and benefits, it is chosen not to apply any discount rate in order to avoid any mismatch between economic and environmental impacts. Applying discount rates, the results would only change in terms of their level but not in terms of their trend (unless the economic discount rate exceeds the environmental one for this investment project by a factor of 583). This means that the year in which the investment yields a positive accumulated net benefit might change, but the overall conclusions drawn from those results are likely to remain valid.
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Flachenecker, F., Bleischwitz, R., Rentschler, J. (2018). The Introduction and Application of a Comprehensive Cost-Benefit Framework for Resource Efficiency Investments. In: Flachenecker, F., Rentschler, J. (eds) Investing in Resource Efficiency. Springer, Cham. https://doi.org/10.1007/978-3-319-78867-8_5
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