Incentive Structures

Abstract

Environmental (‘green’ or ‘clean’) investments can achieve both commercial and social objectives by generating high rates of return for investors and promoting environmental sustainability, economic prosperity, and social well-being. However, investments in clean products or technologies are generally characterised by relatively high sunk costs albeit with low operational and maintenance costs. These characteristics make green investments attractive in the long run but less so in the short run where the premium is on immediate cost minimisation. In addition, in many developing countries, investments in green projects such as renewable energy, as opposed to conventional energy, face significant barriers in the form of highly subsidized prices of conventional energy products; limited awareness of the consequences of environmental degradation and the benefits of mitigation and adaptation policies and programmes; lack of financial and non-monetary incentives; absence of or weak legal and regulatory statutes on environmental protection; inadequate institutional capacity; trader barriers hampering deployment of green technologies; market failure; and lack of a comprehensive policy agenda and political commitment. These and other related factors serve to discourage private sector involvement in environmental investments in many emerging and developing countries.