Climate Change 2001:
Working Group III: Mitigation
Other reports in this collection Achievement of Socioeconomic Potential

Vested Interests
Organizations provide not only public goods to their members but also selective incentives, i.e., private goods. These selective incentives may be sufficient to maintain the organization even if the public good it once provided is no longer needed. Organizations that represent a narrow segment of society do not have an incentive to increase society’s output, but rather to increase the share of output going to its members. These organizations are themselves barriers by being rent-seeking coalitions which reduce efficiency and output, and increase the political divisiveness of society. Rent-seeking coalitions interfere with an economy’s capacity to change because of their slow decision-making processes, and because they increase the complexity of regulation and the role of government (Olson, 1982).

A major barrier to the diffusion of technical progress appears to lie in the existence of vested interests among economic agents specialized in the old technologies and who may, therefore, be tempted to collude and exert political pressure on governments to impose administrative procedures, taxes, trade barriers, and regulations in order to delay or even prevent the arrival of new innovations that might destroy their rents (Olson, 1982). The duration of the delay will depend in part on the design of political institutions and in part on technological characteristics (learning by doing and knowledge externalities), and on the balance of power between innovators and incumbents. The more learning by doing and the more positive knowledge externalities on the older technology, other things being equal, the lower the frequency of new innovations (Jovanovic and Nyarko, 1994; Krusell and Rios-Rull, 1996; Aghion and Howitt, 1998).

Firms’ Institutional Structures
Firms’ institutional structures shape their responses to technological opportunities and policies. Firms that tend to maximize stability and tend to rely on single–source internal analyses for information are the least likely to be first adopters of a new technology. On the other hand, firms that maximize profitability, and rely on multiple internal and external sources of information were most likely to experiment with a variety of technologies, but unlikely to commit themselves to a single fuel or process (Braid et al., 1986; O’Riordan et al., 1998). A vertically integrated firm may be slower to absorb information and respond to change than a firm where lateral transfers are possible (“smart workplaces”). An integrated firm also has less incentive to innovate than a decentralized one (“Arrow replacement effect”). On the other hand, as a lot of climate change innovation research is of an applied nature, research is more productive when it is carried out by the firm itself than when delegated to a research institution. Delegation of the research function to a specific entity within the firm increases the incentive to acquire information, but also increases the probability of getting a suboptimal innovation (Aghion and Howitt, 1998; DeCanio, 1998).

Inadequate Attention to Institutional Design
This lack of attention, for example, is especially connected to the institutional context (“national innovation system”) for the heuristic search which gives rise to a set of new findings, blueprints, artifacts (“selection environment”), and which may yield a protected space (“niche”) in which a new product can survive more easily because of technology forcing. A national innovation system provides long-term goals, predictions of long–run outcomes, creation of an actors’ network, adequate experimentation, and monitoring of outcomes, formulation of standards, tax and subsidies, etc. for alternative energy technologies (Freeman and Soete, 1997; Rip and Kemp, 1998).

National policy styles, as routinized institutional methods to deal with issues, in which the balance of authority is shifted from formal institutions toward informal networks and associations may help achieve economic potential. This shift favours the development of innovative policy formulation, and implementation (Wynne, 1993; O’Riordan et al., 1998).

Lack of Effective Regulatory Agencies
Many developing countries have excellent constitutional and legal provisions for environmental protection but the latter are not enforced (O’Riordan et al., 1998). However, “informal regulation” under community pressure from e.g., non-governmental organizations, trade unions, neighbourhood organizations, etc. may substitute for formal regulatory pressure (Pargal and Wheeler, 1996). Informal regulation is correlated with the adoption of clean technologies (Blackman and Bannister, 1998). Differences in regulatory costs between the old and the new technologies affect the rate of return on the new technology and the speed of diffusion of technologies (Millman and Prince, 1989; Ecchia and Mariotti, 1994).

Reliance on Market Mechanisms when Inappropriate
Organizations co-ordinate behaviour by promulgating standards and rules, and by offering certification that allows actors to formulate stable expectations about the environment and about the behaviour of other actors. Markets perform such functions incompletely or not at all. Thus, reliance on market mechanisms, to the exclusion of the development of organizations needed to perform standard-setting and other co-ordination functions limits the spread of new technology by increasing uncertainty and preventing the realization of co-ordination benefits.

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