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At one level, it may seen sensible for a private firm to invest in GHG reductions
only if there is an obvious financial benefit. But for many firms, greenhouse
gas reductions can result from corporate decisions that are taken in response
to direct economic incentives--like reduced costs, increased profits, and increased
market share. For example, the World Business Council for Sustainable Development
is promoting the view that corporate efforts for eco-efficiency are a sign of
management competence, and hence will increase shareholder value (e.g.,
ease raising of equity) as well as credit-worthiness (e.g., ease raising
of debt financing) (Schmidheiny and Zorraquin, 1996). A "green" corporate
image can become a corporate asset, and some preliminary research in the United
States has shown that better environmental management systems and environmental
performance tend to reduce firms' risk profile (controlling for other factors),
with the expectation of a positive impact on the stock price of the greener
firms because of their reduced risk (Feldman et al., 1997). The value
of a company's equity ultimately is determined by the present value of the entire
expected future stream of earnings (suitably discounted), so long-run concerns
including environmental performance should have an effect on the market evaluation
of a firm's net worth.
Internal barriers are often overlooked, partly because economic models typically
make the simplifying assumption that all market agents are fully maximising
their objectives. Yet several strands of recent research have shown that private
sector firms do not take full advantage of all the cost-effective investments
in energy efficiency and other cleaner energy technologies that are available.
This evidence comes from "bottom-up" studies (Interlaboratory Working
Group, 1997; Energy Innovations 1997; National Laboratory Directors 1997; IPCC,
1996, Table 9.8 and the studies cited therein), statistical tests of the maximisation
hypothesis (DeCanio and Watkins, 1998a; DeCanio, 1998), and theoretical and
empirical studies (Koomey, 1990; Ayers, 1993; Lovins and Lovins, 1991; Jaffe
and Stavins, 1993; Koomey et al., 1996; DeCanio and Watkins 1998b; Porter and
van der Linde, 1995a, 1995b).
A number of specific intra-firm barriers to the adoption and diffusion of profitable
energy saving and other cleaner energy technologies have been identified. In
addition to the long-recognised tension between the goals of shareholders and
management, managers at different levels within a firm may have conflicting
incentives. It is often the case that data that could be used for energy auditing
and control either is not available or is scattered through the organisation
in such a way as to make cost-saving investments in energy efficiency more difficult.
Capital budgeting procedures that are put in place to control principal/agent
problems within the organisation may have the unintended side effect of screening
out profitable energy-saving investments. Managers can be inappropriately risk
averse because of the way their performance is evaluated, and their incentives
to pursue energy efficiency blunted by frequent turnover or switching of positions
within the company. Managers rarely have incentives to make the long-run decisions
that will benefit their successors at the expense of their own performance in
the short run (DeCanio, 1993, 1994).
Furthermore, many firms in NIS countries (mainly Russia and Ukraine) operate
under perverse microeconomic conditions that encourage them to under-report
or hide revenues, expenses, and profits. Barter transactions, which make up
a substantial percentage of economic activity in these countries, along with
corruption in many forms, complicate matters further. Under these conditions,
judging the financial condition of enterprises become problematic, and adds
risk and uncertainty to energy efficiency and other types of otherwise profitable
investments. In general, issues of corporate governance in non-monetary, distorted
economies of some large NIS countries can represent significant barriers to
environmentally sound technology transfer (OECD, 1997; EBRD, 1998; Commander
and Mumssen, 1998).
Firms are not unitary entities having a mind and will of their own. Instead,
they are made up of a multitude of individuals, each of whom has their own individual
interests and objectives. The decisions of firms are thus the result of collective
action, and it has long been understood that collective action may not yield
optimal outcomes, even if all the individuals taking part in the decision-making
process are perfectly rational (Olson, 1965). This problem can manifest itself
in the operation of for-profit firms just as it does in voting models of group
choice. In both cases, the (possibly divergent) interests of individuals have
to be 'aggregated' into organisational decisions.5
The task of management is to bring about as much correspondence as possible
between the interests of the individuals making up the organisation and its
formal goals, and this task is neither straightforward nor simple. The modern
theory of the firm is based on an exploration of the multitude of ways in which
agency problems, asymmetric information, and incentive incompatibility can create
a gulf between the formal objectives of the firm (maximisation of profits or
of stock value) and the behaviour of its employees. It should come as no surprise
that perfect maximisation is rarely achieved, and in particular that it is not
realised in the realm of energy efficiency.
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