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On imperfect competition and market distortions: the causes of corporate under-investment in energy and material efficiency

Abstract

In practice firms are faced by a range of market frictions and barriers, which can prevent them from undertaking investments in efficiency and low-carbon technologies. Thus, even when environmental taxes are imposed, firms may be unable (or unwilling) to adjust their behaviour and technology in response to price signals. With a focus on energy and material efficiency investments, this paper systematically investigates how the theoretical assumptions of perfectly competitive and efficient markets are violated in practice, and how this results in complex and interlinked investment barriers. It classifies five categories of investment barriers: information, capacity, and financial constraints, as well as uncompetitive market structures and fiscal mismanagement; and presents evidence on each of these. It concludes by proposing a range of measures for mitigating investment barriers, and addressing their structural causes. Overall, the evidence presented in this paper aims to help increase the effectiveness of environmental taxes and regulation, by identifying market imperfections that environmental taxes alone cannot address.

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Notes

  1. 1.

    This violates the hypothetical condition of perfectly competitive markets that economic agents can make rational decisions based on available information, without incurring transaction costs (such as having to hire external technical consultants).

  2. 2.

    For other less energy intensive materials other factors, such as labour costs, can play an important role too.

  3. 3.

    The E11 country grouping is defined as Australia, Canada, France, Germany, Japan, Italy, Poland, Russia, Spain, United Kingdom, and United States.

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Acknowledgements

This paper is partly based on a research partnership between the Institute for Sustainable Resources at University College London (UCL ISR) and the European Bank for Reconstruction and Development (EBRD), and the associated policy report by Flachenecker and Rentschler (2015). It benefited from extensive comments from and discussions with Craig Davies, Paul Ekins, Nigel Jollands, and Gianpiero Nacci. Comments by seminar participants at the EBRD in December 2014, and by anonymous referees are gratefully acknowledged. The conceptual framework of this paper is inspired by Chapter 2 of the World Bank’s World Development Report 2014 (Typology of obstacles to risk management) by Stéphane Hallegatte.

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Rentschler, J., Bleischwitz, R. & Flachenecker, F. On imperfect competition and market distortions: the causes of corporate under-investment in energy and material efficiency. Int Econ Econ Policy 15, 159–183 (2018). https://doi.org/10.1007/s10368-016-0370-2

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Keywords

  • Investment barriers
  • Efficiency
  • Firms
  • Environmental taxes

JEL codes

  • H23
  • H32
  • L22