Sustainability and Environmental Decision Making (Sustainable Development) 9811592861, 9789811592867

Citation preview

Sustainable Development Series Editors: Parkash Chander · Euston Quah

Euston Quah Renate Schubert  Editors

Sustainability and Environmental Decision Making

Sustainable Development Series Editors Parkash Chander Jindal School of Government and Policy New Delhi, India Euston Quah Nanyang Technological University Singapore, Singapore

The MRW Series on Sustainable Development explores and examines a range of key sustainability questions, right from the abstract concepts, definition, criteria, and approaches around the subject of Sustainable Development to the examination of more concrete issues from policies and practices. Through various volumes looking at global scenario in general and Asia pacific in particular, the series introduces economic tools in sustainability, including cost-benefit analysis, environmental impact assessment, economic appraisal techniques, methods to deal with uncertainty and risks, and other methods to evaluate the impacts of policy instruments applied by governments to sustainability issues. Finally, the series advocates best practices on the part of produces, consumers and governments, while charting the future for sustainability. More information about this series at http://www.springer.com/series/15042

Euston Quah • Renate Schubert Editors

Sustainability and Environmental Decision Making With 74 Figures and 79 Tables

Editors Euston Quah Nanyang Technological University Singapore, Singapore

Renate Schubert ETH Zurich (Eidgenössische Technische Hochschule Zürich) Zürich, Switzerland

ISBN 978-981-15-9286-7 ISBN 978-981-15-9287-4 (eBook) ISBN 978-981-15-9288-1 (print and electronic bundle) https://doi.org/10.1007/978-981-15-9287-4 © Springer Nature Singapore Pte Ltd. 2021 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Series Preface

The term “sustainable development” – first coined by former Norwegian Prime Minister Harlem Brundtland in 1987 in the World Commission on Environment and Development report – has been used and misused over the years to justify many actions or causes. Sustainability, in the context of that report, is defined as “development that meets the needs of the present without compromising the ability of the future to meet their own.” This concept, while noble and caring for the environment and that for the future generation, has however come to mean different things to different people. To some, it implies a greater awareness of environmental issues, while to others it means a coordinated, organized, and systematic evaluative theory for economic and public policy. Much intellectual debate on sustainability also stems from whether society allows for substitution between natural capital (green areas, fossil fuels, and forests) and man-made capital (buildings and other infrastructure) in the course of economic growth and development. Still others would be happy with efforts to measure sustainability by way of human progress, welfare, and income growth. For much of environmental management, one clear focus is to achieve environmental quality by reducing man-made pollution to a level that is acceptable to society. In all, sustainability is a nebulous but attractive concept with an important guiding principle and essentially asks the basic question for any activity: “Can this activity continue?” There exists many works on sustainability, most of which are related to global sustainability, as well as sustainability in the Western world. In contrast, many Asian countries are still prioritizing strong, yet possibly unsustainable, economic growth. Majority of these developing Asian countries are economically far behind the developed world. Some of these countries are experiencing pockets of abject poverty, struggling to meet the needs of the present in areas such as sanitation and education. It is evident that strong economic growth remains paramount to improving living standards in many Asian regions, but we cannot overlook the fact that growth carries its own costs to the natural environment and to peoples’ health. The true success of growth thus hinges on whether “sustainable development” has been achieved and whether Asian countries are able to balance the twin goals of economic growth and environmental protection.

v

vi

Series Preface

The MRW series on Sustainable Development explores and examines a range of sustainability questions as follows, with each book dealing with a particular topic. 1. The origins and definitions/meanings of the term “sustainable development”; the relationship between sustainability and economic efficiency/growth; sustainability theories and models; sustainability criteria including concepts of weak and strong sustainability; other key conditions required to achieve sustainable development; approaches to measuring sustainability. 2. The roles of various economic agents in sustainable development. What can and what should producers, consumers, and governments do? 3. How has sustainability policies and measures been implemented in developed economies? What are the lessons for Asia? 4. How does sustainability feature in the Asian environment? How is sustainability perceived and understood by Asian countries? What has the region achieved thus far? What are the strengths or weaknesses/limitations of currently adopted policies and approaches? 5. Economic tools in sustainability, including cost-benefit analysis, environmental impact assessment, economic appraisal techniques, methods to deal with uncertainty and risks, and other methods to evaluate the impacts of policy instruments applied by governments to sustainability issues. 6. International policies and sustainability, including international institutions to resolve sustainability related issues, and the history of international negotiations, agreements, and actions. 7. Charting the future for sustainability: What lies ahead? What are the future challenges, new solutions, and technological innovations? 8. Sustainability in megacities. 9. Balancing environment and economic growth, including the complexity of sustainable development in the Asian context. 10. Climate change and international agreements to tackle it. 11. The problem of Southeast Asia haze and its possible solutions. 12. Economic instruments and mechanisms for achieving sustainability and related goals. Audience Practitioners; government policy makers; industry specialists; university students, researchers, and faculty members taking courses on environment, resource management, ecology, economics, environmental science, urban and resource planning, etc.; NGOs; and others. Jindal School of Government and Public Policy, NCR Sonipat, Haryana, India Department of Economics Nanyang Technological University Singapore, Singapore March 2021

Parkash Chander Euston Quah

Volume Preface

To the extent that environmental problems and issues are largely economic problems – as both share the same characteristics of scarcity of resources and competing uses – we should use more economic tools and economic thinking to bear on the environment. The idea of sustainable development with its emphasis on good environmental management has been known for a very long time now, since the 1987 United Nations World Commission on Environment and Development’s report “Our Common Future.” The main idea is to ensure that development needs of today must not come from compromising the ability of future generations to meet their own needs. Yet, many of the world’s developing nations face the immediate challenge of lifting their people out of poverty and providing them a better and higher standard of living. This pursuit of economic growth enables them to fulfill the aforementioned goal, but often it comes with a price in having to trade-off with some environmental losses. Thus, sustainable development ideas allow these trade-offs to be evaluated, and where needed, the losses are mitigated. The problem lies in operationalizing the concept of sustainable development, making this idea relevant and pragmatic for implementation. The chapters in this volume present various economic instruments, commonly understood in the classroom, to the real world. Ranging from emission taxes to permits to command and control regulations, and to some local government initiatives and innovative instruments; the chapters show how they are applied and for what particular targeted purpose. The second half of the book strengthens the first set of chapters by presenting which public policies were designed and how they were implemented in select countries from Switzerland to Southeast Asia and to East Asia, including China and Japan. Public policies on sustainable development are also analyzed and discussed in some detail for certain developing countries. The presentations include developments in the countryside and rural settings to the urban environmental management practices. Failures and success cases in choice of instruments, their policy designs, limitations, and strengths were also highlighted in select countries.

vii

viii

Volume Preface

In summary, this book is about the contribution economics can offer to mitigate and resolve environmental problems and the often-encountered issues raised about environmental decisions, choices, efficiency, and sustainability. Nanyang Technological University, Singapore, Singapore ETH Zurich (Eidgenössische Technische Hochschule Zürich), Zürich, Switzerland May 2021

Euston Quah Renate Schubert

Acknowledgment

The editors have benefitted greatly from the contributions of our authors, and the research and administrative assistance of Benedict Foo. We would also like to thank Ms. Divya Rajakumar at Springer Nature for her advice and suggestions. All errors remain with the editors.

ix

Contents

1

Energy Efficiency Gap in Switzerland: An Empirical Study on Online Purchases of White Goods . . . . . . . . . . . . . . . . . . . . . . . Marcel Stadelmann

1

2

Behavioral Spillovers in Environmental Behavior . . . . . . . . . . . . . Jan Portmann, Claus Ghesla, and Renate Schubert

29

3

Predictors of Environmental Behaviour . . . . . . . . . . . . . . . . . . . . . Samuel Chng and Natalia Borzino

85

4

Using Incentives and Social Information to Promote Energy Conservation Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mike Brock and Natalia Borzino

107

Environmental Decision Making in Small Companies: A Behavioral Economics Perspective . . . . . . . . . . . . . . . . . . . . . . . Manuel Grieder, Deborah Kistler, and Jan Schmitz

129

5

6

Valuing the Environment for Public Policies . . . . . . . . . . . . . . . . . Euston Quah and Tsiat Siong Tan

7

Applied General Equilibrium in Environmental Decision-Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Di Yin and Youngho Chang

153

187

8

Environmental Policy and Sustainable Growth in Japan . . . . . . . . Go Tamakoshi and Shigeyuki Hamori

9

Eco-civilization and Sustainable Development: The Case of China’s Countryside . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Zhikai Wang, Chong He, and Simin Zhang

227

Energy Sustainability Policies in Malaysia: Addressing Energy Efficiency and Environmental Greening . . . . . . . . . . . . . . . . . . . . . Santha Chenayah and Rajah Rasiah

247

10

217

xi

xii

11

Contents

Sustainable Development for Vietnam’s Economy in the Context of Globalization and Industrial Revolution 4.0 . . . . . . . . . Dong Phong Nguyen, Xuan Vinh Vo, Van Chien Nguyen, Xuan Duc Mai, and Quoc Khanh Duong

281

12

Singapore’s Energy Sustainability Policies . . . . . . . . . . . . . . . . . . . Tilak K. Doshi and Nahim B. Zahur

311

13

Promoting Electricity Conservation in Singapore Martina Cecchini

.............

377

14

The Effects of Upward and Downward Social Comparisons on Energy Consumption Behavior . . . . . . . . . . . . . . . . . . . . . . . . . Lorenz Göette, Zhengyi Jiang, Jan Schmitz, and Renate Schubert

409

15

Role of International Remittances as an Economic Instrument for Poverty Eradication in Line with Sustainable Development Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Farhad Taghizadeh-Hesary, Naoyuki Yoshino, and Miyu Otsuka

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

441 467

About the Series Editors

Parkash Chander is an adjunct professor at the University of Pittsburgh, fellow of the Econometric Society, associate editor of the Journal of Public Economic Theory, member of the advisory board of the Journal of Economic Surveys, and member of the international advisory board of Singapore Economic Review. Professor Chander has previously held professorial positions at the National University of Singapore and the Indian Statistical Institute, Delhi. He was formerly head of the Department of Economics, National University of Singapore, and head of the Indian Statistical Institute, Delhi. Professor Chander has researched primarily in the areas of public economics, environmental economics, and game theory and its applications to climate change. His publications include articles in Econometrica, Review of Economic Studies, Journal of Economic Theory, and other leading journals in economics. He has completed a book on climate change, which was published in 2017. He has also written on policy matters in national newspapers and magazines. Professor Chander has held visiting appointments at Johns Hopkins University, California Institute of Technology, University of Pennsylvania, Vanderbilt University, CORE (Louvain-la-Neuve), and Nanyang Technological University, among other institutions.

xiii

xiv

About the Series Editors

Euston Quah is Albert Winsemius chair professor of economics and director of the Economic Growth Centre at Nanyang Technological University, Singapore. He is also editor of the Singapore Economic Review and president of the Economic Society of Singapore. Professor Quah has published widely in the fields of cost-benefit analysis, environmental economics, and law and economics. Contributing to more than a hundred publications, inclusive of academic journals and lead opinion pieces in media, Professor Quah has also served as external reviewer for some economics schools in various universities in Asia. Some of his works have been selected for inclusion by the International Library of Critical Writings in Economics in the UK as well as received favorable reviews in such leading journals as Economic Journal, Journal of Economic Literature, and the Journal of Labour Economics. His textbook with E.J. Mishan, now in its 6th edition (Routledge, UK, 2020), is regarded as a classic text in this subject and used by many universities and governments. It was listed for reference by the US Office of Management and Budget and also by the US Department of Transportation. Professor Quah was listed in Google Scholar Profiler in 2020 as among the top ten most highly cited university economists in the area of cost-benefit analysis in the world. Formerly Vice Dean of the Faculty of Arts and Social Sciences at the National University of Singapore and headed the economics departments at both Nanyang Technological University and the National University of Singapore, Professor Quah has been and continues to be advisor to many government ministries in Singapore. Professor Quah chaired the School of Humanities and Social Sciences at NTU. He is a member of the Social Sciences Research Council of Singapore, Board Member of the Competition and Consumer Commission of Singapore, and a Board Member of the Market Surveillance and Compliance Committee of Singapore’s Energy Market Company. Professor Quah is a recipient of the Public Administration Medal (Silver) in 2020.

About the Editors

Euston Quah is Albert Winsemius chair professor of economics and director of the Economic Growth Centre at Nanyang Technological University, Singapore. He is also editor of the Singapore Economic Review and president of the Economic Society of Singapore. Professor Quah has published widely in the fields of cost-benefit analysis, environmental economics, and law and economics. Contributing to more than a hundred publications, inclusive of academic journals and lead opinion pieces in media, Professor Quah has also served as external reviewer for some economics schools in various universities in Asia. Some of his works have been selected for inclusion by the International Library of Critical Writings in Economics in the UK as well as received favorable reviews in such leading journals as Economic Journal, Journal of Economic Literature, and the Journal of Labour Economics. His textbook with E.J Mishan, now in its 6th edition (Routledge, UK, 2020), is regarded as a classic text in this subject and used by many universities and governments. It was listed for reference by the US Office of Management and Budget and also by the US Department of Transportation. Professor Quah was listed in Google Scholar Profiler in 2020 as among the top ten most highly cited university economists in the area of cost-benefit analysis in the world. Formerly vice dean of the Faculty of Arts and Social Sciences at the National University of Singapore and headed the economics departments at both Nanyang Technological University and the National University of Singapore, Professor Quah has been and continues to be advisor to many government ministries in Singapore. xv

xvi

About the Editors

Professor Quah chaired the School of Humanities and Social Sciences at NTU. He is a member of the Social Sciences Research Council of Singapore, board member of the Competition and Consumer Commission of Singapore, and board member of the Market Surveillance and Compliance Committee of Singapore’s Energy Market Company. Professor Quah is a recipient of the Public Administration Medal (Silver) in 2020. Professor Renate Schubert is a professor of economics and a dedicated researcher and teacher. Her key focus is on behavioral economics, environmental and energy economics, social and political analyses, as well as digitization topics. Besides research and teaching, Professor, Schubert is an advisor to governmental committees and an experienced expert in assessments of research projects and research institutions. For many years, Professor Schubert has been professor of economics at ETH Zurich (Switzerland). In 2015 she joined the Singapore-ETH Center (SEC) to run projects in the FRS (Future Resilient Systems) program as well as in the Cooling Singapore and Heat Safe Singapore cluster. She has been involved in projects coping with the mitigation of urban heat effects, assessing the costs and benefits as well as the citizens’ willingness-topay associated with different mitigation measures. Measuring, modelling, and enhancing social resilience in case of natural but also pandemic disasters is part of her project portfolio. Furthermore, Professor, Schubert’s research has been focused on adequate measures to induce behavioral changes with respect to the consumption of natural resources. Hereby, the existence of positive and negative spillover effects are of special importance. The work mostly relies on empirical studies including lab experiments, field experiments, and questionnaire-based surveys. Professor, Schubert has been the author of high-rank publications, but also reaches out to decision-makers to foster and support sustainable decisions. Professor, Schubert has been member of various juries, evaluation committees, and research networks worldwide. She chaired the German Advisory Council on Global Change (WBGU) as well as the external advisory board of the Center for Research on

About the Editors

xvii

Environmental Decisions (CRED) at Columbia University. Professor, Schubert initiated the ClimPol (Climate Policy Making for Enhanced Technological and Institutional Innovation) initiative within the ETH Domain and was a member of the advisory board of the Rachel Carson Center in Munich. For many years, she was the chair of the supervisory board of the Karlsruhe Institute of Technology (KIT). Professor, Schubert has been a member of the OcCC (Organe Consultatif sur les Changements Climatiques) of the Swiss Government as well as of the Advisory Group to the Swiss Government on the Agenda 2030.

Contributors

Natalia Borzino Future Resilient Systems (FRS) Program, Singapore-ETH Centre (SEC), Singapore, Singapore Mike Brock School of Economics, University of East Anglia, Norwich, UK Martina Cecchini Future Resilient Systems (FRS) Program, Singapore-ETH Centre (SEC), Singapore, Singapore Youngho Chang School of Business, Singapore University of Social Sciences, Singapore, Singapore Santha Chenayah Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia Samuel Chng Lee Kuan Yew Centre for Innovative Cities, Singapore University of Technology and Design (SUTD), Singapore, Singapore Tilak K. Doshi Middle East Institute, National University of Singapore, Singapore, Singapore Quoc Khanh Duong University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam Claus Ghesla AFRY Design Company, Vienna, Austria Lorenz Göette University of Bonn, Bonn, Germany National University of Singapore, Singapore, Singapore Manuel Grieder School of Management and Law, Center for Energy and the Environment, Zurich University of Applied Sciences (ZHAW), Winterthur, Switzerland Shigeyuki Hamori Graduate School of Economics, Kobe University, Kobe, Japan Chong He School of Economics, Zhejiang University, Hangzhou, China

xix

xx

Contributors

Zhengyi Jiang Future Resilient Systems (FRS) Program, Singapore-ETH Centre (SEC), Singapore, Singapore Deborah Kistler Department of Humanities, Social and Political Sciences, ETH Zurich, Zürich, Switzerland Xuan Duc Mai University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam State Bank of Vietnam, Ho Chi Minh City Branch, Ho Chi Minh City, Vietnam Dong Phong Nguyen University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam Van Chien Nguyen University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam Thu Dau Mot University, Thủ Dầu Một, Vietnam Miyu Otsuka Graduate School of Economics, Keio University, Tokyo, Japan Jan Portmann University of Zurich, Zürich, Switzerland Euston Quah Nanyang Technological University, Singapore, Singapore Rajah Rasiah Asia-Europe Institute, University of Malaya and Institute of Energy Policy and Research (IEPRe), Universiti Tenaga Nasional (UNITEN), Kuala Lumpur, Malaysia Jan Schmitz Department of Economics, Institute for Management Research, Radboud University Nijmegen, Nijmegen, The Netherlands Renate Schubert ETH Zurich (Eidgenössische Technische Hochschule Zürich), Zürich, Switzerland Marcel Stadelmann School of Management and Law, Zurich University of Applied Sciences, Winterthur, Switzerland Farhad Taghizadeh-Hesary Tokai University, Tokyo, Japan Keio University, Tokyo, Japan Go Tamakoshi Graduate School of Economics, Kobe University, Kobe, Japan Tsiat Siong Tan Singapore University of Social Sciences, Singapore, Singapore Xuan Vinh Vo University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam Zhikai Wang School of Economics, Zhejiang University, Hangzhou, China Di Yin School of Economics and Management, Beijing University of Technology, Beijing, China

Contributors

xxi

Naoyuki Yoshino Keio University, Tokyo, Japan Financial Research Center, Financial Services Agency (FSA), Government of Japan, Tokyo, Japan National Graduate Institute for Policy Studies (GRIPS), Tokyo, Japan Nahim B. Zahur Department of Economics, Queen’s University, Kingston, ON, Canada Simin Zhang School of Economics, Zhejiang University, Hangzhou, China

Introduction

Awareness of the necessity to increase the sustainability of our use of natural resources is omnipresent – in science as well as in business. Politics seems to be lagging behind – and there is still the stereotype around that more environmental sustainability might be too costly and hence detrimental for the economy. In addition, many lobby groups, which might experience immediate disadvantages from stricter rules in the environmental area, are very active. It is interesting to see that many obstacles to enhancing environmental sustainability are related to the use of short-term timeframes. And indeed, from the perspective of individuals, more sustainability often requires to bear some additional costs now and receive additional benefits only much later. Those who tend to discount the future at high rates will not be motivated to engage in sustainability-enhancing strategies. Science clearly points out that for our societies a further decrease in environmental sustainability will be detrimental. Our future economic possibilities will shrink considerably if global climate change proceeds, if droughts, floods, or hurricanes increase in number and magnitude, if nonrenewable resources become scarcer, if soils are overexploited or overused for settlement purposes, if heat islands become more frequent and intense, etc. Along with shrinking economic opportunities, health problems will augment and social resilience might be impacted in a negative way, given the amplified environmental stress, which populations – especially urban populations – experience. Hence, it seems more than adequate to think about ways to foster environmental sustainability in the near future. Designing such ways in an effective manner requires knowledge about current behaviors, which influence the natural environment and the use of natural resources. We have to know why individuals or companies overuse the natural environment or are not interested in the long-term environmental effects of their behaviors or decisions. Only based on such knowledge, recommendations on how to make decisions more environmentally friendly and hence more sustainable can be developed. The chapters in this book can be split into two categories. The chapters in the first category focus on economic instruments and directly show their application. Those in the second category deal with an overview of how their governments promote green actions and sustainability. The chapters analyzed how successful their government’s policies were as well as the accompanying government campaigns and special programs which would not be captured in the first category.

xxiii

xxiv

Introduction

The contributions in this book show many different contexts, which are the decisive points in environmental decision-making. They elaborate on barriers for more environmentally friendly decisions, but also on the effects of various potential ways to increase the environmental sustainability of individual or group decisions. Therefore, they provide a plentitude of insights, especially for policymakers, how to change the choice architecture of decisions in order to let the respective decisions foster the environmental quality on local, regional, national, and global levels. Small nudges or incentives may have big effects on securing a high quality of the natural environment also in the future. This book shows how we can arrive at future-ready decisions that protect the environment, the economy, and the societal cohesion in the future.

Chapter Summaries: Economic Instruments Energy Efficiency Gap in Switzerland: An Empirical Study on Online Purchases of White Goods Dr. Marcel Stadelmann Household appliances that run on electricity have an important influence on the environment. In most countries, electricity is produced from fossil fuels. Burning fossil fuels has a strong negative impact on the environment, reaching from the emission of greenhouse gases to the emission of polluting carbon-particulate matter. Therefore, it seems important to make sure that household appliances are as energy efficient as possible, i.e., use as less electricity as possible for given purposes. When we observe private households purchasing household appliances that run on electricity, we encounter the so-called energy-efficiency gap. This means that households purchase the cheaper and less energy-efficient devices even if in the long run, looking at purchasing prices plus operating costs, the more energy-efficient products would be less costly for the households. Obviously, the purchase prices dominate purchase decisions in a nonrational way. Marcel Stadelmann investigates reasons to explain this nonrationality. For his analysis, he focuses on whiteware in Switzerland. More specifically, he found twin products, i.e., appliances, which are identical with respect to many of their technology-related as well as aesthetic and function-related features, and only differ with respect to their energy efficiency and their purchase price. Such twins can be easily compared with respect to the role, which energy efficiency and purchase prices play in purchasing decisions. Many other potentially confounding factors are excluded from the comparison, which makes the comparison very clear and helps to identify reasons for the observable energy-efficiency gap. Stadelmann states that for whiteware products, the existence of twins can be observed rather often. The twins Stadelmann looks at are characterized by the fact that the energyefficient device has a lower present value of total costs than the inefficient device. Nevertheless, sales statistics show that the inefficient twin devices are sold more often than the energy-efficient ones. The author does his analysis for different

Introduction

xxv

discount rates. According to the discount rates, the differences in the net present value (NPV) of purchasing plus operating costs vary in size. This means that also the energy-efficiency gap might tend to be bigger (for a rather low NPV of costs for the energy-efficient product) or smaller (for a higher NPV of costs for the energyefficient device). Stadelmann calculates exact values for the energy efficiency gap taking into account the mean annual electricity consumption of the respective twin appliances. It turns out that for reasonable discount rates, the energy-efficiency gap of twin products in the Swiss whiteware market is rather small. One of the reasons seems to be that retailers offer rather big rebates on the purchase of energy-efficient products. If in fact the difference in the NPV of total costs is small between energy-efficient and non-efficient appliances, decisions in favor of non-efficient devices seem hardly irrational, at least from an economic point of view. Economically it does not matter substantively whether you buy the energy-efficient or non-efficient device. It seems to be rather a matter of having pro-environmental preferences or not, which determines the purchase decision of private households. Therefore, policy interventions to cope with the energy-efficiency gap for household appliances seem to be of minor importance. Stadelmann supplements his analysis by a short survey, which he did with households who recently bought a whiteware product. With this survey, he finds two factors that might motivate private households to buy inefficient devices with respect to their energy consumption. One is a low financial literacy of households buying inefficient products, the other is missing information on the existence of energy-efficient twin products. These two aspects seem to play an important role for purchase decision in favor of energy inefficient household appliances even in cases where a nearly identical energy-efficient device exist. The author concludes that these aspects should in any case be tackled by policymakers, since they seem to be relevant even in case of twin products with hardly any difference in their NPV of total costs. The less similar the devices, the more additional factors that influence households’ purchase decisions have to be looked at.

Behavioral Spillovers in Environmental Behavior: Domains, Links, and Economic and Psychological Factors Jan Portmann, Claus Ghesla, and Renate Schubert Policymakers trying to move individuals’ decisions toward more environmentally friendly decisions often try to nudge or incentivize them to behave in a specific way in a specific area. For instance, policymakers try to make car driving more expensive in order to get more people use their bicycles or public transport. What is often neglected, however, is that behavioral changes of individuals in one area might bring along behavioral changes in other areas too. These changes in other areas, which are induced as side effects of targeted changes in specific areas, i.e., the so-called spillovers, may either reinforce or compensate the originally aspired effects of an increased environmental sustainability.

xxvi

Introduction

There is theoretical and empirical literature on both types of spillover effects, i.e., on moral licensing as well as on moral consistency effects. Moral licensing effects mean that individuals who are contributing to socially wanted public good in one area may tend to “misbehave” in another area. Having done something positive for the society in a specific area, they might feel entitled to also do something less positive related to another topic. On the other hand, individuals that are nudged into behaving more environmentally friendly might change their attitudes and become more environmentally conscious persons wanting to help increase environmental sustainability. Behaving more environmentally friendly in several areas would let them feel morally consistent which would give them additional satisfaction. The chapter by Jan Portmann, Claus Ghesla, and Renate Schubert investigates the framework conditions under which moral licensing or moral consistency can be observed. Knowing more about the relevance of these effects is important for policymakers. In case of moral licensing, nudging measures should be accompanied by measures to prevent an overcompensation of the originally positive effect for the environment. In case of moral consistency, policy interventions might become rather efficient. Pushing the behavior in one area toward more sustainability would come along with quasi-automatic improvements in other areas. The chapter consists of two studies. A first study relies on a consumer survey for a representative sample of the Swiss population. Based on this survey, four clusters of environmental behaviors are identified which seem to be strongly connected to each other. Strongly connected areas seem to be more prone to spillover effects than other areas. At a first glance, almost all domains of environmental behaviors seem to be positively correlated. For some domains, for instance water conservation and electricity saving, the correlations seem to be rather strong. Based on further analyses, investigating individuals’ intentions to behave environmentally friendly in the future, the authors identify four groups of environmental behaviors that prove to be very closely connected. These four areas are recycling behaviors, conservation behaviors, mobility behaviors, and behaviors related to waste and food. The authors conclude that these areas are specifically prone for spillover effects to occur. A second study reports on an online experiment testing potential moderators of moral licensing or moral consistency effects. The key focus of the experiment is on the moral licensing effect since this is the more harmful and problematic effect. As said before, this effect might cancel out positive effects that were achieved by targeting a specific behavior and making it more environmentally friendly. Three types of potentially moderating factors have been considered: the costliness of a behavior, the temporal distance of behaviors, and the strength of commitment. It turns out that for all types of moderators, moral licensing effects do not play an important role within the framework conditions that were considered. On the contrary, positive spillovers between closely related environmental domains seem to be rather plausible. The authors conclude that it might be important to make sure that many individuals are aware of how closely different environmental domains are linked. The more aware they are, the better the chances for amplifying beneficial

Introduction

xxvii

original effects via positive spillovers and hence to make the respective policy interventions more effective.

Predictors of Environmental Behaviour: The Role of Value Orientations, Environmental Concern, and Beliefs in Singapore Samuel Chng and Natalia Borzino Environmental decision-making may involve factors like value orientations, environmental concerns, the awareness of environmental consequences of one’s own behaviors, or ascriptions of responsibilities. Samuel Chng and Natalia Borzino investigate the importance of these factors for predictions of environmental behaviors. Specifically, they focus on the effects of three different value orientations (egoistic, altruistic, and biospheric). For a sample of 146 individuals living in Singapore, they analyze nine everyday environmental behaviors, comprising regular household behaviors, purchasing behaviors, and travel behaviors. The authors hypothesize that high environmental concerns and a high biospheric value orientation will result in a higher degree of environmental friendliness of behaviors. For the nine analyzed environmental behaviors, the authors expect that the relevance of environmental concerns and biospheric value orientation may vary. The study was carried out as a survey study and the results were essentially derived based on correlations between predicting variables and environmental behaviors. Furthermore, regression analyses were done. The authors find that for some of the nine behavioral areas, i.e., for turning off the TV standby mode, for purchasing products with less packaging, for using public transport whenever possible, and for walking or cycling in case of shorter journeys, individuals tend to behave in an environmentally friendly way. These environmentally friendly behaviors can be observed more often if the individuals are aware of and feel a high responsibility for the environmental consequences of their behaviors. The authors also detect some behaviors – for instance purchasing products made out of recycled paper – which are rarely chosen in the sample that was analyzed. This is an interesting result for policymakers who might wish to think of interventions to increase the frequency of these behaviors. Similarly, as in Portmann, Ghesla, and Schubert, this chapter also finds behavioral areas, which seem to be closely related. In particular, purchasing products with little packaging and using public transport, as well as walking or cycling whenever possible seem to be areas, which are closer related to other areas. It seems to be worthwhile to exploit whether positive spillovers could be achieved between these areas. Encouraging more environmentally friendly behavior in one area through appropriate interventions might change the choice framework of individuals so that they want to become more consistent with respect to the environmental friendliness of their behaviors. Hence, they would also behave more environmentally friendly in other areas without additional incentives. Improved knowledge on the possibilities of such positive spillovers would help policymakers to design more efficient strategies.

xxviii

Introduction

Using Incentives and Social Information to Promote Energy Conservation Behavior: Field Experiment Mike Brock and Natalia Borzino As already mentioned, saving energy is an important contribution to environmental sustainability. Saving energy implies not only a reduction per capita in the emission of greenhouse gases and polluting particles, but also the preservation of natural resources, especially of nonrenewable ones. Individuals decide on their energy consumption, and it is important to shape the choice architecture such that more decisions of more individuals are made in favor of energy conservation. As known from other fields, the question of whether extrinsic incentives or intrinsic motivation drives energy conservation is important for the design of appropriate decision support mechanisms. Mike Brock and Natalia Borzino investigate various potential interventions to increase individuals’ energy savings. The authors ran a field study in student residences at a UK university. They gave weekly feedback to their participants with respect to their absolute and relative energy use. The persistence of energy conservation effects after the end of such feedback is a further topic of interest for the authors. It turns out that residents who were good performers during the intervention period continued with a low energy usage level in the post-intervention period. Obviously and not surprisingly, individuals with pro-environmental preferences can be easily nudged into a longer-lasting energy conservation behavior. For all others, relevant short-term effects can be achieved by offering monetary rewards for saving energy. Yet, these effects are not sustainable. Furthermore, the authors find that extrinsic motivation, for instance by issuing prizes for achieving high-energy savings, does not crowd-out intrinsic motivation during the intervention phase. However, once the prizes were issued, the residents receiving a reward quickly reverted back to their prior less energy-saving behaviors. Residents, who did not receive an extrinsic reward, seemed to be more prone to sustain the energy savings from the intervention phase also to the post-intervention phase. Overall, this chapter recommends to policymakers to rather opt for nonfinancial incentives in order to promote energy conservation behaviors. The chances that the desired behavioral changes persist for a longer period seem to be higher for interventions based on nonfinancial incentives than for those using monetary rewards.

Environmental Decision Making in Small Companies: A Behavioral Economics Perspective Manuel Grieder, Deborah Kistler, and Jan Schmitz Not only private households but also firms play an important role to foster environmental sustainability. Hence, it matters that also companies make decisions that help to protect and sustain the natural environment. In bigger companies, decision-making is oftentimes rather complex since it involves many different

Introduction

xxix

stakeholders at different hierarchical levels with different negotiation power. Due to the complexity of this company decision-making, which has not much to do with environmental sustainability per se, this volume does not have a focus on bigger firms. Yet, for small and medium-sized enterprises (SMEs), the situation is different. In many cases, just one person or only a few persons make relevant decisions, which comprise environment-related decisions. Therefore and since, for instance within the European Union, over 95% of all companies are SMES, it is interesting to analyze the framework conditions, which might foster environmentally friendly decisions in SMEs. Manuel Grieder, Deborah Kistler, and Jan Schmitz do this analysis in their contribution. They are mainly asking whether nudges and other instruments from the behavioral economics toolkit, which are typically conceived for individuals’ decision-making, are also effective for SMEs. In particular, the authors discuss whether and how social or other regarding preferences present bias or a high discounting of future events as well as loss aversion influence the environmental management and the sustainability-related decision-making in SMEs. The authors state that many SMEs are already taking environmentally friendly decisions, whereas others miss to take environmental actions that would even be in their own financial interest. As explained in the chapter by Stadelmann, biases might be a key source for this “environmental efficiency gap.” The chapter argues that the three above-mentioned behavioral phenomena, i.e., social preferences, present bias, and loss aversion play a role in environmental decision-making in SMEs. Focusing on them when designing policy interventions for SMEs may increase the prevalence of good environmental management practices in such firms. The authors show that instruments like nudges, belonging to the behavioral economics toolbox, are of special interest for SMEs since they are more binding than just voluntary approaches, but less strict than conventional regulatory policies like taxes or subsidies. Nudges can be a good entry point for the few persons that make strategic decisions in SMEs. Such instruments appeal to these decision-makers as individual persons but have the potential to also shape their business decisions, since private and strategic decisions are very closely linked in SMEs. Often, personal and corporate responsibilities can hardly be separated in SMEs. Therefore, taking the personal social preferences and biases as an entry point and shaping them in a way that influences and changes business decisions toward more environmental sustainability seems to be an interesting new approach to environmentally friendly corporate decisions. Building on the personal preferences and biases of SME decision-makers and using the built-in spillovers from personal to business-oriented decisions seem promising approaches for policymakers. Making use of such spillovers might be an efficient way to push SMEs toward more environmental sustainability. This way is efficient since the instruments and their effectiveness, which are known from a great number of studies on individuals and their environmental behavior, can be taken as a model for how to foster SMEs environmental sustainability.

xxx

Introduction

Valuing the Environment for Public Policies Euston Quah and Tsiat Siong Tan It is no simple feat to value the environment. Unlike most goods and services, environmental goods and services are not traded in conventional markets due to their public goods characteristics of non-excludability and/or non-rivalry, as well as the fact that they tend to exist in the form of externalities. As a result, they tend to be out of sight and consideration for producers and consumers. Despite this, based on intuition we know that people do value the environment. We prefer a cleaner environment, but we are unwilling to sacrifice everything for a better natural environment. Thus, the environment can be thought of to have some positive value, albeit not an infinite one. In determining the amount of environmental goods and services to provide or preserve, the question lies in society’s degree of preference for the environment vis-à-vis other goods and services. Due to the constraint of scarce resources, tradeoffs must be made. Generally speaking, the choices made should ideally maximize society’s well-being. This notion of welfare maximization inevitably raises its own ethical and philosophical questions. Concerning measuring society’s preferences, money may be used to measure unpriced preferences as it allows us to make a quantifiable comparison between environmental goods and market goods. The resulting value measure serves to inform policymaking and thereby justifies the allocation of limited resources among competing uses. To this end, there are a variety of economic valuation methods that can be employed. The chapter by Euston Quah and Tsiat Siong Tan provides an overview of these methods for environmental goods with examples of policy applications. Valuation methods include demand and nondemand curve approaches, including the dose-response method, contingent valuation method, and hedonic pricing. The chapter further discusses the damage schedules approach and benefits transfer in cases where conventional valuation methods are less suitable. The chapter begins by running through the various components of total economic value, starting from use values and nonuse values then moving into their subdivisions. Then moving into valuation methods, they cover various demand and nondemand curve approaches, including the aforementioned methods. They end the section by mentioning other approaches such as the pairwise comparison approach and benefits transfer. In the conclusion, Quah and Tan provide a table summarizing economic valuation methods and their potential applications. They emphasize that no valuation method is without its flaws, and for any study, the choice of method ultimately depends on the researcher’s judgment. They then go into detail surrounding the considerations when choosing valuation techniques for developing countries, mentioning that those appropriate for developed countries may not be suitable for developing ones. In the end, they conclude by stressing that the conversion or destruction of environmental assets is often an irreversible process and that the value of the ecosystem is not simply the sum of all environmental goods.

Introduction

xxxi

Applied General Equilibrium in Environmental Decision-Making Di Yin and Youngho Chang When economists attempt to answer research questions regarding environmental regulations, they tend to analyze them in various analytical frameworks. The existing analytical frameworks include game theory, cost-benefit analysis, applied general equilibrium analysis, environmental risk analysis, input-output analysis, and the qualitative approach. The chapter by Di Yin and Youngho Chang reviews studies in environmental decision-making in the framework of applied general equilibrium analysis. The applied general equilibrium has various applications, one of which being the evaluation of the welfare change and matching cost that come by as a result of environmental regulations. This framework has not only been used extensively in environmental decision-making research but also has been applied in international trade. For this chapter, 104 studies were selected for review out of 243 studies. They begin by covering the searching methodology, the searching scope, and the potential limitations. Then they summarize the characteristics of the selected studies, before moving into the classification of the articles. This is broken down into three dimensions: the functional type, the time horizon, and the model randomness. The chapters are also classified according to the research topics and the environmental policy instruments. In the next section, the data is cross-tabulated and analyzed by the attributes of the methodologies, the attributes of the research topics, and the attributes of the environmental policy instruments. They found that a pure CGE model seemed to be the most extensively used among all research topics in environmental decision-making. The static and dynamic models appeared to be used in equal measure within the chapters reviewed. The main variations were in terms of what topics each model tends to be applied to. Comparing the usage of deterministic versus stochastic models, they found that stochastic models were used much less, with only a one-tenth share in the overall chapters reviewed. They close by discussing the existing literature and potential research directions.

Chapter Summaries: Country Studies and Policy Interventions One focus of this book is on sustainable environmental policy, with the policies of various countries evaluated in detail. The following first five chapters explore the environmental policies of Japan, China, Malaysia, Vietnam, and Singapore respectively. Each chapter explores the governmental policies of the past and now, and provides some country-specific suggestions relevant to the policies discussed. The next two chapters explore topics related to energy conservation in Singapore, followed by a chapter exploring the role of international remittances on developing countries.

xxxii

Introduction

Environmental Policy and Sustainable Growth in Japan Go Tamakoshi and Shigeyuki Hamori The chapter by Shigeyuki Hamori and Go Tamakoshi looks at the current decarbonization policies in Japan, and how they have changed over time. With Japan being the fifth largest country with regard to greenhouse gas emissions, the government has recently prioritized decarbonization in its policy discussions. This is not to imply that Japan was idle regarding environmental policies in the past. In 1979, they enacted the Energy Conservation Law, and in 1997, they pushed for the adoption of the Kyoto Protocol, among other initiatives. More recently, it appears that Japan has dropped behind in its efforts to combat climate change, in terms of its environmental policies. A stark example was the country’s increase in coal-fired generation capacity, which was met with much criticism. This loss of visibility might be understood through the characteristics of the country’s environmental policies. Arimura et al. (2019) explained that Japan’s environmental policies were unique through their bottom-up, voluntary approach, compared to heavier approaches such as direct command and control. They mentioned that the Ministry of the Environment in Japan practices a softer negotiation strategy with representatives of companies in relevant sectors, which does not involve any punishments for noncompliance. This could potentially be a significant reason as to why Japan’s decarbonization policies appear lacking. Hamori and Tamakoshi first evaluate Japan’s existing decarbonization policies. They start with the 1979 Energy Conservation Law, before moving to the Carbon Tax which was enacted in 2012. They found that the effectiveness of this tax has been ambiguous, as its current rate is much lower than the rates of other European countries with carbon taxes. Next, they turn to the Feed-In-Tariff, which was also launched in 2012. This policy requires electric utilities to obtain electricity from renewable energies. Despite its arguable contribution to the recent expansion of renewable energy, the possibility of doing away with this policy has been considered recently. Lastly, they touch on the J-Credit System which was introduced in 2013. The above four policies originally operated mostly separately, but with the growing global movement toward decarbonization, the Japanese government has been looking into a more integrated approach. This led to the “Long-Term Strategy as a Growth Strategy Based on the Paris Agreement” in June 2019. Comprising measures for specific sectors, as well as measures that go across sectors, this strategy illustrates Japan’s vision for a carbon-free society as quickly as possible, aligning with Japan’s current quantitative target, which is to reduce greenhouse gas emissions by 80% in 2050. From the above, Hamori and Tamakoshi identify two benefits to Japan’s decarbonization policies. The first is that the above policies put weight on employing the country’s strength in its energy-saving technologies. They highlight the Top Runner Program as one of the key players toward building the country’s strength in this direction. The second benefit is the clear long-term vision set by the country’s decarbonization policies, pointing the country toward its bold target of 80% reduction in greenhouse gas emissions by 2050.

Introduction

xxxiii

However, Hamori and Tamakoshi also found some issues that have to be resolved to move forward. First, they point to the halfway status of carbon pricing policies in Japan, suggesting a lack of an agreement on the country’s future direction. They mention the low carbon tax rate and the fact that emissions trading schemes in Japan are not implemented at a nation-wide level. The second issue is regarding Japan’s long-term strategy. They state that though it encapsulates a host of policy alternatives, it lacks a clear focus. Some examples that they highlight include the lack of a strategy to deal with the increasing reliance on coal-fired power for the energy sector and a lack of specifics concerning how to achieve Well-to-Wheel Zero Emission for the transportation sector. The third issue is concerning the limited source of funding for decarbonization policies, which calls into question the effectiveness of these measures in the long-run. Toward the end of the chapter, Hamori and Tamakoshi suggest some potential policy directions. The first suggestion is to exert some heavy-handed regulations, looking at other countries such as Sweden who have done so but yet have successfully avoided criticisms from the business community. The next potential direction is for the government to provide back-end support for nongovernmental organizations and corporations who are spontaneously working on decarbonization. This could either be in the form of policy support for capital investment to those companies who have committed to greenhouse gas reduction targets such as the Science-Based Targets, or it can be in the form of incentives related to taxation or subsidies to companies with good decarbonization ratings, which can be obtained from organizations like the Carbon Disclosure Project, which provides ratings of companies’ decarbonization based on information concerning their greenhouse gas emissions and climate change initiatives. The authors conclude by reiterating the importance of clarifying shortterm policy measures to revitalize the country’s decarbonization policies.

Eco-civilization and Sustainable Development: The Case of China’s Countryside Zhikai Wang, Chong He, and Simin Zhang Zhikai Wang, Chong He, and Simin Zhang take a more chronological and historical approach as compared to some of the other chapters. It focuses on China’s efforts toward sustainable economic and social development as it relates to the countryside. Labeled as “Green Development,” these efforts include countrywide experimentation of sustainable development that leads to high-quality growth. Some of the initiatives covered in this chapter include “China’s Agenda 21” and Xi Jinping’s “Innovation, Coordination, Green, Openness and Sharing” concept proposed in 2015. According to the authors, these are some of the initiatives that have been marking China’s path of sustainable development up till now. Wang, He, and Zhang begin with the evolution of China’s path toward sustainable and green development. They highlight various proposals along the way, such as the scientific development concepts that were proposed in 2003 by the 16th National Congress of the CCP and the “Two Mountains” theory that General Secretary Xi

xxxiv

Introduction

Jinping proposed in 2005. After that, they elaborate on ecological civilizations and the concept of green development. In the second section, they touched on the rural revitalization strategy in China. This strategy has five guidelines, namely industrial prosperity, ecological livability, rural civilization, effective governance, and wealthy life. They break down each of these guidelines, regarding how they apply to rural areas as well as how they complement each other to promote rural revitalization. They also cover some of the issues faced by remote rural areas, such as their difficulty in developing popular ecotourism projects and shortages of infrastructure. In the end, they briefly run through the stages of development of the Green Rural Revival Program in Zhejiang. In the third section, China’s efforts toward investing in the rural areas, through the construction of the beautiful countryside were discussed. Here they expound on the origin of the “Two Mountains” theory, originating from Xi Jinping’s visit to Yucun Village in Anji County. According to the authors, throughout the “Twelfth Five-Year Plan” period, Anji County heavily prioritized the environment, shutting down a variety of high pollution and energy-consuming enterprises. They also removed low-output and low-efficiency enterprises, focusing on adjusting the proportions of primary, secondary, and tertiary industries to an optimal ratio. In the past, it was popular to destroy the forest and bamboo to make space to plant white tea, but this deteriorated the environment, causing soil erosion. Thus, Anji County decided to reverse this, by decreasing white tea cultivation, and replanting that with bamboo. Since 2014, over 40,000 acres of land in the mountain area have been restored to their original status. Under the forest property right system, the government encouraged the people to develop farming, breeding, and processing industries reliant on mountain and reservoir resources. This ensured the survival of farmers as well as ecological protection in Anji County. The fourth section looks at Jiaozuo, which was a successful case of a coal mineral resource exhausted city that was transformed into an ecotourism paradise. Back in the 1990s, coal-related industries accounted for more than 90% of the total added value of secondary industries above designated size in Jiaozuo City. However, overexploitation led to the exhaustion of the city’s coal resources, leading to many of the workers depending on government relief in the 1990s. When the government introduced a strict pollution control policy in 1998, shutting down many small enterprises across multiple industries, this further worsened Jiaozuo’s situation. Fortunately, the natural landscape and rich cultural heritage were still preserved in some corners of Jiaozuo, shifting the city’s focus toward its tourism sector. According to the authors, their shift toward tourism development appears to have worked well for the city. In March 2003, “Jiaozuo’s Landscape” and “Yuntai Mountain” were rated as China’s favorite tourism brands, and the number of tourists and ticket revenue of Yuntai Mountain rose to the top among more than 40 other tourist spots such as Shaolin Temple and Longmen Grottoes in Henan Province. The city also saw a 10.7% rise in its per capita GDP and a 21.5% increase in its local fiscal revenue. With the significant benefits that Jiaozuo city faced as a result of their tourism development, the success of Jiaozuo’s transformation is now widely referred to as the “Jiaozuo Phenomenon”.

Introduction

xxxv

The last section looks at the application of cost-benefit analysis into China’s pollution control and environmental protection. Wang, He, and Zhang propose costbenefit analysis as an effective analytical tool for the government, society, and enterprises making pollution control decisions. Highlighting the issue of air pollution in China, they suggest cost-benefit analysis as a useful tool to identify how to balance pollution control policy and economic and social development options. They take the next two subsections to run through the cost and benefits of factory relocation, shutdown, and production limitation as a solution for haze control. Then they close the section by highlighting some of the issues with applying this method. In conclusion, they find that green development has moved past simply being a slogan, but it is now a development concept that is highly recognized and affirmed by the Chinese government. They also highlight a considerable gap in China’s green development. As such, they suggest that China’s society urgently needs to form a strong atmosphere for promoting green development methods and green lifestyles. They acknowledge that the effects of green development are largely determined by institutional arrangements, rather than technological and capital constraints. They also emphasize the importance of education for a green development mindset to permeate through all levels of society.

Energy Sustainability Policies in Malaysia: Addressing Energy Efficiency and Environmental Greening Santha Chenayah and Rajah Rasiah One of the chapters, by Santha Chenaya and Rajah Rasiah, delves into the energy sustainability policies in Malaysia. They start by looking at some of the critical theoretical arguments in the environmental literature so far. They start with the early ideas of Malthus concerning checks on population growth, then move toward the inverted “U” shaped environmental curve to explain the relationship between the environment and economic growth. The third and most recent argument that they touch on is the one positing that countries can continue to grow as long as they replace fossil fuels with renewable energy. This argument is the basis behind the United Nations Convention on Climate Change (UNFCCC) targeting the substitution of fossil fuels with renewable energy. Despite their efforts, most of the focus has only been on decarbonization from energy consumption. As such, Chenaya and Rasiah look into some government initiatives taken to check other sources of environmental disaster, such as the disposal of municipal waste, deforestation, and haze. First, they take us through some of the policies that have been adopted by Malaysia. The past policies that they explore include the 1979 National Energy Policy, the Kyoto Protocol in 2002, the Renewable Energy Policy in 2001, and the National Renewable Energy Policy launched in 2010. Next, they look into the sources of energy consumption worldwide, before going into Malaysia’s sources. They show the historical growth in Malaysia’s energy consumption from 1965 to 2017 split into various types of sources. To better reflect the inefficiencies that fossil fuels incur when being converted into final energy, an inefficiency factor is applied.

xxxvi

Introduction

They also screen various energy policies against their desired policy objectives. They looked into energy production and consumption trends in Malaysia, as well as energy demands. They touched on the Kyoto Protocol, specifically the Clean Development Mechanism (CDM), which allows industrialized countries with a greenhouse gas reduction commitment to invest in projects that reduce emissions in developing countries as an alternative to more expensive emissions reductions. Under this, the Biomass Energy Plant Lumut was the first Malaysian project to be registered as a CDM project. Doshi and Zahur also went through the status of existing energy policies from 2006, as well as some financial incentives and energy security initiatives. Finally, they raise their proposed energy mix, comparing it to the current mix. They believe that solar power has the greatest potential for Malaysia, though storage capabilities will need to be explored. Other than hydropower and biomass and biogas, they also cover smart grids and smart meters, mentioning Cyberjaya’s role as a living lab for IoT (Internet of Things). They highlight Tenaga Nasional Berhad’s grid strategy, which they believe is of great importance given the projected growth of domestic demand for power and utilities due to economic growth.

Sustainable Development for Vietnam’s Economy in the Context of Globalization and Industrial Revolution 4.0 Dong Phong Nguyen, Xuan Vinh Vo, Van Chien Nguyen, Xuan Duc Mai, and Quoc Khanh Duong The chapter by Dong Phong Nguyen, Xuan Vinh Vo, Nguyen Van Chien, and Duong Quoc Khanh looks into Vietnam’s economic growth since the Doi Moi economic reforms in 1986. They touch on some of Vietnam’s socioeconomic achievements, highlight some of the risks that the country faces, and provide their recommendations through a sustainable development model consisting of three aspects (economic, social, and environmental). They begin with an evaluation of Vietnam’s economic performance since 1986 and split it into three periods: 1986–1996, 1996–2006, and 2006–2019. Beginning with the implementation of the Doi Moi policy in 1986, they track Vietnam’s economic progress by graphing out some economic indicators. Through this, they show the impact of the socioeconomic crisis during the period 1987–1990, specifically on the country’s GDP. From 1990 to 1996, Vietnam faced a period of continuous growth as the economy began to recover. The authors point out the rise of Vietnam’s degree of trade openness throughout this period. The chapter then moved on to the 1996–2006 period, focusing on Vietnam’s expansion of its trade relations and participation in many international trade organizations. One notable event at the start of this period was the normalization of diplomatic relations between the USA and Vietnam. Post-normalization, Vietnam’s economy grew more than 2.5 times from USD $24.66 billion in 1996 to USD $66.37 billion in 2006. One sore spot was the level of foreign direct investment (FDI), which maintained generally low levels throughout this period. It is noted that despite this, the share of exports and

Introduction

xxxvii

degree of trade openness continues to increase. In 2007, Vietnam joined the World Trade Organization (WTO), marking a historic milestone in Vietnam’s integration into the world economy. The authors observed the rapid growth of international trade and FDI after Vietnam joined the WTO. This is mainly seen through the significant spikes in export turnover, import turnover, foreign direct investment, and GDP. The following section looks at the risks and challenges that Vietnam faces in the context of globalization and the Fourth Industrial Revolution (Industry 4.0). It begins by introducing globalization and Industry 4.0 and their impact on the economy. Next, the authors identify some new trends in Vietnam, including the digital economy, the green economy, and the global value chain and reshoring trend. From the Vietnam Private Economy Forum 2019, the digital economy is understood as all economic activities based on digital platforms, and digital economic development is the use of digital and data technologies to create new business models. The green economy is a concept from the United Nations Conference on Sustainable Development, aimed at lessening environmental risks and ecological scarcities as well as enhancing human well-being and social equity. The global value chain is a globalized production line in which many countries participate in various stages including concept, manufacturing, and logistics. The authors find that Vietnam has the opportunity to become an important link in the global value chain, in light of globalization and the free trade agreements between Vietnam and other countries. However, they also acknowledge the rising trend of reshoring. Reshoring can minimize or eliminate any costs associated with outsourcing and also shorten the time taken to launch new products into the market. The end of the aforementioned section focuses on the risks of Vietnam’s economy in the context of globalization 4.0. The first risk identified is the heavy dependence on international trade and the FDI sector. This risk arises as Vietnam’s economy opens up, with exports of FDI enterprises dominating the national economy in key export sectors, and will be a significant risk that the country has to overcome in the future. The second risk identified is the possibility of falling out of the global value chain and into the medium-income trap. The third risk is about privacy and cybersecurity issues, which come with the development of the digital economy. The fourth and final risk identified is a rising redundancy of low-skilled labor and a lack of highly skilled labor. The final section talks about sustainable development for Vietnam’s economy. The authors go into Vietnam’s sustainable development strategies, such as their 2030 Agenda Sustainable Development with 17 sustainable development goals and 115 specific goals. Based on the definition of sustainable development, the authors build a sustainable development model for Vietnam based on three major pillars – economic, social, and environmental. In this model, the green economy is the solution to environmental problems, the digital economy promotes economic development, and human resource development solves social problems, especially issues related to labor and employment. For the remainder of the section, the authors go through the above three aspects and Vietnam’s progress on each of them. The scale of Vietnam’s digital economic market is about USD $9 billion, accounting for one-eighth of the Southeast Asian market with a value of USD $72

xxxviii

Introduction

billion. Consequently, Politburo issued Resolution No. 52-NQ/TW, which included a target for the country’s digital economic market to hit USD $90–95 billion by 2025, ensuring a 20% proportion of GDP. The authors point out that this will not be easy to achieve if Vietnam does not seriously implement business environment reform, take advantage of globalization, and invest in high-quality human resources toward sustainable development. To transform into a digital economy by 2030, Vietnam needs at least 100,000 digital technology enterprises to develop a digital economy, build smart cities, and more. Regarding the green economy, prime minister issued Decision No. 153/2004/ QĐ-TTg dated August 17, 2004, on strategic orientation for sustainable development in Vietnam. In the past, several investment projects by foreign investors faced many environmental effects, arousing the annoyance of locals and conflicting with the goal of sustainable development. One example is the case of Vedan discharging waste into Thi Vai River. In the push for a green economy, the government has issued a Green Growth Strategy Framework, in which the goal is to build an economy based on science and technology to achieve green growth, low carbon, efficient economic structure, many green technologies, and sustainable development. In the long term, Vietnam will establish appropriate facilities, technology, human resources, and institutions to manage and orient economic development towards green growth measured by a number of indicators such as energy-saving, using renewable energy, reducing emissions in agriculture, cleaner manufacture, the percentage of investment in the environment, and green GDP. For human resource development, one of the main issues identified is a rising redundancy of low-skilled labor and a lack of highly-skilled labor. One solution suggested is tax transformation, which involves raising tax revenue and converting it into social welfare activities, with a focus on education and training. This can be done by increasing the personal income tax on those with high income and a high level of skills. With the additional tax revenue, the government could subsidize education and training activities for low-skilled workers and those wishing to improve skills and professional knowledge. Human resource development is also an effective solution for Vietnam to escape the cheap labor trap and upgrade its position in the global value chain. To explain the effectiveness of this policy, the authors graph out the relationship between wages and labor value (as understood as skills and qualifications). In the above policy, the authors suggest taxing at the average wage because if taxing at a higher level, the tax revenue will be not enough to compensate for the cost of education and training, and if it is lower, this can raise social unrest because the majority of workers will suffer the increase in income tax while the unemployment problems are increasingly tense due to the negative effects of the industrial revolution. In the conclusion, the authors talk about Vietnam’s progress towards integration into the world economy. They acknowledge that Vietnam has opened to attract FDI but overlooked the environmental impacts while their institutional policies are not transparent and clear. As a result, many domestic and foreign investment projects caused serious environmental harm. The authors’ solution to this is their Green Growth Strategy Framework, in which the goals of building an economy based on

Introduction

xxxix

scientific and technological advances to achieve green growth, low carbon emission, efficient economic structure, and sustainable development. At the same time, the government also needs to develop a strategy for highly qualified human resource development to meet the needs of digitizing the economy and upgrading Vietnam’s position in the global value chain.

Singapore’s Energy Sustainability Policies: Balance Between Market and Government Tilak K. Doshi and Nahim B. Zahur The chapter by Tilak K. Doshi and Nahim B. Zahur assesses the energy sustainability policies in Singapore. They kick off by discussing how sustainability, in general, relates to energy policy. Given historical arguments (as seen in the Club of Rome report) concerning fears of resource depletion, Doshi and Zahur show through World Bank studies how the price drops of various commodities across the past century suggest that these fears are misplaced. Recently, rising carbon emissions and anthropogenic global warming have taken center stage in the discussions surrounding energy sustainability. The “Stern Review on the Economics of Climate Change,” a study commissioned by the British government and released in October 2006, claimed disastrous consequences if the world failed to act against global warming. This was a stark difference from most of the other available economic modeling studies, and this can be attributed to differences in their assumed discount rates. Energy sustainability is very closely associated with “energy security”: one cannot have sustainable energy policies without a reliable supply of energy. Energy security has been present in the political discourse for at least a hundred years, but still, there is difficulty in defining it, let alone in measuring it. One such attempt to measure energy security is the “Index of US Energy Security” compiled by the US Chambers of Commerce’s energy policy group. According to Doshi (2011), energy security has been the justification for much bad policy. He posits that many state- and company-led actions tend to lead to more inefficiency and may even endanger energy security. Next, Doshi and Zahur look at these issues in the Singaporean context. Similar to other countries, Singapore has to balance priorities in meeting the simultaneous requirements of economic growth, energy security, and environmental sustainability. The country is faced with a variety of policy challenges related to energy sustainability, both on domestic and international fronts. These policy challenges include the perceived need to promote energy efficiency and “renewable” energy initiatives, the perennial concerns about improving energy security in the context of a small islandstate importing all of its energy needs, and the need to participate in international and regional forums while ensuring the country’s economic competitiveness and growth prospects are not compromised by inefficient or defective multilateral agreements. Then they cover the use of energy and emissions across the sectors in Singapore. Energy consumption is split according to end-use sectors, and CO2 emissions per

xl

Introduction

capita are graphed from 1990 to 2016. This reveals that despite the growing CO2 emissions that have matched the increase in energy consumption, CO2 emissions per capita have declined since the mid-1990s. Of course, we cannot rely solely on per capita emissions to define Singapore’s status, being a city-state in a world of generally larger, less urbanized countries. Next, they compare Singapore’s CO2 emissions per sector to Hong Kong, Taiwan, South Korea, and the UAE. They note that for UAE and Singapore, a relatively high share of emissions is from the manufacturing and construction sectors. After that, they look at power generation by fuel source, noting the move from oil to natural gas, before concluding that section. The following section assesses Singapore’s energy sustainability policies, including the new carbon tax, subsidies for electric vehicles, policies targeting the adoption of solar, and climate change adaptation efforts. In the conclusion, they find that by any standard, Singapore has successfully achieved the broad objectives of energy security, environmental sustainability, and economic growth over the decades since independence. They reiterate the five strategies identified by the government as integral to the country’s energy policy framework, reject the possibility of a vast “energy-efficiency gap,” and highlight Singapore’s large public investments to build the LNG regasification terminal and the underground Jurong Caverns oil and petrochemicals storage infrastructure to support energy security and diversification objectives. They close by commenting on Singapore’s ability to amass savings and resources, quoting Nobel Laureate Franco Modigliani, who commented that “Singapore is accumulating assets on a massive scale. . .you wonder what is the point; do you want your kids much wealthier than you are?” (Tripathi, 1992, as cited in Doshi, 1997).

Promoting Electricity Conservation in Singapore Martina Cecchini Using electricity that is produced from fossil fuels has negative effects on the natural environment. Not only is the global climate change promoted but also other negative effects, like particle pollution are linked to the use (and production) of electricity. Conserving electricity is hence an important goal for many countries. It also matters, for example, for Singapore. There are essentially two ways to reduce the electricity consumption of private households. One refers to private households when they decide to purchase energy-efficient or nonefficient appliances (see the contribution by Marcel Stadelmann). The second option is to incentivize private households to use their devices in an efficient way, i.e., to switch them off in case that users are not at home and to use energy-intense devices like air-conditioning systems not very often and at rather high temperatures. Martina Cecchini analyzes which incentives might work for private households to let them behave in a more energy-efficient way. In this context, she is especially interested in the effects of social norms on Singaporean households. She ran a survey on Singaporean citizens and permanent residents. Her goal was to find out whether social norms are strong predictors for electricity conservation behaviors. In addition, she is interested in a comparison of the effects of social norms, personal norms, and habits.

Introduction

xli

At the side of a conventional questionnaire, Cecchini uses so-called vignettes, i.e., short fictional stories to find out to which type of norms, including habits, households reacted in a strong way. She finds out that habits seem to be the most important driver of private households’ electricity conservation activities. Personal norms, indicating that electricity conservation is something one should do or reminding people that electricity conservation has positive effects for themselves as well as for others, hold the second place. Social norms seem to play a rather weak role in normal times. The influence of social norms seems to be rather indirect: Social norms seem to strengthen electricity conservation as a personal norm or they seem to support the formation of saving electricity habits. In spite of the rather modest direct effect of social norms on electricity conservation in normal times, a change of social norms, for instance during a crisis, seems to make social norms more powerful to an initiative or foster electricity saving. In this case, social norms may increase the effectiveness of norm-based interventions to trigger households into electricity conservation. A potential explanation, which Cecchini gives for this effect, is the anchoring bias. She implements a change in social norms by presenting sequentially two different vignettes with two different social norms. In some cases, the social norm becomes stricter, in other cases less strict. It turns out that the individuals’ reactions to the second vignette depend on how it relates to the first vignette. Social norms becoming stricter seem to result in stronger efforts to save electricity. The author concludes from this insight, that providing information on how a social norm evolves over time might be useful in order to make people become more sensitive to electricity saving. In this context, Cecchini qualifies Singapore’s utility bills, which indicate the consumption of the entire country over time as an interesting model. Yet, she points out that those households, which get to know that they use less electricity than the average, might be confronted with a problematic incentive: they might feel encouraged to use more electricity – as many others do. Therefore, from a policy maker’s perspective, it might be a better solution not to give information on the average consumption in a specific region, but to indicate which percentage of households is below average or which percentage reduced their electricity consumption during the last few months. Obviously, the design of social information plays an important role and should be taken into account when deciding on nudges to make people’s behavior more environmentally friendly.

The Effects of Upward and Downward Social Comparisons on Energy Consumption Behavior: Evidence from a Field Study on Air-Conditioning Usage Lorenz Götte, Zhengyi Jiang, Jan Schmitz, and Renate Schubert Social comparisons and their role for electricity conservation of private households are also the topics of this chapter by Lorenz Götte, Zhengyi Jiang, Jan Schmitz, and Renate Schubert. The key focus of their contribution is the analysis of the

xlii

Introduction

air-conditioning usage behavior of residents at a university dormitory in Singapore. The residents participated in a field experiment, in which they became part of one of three different groups. One group received so-called upward comparison feedback, i.e., they were informed about their own air-conditioning usage as well as about the distribution of the air-conditioning usage of all other residents, hereby highlighting the usage of those residents with a very low air-conditioning consumption. The second group received so-called downward comparison feedback, including feedback on their own consumption and the distribution of the air-conditioning usage of the other residents, hereby emphasizing the usage of those residents who were consuming a lot of air-conditioning. The third group was a control group, which did not receive any feedback at all. The idea behind this experiment was the expectation that residents consuming a lot of electricity for air-conditioning purposes might become motivated to save on air-conditioning-related electricity if they are informed that many others are already saving more on electricity than they do. On the other hand, based on previous literature, the authors expected residents in the downward comparison group to rather increase their electricity consumption if they know that they are conserving more electricity than many others (the so-called boomerang effect). The argument behind the authors’ expectations lies in the relevance of reference points for one’s own decision behavior. Conducting the experiment and assessing the respective data show that overall there is no statistically significant difference between the two groups who receive the upward or downward feedback and the control group. At least with respect to the downward feedback, this is good news because the treatment or intervention did not trigger low-consumption residents to use more air-conditioning-related electricity. Overall, the boomerang effect known from the literature, describing the phenomenon that individuals with relatively low electricity consumption tend to increase their consumption once they get to know that many others consume more than they do, cannot be found. On the other hand, against the authors’ expectations, no additional conservation effects could be achieved by upward comparisons. If additional electricity saving is aimed at, policymakers must hence find other ways to nudge consumers into this changed behavior. Upward comparisons seem to be at least no efficient instrument in this context. A further result of this chapter consists of the finding that there is one segment in the upward comparison group, which showed a strong reaction to the feedback about others. Residents, who belonged to the lowest 20th percentile of electricity usage for air-conditioning purposes, reduced their consumption furthermore and in a statistically significant way. This means that obviously some low-consumption residents want to increase the difference between themselves and the rest of their group. This is an interesting and useful finding for policymakers, seeking for a framework that could motivate individuals that are already successfully saving on electricity to boost their conservation efforts. Such behaviors could potentially have a positive model effect on others.

Introduction

xliii

Role of International Remittances as an Economic Instrument for Poverty Eradication in Line with Sustainable Development Goals Farhad Taghizadeh-Hesary, Naoyuki Yoshino, and Miyu Otsuka International remittances are the most important source of external funding for developing countries. The international remittance flowing into developing countries has been attracting considerable interest due to their rising volume and impact on origin countries. There also has been a growing interest in international migration and the resulting macroeconomic growth of origin developing countries by achieving poverty reduction. When the authors consider the linkage between migration and sustainable development, international remittances are thought to be one of the most important elements that contribute to the development of migrant-sending countries. As opposed to foreign direct investment (FDI), remittances are what migrants themselves move across national borders as they transmit money or goods to their relatives. This means that remittances have the potential to contribute to the independent growth of developing countries. Also, “No Poverty” is the first goal in the Sustainable Development Goals (SDGs) framework and remains as a pressing concern in many developing countries. As such, the link between international remittances and poverty reduction is an important relationship to establish. Although several studies have looked into the effect of international remittances on poverty reduction in specific countries or villages, a little attention has been paid to the impact of international remittances on poverty reduction using the data set of Asian developing countries as a whole and on different indicators of poverty. Thus, in this chapter, Farhad Taghizadeh-Hesary, Naoyuki Yoshino, and Miyu Otsuka examine the impact of international remittances on poverty reduction using the panel data of 12 Asian developing countries from 1981 to 2018. These countries are Bangladesh, the People Republic of China, India, Indonesia, Malaysia, Nepal, Pakistan, the Philippines, Sri Lanka, Lao PDR, Vietnam, and Thailand. The authors start the next section by explaining some of the recent trends of international remittances and poverty in Asian developing countries using data from official sources including the United Nations and the World Bank. They compare the trends in remittances to Asia as well as the recent trends of poverty reduction in Asia. Following this, they conduct a literature review and review the previous research concerning the relationship between international remittances and poverty reduction at the country level and the cross-national level. Though several studies have found that an increase in remittances affects not only consumption but also savings and investment in physical capital, but the empirical and theoretical evidence on whether international remittances have an impact on reducing poverty in developing countries is mixed. In the following section, they theoretically demonstrate the impact of remittances on income level and therefore on poverty reduction. They do this by modifying the utility function of a country consisting of a low-income group and a high-income

xliv

Introduction

group. After that, they bring in the budget constraints for both income groups and introduce the Lagrange function. They find that the flow of remittances has a greater impact on the low-income group than the high-income group; therefore, it has a poverty reduction impact. Next, they provide empirical work regarding the relationship between international remittances and poverty reduction. They use an updated version of the model of Anyanwu and Erhijakpor (2010) and Banga and Sahu (2010). Regarding dependent variables, this study picks up three poverty indicators: poverty headcount ratio, poverty gap ratio, and poverty severity ratio. The first explanatory variable, y it, is the real per capita GDP annual growth rate. The relationship between this variable and poverty is expected to be positive. The second variable, remit it (RMT), is the inflow of international remittances (ratio of the GDP). The objective of this chapter is to assess the direction and magnitude of this variable, as the resulting coefficient is ambiguous according to the literature review. X it includes the control variables, inflation (INF), and trade openness (OPN). In conclusion, the authors find that international remittances have a statistically significant impact on reducing the poverty gap ratio and poverty severity ratio using the random-effect model of ordinary least squares (OLS) estimates. A 1% increase in international remittances as a percentage of GDP can lead to a 0.19% decline in the poverty headcount ratio, a 0.3% decline in the poverty gap ratio, and a 0.6% decline in the poverty severity ratio. The results also suggest that trade openness can decrease poverty measures and that higher inflation rates may be one of the causes of poverty. The authors also provide some policy suggestions. One of their suggestions is to reduce transaction costs. Lowering the transaction costs of sending remittances in Asia can encourage an increasing share of remittances that flow through formal channels rather than unofficial ones. One proposed method of reducing the costs of sending remittances is to encourage a partnership between international banking services and remittance transfer operators. By fostering official banking channels and encouraging migrants to use these channels, it can lead to increased efficiency and equality for migrants in sending remittances. The second proposed method is to create a remittance transfer system (peer-to-peer or P2P) using Fintech and Blockchain technology to reduce the cost of sending remittances and to make good use of remittances in migrant-sending countries. These methods might lead to an increase in the disposable income of migrants and their families, which may accelerate the reduction of poverty in migrant-sending countries.

1

Energy Efficiency Gap in Switzerland: An Empirical Study on Online Purchases of White Goods Marcel Stadelmann

Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Empirical Approach to Quantify the EEG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assessing the First Condition for an EEG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quantifying the EEG Based on Actual Sales Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2 6 9 10 11 13 19 22 25 26

Abstract

An energy efficiency gap implies that purchases of more energy-efficient equipment result in monetary (and energy) savings. This chapter analyzes the energy efficiency gap for white goods in Switzerland. Hereby, it takes advantage of the unique characteristics of “twin” products – i.e., two products sharing identical characteristics except for their energy efficiency and their purchase price. The energy efficiency gap requires two conditions to be met: First, the energy-efficient twin has to have a lower present value of total costs than its inefficient counterpart, and second, the inefficient twin has to be purchased nonetheless. In an empirical analysis of the Swiss online market for twin white goods, this chapter illustrates cases meeting both conditions for different discount rates. Based on these cases, the size of the respective energy efficiency gap is calculated. The energy efficiency gap is measured by the relative difference between the mean annual electricity consumption of the products actually purchased and the mean annual electricity consumption of products hypothetically purchased by fully rational economic agents. It seems that for reasonable discount rates the energy M. Stadelmann (*) School of Management and Law, Zurich University of Applied Sciences, Winterthur, Switzerland © Springer Nature Singapore Pte Ltd. 2021 E. Quah, R. Schubert (eds.), Sustainability and Environmental Decision Making, Sustainable Development, https://doi.org/10.1007/978-981-15-9287-4_12

1

2

M. Stadelmann

efficiency gap is rather small. One key reason seems to be the generally high purchase price premium of energy-efficient appliances. Keywords

Energy efficiency gap · Purchase decisions · Discounting · White goods JEL Codes

D120; H310; Q49

Introduction A large body of literature suggests that households could profit from net monetary savings by purchasing more energy-efficient household appliances such as, for example, refrigerators, freezers, or tumble dryers (see, e.g., Granade et al. 2009; McKinsey and Company 2009; Chandler and Brown 2009; EPRI 2009; National Academy of Sciences 2009; Rosenfeld et al. 1993). Although they seem to be economically profitable, the energy-efficient appliances are often not bought by households. This leads to an “energy efficiency gap” (EEG) between the economically optimal level of energy consumption and the observed energy consumption of purchased appliances (Cohen et al. 2017). Since the 1970s, there have been a considerable number of attempts to empirically estimate an EEG in households’ purchases of energy-using durables and to identify its possible causes. A popular method introduced by Hausman (1979) has been to estimate the discount rate implicit in households’ actual purchases of energyusing durables. Train (1985) and DEFRA (2010) provide extensive reviews of the literature on discount rates in households’ energy-related decisions and show that most of the estimated discount rates are considerably higher than market interest rates, even as high as 300% for refrigerators. The finding that households behave as if they discounted future energy savings very strongly has commonly been interpreted as evidence for a substantial EEG (Howarth and Stanstad 1995; Train 1985). However, the more recent literature produced much lower estimates of implicit discount rates between 6% and 22%, raising a debate on the effective size of the EEG (Allcott and Wozny 2014; Busse et al. 2013; Cohen et al. 2017; Tsvetanov and Segerson 2014). Cohen et al. (2017) offer two explanations for why recent works find smaller implicit discount rates than earlier studies, a methodological one and a factual one. The methodological explanation is that recent studies use panel data techniques, which allow to control for unobserved product characteristics. If energyefficient products have systematically worse unobserved characteristics than products with lower energy efficiency, there is an upward bias in the estimates of implicit discount rates if these unobserved characteristics are not controlled for (Stadelmann 2017). (An example for worse unobserved characteristics of energy-efficient products is the light of fluorescent light bulbs, which is often perceived as aesthetically

1

Energy Efficiency Gap in Switzerland: An Empirical Study on Online. . .

3

inferior to the light of incandescent light bulbs (Howarth 2004).) The factual explanation mentioned by Cohen et al. (2017) is that households seem to be better informed today than some 30 years ago because energy labeling has been mandatory for many appliances, including most white goods, in many countries around the world (see Rohling and Schubert (2013) for a review of energy labels). Better information on products’ electricity consumption can be expected to increase the purchase share of energy-efficient appliances, which reduces implicit discount rates estimated from purchases of energy-using durables. Hence, the EEG seems to be smaller than suggested by much of the earlier literature. The goal of this chapter is to build on the recent literature and estimate the size of the EEG in purchases of energy-using durables in Switzerland in order to evaluate the need for policy intervention to reduce this gap and attain a socially more preferable – i.e., lower – level of energy consumption. The purchase decision for an energy-using durable is typically characterized by a trade-off between capital costs and energy costs, i.e., appliances with lower energy costs mostly have higher purchase prices. This chapter focuses on the particular occurrences of “twin” products among white goods, (A white good is a large machine which accomplishes some routine housekeeping task, such as cooking, washing laundry, or food preservation.) i.e., two products offered by the same supplier sharing identical characteristics except for their energy efficiency and their purchase price (Gately 1980). A twin pair of products consists of an energy-efficient twin with a relatively higher level of energy efficiency and an inefficient counterpart with a relatively lower level of energy efficiency. (Throughout the remainder of the chapter, the two products embodying a twin pair are referred to as the “energy-efficient twin” and the “inefficient twin” in reference to the relative difference in energy efficiency between the two twin products. Figure 2 in the Appendix provides an example of exact twin products.) The features of twin products present a unique opportunity to completely reduce the purchase decision to the monetary trade-off between capital costs and energy costs without having to control for unobserved product characteristics. (By definition, there are no unobserved product characteristics for twin products. Hence, there is no need for panel data to quantify the EEG in purchases of twin products.) A purchase of a twin product can be classified by means of a 2
2 matrix, building on the premise that a fully informed consumer’s choice of one of the twin products from a selection of products is implicitly a decision against the purchase of its twin counterpart (see Fig. 1). Purchases of the product twin with the lower present value of total costs than its counterpart minimize total costs (see fields “A” and “D” in Fig. 1). Purchases of the energy-efficient twin in the case of a higher present value of total costs do not minimize total costs, but they minimize energy consumption, which can be rationalized by underlying preferences such as, for instance, proenvironmental preferences (see field “B” in Table 1). (See Schleich et al. (2016) for different motives to explain proenvironmental preferences.) The only part of Fig. 1 that cannot straightforwardly be explained with some type of standard preferences is field “C”, which contains purchases of inefficient twins despite a higher present value of total costs than their energy-efficient counterparts. These purchases minimize neither total costs nor energy consumption and are responsible

4

M. Stadelmann

Fig. 1 2
2 matrices characterizing the purchase of a twin product

Table 1 Differences in present values of total costs (Di) for the entire sample of N ¼ 39 twin products, using manufacturers’ list prices as initial acquisition costs Descriptive statistics of Di (in CHF) N P

Product category (1) Refrigerators Fridge-freezers Freezers Tumble dryers

N (2) 20 11 6 2

i¼1

(3) 0 0 0 0

½Di < 0a

min (4) 73.94.80.61.-

median (5) 243.136.366.71.-

max (6) 476.387.580.81.-

Notes: Calculations of Di for r ¼ 0%, T ¼ 15, and e ¼ 0.2  1 if P is ture; Iverson bracket notation defined as ½P ¼ 0 otherswise:

a

for the EEG analyzed in this chapter. (This definition limits the EEG to the demandside aspect of consumer behavior, which conforms to the prevailing definition in the academic literature. For a different approach integrating supply-side aspects as causes of an EEG, see, e.g., Cohen et al. (2017), Gerarden et al. (2015), or Jaffe and Stavins (1994).) As depicted in Fig. 1, the EEG requires two conditions to be met: First, the energyefficient twin has to have a lower present value of total costs than its inefficient counterpart (left half of Fig. 1), and second, the inefficient twin has to be purchased nonetheless (lower half of Fig. 1). In an effort to estimate the size of the EEG, the

1

Energy Efficiency Gap in Switzerland: An Empirical Study on Online. . .

5

author first searched for twin products offered in Switzerland meeting the first condition for an EEG, i.e., twin products in the left half of Fig. 1 with the energy-efficient twin as the economically superior choice. Using manufacturers’ list prices as initial acquisition costs, the author found no twin products meeting the first condition for an EEG for nonnegative discount rates. Using the lowest available online shop prices as initial acquisition costs, the author found several cases of twin products meeting the first condition for an EEG, even for very large discount rates. In order to assess the second condition for an EEG, the author cooperated with a large Swiss online retailer and received a sample of sales figures of twin cooling devices. (“Cooling device” is an umbrella term for refrigerators, fridge-freezers, and freezers.) The chapter shows that numerous inefficient twins are sold even if their present value of total costs is higher than for their energy-efficient counterparts. The size of the EEG is calculated as the relative difference between the mean annual electricity consumption of the products actually purchased – including the purchases in field “C” of Fig. 1 – and the mean annual electricity consumption of products hypothetically purchased by fully rational economic agents, i.e., if only field “A” materialized whenever the left half of Fig. 1 is applicable (The annual electricity consumption of a product is based on standard testing by manufacturers and depicts a technical characteristic of the product.). Because of the ongoing discussion of households’ (heterogeneous) rates of time preferences (see, e.g., Andreoni et al. 2015; Enzler et al. 2014; Epper et al. 2011), the EEG is calculated for different discount rates in order to illustrate the sensitivity of the results to the assumed values. For a discount rate of 0%, there is a substantial EEG of 12.9%, i.e., the mean annual electricity consumption of newly purchased twin products could be reduced by 12.9% if the EEG was eliminated. For positive discount rates of the order of recent findings in the literature, the EEG is much smaller (r ¼ 10%: EEG ¼ 5.3%; r ¼ 40%: EEG ¼ 1.1%), mainly because the generally high price premium for energyefficient twins rarely leaves them as the economically superior choice. A positive EEG remains even for infinitely large discount rates, as there are cases of inefficient twins purchased despite higher purchase prices than for their energy-efficient counterparts. In an attempt to explain why some households purchase inefficient twins despite their economic inferiority to their energy-efficient counterparts, the author conducted an online survey with consumers who purchased a cooling device online. It was found that part of the EEG might be explained by consumers’ expectations of short product lifetimes and by deficient financial literacy. Another part of the EEG might be explained by imperfect information with respect to the product portfolio, as demonstrated by the purchases of inefficient twins with higher purchase prices than their energy-efficient counterparts. The chapter proceeds as follows. Section “Empirical Approach to Quantify the EEG” describes the empirical approach used to quantify the EEG. Section “Data” presents the data set. Section “Results” unveils the results of the analysis. Section “Discussion” discusses the results and Section “Conclusion” concludes.

6

M. Stadelmann

Empirical Approach to Quantify the EEG This chapter uses a static framework of a purchase decision, i.e., it is assumed that an individual household has already made the decision to purchase a new product and now faces the choice of a specific product. (Cohen et al. 2017 state that the date of purchase of a new refrigerator is mostly exogenous, as refrigerators are typically replaced when they break down or when a kitchen is newly built or renovated. Hence, a static framework seems to be feasible for purchases of white goods. For a dynamic framework to explain the timing of households’ purchase decisions for energy-using durables, see, e.g., Rapson 2014.) In this framework, the EEG is caused by purchases of inefficient twins with a higher present value of total costs than their energy-efficient counterparts (see field “C” in Fig. 1). A set of twin products τi(i ¼ 1, . . ., N) from the total sample of N sets of twin products consists of two products, an energy-efficient twin p^i and an inefficient twin pˇ i : τi ¼ fp^i , pˇ i g . Since p^i and pˇ i only differ with respect to acquisition costs and electricity consumption, the product with the lower present value of total costs presents the economically superior choice. In order to identify the economically superior choice for each set of twin products τi the difference Di between the present values of total costs of the energy-efficient twin and the inefficient twin is calculated (The second term on the right side of Eq. (1) is always negative because xp^i is smaller than xpˇ i . The negative amount expresses the lower discounted lifetime costs – i.e., the savings – attained by purchasing the energy-efficient product instead of its inefficient counterpart.): Di ¼

ðCp^i  Cpˇ i Þ þ |fflfflfflfflfflfflffl{zfflfflfflfflfflfflffl} additional acquisition costs for the energy-efficient product

T X eðxp^i  xpˇ i Þ t i¼1 ð1 þ r Þ |fflfflfflfflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflfflfflfflffl} savings10 in discounted lifetime electricity costs with the purchase of

; i ¼ 1, . . . N

ð1Þ

the energy-efficient product

Here by, Cp^i ½Cpˇ i  represents the initial acquisition costs of the energy-efficient [inefficient] product and xp^i ½xpˇ i  is the expected annual electricity consumption of the product for each year t based on standard testing by manufacturers. (By using the objective electricity consumption measure based on standard testing by manufacturers, this paper abstracts from different usage patterns for different products. By defining product usage to be independent of the product, it is assumed that there is no direct rebound effect, i.e., it is assumed that gains in the efficiency of electricity consumption do not lead to an increase in usage of this single energy service (see Greening et al. (2000) for definitions of the rebound effect). For a refrigerator, for example, a direct rebound effect would be if an energy-efficient twin is purchased and set to a lower cooling temperature than if the inefficient twin had been purchased. Based on the results presented by Sorrell et al. (2009), it seems reasonable to neglect such effects for white goods, particularly for refrigerators and freezers. Cohen et al. (2017) even go as far as labeling refrigerators’ electricity consumption as “exogenously determined.”) T is the expected product lifetime, e is the price of

1

Energy Efficiency Gap in Switzerland: An Empirical Study on Online. . .

7

electricity per kWh, and r is the discount rate (Electricity prices are assumed to be constant over product lifetime. Davis and Metcalf (2016) argue that electricity prices at time of purchase are actually the best estimate of future electricity prices.; For simplicity, all products are assumed to have the same expected product lifetime. In an interview, a large manufacturer claimed that there are no differences in the expected product lifetime between energy-efficient and inefficient products.). For simplicity, e and r are chosen to be uniform, abstracting from consumer heterogeneity. (By using different discount rates in the analysis, this paper illustrates how sensitive the results are to the assumed value of this variable.) If Di is negative, the energy-efficient twin has a lower present value of total costs than the inefficient twin and hence represents the economically superior choice, which is the first condition for an EEG. As mentioned before, the acquisition costs of an energy-efficient twin are typically higher than the acquisition costs of its inefficient counterpart ðCp^i > Cpˇ i Þ, which makes the first term on the right side of Eq. (1) typically positive. The second term on the right side of Eq. (1) is always negative because the energy-efficient twin naturally has lower electricity costs than its inefficient counterpart. Hence, the difference Di between the present values of total costs of the energy-efficient twin and the inefficient twin is negative if the savings in discounted lifetime electricity costs outweigh the typically higher acquisition costs for the energy-efficient product – or if the acquisition costs of the energy-efficient twin are exceptionally lower ðCp^i < Cpˇ i Þ. The assessment of Eq. (1) for the analyzed sample of twin products offered in Switzerland is presented in section “Assessing the First Condition for an EEG,” using both manufacturers’ list prices as well as the lowest available online shop prices as initial acquisition costs and various discount rates to illustrate the sensitivity of the results with respect to this variable. Subsequently, actual sales figures of twin products are needed to quantify the EEG. Based on a sample of actual sales figures of twin products, the chapter determines the mean annual electricity consumption x of  all  sold products by multiplying the number of sales of each energy-efficient sp^i and an inefficient ðspˇ i Þ twin with the respective product’s expected annual electricity consumption (based on standard testing by manufacturers) and dividing the sum by the total number of sold products: N  P

x ¼ i¼1

xp^i  sp^i þ xpˇi  spˇi N P i¼1

 ð2Þ

sp^i þ spˇi

In the presence of an EEG, a counterfactual scenario with fully rational economic agents would lead to a mean annual electricity consumption x below x because more energy-efficient twins would hypothetically be purchased. In particular, energyefficient twins would be purchased instead of their inefficient counterparts in cases in which they are economically superior (i.e., if Di < 0). Hence, x can be

8

M. Stadelmann

constructed by replacing the electricity consumption values for sales of economically inferior inefficient twins with the consumption values of their energy-efficient counterparts: N P

N P

ðxp^i  sp^i þ xpˇ i  spˇ i Þ þ

i¼1

x ¼

xp^i  ðsp^i þ spˇ i Þ

i¼1

ijDi >0

ijDi 0. This means that purchases of twin products with Di > 0 (right half of Fig. 1) remain unaltered in the counterfactual scenario. In the second term of the numerator in Eq. (3), which refers to the twin products with Di < 0, xpˇ i is absent because fully rational economic agents in a counterfactual scenario would only purchase the energy-efficient twin whenever it is economically superior. Referring to Fig. 1, the counterfactual scenario replaces all purchases in field “C” with hypothetical purchases in field “A.” Based on Eqs. (2) and (3), the EEG is quantified as the relative difference between the mean annual electricity consumption of the products actually purchased ðxÞ and the mean annual electricity consumption of products hypothetically purchased in a counterfactual scenario with fully rational economic agents ðx Þ (An alternative approach to quantify the EEG would be to focus only on the purchases of economically inferior inefficient twins (purchases in field “C” of Fig. 1). The purchases of economically inferior inefficient twins instead of their economically superior energy-efficient counterparts lead to an excess in mean electricity consumption of purchased products identical to the difference between x and x located in the N P spˇ i ðxpˇ i xp^i Þ i¼1

numerator in Eq. (4):

ijDi