Methodological and Technological issues in Technology Transfer

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5.4.2 Incentives and Barriers to Energy-Saving Investments

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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