Abstract
Studies report that firms do not invest in cost-effective green technologies. While economic barriers can explain parts of the gap, behavioural aspects cause further under-valuation. This could be partly due to systematic deviations of decision-making agents’ perceptions from normative benchmarks, and partly due to their diversity. This paper combines available behavioural knowledge into a simple model of technology adoption. Firms are modelled as heterogeneous agents with different behavioural responses. To quantify the gap, the model simulates their investment decisions from different theoretical perspectives. While relevant parameters are uncertain at the micro-level, using distributed agent perspectives provides a realistic representation of the macro adoption rate. The model is calibrated using audit data for proposed investments in energy efficient electric motors. The inclusion of behavioural factors reduces significantly expected adoption rates: from 81% using a normative optimisation perspective, down to 20% using a behavioural perspective. The effectiveness of various policies is tested.
Highlights
Why are firms’ investments in green technologies lower than predicted by engineering studies? Can the gap be sufficiently explained as a rational response to risky future cost-savings and information asymmetries? Or do behavioural aspects cause a further systematic undervaluation of green technologies compared to contemporary mainstream investment theory? If so, what implication does this have for policies aimed at increasing such investments?A green technology is one that generates or facilitates a reduction in environmental externalities relative to the incumbent (Allan et al, 2014, p. 2)
Engineering-economic analyses may fail to account for either the reduction in utility associated with energy efficient technologies, or the additional costs associated with them
We introduce a model of technology adoption that explicitly includes the diversity of agents and systematic behavioural deviations from expected utility theory (EUT)
Summary
Why are firms’ investments in green technologies lower than predicted by engineering studies? Can the gap be sufficiently explained as a rational response to risky future cost-savings and information asymmetries? Or do behavioural aspects cause a further systematic undervaluation of green technologies compared to contemporary mainstream investment theory? If so, what implication does this have for policies aimed at increasing such investments?A green technology is one that generates or facilitates a reduction in environmental externalities relative to the incumbent (Allan et al, 2014, p. 2). According to mainstream economic theory, a profit-maximising firm should undertake such an investment whenever these future savings outweigh the upfront cost. Studies based on engineering data regularly report that seemingly cost-effective green investments are not undertaken McKinsey and Company (2009) claims that global CO2 emissions could be reduced by 11Gt per year by investing in cost-effective green technologies, which is not currently happening. The International Energy Agency (Waide and Brunner, 2011) estimates that electric motor driven systems (EMDS) account for 43–46% of global electricity consumption, causing annual CO2 emissions of roughly 6 Gt. At the same time, the IEA estimates that the energy efficiency of EMDS could be cost-effectively increased by 20–30%. Investment decisions focus on low investment costs, and largely ignore the potential cost-savings
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