Climate Change 2001:
Working Group III: Mitigation
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5.1.1 Summary of the Second Assessment Report – Barriers and Opportunities

The topic of barriers to the market penetration of environmentally sound technologies (ESTs) was treated in Section 1.5.3 (“Market failures and government responses”) of the Working Group (WG) III SAR, and also in Chapter 8, Sections 8.2.3 (“Key factors affecting the magnitude of costs: Costs as a function of baselines and policy strategies”), and 8.4.3 (“The top-down vs. bottom-up modelling controversy: Some lessons from the energy field”) respectively. The latter sections dealt with the discussion of the differences between top-down and bottom-up modelling when estimating the costs of strategies to reduce or control GHG emissions. The primary question raised in the discussion in the SAR may be summarized as: Given market prices, do firms fail to take advantage of all the energy efficiency opportunities available to them? Thus, a business investment decision, considering private costs, may not undertake all the available efficiency opportunities. Likewise, in the modelling sections, the discussion focused on the existence of the “no regrets” potential. Its existence implies that (1) market and/or institutional failures exist, and (2) cost-effective policies targeted to correct these can be identified and implemented. The SAR notes four categories of market imperfections that explain the above phenomena, and the policies that could be used to address them. A more detailed discussion of these topics is included in other sections of this chapter.

Information Dissemination
Acquiring information is costly, and markets, on their own, do not provide an efficient level of disclosure of information. Governments can amend this by providing information or instituting legislation and/or regulations that requires disclosure of information, e.g., requiring energy performance labels on household appliances (see Section 5.3.7 for further discussion on lack of information as a barrier).

Bureaucratic Structure and Limited Scope of Attention
Economic and organizational theory has emphasized that large organizations are not, in general, run by owners; that the managers, even with best-designed incentives, do not in general maximize the firm’s market value; and that among the principal scarce factors within an organization are time and attention. Governments could provide information on energy efficiency that managers could access with ease, which may yield private returns higher than their marginal costs. (See Sections and 5.4.3 for further discussion on barriers and opportunities in the industrial sector.)

Returns to Scale and Network Externalities
Technologies or projects may require large infrastructure or size in order to make them economic. The scale of such a project, e.g., a natural gas-based transportation system, may deter investment, although it may be cost-effective in comparison to a gasoline-based system at some higher future oil price (see Sections 5.3.5 for further discussion on network externalities).

Capital Market Imperfections
Studies of implicit discount rates have shown that households and firms behave as if they use rates substantially above the market rate for long-term government bonds. Firms use discount rates that reflect the riskiness of projects, and, as a result of imperfect information, households and firms often face rationing in capital markets for credit and equity. Economists emphasize that timing, risk, capital constraints, and information or lack thereof should be dealt with separately. A discount rate should reflect investment timing questions, risk should be treated by converting costs and benefits into certainty equivalents, and shadow pricing should address constraints on capital. Lack of information could be addressed through government intervention (see Sections 5.3.3 for further discussion on financing).

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