Published 29 February 2012

Environment-driven business development

Some basic starting points for an active, effective and learning policy

Environment-driven business development assumes technical development in a broad sense

The need to switch to a green, sustainable economy involves very great challenges over a very short period of time. The climate challenge alone means reducing environmental impact in the form of greenhouse gases by at least 80% by 2050. The Government’s target is 100%. Attaining these targets given the forecast population development without reducing economic activity is completely dependent on our managing to develop and implement radically more eco-efficient technologies. Technology in this context is defined as implemented knowledge and includes the entire production process from cradle to cradle, that is to say, also how a worn-out product is reused.

The role of the state is motivated by market failures that slow innovation and prevent environment-driven markets from developing. Since the problems are global, there are also great economic opportunities for those countries that first manage to develop the eco-efficient solutions of the future.

Growth Analysis has been commissioned by the Government to analyse a number of issues that have a bearing on the prerequisites for environment-driven business development.

The assignment consists of four sub-assignments, the final report of the first of which was presented on 30 April 2011. The results from the other three are presented here.

Based on theory and experience, an optimum policy for environment-driven business development consists of a mix of general economic policy instruments and selective (facilitating) measures

One important conclusion from the first assignment that has already been presented is that the research literature and previous experience indicate a need for a mix of both general and selective policy instruments.

Swedish environmental policy in recent years has however aimed at and mainly used general policy instruments such as a carbon dioxide tax and trading in emissions certificates since these are considered to be the most effective ones. The environment-economic theory that one then rests upon states that policy instruments should be directed at the source and preferably consist of only one policy instrument – “one goal, one instrument”. In practice, however, several goals must be taken into account, which often means that an optimum policy consists of a combination of policy instruments to be as sure as possible of hitting the mark.

Common goals include environmental effectiveness, cost-effectiveness, distribution considerations, implementability, and impact on technological development. The last is one of the most important in a socio-economic perspective since technological development can reduce the cost of attaining environmental and climate goals in the long term. That this does not take place spontaneously in the markets is because market failures occur that lead to technology not being developed and implemented to a sufficient extent (1) (2) .

We have insufficient knowledge of the effects of Swedish facilitating measures that have been implemented

By means of a meta-evaluation (3), Growth Analysis has identified and analysed lessons from previously implemented selective measures. The measures were identified in respect of: the measures’ focus, whether the measures had been evaluated, type of evaluation and the results of the evaluations.

A first delimitation generated a gross list of over thirty national measures. Further scrutiny revealed that only a few explicitly combined environmental goals and business-developing goals, which in the study had been set as a criterion for selecting measures. Most had the overarching aim of developing either the environment or trade and industry. It is, however, important to note that several of the rejected measures might very well have had subordinate or implicit aims to combine development of the environment and trade and industry.

The measures selected had an emphasis on supply-driving activities. However, it can be noted that it might be possible to find more demand-stimulating measures among those that were sifted out, or that for other reasons are not included in the present study. There is a great spread among the selected measures between those intended to develop technology, business and markets. There is also a spread as regards the tools that the measures use, between subsidies (for example financial subsidies) and guidance and advice (competence development).

The majority of the measures have been followed up in some way or other. However, only one of the measures has been evaluated in respect of its impact. An impact evaluation is one that seeks to analyse the impact of the measure adjusted for what might have happened if the measure had not been implemented (a contra factual situation). A number of measures have been evaluated in respect of their results.

Most of the evaluations made are purely qualitative. Impact was not measured but instead businesses were mainly asked about the perceived impact of the support. The results of the qualitative result evaluations show without exception that businesses are satisfied with the measure (the support), but it is not evident how far businesses feel that developments would have been similar even without the measure. This means that it is uncertain what extra value the public measures created.

A learning policy needs a better knowledge basis

A rigorous impact evaluation of the Rural Development Programme (which in parts includes measures for environment-driven business development) indicate only minor effects. It is, however, important in this context to note that the strength of the effects is dependent on existing external factors. If the cost of polluting and the cost of raw materials and energy were to increase, the result of the measures would be different. This can be expressed as the selective measures having a better effect if the general policy were clearer and more long-term. At the same time it is reasonable to assume that the impact of the general policy increases through the existence of selective supportive instruments.

The meta-evaluation also looks at some of the regions, where there appear to be some particularly successful efforts on a regional level, for example in Skåne and Västra Götaland.  On the regional level, attempts are made to form cohesive strategies that combine different instruments for environment-driven business development. On the regional level a certain tendency towards more extensive attempts to promote demand has also been observed. It is important that these measures be analysed carefully and that important lessons be fed back to the national level.

All together, Growth Analysis’ conclusion is that there is insufficient knowledge about the results/impact and effectiveness of the measures. This in turn means that there is a significant risk that the wrong measures will be implemented or that the right measures will be implemented in the wrong way. If the quality of the evaluations could be raised, it would be possible to design a better policy, that would be able to achieve greater impact more effectively.

Few companies focus on eco-innovations.

A Eurobarometer survey of over 5,000 small and medium-size companies (4) in EU27 and Sweden showed that only a small proportion (6%) of the companies focus on eco- innovations. Focus means that more than 50% of the investments are directed towards ecoinnovations. Most of the companies, however, invest less than 10% of their innovation budget in eco-innovations. Considering that the term “eco-innovations” comprises everything from more energy- and resource-efficient processes, products and organisation-related measures such as environmental management systems, with no requirement as to real impact, this can be regarded as a weak result, if the ambition is to achieve an adaptation of trade and industry that is consistent with the environmental goals that the EU has drawn up.

More Swedish companies are investing heavily in eco-innovations and are also reporting greater effects from their investments

According to Eurobarometer, big companies (5) invest more in eco- innovations than small companies. It is also primarily big companies who report substantial effects from their innovations.

On average, more Swedish companies (21%) than European companies (16%) report that a relatively high proportion (>30%) of their investments are made in eco-innovations. One sector that makes great investments in eco-innovations is Water and waste collection. At the same time it is in Food and drink and Construction that a high proportion of companies say that they do not invest in ecoinnovations at all, which leads to a somewhat higher proportion of Swedish companies on average who do not invest in eco-innovations at all. Swedish companies thus invest both more and less than European companies in ecoinnovations.

Investments in environmental innovations are relatively evenly distributed between investments in more eco-efficient products, production processes and organisational innovations with slightly more investment in production processes.

Small companies, however, invested to a greater extent in eco-innovative products while larger companies invest more in organisational innovations.

Swedish companies report considerably higher impact from eco- innovations than their European counterparts. In Sweden, 42% of the companies have introduced at least one eco- innovation over the past five years. 24% of them have increase their environmental efficiency by over 40%, which must be considered a very substantial impact. In EU27, slightly more, 45%, have introduced at least one ecoinnovation, but only 4% report an impact of over 40%. A sector that reports significant effects from investments in eco-innovations is Water and waste disposal.

The most serious obstacle to investment in environmental innovations according to the companies themselves is uncertain market demand. The most important driving forces are costs related to energy and raw materials. The companies consider a lack of market demand and an uncertain yield from investments in environmental innovations to be the most serious obstacles to investment in eco-innovations.

The most important driving forces behind investment in eco-innovations are expected increases in energy prices and material costs and present energy prices.

According to what the companies themselves say, the least important obstacle, and also the least important driving force, is access to research collaboration.

Swedish companies consistently consider every obstacle to be less serious than European companies do. Another difference between companies in Sweden and EU27 is that considerably fewer Swedish companies feel that access to funding is an obstacle. Instead, they attach greater weight to the importance of human capital for uptake of environmental innovations.

Another difference is that Swedish companies consider green products to be a driving force for environmental innovation to a considerably greater degree.

Changes in relative prices are only one of many important driving forces behind technological change.

John Hicks, economist and Nobel laureate in economics, presented his ideas concerning the significance of price for technological change as long ago as the 1930s. When the importance of climatic change came to the fore in the 1980s, interest in his hypothesis was reawakened. But despite a large number of scientific studies, it has not gained any theoretical unanimity. Many studies have shown that relative price changes are important as regards implementation and more incremental technological shifts while there is no empirical evidence to show that changes in relative prices play a central role in more fundamental technology shifts.

Technological leaps are by definition associated with great uncertainty, where price is often of little or no importance.

Better analysis of the technological innovation systems is needed to attain better accuracy of aim and greater cost-effectiveness in policy measures

Technological Innovation Systems (TIS) constitute a methodological framework that has been developed on the basis of a need to pursue a policy aimed at pushing technological development in a certain direction and increasing the pace of this technological development. The need for technological development is motivated by the ability of technological development to reduce the cost of attaining climate and environmental goals. Another important motive is to take advantage of the potential for growth in a fast-growing market segment, with enormous business opportunities for the successful ones.

An administrative motive is the need to minimise genuinely high uncertainty by having as good a knowledge and decision basis as possible.

A technological innovation system can be described as a network of players and institutions that collaborate within a specific technical area and contribute to development, dissemination, and use of variants of technologies and/or products.

The purpose of a TIS analysis is to map, analyse and diagnose the system by investigating the innovation system’s players and so-called functions to be able to formulate policy objectives.

One of the objectives of a TIS analysis is to identify weaknesses in the system, their nature, what causes them, how they differ from equivalent systems in other countries. One important issue is what weaknesses the system’s players can be expected to rectify themselves and what weaknesses decision-makers must pay attention to.

In-depth knowledge of the technical innovation system enables the best possible operative and effective policy. On the basis of TIS analyses that have been made, a number of general and specific conclusions have been able to be drawn. Some general conclusions are that it takes decades to create industrial capacity with the ability to develop and disseminate energy engineering with potential on a large scale. Another lesson is that decisionmakers and politicians should refrain from choosing winners at an early stage. Practical politics should instead stimulate variation, experimentation and the development of in-breadth knowledge within a technological field. This is not possible without selective policy instruments directed towards these activities such as support for demonstration installations, reference installations, and subsidies to compensate for prevailing price disadvantages against mature technologies during a growth phase.

In Growth Analysis’ judgement, TIS analyses should be made before any decisions on measures to promote technology. With a TIS analysis it is possible to identify what type of measure has the potential to give the greatest benefit and the required magnitude and extent of the measure.

The TIS analysis does not guarantee success but should lead to greater accuracy and cost effectiveness.

South Korea’s extensive focus on shifting to a climate-efficient green economy is an interesting large-scale experiment.

A sub-assignment carried out in 2011 was to analyse international efforts to promote environment-driven business development that were judged to be of interest from a Swedish policy perspective. Within the framework of this assignment, Growth Analysis chose to make a study of South Korea – a country that a few years ago embarked upon an ambitious attempt to implement a green transformation of its trade and industry.

Over the past 60 years, South Korea has seen rapid economic development – from having been one of the poorer countries in the world to the high standard of living it has today and one of the world’s 20 largest economies. Over the past decade, however, growth has slowed and the country is looking for new sources of growth. A new nation vision,  ”Low Carbon, Green Growth”, was launched in 2008, whereby the country aims to switch to a competitive environmentally friendly trade and industry by using a combination of general and specific policy instruments. The aim is to take large shares of the world market in the field.

One basic activity that has been pointed out as central to green growth is green financing, i.e. companies with environmentally friendly products or services that have good market potential must have access to capital. On the basis of a number of investigations, it was established that there is a great risk that unsatisfactory financing of these companies will cause the green shift of trade and industry in South Korea to fail, due to the market uncertainty as regards environmentally adapted products and services. Against this background, Korea has launched a number of policy measures to reduce the risk for financers and thereby make it possible for more green companies to test their business concepts.

The measures include: (1) state loans direct to green companies, (2) state loans to commercial banks, who in turn lend to green companies, (3) state loan guarantees for green companies who borrow from commercial banks, (4) a deposit-lending programme where private customers are given tax deductions if they save in special green accounts – savings that the banks must then lend to green companies at favourable interest rates, (5) state risk capital funds for investments in green companies and (6) measures to facilitate financing in the capital markets.

As a complement to the various financing solutions Korea has launched a certification programme for green technologies, green projects and green companies, where certified companies in their turn have the possibility to obtain cheaper loans, guarantees and so on. Certification is coordinated by a central certification authority, KIAT, which in turn receives assistance from research institutes and expert authorities to determine whether a technology or a company is entitled to be certified.

Korea has come to be a test bench for green trade and industry policy and it is therefore highly important that Sweden follow developments and learn from the lessons that are generated. In Growth Analysis’ judgement, several of the South Korean measures have a high policy relevance and these should therefore be studied further.

The studies conducted in the assignment point out important building blocks for environment-driven business development.

These building blocks or fundamental starting points were presented separately from the summary in the previous section “Summarising conclusions and proposals”.

(1) ”Spill-over-effects” – i.e. that technology can easily be copied once it has been developed – constitute so-called positive externalities favouring the economy but where the individual innovator under-produces since spill-over effects do not entail any financial remuneration. In order to rectify this, attempts have been made for a long time to work with different kinds of facilitating measures (selective policy instruments).

(2) ”Spill-over-effects” – i.e. that technology can easily be copied once it has been developed – constitute so-called positive externalities favouring the economy but where the individual innovator under-produces since spill-over effects do not entail any financial remuneration. In order to rectify this, efforts have been going on for a long time to work with different kinds of facilitating measures (selective policy instruments).

(3) The term meta-evaluation is normally used in three different contexts. An evaluation is either one that (1) processes the results from two or three evaluations, (2) examines the quality and exactitude in one or more evaluation, or (3) evaluates an evaluation organisation. In this case, we mean (1) or (2).

(4) The sectors in the survey are the Land-based industries, Manufacturing , Construction and road work, Water and waste disposal, and Food and drink.

(5) In the study, the companies have been grouped by turnover as follows: <2. 2-10, 10-15 and >50 million EUR.

Title
Environment-driven business development Some basic starting points for an active, effective and learning policy

Serial number
Report 2012:02

Reference number
2011/057

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