Week 1
LECTURES & READINGS (BLOK ET AL. CHAPTER 2)
Introduction
Sustainability is about several aspects:
- Limits to growth
- Intergenerational aspects
- Transitions: behavioural and technological
New ways of thinking needed:
- See systems: time scale
- Collaborate across borders
- Creative problem solving
- Evidence based
Limits to growth
𝐸 𝑌
Energy decomposition: 𝐸 = 𝑌∑ (𝑌𝑖 ) ∗ ( 𝑌𝑖 ) = total amount of energy/emissions decomposed
𝑖
into:
1. Volume: the GDP (Y): the total value output -> produce less (limit to growth)
𝐸
2. Technology: the energy intensity: 𝑖 -> improve technology
𝑌𝑖
𝑌𝑖
3. The sectoral decomposition: some sectors are more energy intensive: -> produce less
𝑌
in certain sectors
Energy increase is caused by an increase in the energy intensity, not by the decomposition
effect (moving to more energy-intensive sectors)
The Netherlands performance
The Netherlands are performing bad:
1. Relatively low energy prices: we are addicted to gas because we have a lot of it
2. Uncertainty because policies are changing a lot: there’s an incentive to wait
3. ICT in the service sector uses a lot of energy
4. Energy intensive international trade
Energy Efficiency Paradox
The Energy Efficiency Paradox: why are seemingly profitable technologies not adopted?
𝑖𝑡 𝑆 −𝐶
𝑖𝑡
Net Present Value: 𝑁𝑃𝑉𝑖 = −𝐼𝑖 + ∑ ( (1+𝑟) 𝑡)
- 𝐼𝑖 : the initial investment
, 𝑆 −𝐶
𝑖𝑡 𝑖𝑡
- ∑ ( (1+𝑟) 𝑡 ): the return you will get in a period of N: 𝑆𝑖𝑡 : what you earn, 𝐶𝑖𝑡 : maintenance
costs, (1 + 𝑟)𝑡 : the discount rate and r: the interest rate
Use discount rate because time value of money: money you have now is worth
more than the identical sum in the future: you could invest it otherwise and there
is inflation
- You should adopt an investment if the NPV=0 or if the IRR (the r for which NPV=0) > the
critical discount rate
Technological development follows S-shaped diffusion curve:
1. Probit or rank models: firms are heterogenous (differences in the goals, needs and
abilities), so the best timing to join differs between firms
2. Epidemic models: the diffusion of (information about) technology happens gradually
Sustainability barriers
Explanations for the Energy Efficiency Paradox: barriers:
1. Measurement errors:
- Hidden investment costs: costs of information gathering, research, negotiations on
contract terms and of decision-making: firm specific, depending mainly on economic,
organisational and human capital factors
- Hidden annual costs:
Costs of raising funds: tend to differ between firms
Annual costs of maintenance and operation associated with the technology
Annual depreciation costs of the old not yet fully depreciated technologies:
currently used technologies have to be depreciated before new technologies are
purchased
- Hidden annual savings: the total amount of energy currently used in a firm (and the price
paid for energy) influences the savings potential of a technology
If the total use of energy and energy costs are too low the energy base is too
small for the technology to ever be profitable
Even though some technologies may be profitable, low energy costs often receive
little attention in investment decisions
Large energy users pay relatively low prices in most countries
- Different (high) critical discount rates are being used
2. Information as a precondition:
- Information about existing technologies
Size and the typical environment in which firms operate influence the information
gap
- many firms are uninformed about policy instruments and institutions for innovation
support
, 3. Capital as a precondition: a lack of capital is the most important barrier regarding
general innovation investments
- The lack of internal capital (= from the business) is a larger constraint than the lack of
external capital (= from outsider investors)
Could also be that lack of internal capital in the end leads to an external financial
constraint
- Failure in the market: banks are unwilling to finance seemingly profitable investments
Could also be because of other reasons: bijv. certain financial requirements that
prevent them from lending (more) money
4. Non-rational behaviour:
- “Satisficing principle”: look for satisfactory profits instead of profit maximization
Making enough profit to keep shareholders happy/for investors to maintain
confidence in the management they appoint
Apply rules of thumb and routines
- Firms can’t acquire and process all relevant information
- Adoption decisions are more sensitive to short-term cost-benefits than long-term
benefits: bijv. adoption subsidies work better than tax reduction
5. Uncertainty: in the presence of uncertainty and an irreversible investment there is an
option value of waiting
- Firms tend to delay investments in projects to wait for new information to arrive
- Firms require a compensation for the uncertainty that they face
- Firms put a mark-up on the critical discount rate that they apply
- There is a lot of uncertainty associated with energy-saving technologies:
Future prices -> price will likely go down
Qualities of currently used and future technologies
The future level and volatility of interest rates and the interest costs associated
with them
The potential savings of energy-efficient technologies
Future policies: timing and implementation of the Kyoto protocol, subsidy
schemes, the strictness of environmental regulation etc.
- The foregone energy saving is not the only cost of delaying investment:
First mover advantages
Learning-by-doing and learning-by-using advantages
6. Learning curve: the costs and benefits of technology are not constant over time: the
costs decrease with cumulative installed capacity
- Internal learning: the returns build up over time for the firm that adopted the technology
LECTURES & READINGS (BLOK ET AL. CHAPTER 2)
Introduction
Sustainability is about several aspects:
- Limits to growth
- Intergenerational aspects
- Transitions: behavioural and technological
New ways of thinking needed:
- See systems: time scale
- Collaborate across borders
- Creative problem solving
- Evidence based
Limits to growth
𝐸 𝑌
Energy decomposition: 𝐸 = 𝑌∑ (𝑌𝑖 ) ∗ ( 𝑌𝑖 ) = total amount of energy/emissions decomposed
𝑖
into:
1. Volume: the GDP (Y): the total value output -> produce less (limit to growth)
𝐸
2. Technology: the energy intensity: 𝑖 -> improve technology
𝑌𝑖
𝑌𝑖
3. The sectoral decomposition: some sectors are more energy intensive: -> produce less
𝑌
in certain sectors
Energy increase is caused by an increase in the energy intensity, not by the decomposition
effect (moving to more energy-intensive sectors)
The Netherlands performance
The Netherlands are performing bad:
1. Relatively low energy prices: we are addicted to gas because we have a lot of it
2. Uncertainty because policies are changing a lot: there’s an incentive to wait
3. ICT in the service sector uses a lot of energy
4. Energy intensive international trade
Energy Efficiency Paradox
The Energy Efficiency Paradox: why are seemingly profitable technologies not adopted?
𝑖𝑡 𝑆 −𝐶
𝑖𝑡
Net Present Value: 𝑁𝑃𝑉𝑖 = −𝐼𝑖 + ∑ ( (1+𝑟) 𝑡)
- 𝐼𝑖 : the initial investment
, 𝑆 −𝐶
𝑖𝑡 𝑖𝑡
- ∑ ( (1+𝑟) 𝑡 ): the return you will get in a period of N: 𝑆𝑖𝑡 : what you earn, 𝐶𝑖𝑡 : maintenance
costs, (1 + 𝑟)𝑡 : the discount rate and r: the interest rate
Use discount rate because time value of money: money you have now is worth
more than the identical sum in the future: you could invest it otherwise and there
is inflation
- You should adopt an investment if the NPV=0 or if the IRR (the r for which NPV=0) > the
critical discount rate
Technological development follows S-shaped diffusion curve:
1. Probit or rank models: firms are heterogenous (differences in the goals, needs and
abilities), so the best timing to join differs between firms
2. Epidemic models: the diffusion of (information about) technology happens gradually
Sustainability barriers
Explanations for the Energy Efficiency Paradox: barriers:
1. Measurement errors:
- Hidden investment costs: costs of information gathering, research, negotiations on
contract terms and of decision-making: firm specific, depending mainly on economic,
organisational and human capital factors
- Hidden annual costs:
Costs of raising funds: tend to differ between firms
Annual costs of maintenance and operation associated with the technology
Annual depreciation costs of the old not yet fully depreciated technologies:
currently used technologies have to be depreciated before new technologies are
purchased
- Hidden annual savings: the total amount of energy currently used in a firm (and the price
paid for energy) influences the savings potential of a technology
If the total use of energy and energy costs are too low the energy base is too
small for the technology to ever be profitable
Even though some technologies may be profitable, low energy costs often receive
little attention in investment decisions
Large energy users pay relatively low prices in most countries
- Different (high) critical discount rates are being used
2. Information as a precondition:
- Information about existing technologies
Size and the typical environment in which firms operate influence the information
gap
- many firms are uninformed about policy instruments and institutions for innovation
support
, 3. Capital as a precondition: a lack of capital is the most important barrier regarding
general innovation investments
- The lack of internal capital (= from the business) is a larger constraint than the lack of
external capital (= from outsider investors)
Could also be that lack of internal capital in the end leads to an external financial
constraint
- Failure in the market: banks are unwilling to finance seemingly profitable investments
Could also be because of other reasons: bijv. certain financial requirements that
prevent them from lending (more) money
4. Non-rational behaviour:
- “Satisficing principle”: look for satisfactory profits instead of profit maximization
Making enough profit to keep shareholders happy/for investors to maintain
confidence in the management they appoint
Apply rules of thumb and routines
- Firms can’t acquire and process all relevant information
- Adoption decisions are more sensitive to short-term cost-benefits than long-term
benefits: bijv. adoption subsidies work better than tax reduction
5. Uncertainty: in the presence of uncertainty and an irreversible investment there is an
option value of waiting
- Firms tend to delay investments in projects to wait for new information to arrive
- Firms require a compensation for the uncertainty that they face
- Firms put a mark-up on the critical discount rate that they apply
- There is a lot of uncertainty associated with energy-saving technologies:
Future prices -> price will likely go down
Qualities of currently used and future technologies
The future level and volatility of interest rates and the interest costs associated
with them
The potential savings of energy-efficient technologies
Future policies: timing and implementation of the Kyoto protocol, subsidy
schemes, the strictness of environmental regulation etc.
- The foregone energy saving is not the only cost of delaying investment:
First mover advantages
Learning-by-doing and learning-by-using advantages
6. Learning curve: the costs and benefits of technology are not constant over time: the
costs decrease with cumulative installed capacity
- Internal learning: the returns build up over time for the firm that adopted the technology
