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.
Similar content being viewed by others
Notes
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).
For other less energy intensive materials other factors, such as labour costs, can play an important role too.
The E11 country grouping is defined as Australia, Canada, France, Germany, Japan, Italy, Poland, Russia, Spain, United Kingdom, and United States.
References
Acemoglu D, Robinson J (2010) The role of institutions in growth and development. In: Brady D, Spence M (eds) Leadership and growth. The World Bank, Washington DC, pp 135–164
Acemoglu D, Aghion P, Bursztyn L, Hemous D (2012) The environment and directed technical change. Am Econ Rev 102:131–166
ADB (2013) Same energy, more power: accelerating energy efficiency in Asia. Asian Development Bank, Manila
Aghion P, Bloom N, Blundell R, Griffith R, Howitt P (2002). Competition and Innovation: an inverted U relationship. NBER Working Paper Series, No. 9269
Aldy JE, Krupnick AJ, Newell RG, Parry IW, Pizer WA (2010) Designing climate mitigation policy. J Econ Lit 48(4):903–934
Allwood JM, Ashby MF, Gutowski TG, Worrell E (2011) Material efficiency: a white paper. Resour Conserv Recycl 55(3):362–381
Anderson S, Newell R (2004) Information programs for technology adoption. Resour Energy Econ 26:27–50
Avner P, Rentschler J, Hallegatte S (2014). Carbon price efficiency lock-in and path dependence in urban forms and transport infrastructure. World Bank Policy Research Working Papers, 6941
Baron D (1985) Regulation of prices and pollution under incomplete information. J Public Econ 28:211–231
Bastein T, Koers W, Dittrich K, Becker J, Lopez F (2014) Business barriers to the uptake of resource efficiency measures. POLFREE Deliverable 1.5. Policy Options For a Resource Efficient Economy (POLFREE)
Blaug M (2007) The fundamental theorems of modern welfare economics, historically contemplated. Hist Polit Econ 39(2):185
Bleischwitz R (2010) International economics of resource productivity—relevance, measurement, empirical trends, innovation, resource policies. IEEP 7(2–3):227–244
Bleischwitz R (2012) Towards a resource policy - unleashing productivity dynamics and balancing international distortions. Miner Econ 24(2):135–144
Bleischwitz R, Hennicke P (eds) (2004). Eco-efficiency, regulation, and sustainable business: towards a governance structure for sustainable development. Edward Elgar Publishing
Bloom N, van Reenen J (2007) Measuring and explaining management practices across firms and countries. Q J Econ 122(4):1351–1408
Bontems P, Bourgeon JM (2005) Optimal environmental taxation and enforcement policy. Eur Econ Rev 49(2):409–435
Bovenberg AL (1999) Green tax reforms and the double dividend: an updated reader’s guide. Int Tax Public Financ 6(3):421–443
Bovenberg L, Goulder LH (1996) Optimal environmental taxation in the presence of other taxes: general-equilibrium analyses. Am Econ Rev 86(4):985–1000
Brunner S, Flachsland C, Marschinski R (2012) Credible commitment in carbon policy. Clim Pol 12(2):255–271
Cagno E, Worrell E, Trianni A, Pugliese G (2013) A novel approach for barriers to industrial energy efficiency. Renew Sust Energ Rev 19:290–308
Castagneto-Gissey G (2014) How competitive are EU electricity markets? An assessment of ETS Phase II. Energy Pol 73:278–297
Commander S, Nikolski Z, Vagliasindi (2015). Estimating the size of external effects of energy subsidies in transport and agriculture. World Bank Policy Research Working Papers, 7227
D’Amato A, Dijkstra BR (2015) Technology choice and environmental regulation under asymmetric information. Resour Energy Econ 41:224–247
DeCanio S (1993). Barriers within firms to energy-efficient investments. Energy Policy: 906–914
DeCanio S, Watkins W (1998) Investment in energy efficiency: do the characteristics of firms matter? Rev Econ Stat 80(1):95–107
DeCanio S, Dibble C, Keyvan A-A (2000) The importance of organizational structure for the adoption of innovations. Manag Sci 46(10):1285–1299
Dijk M, Kemp R (2016) Understanding the web of constraints on resource efficiency in Europe. Policy brief March 2016. Policy options for a resource efficient economy (POLFREE)
Domenech T, Bleischwitz R, Ekins P, O’Keeffe M, Drummond P (2014) Lessons from the EU policy experiences, POLFREE Deliverable 1.2. Policy Options For a Resource Efficient Economy (POLFREE)
Durbin S (2004) Workplace skills, technology adoption and firm productivity: a review. New Zealand Treasury Working Paper. 04/16. September 2004
Ebrahim Z, Inderwildi OR, King D a (2014) Macroeconomic impacts of oil price volatility: mitigation and resilience. Front Energy 8(1):9–24
EBRD (2010) EBRD Management, Organisation, and Innovation (MOI) Survey. From European Bank for Reconstruction and Development: http://www.ebrd.com/pages/research/economics/data/moi.shtml
European Commission (1999) Council Directive 1999/31/EC of 26 April 1999 on the Landfill of Waste. Brussels: European Commission
European Commission (2008) Directive 2008/98/EC of the European parliament and the council of 19 November 2008 on waste. European Commission, Brussels
European Commission (2011). Roadmap to a resource efficient Europe. Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions
European Commission (2012) Directive 2012/27/EU of the European parliament and the council of 25 October 2012 on energy efficiency. European Commission, Brussels
European Commission (2013) Eurobarometer: SMEs, resource efficiency and green markets. European Commission, Brussels
Fankhauser S, Hepburn C, Park J (2010) Combining multiple climate policy instruments: how not to do. Clim Chang Econ 1(3):209–225
Farzin YH, Kort PM (2000) Pollution abatement investment when environmental regulation is uncertain. J Public Econ Theory 2(2):183–212
Fay M, Hallegatte S, Vogt-Schilb A, Rozenberg J, Narloch U, Kerr T (2015) Decarbonizing development: three steps to a zero-carbon future. The World Bank, Washington, DC
Fischer C (2008) Emissions pricing, spillovers, and public investment in environmentally friendly technologies. Energy Econ 30(2):487–502
Fischer C, Greaker M, Rosendahl KE (2015) Strategic subsidies for renewable energy. Conference Paper. Green Growth Knowledge Platform (GGKP) Third Annual Conference. 29–30 January, 2015
Flachenecker F, Rentschler J (2015) A report commissioned by the European bank for reconstruction and development (EBRD). University College London (UCL), London, Investments in Resource Efficiency—Costs and Benefits, Investment Barriers, and Intervention Measures
Frishammar J, Hörte S (2005) Managing external information in manufacturing firms: the impact on innovation performance. J Prod Innov Manag 22(3):251–266
Gillingham K, Newell RG, Palmer K (2009) Energy efficiency economics and policy. Ann Rev Resour Econ 1(1):597–620
Gollier C (2002) Discounting an uncertain future. J Publ Econ:149–166
Goulder L (2013) Climate change policy’s interactions with the tax system. Energy Econ 40(2013):S3–S11
Grubb M, Ulph D (2002) Energy, the environment, and innovation. Oxf Rev Econ Policy 18(1):92–106
Hallegatte S, Fay M, Vogt-Schilb A (2013). Green industrial policies—when and how. World Bank Policy Research Working Papers, 6677
Howarth R, Andersson B (1993) Market barriers to energy efficiency. Energ Econ: 262–272
Hyytinen A, Toivanen O (2005) Do financial constraints hold back innovation and growth? Evidence on the role of public policy. Res Policy 34(9):1385–1403
IFC (2011) Resource efficiency in the ferrous foundry industry in Russia. International Finance Corporation, Washington DC
IMF (2013) Energy subsidy reform: lessons and implications. International Monetray Fund, Washington DC
Jordan ND, Lemken T, Liedtke C (2014) Barriers to resource efficiency innovations and opportunities for smart regulations—the case of Germany. Environ Policy Gov 24(5):307–323. doi:10.1002/eet.1632
Kammerlander M (2014). Individual Behavioural Barriers to Resource Efficiency (2014), Deliverable 1.6 of POLFREE project, SERI, MU-ICIS and UCL http://www.polfree.eu/publications/publications-2014/ Del_1.6_FINAL_20VERSION_clean_20lay-out_20-2.pdf
KfW (2013) BMU-Umweltinnovationsprogramm: Neuer Förderschwerpunkt „Materialeffizienz in der Produktion“., From Kreditanstalt für Wiederaufbau
Kostka G, Moslener U, Andreas J (2013) Barriers to increasing energy efficiency: evidence from small-and medium-sized enterprises in China. J Clean Prod 57:59–68
Krishna P, Mitra D (1998) Trade liberalization, market discipline and productivity growth: new evidence from India. J Dev Econ 56(2):447–462
Krysiak FC (2008) Prices vs. quantities: The effects on technology choice. J Public Econ 92(5–6):1275–1287
Laffont JJ (1994) Regulation of pollution with asymmetric information. Issues and Analysis, Nonpoint Source Pollution Regulation, p 39
Lecuyer O, Quirion P (2013) Can uncertainty justify overlapping policy instruments to mitigate emissions? Ecol Econ 93:177–191
Legeida N (2002) The Economic implications of government support for the steel industry: The Case of Ukraine. Association for Studies in Public Economics—The Fifth International Conference on “Public Sector Transition”
Lipsey R, Lancaster K (1956) The general theory of second best. The Review of Economic Studies Vol. 24, No. 1 (1956–1957), pp. 11–32
Montero JP (2002) Permits, standards, and technology innovation. J Environ Econ Manag 44(1):23–44
Morris MG, Venkatesh V (2000) Age differences in technology adoption decisions: implications for a changing work force. Pers Psychol 53:375–403
Morrisa J, Phillips P, Read A (1998) The UK Landfill Tax: an analysis of its contribution to sustainable waste management. Resour Conserv Recycl 23(4):259–270
OECD (2004) Principles of corporate governance. OECD, Paris
OECD (2015) OECD inventory of support measures for fossil fuels 2015. OECD, Paris
Onischka M, Liedtke C, Jordan N (2012) How to sensitize the financial industry to resource efficiency considerations and climate change related risks. J Env Assess Pol Assess 14 (3)
Pamukcu T (2003) Trade liberalization and innovation decisions of firms: lessons from post-1980 Turkey. World Dev 31(8):1443–1458
Parry IWH, Williams RC III, Goulder LH (1999) When can carbon abatement policies increase welfare? The fundamental role of distorted factor markets. J Environ Econ Manag 37(1):52–84
Parry I, Evans D, Oates WE (2014) Are energy efficiency standards justified? J Environ Econ Manag 67(2):104–125
Pigou AC (1920) The economics of welfare. New York
Pindyck R (1990) Irreversibility, uncertainty, and investment. NBER Working Paper No. 3307
Pindyck R (2006) Uncertainty in environmental economics., NBER Working Paper, No. 12725
Pindyck R (2013) Climate change policy: what do the models tell us? J Econ Lit 51:860–872
Popp D (2006) R&D subsidies and climate policy: is there a “free lunch”? Clim Chang 77(3):311–341
Reddy S, Assenza GB, Assenza D, Hasselmann F (2013) Barriers and drivers to energy efficiency—a new taxonomical approach. Energy Convers Manag 74:403–416
Requate T (1998) Incentives to innovate under emission taxes and tradeable permits. Eur J Polit Econ 14(1):139–165
Requate T (2005) Timing and commitment of environmental policy, adoption of New technology, and repercussions on R&D. Environ Resource Econ 31(2):175–199
Requate T (2006) Environmental policy under imperfect competition. Int Yearb Environ Resour Econ 2007:120–207
Requate T, Unold W (2003) Environmental policy incentives to adopt advanced abatement technology: will the true ranking please stand up? Eur Econ Rev 47(1):125–146
Rodrik D (1988) Closing the technology gap: does trade liberalization really help? NBER Working Paper Series, No. 2654
Rohdin P, Tholander P, Solding P (2007) Barriers to and drivers for energy efficiency in the Swedish foundry industry. Energy Policy 35(1):672–677
Rozenberg J, Vogt-Schilb A, Hallegatte S (2014) Transition to clean capital, irreversible investment and stranded assets. World Bank Policy Research Working Papers, 6859
Salehi-Isfahani D, Stucki BW, Deutschmann J (2014) The reform of energy subsidies in Iran : the role of cash transfers
Schleifer A (1998) State versus private ownership., NBER Working Paper Series, No. 6665
Sorrell S, Sijm J (2003) Carbon trading in the policy mix. Oxford Rev Econ Policy 19(3):420–437
Sutherland R (1991) Market barriers to energy-efficiency investments. Energy J 12(3):15–34
Trianni A, Cagno E, Thollander P, Backlund S (2013) Barriers to industrial energy efficiency in foundries: a European comparison. J Clean Prod 40:161–176
US Dept. of Commerce (2001) Report to the president. Structural Problems. International Trade Administration, Global Steel Trade
Vogt-Schilb A, Hallegatte S (2014) Marginal abatement cost curves and the optimal timing of mitigation measures. Energy Policy 66:645–653
Whitley S (2013) At cross-purposes subsidies and climate compatible investment. Overseas Development Institute (ODI), London
World Bank (2004a) Corporate governance country assessment: Moldova. World Bank, Washington DC
World Bank (2004b) Corporate governance country assessment: Romania. World Bank, Washington DC
World Bank (2006) Corporate governance country assessment—Ukraine 2006. The World Bank, Washington DC
World Bank (2013) World development report 2014—risk and opportunity: managing risk for development. The World Bank, Washington DC
World Bank (2014) Diversified development—making the most of natural resources in Eurasia. The World Bank, Washington DC
Yeo M, Partner, Steptoe, Johnson (2010). Natural resource subsidies. Geneva: World Trade Organization
Zhao J (2003) Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges. J Public Econ 87(12):2765–2789
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.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
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
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10368-016-0370-2