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Study on Incentives Driving Improvement of Environmental Performance of Companies
Under FWC ENTR/29/PP/2010FC Lot 1
Client: European Commission - DG Environment
Rotterdam, 8th May 2012
Study on Incentives Driving Improvement of Environmental Performance of Companies
Under FWC ENTR/29/PP/2010FC Lot 1 Final Report
Client: European Commission - DG Environment
Koen Rademaekers
Rob Williams
Robert Ellis
Matthew Smith
Dr Katarina Svatikova
Dr Valentijn Bilsen
Rotterdam, 8th May 2012
2 FEB91202
About Ecorys
At Ecorys we aim to deliver real benefit to society through the work we do. We offer research,
consultancy and project management, specialising in economic, social and spatial development.
Focusing on complex market, policy and management issues we provide our clients in the public,
private and not-for-profit sectors worldwide with a unique perspective and high-value solutions.
Ecorys’ remarkable history spans more than 80 years. Our expertise covers economy and
competitiveness; regions, cities and real estate; energy and water; transport and mobility; social
policy, education, health and governance. We value our independence, integrity and partnerships.
Our staff are dedicated experts from academia and consultancy, who share best practices both
within our company and with our partners internationally.
Ecorys Netherlands has an active CSR policy and is ISO14001 certified (the international standard
for environmental management systems). Our sustainability goals translate into our company policy
and practical measures for people, planet and profit, such as using a 100% green electricity tariff,
purchasing carbon offsets for all our flights, incentivising staff to use public transport and printing on
FSC or PEFC certified paper. Our actions have reduced our carbon footprint by an estimated 80%
since 2007.
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Table of contents
Study on Incentives Driving Improvement of Environmental Performance of Companies 3
Glossary 5
Executive Summary 7
1 Introduction 23
1.1 Purpose of study 23
1.2 Study Context 24
1.3 Report Structure 28
2 Methodology 29
2.1 Approach 29
2.2 Research 30
2.2.1 Step 1: Literature Review 30
2.2.2 Step 2: Verification and Gap Filling 30
2.2.3 Step 3: Analysis 31
2.3 Challenges and limitations 32
3 Theoretical underpinnings of incentives 33
3.1 The importance of company environmental performance 33
3.2 Organisational change and environmental performance 38
3.2.1 Theories of organisational change 38
3.2.2 Drivers and barriers to improved company environmental performance 39
3.3 Incentives: need and type 47
3.3.1 Why are incentives needed? 47
3.3.2 Types of incentive schemes 49
3.3.3 Administrative 50
3.3.4 Economic 51
3.3.5 Reputational 55
3.4 Summary of findings 56
4 Findings: Specific incentives in practice 59
4.1 Existing Incentives 59
4.1.1 Incentives data-search 59
4.2 Administrative Incentives 60
4.2.1 Effectiveness of administrative incentives 63
4.2.2 Success factors and challenges 66
4.2.3 Potential applicability to environmental footprinting 66
4.3 Economic Incentives 67
4.3.1 Effectiveness of economic incentives 72
4.3.2 Success factors and challenges 79
4.3.3 Potential applicability to environmental footprinting 80
4.4 Reputational Incentives 81
4.4.1 Effectiveness of reputational incentives 84
4.4.2 Success factors and challenges 86
4.4.3 Potential applicability to environmental footprinting 87
4.5 Summary 88
4 Study on Incentives Driving Improvement of Environmental Performance of Companies
5 Findings: Incentives in general 93
5.1 Factors in success 93
5.1.1 Incentive Design 93
5.1.2 Company Size 97
5.1.3 Views on Sector importance to incentive success 101
5.1.4 Level: views on incentives and their level of implementation 105
5.2 Barriers 108
5.3 The role for a common methodology for organisations environmental footprinting 110
5.4 Incentive mixes 111
5.5 Summary of Findings 117
6 Conclusions and Recommendations 121
6.1 Conclusions 121
6.2 Policy Recommendations 131
References 137
Annex A: Stakeholder workshop and consultations 141
Annex B: Summary of incentive database 145
Annex C: Views on specific aspects of common methodology 161
Study on Incentives Driving Improvement of Environmental Performance of Companies
5
Glossary
CRC Carbon Reduction Commitment, UK
BAT Best Available Technology
CCS Carbon Capture and Storage
CDP Carbon Disclosure Project
CIS Community Innovation Survey
CRC Carbon Reduction Commitment
CSR Corporate Social Responsibility
DEFRA Department for Environment, Food and Rural Affairs
DMC Domestic Material Consumption
EEA European Environment Agency
EIA Environmental Impact Assessment
EKU Ecologically sustainable procurement scheme in Sweden
EMAS Eco-Management and Audit Scheme
EMS Environmental Management Systems
EPA Environmental Protection Agency, US
ESG Environmental, Social and Governance
ESI Environmental Ship Index
ETS Emissions Trading System
FTSE Financial Times Stock Exchange
GDP Gross Domestic Product
GHG Greenhouse Gas
GRI Global Reporting Initiative
HEVs Hybrid Electric Vehicles
IO Input Output Analysis
KÖVET The Hungarian Association for Sustainable Economies
KPI Key Performance Indicators
LCA Life Cycle Assessment / Analysis
MS Member States
NFM Non-ferrous metals
NISP National Industrial Symbiosis Network
NOx Nitrogen oxide
OECD Organisation for Economic Cooperation and Development
OEF Organisations' Environmental Footprinting
OPRA Operational Risk Appraisal
R&D Research and Development
SCP Sustainable Consumption and Production
SEPA Swedish Environmental Protection Agency
SME Small and medium enterprises
SOx Sulphur oxide
SRI Socially Responsible Investment
UNEP United Nations Environment Programme
VAT Value Added Tax
WML Waste Management Licensing
WTO World Trade Organization
7Study on Incentives Driving Improvement of Environmental Performance of Companies
Executive Summary
In August 2011 the European Commission (DG Environment) appointed Ecorys to carry out a study
on “Incentives driving the improvement of the environmental performance of companies”. The
overall objective of the study was to analyse the effectiveness of incentives in changing the
environmental behaviour of companies (including the effects of different mixes of incentives). The
research therefore focused on analysing and understanding how incentives work, what different
factors play a role in determining outcomes and what lessons might be learned as a result. We
were interested particularly in what steps the EU and other policy makers should take in future to
provide better incentives to firms, so that they decide to improve their environmental performance.
Specifically, it considered the role and contribution of a potential organisational environmental
footprinting (OEF) initiative in the area of incentive design.
1. Background
As a result of legislation, pressure from key stakeholders and market signals, EU companies and
organisations are steadily improving their environmental performance. However, the fact that
several of the EU's environmental goals weren't reached1 and the variation in resource efficiency
between Member States suggests that there remains potential further for improvements in this
area2. One essential element in facilitating the transition towards a more resource efficient and less
environmentally damaging economy is a coherent and favourable framework for influencing
markets to recognise and value good environmental performance. Within such a framework it is
important that in seeking to improve resource efficiency by rewarding good environmental
performance, governments and markets act in a coherent way, across the Single Market. To assist
and inform this process, better knowledge on incentives is required and a reliable basis for
assessing performance needs to be developed.
With this in mind the European Commission is developing a technical guide for the calculation of
the environmental footprint of organisations. This so-called “common methodology” for
Organisations’ Environmental Footprinting (OEF) has the potential to provide a reliable basis for
assessment and comparison of companies’ (and other organisations’) environmental performance,
and tracking of improvements. It would take into account not only carbon, but also at other
environmental impacts of a company such as those on water, land and other mediums across the
full life cycle of its product and service portfolio.
Decisions made by businesses to improve their environmental performance are subject to various
internal and external drivers and barriers, in particular where some form of organisational change is
required. The table below provides a summary of these:
1 State of the Environment Report, EEA, 2010 2 Eurostat data on resource productivity (Gross domestic product (EUR) / domestic material consumption (kg)) for 2009
shows an EU 27 average of 1.41, with a maximum of 3.01 and a minimum of 0.14, although this is a high level figure with
some variation to be expected according to MS economic structure. There is also high variability between MSs in other
indicators of environmental performance such as recycling rates and per capita energy use.
8 Study on Incentives Driving Improvement of Environmental Performance of Companies
Table 1 Organisational change: drivers and barriers
Internal factors External factors
Dri
vers
Financial benefits;
Corporate culture, history, norms and
learning;
Leadership and top-level commitment;
Individual ethics;
Employee attitudes;
Operational risk;
Company status.
Government: national and EU
regulation/legislation;
Corporate image, reputation and associated
risk;
Media, NGOs/Interest groups, wider society;
Competitors;
Customers, investors, shareholders;
Suppliers and trading partners;
Insurers and other financial institutions;
Bar
rier
s
Lack of finance;
Corporate culture (including organisational
norms, structure, learning and
communication);
Demand on resources, staff and financial;
Access to information / lack of knowledge;
Lack of top-level commitment;
Lack of employee participation/
acceptance;
Regulations;
Markets;
Consumer behaviour;
Access to finance;
Shareholders.
Source: Adapted from Improving Business Environmental Performance: Corporate Incentives and Drivers in
Decision Making. p.33-34. DEFRA 2006.
In general, incentives empower drivers and reduce barriers. Their role is to change the weight of
these drivers and barriers, as applied to the decisions companies make. Conceptually, firms can be
incentivised to make improvements in their environmental performance through making the drivers
more powerful, e.g. improving the potential for financial gains, or offering more opportunities to
present a positive company image; and/or by reducing the barriers, for example by improving
access to information or creating ‘smart’ regulation. In this way, incentives may help companies to
make the ‘right’ decision in terms of improving their environmental performance.
For the purposes of this study, incentives were divided into three different types, allowing us to
classify and analyse the individual effects of each type and to compare effects between them. The
three types are shown in the figure below, together with examples of specific incentives.
Understanding how these incentives can and do influence companies to improve their
environmental performance was the main focus of this study.
9Study on Incentives Driving Improvement of Environmental Performance of Companies
2. Methodology
The approach to this study has been a combination of literature review, expert consultation through
interviews and the feedback received from a high level workshop. The literature review involved an
extensive, though non comprehensive, review of existing incentive schemes from around Europe
and the development of a database of incentives. This process identified 106 incentives in use in
the EU and internationally, Profiling these indicated that the most common incentive type was
economic (70), followed by reputational (51) and administrative (22). The majority (56) of measures
were voluntary, while significantly fewer (18) were mandatory. The majority of the incentives that
were identified (65) were applied at a national level, but EU, international and regional schemes
were also present. The data on incentives and views from literature were then enriched and tested
through stakeholder interviews with relevant experts in this field. Our draft findings and conclusions
were then tested through a workshop, attended by 45 participants.
It is important to stress that this study found a lack of quantified data on the impacts and benefits of
specific incentives. Therefore we have had to rely on a combination of qualitative data, theory,
consultation views and our own expertise and experience. This lack of quantitative data suggests
that commissioning primary research in this area would be useful.
3. Key Findings and Conclusions
The study was structured around a series of research questions. Our findings are set out below,
under these questions, although some have been grouped together to aid clarity. Where
recommendations are made, these are highlighted in coloured tables.
Which incentives are the most effective in changing the environmental behaviour of
organisations?
This question focuses on the fundamental effectiveness of incentives in changing the environmental
behaviour of organisations. This required consideration of why companies behave in the ways that
they do and how policy can change their behaviour.
Regulation remains an important driver of environmental behaviour for many firms and
sectors and its effectiveness can be enhanced with incentives. When regulations are
effectively enforced they force an organisation to achieve minimum levels of environmental
performance. Although many businesses and associations are instinctively against further
regulation, most firms acknowledge that it plays an important role in their environmental
performance and behaviour, and that it serves a necessary purpose. However, many regulations do
not help achieve continuous improvement. Combining regulations with incentives can help achieve
a positive cycle of improvement. For example, companies obliged to report under the EU ETS may
be incentivised to continually improve their environmental performance via the economic incentive
of carbon trading and the reputational incentive of league tables showing their performance against
their peers and competitors. Put another way an effective incentive package has to rely on and
complement regulatory drivers.
The most effective elements in a package of incentives appear to be those that relate to
economic and reputational factors. Based on our incentive database it appears that economic
incentives are the most effective, since they are the most common (see numbers in section 2).
Administrative incentives are the least common, but the number of reputational incentives is
10 Study on Incentives Driving Improvement of Environmental Performance of Companies
increasing rapidly. Although administrative incentives have a role, this appears to be limited, as a
result of their implicit association with relatively complex regulatory regimes.
Effectiveness of specific incentive types
Administrative incentives are most attractive to SMEs and are most effective when they are
automatically applied and when the burden reduction is tangible. These types of incentives
are most effective where the organisation can clearly see a benefit (e.g. reduced operational
downtime via reduced regulatory inspection) and where there is no requirement to opt into benefits
(as requiring opt-in creates a barrier which leads to low take up). Administrative incentives can also
reduce the cost of regulation.
Economic incentives are attractive to all firms, although large firms are more proactive and
SMEs more reactive to them. Recycling revenues appears to improve their take up and
effectiveness. Economic incentives are relevant to all firms and offer a large range of possibilities
to effectively enhance drivers and reduce barriers to improved environmental performance.
Different incentive types work better with different size firms, with SMEs generally responding better
to targeted measures such as free support, grants and loans. The use of revenues generated by
any economic incentives can have an important impact on its continuing effect, it is generally better
to recycle some part of the revenues back to those affected, particularly to the better performers.
Reputational incentives can be effective tools for improving poor performance and
rewarding good (and improved) performance. The increased importance of reputation can be
seen in the rapid increase in the number of reputational incentives. The fact that reputational
incentives are increasingly numerous also reflects a recognition amongst organisations of the
financial risks associated with a drop in reputational standing. Naming and shaming poor
performers can induce action, while good performers can seek to differentiate themselves by the
positive reputation these incentives can help create.
What are the success factors for effective incentives?
These points illustrate what our literature review and consultations suggest are the design features
of incentives that help improve their effectiveness in terms of improving the environmental
performance of organisations.
General design of incentives to increase effectiveness
There is no 'one size fits all' incentive. The reasons why organisations behave in the way that
they do, and consequently the ways in which this behaviour can be changed, are diverse and
multiple. Some factors are internal to the organisation (e.g. attitude towards innovation) while others
are external in nature (e.g. market forces). Therefore no single incentive has the potential to be able
to influence all types of organisations
Incentives that impact firms' profitability and competitiveness are effective, with incentives
whose benefits outweigh their costs likely to be the most popular and effective. Decisions to
act to improve environmental performance are considered in the light of the economic advantages
in comparison with any costs of participation. The relative levels of benefits to costs are therefore of
crucial importance when designing an incentive, this is to be considered not only in monetary terms,
but also how firms perceive an incentive may affect their strategic goals and potential future
earnings, with these latter elements particularly relevant to reputational incentives.
11Study on Incentives Driving Improvement of Environmental Performance of Companies
Modulated incentives are effective. Significant variation between sectors, firms, Member States,
markets, clients and other factors means that the application of individual incentives has to be
carefully considered depending on targeted companies and targeted behaviour change.
Incentives need to be transparent and action orientated. All incentives need to be relatively
straightforward and it is important that they require positive action by the organisations concerned,
in order to avoid the risk of 'greenwash'.
Supply chain pressure can improve environmental performance and promote life-cycle
thinking. This is particularly effective for smaller companies which are dependent on supplying a
single large customer. A focus on the individual components in the supply chain of a completed
product helps ensure that larger companies consider the full impact and life cycle of their products.
Incentives are best applied automatically and/or linked to well known programmes. This
approach helps address low take-up by linking to existing schemes, such as ISO certifications or
established international reporting initiatives (e.g. Carbon Disclosure Project, Global Reporting
Initiative), which bring credibility and a range of potential participants who are already convinced of
the benefits of the existing programme. Automatic application of reputational incentives eliminates
problems of self-selection and opting out of poor performers, ensuring a more complete picture is
available to relevant stakeholders.
Providing support for firms to meet thresholds or qualify for incentives is important,
particularly for SMEs. Successful implementation of schemes is often based on fore-runner
programmes providing information and support to help candidates meet the levels required for the
incentive.
A global basis is the ideal in terms of consistency but this may have limited practical
application for incentives. Work carried out by international organisations such as the OECD and
UNEP is useful for guidance on the design and consistency of incentives, but there are significant
political barriers in the way of implementing them. Harmonising with global standards is the ideal
solution but the divergence of opinions and positions that exists at the global level makes this very
challenging and time consuming to achieve. A global basis is perhaps best viewed only as a long-
term goal.
Specific success factors for economic incentives
Economic incentives are most effective when they are simple and the benefits are tangible
and rapid. There are a number of examples of overlap between reputational / reporting incentives
and economic incentives, where the complexity and time lag between action and reward appears to
impact negatively on their effectiveness in changing behaviour. This was apparent in some
experiences of sustainable procurement and from reduced insurance premiums related to
environmental performance.
Important design considerations for tax-based incentives include recycling of revenues and
avoiding disproportionate effects on some firms. It is important to consider and prioritise the
recycling of revenues from taxes back to the sector, potentially with a focus on rewarding the better
performing players. Careful design of incentives is needed to ensure that certain organisations
within a sector are not punished because of specialisation, or other factors beyond their control.
Specific success factors for reputational incentives
Simplicity, comparability, transparency, inclusiveness and effective communication are key
success factors for reputational incentives. Incentives should lend themselves to simplicity, and
12 Study on Incentives Driving Improvement of Environmental Performance of Companies
employ a transparent methodology to aid understanding. Comparability is a concern for some, but
is also important to usefulness. Barriers to entry need to be reasonable and appropriate to the
target audience (i.e. lower for SME targeted incentives). The purpose and quality of the incentives
needs to be communicated effectively, both to potential users and to their customers
Sector involvement improves credibility and effectiveness. There is concern that comparing
across sectors can be harmful, since league tables or rankings often lack context or fail to take into
account the specific resource intensity of a sector. This can lead to unfair comparisons and to
organisations in resource intensive sectors being ranked poorly, despite being relatively good
performers. Involving the target sector in the development of reputational incentives should help
avoid these problems.
What is the nature of change induced by incentives (incremental, systemic)?
What type of measures (preventive, end-of-pipe, innovation, investment in technologies)do
incentives trigger?
Which incentives are more likely to drive continuous improvement instead of on-off actions?
These points discuss the type of behaviour change that incentives are capable of encouraging.
The process of behaviour change is complex and can start with small changes but lead on
to larger scale process changes. The behaviour of organisations changes according to a
dynamic interaction between internal and external drivers. Change can start with incremental
actions but can then lead onto larger scale, more systemic changes in behaviour.
Change is hard to recognise and classify without baseline data and measuring and reporting
such data is an important first step in changing environmental behaviour. It is important to
point out that a lack of knowledge on current performance levels amongst many organisations
makes it difficult to answer this question, since without knowledge of baseline performance it is not
possible to ascertain the scale and nature of any change induced. All Environmental Management
Systems begin with a data collection step, this is recognised as being the vital first step in starting
to improve environmental performance.
Administrative incentives are unlikely to lead to systemic/ large scale one off improvements
because by their nature they are tied to existing legislation. Those firms most likely to be
influenced by these types of incentives will have a long experience of operating under a particular
legislative framework, to which they will have developed a stable response. Therefore, as a result of
inertia and sunk costs, large-scale change is less likely to occur.
Transparency about future regulation or standards can either drive systemic change or be
an obstacle to it. The outcome will depend on the level of legislation/standard foreseen, with the
nature of the response driven by a combination of the options available and the attitude of the
organisation. When presented with a clear and rigorous timetable of planned environmental
legislation companies with a pro-active 'beyond legislation' attitude may well decide to change their
behaviours early and radically. In the same situation a company which seeks to differentiate itself
on low costs may look to the least-cost compliance route or even look to move out of a market.
Systemic changes are often costly and return on investment is longer term, but economic
incentives can help reduce these barriers. Incentives which effectively reduce the payback
13Study on Incentives Driving Improvement of Environmental Performance of Companies
period, e.g. grants and other economic incentives (e.g. risk capital) can help reduce the barriers to
such investments. There are parallels here with the incentives given to encourage innovation,
another type of investment where the returns can be long term. The tax breaks given to support
R&D investments have been shown to produce an increase in R&D expenditure significantly above
the tax income that is foregone.
Well implemented Environmental Management Systems and incentives that judge
performance against increasing targets should help maintain and improve environmental
performance. Although neither are a guarantee of good environmental performance, the ongoing
efforts that both of these require are one way of avoiding a response limited to one-off actions.
Data is lacking on the nature of change induced by incentives, so further research would be
valuable. Our literature review and consultations revealed a lack of detailed and comparable data
on changes to environmental behaviour brought about explicitly by incentives. It is difficult to
separate out the effect of incentives from other factors in inducing change. Theory, literature and
consultations suggest that it varies by type of incentive and nature of company. The change
process within organisations is multi-faceted. It can start with incremental changes and then
becomes systemic. It is also affected by a wide variety of internal (e.g. corporate culture) and
external (e.g. regulations and competitors) factors. The lack of data and complexity involved here
suggests that further specific research in this area may be beneficial
Do incentives work differently in different sectors and Member States? In what way?
What type of companies (large companies, medium companies, small and micro companies,
multinationals, operating in significantly polluting sectors, those with an environmental
management system/ already environmentally active, companies lagging behind in this area,
etc.) are susceptible to change their behaviour based on incentives?
Which are the best incentives for SMEs, specially small and micro sized companies?
These points discuss the different ways in which incentives influence different organisations and
also the ways in which they need to be designed in order to influence these different types of
organisation.
Sectoral Factors
Sectors and sub-sectors can have significantly different environmental risks, regulatory
environments and contexts, structure and client relationships – this has a significant impact
on how incentives operate. When designing incentives it is recommended that sectors should be
grouped according to determinant factors in order to avoid too narrow a focus, for example:
- Sectors dominated by business-to-business transactions. In these sectors supply
chain pressure is particularly important and effective as is support for SMEs to comply /
qualify for incentives. Sectoral benchmarks are also important here as they allow
organisations to make meaningful comparisons between themselves and their competitors,
and they offer high performing organisations the potential to differentiate themselves from
their competitors in markets where the customer (other businesses) are arguably more
inclined to make well researched / informed decisions than in markets where the customers
are individuals.
- Consumer facing sectors. Where some organisations would be expected to react well to
credible, yet simple, reputational incentives that the public can use to differentiate their
14 Study on Incentives Driving Improvement of Environmental Performance of Companies
products. However some companies will only seek to differentiate on price, so there may
well be a need for compulsory schemes and a continued major role for regulation.
- Significant existing regulatory regimes (e.g. primary industries and manufacturing).
Where administrative incentives are possible and more likely to be appropriate given that the
benefits (e.g. of reduced inspections) are widely understood and tangible. For regulatory
regimes/sectors where compliance is felt to be a heavy administrative burden, there is a
potential for administrative incentives to reduce this burden and have a positive effect on
environmental performance. There appears to be a link between the level of risk (of
environmental damage) associated with a sector and their need for more specific incentives,
with the higher risk reflecting an (understandably) more conservative approach to
participating in incentives.
- Reputation conscious sectors. Some sectors are much more reputation conscious, than
others e.g. services, food and drink. By definition, reputational incentives will be more
important in these sectors than in others, e.g. iron and steel, which perceive reputation as
less of an issue than regulation or other drivers.
Benchmarking by sector type is a fairer basis for incentive. Comparing similar firms is more
likely to give a fair representation of good or poor relative environmental performance and give
useful indications for improvement. Cross sectoral benchmarks (as used in some incentives) are
misleading and unpopular with some organisations.
Environmental performance is strongly linked to the existing regulatory framework, so
incentives need to reflect this in order to be effective. Administrative incentives are more likely
to be effective in sectors which impact upon heavily regulated environmental media (water, air etc.);
than in those areas with a shorter history (and acquis) of legislative incentives.
Member State Factors
Organisations in MSs with higher level of innovation are generally more likely to improve
their environmental behaviour. Although there are many exceptions to this, the importance of
innovative approaches in improving environmental performance suggests that, at a high level, this
is generally true.
Voluntary incentives work better in MSs with a traditionally consensus orientated culture.
Voluntary schemes / incentives are often introduced to head-off mandatory regulation. Although
voluntary schemes can be successful in some contexts, this is often related to national culture, i.e.
they are more successful in consensus-oriented cultures such as the Netherlands. Voluntary
schemes need follow-up / verification in order to be effective.
Environmental performance is generally a more widely accepted consumer criteria in the old
MSs. As consumer demand is an important factor in many company decisions incentives designed
to improve organisation environmental behaviour are likely to be better received in the old MSs.
Organisation Size Factors
Large firms are responsible for 30-35% of environmental impact. Although they are less than
1% of all firms and are often above average performers, their high proportional impact and supply
chain influence means it is important that incentives are designed with these firms in mind:
- They are often more systematic in improving their environmental performance. Many
firms will strive to go beyond regulation, with an eye on the strategic and economic benefits
and also a need to satisfy internal and external stakeholders, and company ethics. This
implies that economic and administrative incentives are less important in terms of changing
behaviour for some large companies.
15Study on Incentives Driving Improvement of Environmental Performance of Companies
- Larger firms tend to be more proactive. Because of their investment and capital needs
they tend to take care to manage their environmental performance and reputation to ensure
access to funding and to protect share holder value. Reputational incentives are therefore
most effective for large, especially, multinational companies where these are
international, high profile and investor opinion orientated. This reflects the wider
geographic scale of market activity by large companies and the importance to them of
fostering a positive reputation among institutional investors.
SMEs remain crucial to overall long term improvements in environmental performance.
While they have proportionally less impact than large firms SMEs are still responsible for the
majority of environmental impacts and there are often significant ‘easy wins’ in terms of
environmental performance improvements that incentives can help capture:
- SMEs require empowering tools: access to information, technical assistance and
support (e.g. free/subsidised advice), skills and finance. Since they lack the internal
resources of large companies, these four aspects are particularly important for SMEs if they
are to improve their environmental performance.
- Impact of reputational incentives is typically lower but can be effective when
implemented at the local level and with supply chain recognition. Unless incentives
are relevant to local supply chains or customers then SMEs tend to be influenced less by
reputational incentives. The effectiveness of local and supply incentives for SMEs is
recognises the (typically) local focus of SMEs activities and the importance of customer
requests on their behaviour.
- SMEs are particularly conscious of administrative burden. This can be a significant
burden for SMEs in time, capacity and resources. Proportionally, administrative incentives
can be more effective for SMEs.
- SMEs have a more reactive attitude than large firms to economic incentives for
improved environmental performance. Because of this they are most often targeted by
grants and soft loans.
Recommendations
Based on all the findings and conclusions presented so far, it is recommended that:
1 New incentives need to be carefully assessed for coherence with existing incentives and
policies, as well as for simplicity and transparency. Synergies and reinforcing effects need
to be maximised, and duplication avoided.
2 If tied to voluntary schemes, measures need to be put in place to guarantee sufficient
take-up at MS or EU level.
3 The design of incentives needs to reflect the type of sector(s) at which they are aimed; and
inputs from target sectors are therefore instrumental in terms of optimisation. 4 Any targets set within incentives need to be clearly defined and relevant to the sector(s)
(e.g. taking into consideration their resource intensity, typical level of pollution, position
along the supply chain, etc)
5 Incentives should be retained for a clearly defined period. Conditions and modalities of
phasing-out need to be clear from the outset, to increase predictability.
6 Measures planned in case the incentive fails to reach the desired objective must be
defined at the outset (e.g. introducing compulsory measures)
16 Study on Incentives Driving Improvement of Environmental Performance of Companies
What obstacles/ disincentives for improving environmental performance can be identified?
Despite all the positive points discussed above it should be borne in mind that incentives are only
one influence on company behaviour and that there are a number of other influences and factors
which can counter their positive impact on the environmental behaviour of companies.
Investment markets and firms remain quite short-term in their outlook: Environmental
improvements often require relatively large upfront investments and are often perceived as high
risk. Company decision-making processes are typically based on maximising rates of return, and
although environmental improvements often pay-off in the medium to longer term, firms have short-
term horizons and the prospect of more immediate returns from alternative investments, can be
more attractive. Financial incentives therefore have a crucial role to play in overcoming this
significant barrier. The perception of long rates of return and high risk is far from being universally
true. This highlights the need to maintain and increase efforts to educate organisations on the rapid
returns and low risk investments that are available for many of them.
Difficulty in accessing finance is an issue and has intensified with the economic crisis.
Long-standing difficulties in terms of access to resources to finance improvements in environmental
performance have increased as firms, banks, donors and governments all switch financial priorities.
Regulation can present a barrier - if too heavy or too light. Stakeholders were divided on
regulation, some seeing it as important to create markets for their products, with others feeling that
it impedes competitiveness. This is often a clear reflection of the stakeholder's positive or negative
attitude towards innovation, with those that have a more positive view on innovation having a more
positive view of regulation. It was noted by a significant number that there was a need for more
regulation of green claims to promote fairness, and also that is was important to reduce regulatory
uncertainty by providing clear and predictable policy roadmaps.
Lack of understanding and information. This remains a persistent barrier in terms of improving
environmental performance, particularly for SMEs, and the incentives that are available to help
them.
Supply chain constraints for some. Some sectors find that the relatively large number of small
suppliers in their supply chain forms a barrier to change. However there are also examples where
supply chain pressure can be used to improve environmental performance.
Lack of market attention/ consumer demand. Some firms perceive weak consumer demand
motivating them to improve company performance, as opposed to product performance where the
link is clearer. For firms with weaker direct links to consumers, e.g. steel industry, this reduces their
overall level of interest in reputational incentives aimed at influencing consumers. Reputational
incentives aimed at other market stakeholders, such as investors and NGOs, can still be of interest
to these firms.
Perverse incentives and unintended consequences. Sometimes incentives can lead to
unexpected impacts which can undermine the original intentions, (as happened with the support for
biofuels and consequent rainforest deforestation for palm oil) in addition the objectives of certain
incentives are perceived as (or become) more economic with negative environmental impacts
ignored. These negative examples can reduce the trust that organisations have in the predictability
and stability of incentives and reduce the likelihood that they will participate for fear of rates of
17Study on Incentives Driving Improvement of Environmental Performance of Companies
economic incentives being reduced, dramatically changing business cases for environmental
improvements, or exposing themselves to risks of negative reputational impacts.
Corporate culture and individuals can be barriers to change. This is an important factor in
improving firms' environmental performance. Without a culture, strategy or leader that supports
change and social and environmental objectives, firms are less likely to respond to incentives.
Trust and credibility are key challenges for reputational incentives. The proliferation of
reputational incentives has created confusion among firms and consumers. This puts the credibility
of such incentives at risk, particularly since verification and authentication of claims is often
limited, leading to significant ‘greenwash’, or to industries creating schemes simply to paint a
positive picture, when the reality is less positive.
What are the roles of the EU and MSs with regard to the design and implementation of
incentives?
It is important to consider the spatial level at which incentives are best designed and implemented.
The EU has a clear rationale for promoting incentives and also has a clear role in their
design. Stakeholders were clear that European level involvement is valid and justifiable in terms of
action on environmental performance incentives. In particular:
- Setting standards and guidelines, and harmonising the implementation of incentives.
This is an area where the European Commission is seen as a credible and appropriate
institution, given the particular relevance of guaranteeing a level playing field in terms of
the Single Market.
- Avoiding duplication and fragmentation of incentives across Member States. This was a
concern expressed by firms and is already an issue for reputational incentives. The
Commission has a role to play in reducing this, which is also inline with its Single Market
objectives.
In general, the European Commission should set the framework, while Member States and
others take responsibility for implementing incentives. Given the various issues at stake
stakeholders suggest, and we agree, that this appears to be the best solution for most incentives, to
comply with subsidiarity and proportionality. This is particularly relevant to tax-based incentives.
Member States have a vital role to play in the implementation of incentives, particularly
financial incentives and adaption to to national contexts. Centralised or top-down
implementation at EU level would place an additional strain on the finances of the EC and restrict
the kind of flexibility required to ensure incentives are appropriate and effective in all Member State
contexts. Member State subsidiarity also implies that many of the incentives are under MS control
(typically fiscal and other financial incentives). Clearly, the extent of the knowledge that resides in
Member States means that implementation is better dealt with at that level, allowing the design of
administrative incentives that fit national legislative context, the provision of assistance for SMEs
tailored to cultural expectations and the setting of different environmental performance priorities in
different Member States.
18 Study on Incentives Driving Improvement of Environmental Performance of Companies
Recommendations
Based on the identified barriers and obstacles and the roles of the EU and MS, it is recommended
that:
7 The current model of the EU setting standards and processes and the MSs implementing
and monitoring remains the best division of responsibilities. It is important to guarantee a
reliable, robust basis for providing incentives. In such cases, verification and monitoring
are necessary, but impose a cost on participants. Cost-efficient verification models
therefore need to be developed..
8 The EU should continue to:
Set frameworks for incentives – reflecting the policy design recommendations above,
Coordinate and share best practice,
Facilitate harmonisation and standardisation across MSs,
Identify priority areas (e.g. priority environmental impacts, priority sectors) where action
should be focussed.
Collate and disseminate knowledge on the benefits of incentives and benchmarks – this
may well require primary research to provide quantified examples.
Retain a medium–long term perspective.
9 MSs should continue to:
Consider where their contact with companies / organisations has a link to environmental
impact and consider if the OEF could be used as a basis for reducing the amount of
contact where it is seen as a burden (e.g. inspections) or increasing it where it is beneficial
to do so (e.g. purchasing).
Consider, and aim to implement where possible, some recycling of revenues to
environmentally better performing organisations and provide assistance to help and
reward organisations which are improving their performance.
Provide possibilities for SMEs to access assistance with improving their environmental
performance and put in place meaningful rewards for them.
Identify priority areas (e.g. priority environmental impacts, priority sectors) where action
should be focussed.
Retain and possibly increase national and sub-national award schemes. These are a
relatively inexpensive, effective and inclusive way of recognising and rewarding good
environmental performance, and as such their use could be expanded – with a particular
focus on SMEs and locally concentrated supply chains.
What is the optimal mix of incentives, keeping in mind the principle of subsidiarity, the
incentives in the remit of the EU, of Member States, of regional/local level and the private
sector?
The intention here was to consider what combination of administrative, economic and reputational
incentives was most effective in improving the environmental behaviour of organisations. There is a
lack of data that would allow a detailed analysis of any specific incentive mixes. However the
following general conclusions may be drawn from the literature and from stakeholder
consultations.
19Study on Incentives Driving Improvement of Environmental Performance of Companies
Incentive mixes can mutually underpin one another and enhance the effectiveness of each
other. OECD studies3 showed a labelling scheme enhanced the effectiveness of environmental
taxes, and conversely, that taxation also increased uptake of the labelling scheme. However care
needs to be taken since mutual enhancement is not always possible, and in such cases incentive
mixes of overlapping instruments should be avoided. More analysis would be needed on concrete
examples of incentive mixes to enable further conclusions to be drawn;
Reputational incentives are most effective when they lead onto, or link with, economic
incentives. This combination provides a first step in motivating behaviour change (via the
reputational incentive) and then backs this up with an economic justification (or reduction in cost of
change).
Stakeholders identified only a few examples of incentive mixes. For example it was stressed
that:
- There is no ‘one size fits all’ approach, and hence it is difficult to derive to an optimal mix of
incentives;
- When considering adding new incentives, their coherence with the existing regulatory and
incentive framework needs to be considered carefully, to ensure that they complement
rather than duplicate.
- Duplication between incentives (and policies) was identified as a problem by stakeholders,
e.g. the plethora of carbon footprinting-type reputational incentives, which causes confusion
for firms and thereby potentially weakens the utility of reputational incentives as a whole;
- There is a need for sector-specific schemes/ mixes;
There is a lack of empirical evidence on the effectiveness of incentive mixes, and further
research should investigate the optimal mix of incentives per environmental aspect. Current
environmental legislation is broad, covering several environmental aspects and resources. An in-
depth analysis of each environmental aspect coupled with incentive mixes in different Member
States is needed to identify where and to what effect different types of incentive interact in practice.
For an EU scheme based on measuring environmental performance on the basis of a
common methodology (Organisation Environmental Footprint, OEF) what would be the
optimal mix of incentives and implementation levels (EU, Member States, etc.?)
In order to analyse the potential role of OEF in incentive mixes, opinions on the potential of the OEF
in general were sought from stakeholders. We have also presented the points related to
incorporating the OEF into incentives.
OEF is generally perceived as a sensible idea, subject to certain conditions. The idea of
footprint was appreciated and the logic understood by most of the stakeholders consulted. The
benefits and challenges of such a scheme were recognised.
An OEF could provide improved comparability, credibility and understanding of company
environmental impact and performance. This was seen as an important part of building
understanding among consumers and across international markets; and would result in increasing
the importance that companies attach to environmental performance.
3 OECD (2006). The Political Economy of Environmentally Related Taxes. OECD (2007). Instrument Mixes for Environmental
Policy
20 Study on Incentives Driving Improvement of Environmental Performance of Companies
The OEF could help identify and reduce trade offs in environmental performance. Incentives
which improve performance in one environmental aspect (e.g. water) might have another
(sometimes opposing) impact in another environmental aspect (e.g. waste). Using an incentive
base that avoids these trade-offs (e.g. a multicriteria / life cycle approach) would counteract this
problem.
Harmonisation with existing schemes was seen as essential to guarantee take-up, although
it was also recognised this could be problematic in practice. The main challenges here include
agreeing and aligning methodologies given their complexity and the desire of the multiple existing
reporting schemes and procedures in the market to remain independent. On a positive note, many
existing GHG reporting incentives remain somewhat immature and some consolidation is likely over
time, which may result in better alignment with environmental footprinting.
Taking account of differences between Member States would be a challenge. Variations in
Governance, culture, economic development and range and types of incentives available in each
MS could all impact on the success or failure of an OEF scheme applied across the EU.
There are concerns that an OEF scheme might increase costs. These costs could arise in
various forms, as a result of the extra time needed to prepare and publish a footprint, and/or
through potential monitoring and verification costs associated with a footprint, or the actions
required by firms to improve their footprint. This reinforces the importance of addressing the cost
effectiveness of any new mechanisms introduced.
OEF as a basis for incentives
OEF has the potential to be a useful tool for designing and implementing incentives that
drive environmental improvement. Beyond the obvious reputational effects and competition
effects among firms (to achieve better scores), an OEF could also be a very useful and reliable
standard which authorities could use to benchmark, screen or rate company performance. A range
of incentives could be provided, based on such a scoring system, which could replace existing ad-
hoc or more complex application and award systems. If the OEF is used to create a league table of
performance, between comparable organisations, it can help encourage poor performers and
reward good performers.
Administrative incentives can link to OEF through synergies in measurement and as a
screening tool. Monitoring and other administrative reporting requirements could work hand in
hand with an OEF, since the same information could be used for both. Similarly, footprints could
provide administrative authorities with an alternative measure for thresholds or qualification for
incentives. A pre-condition of using the OEF for this purpose is the availability of user-friendly,
simple tools, which make the implementation of OEF more attractive compared with the
administrative requirement it is substituting.
Economic incentives can link to OEF if they are used as a ‘foot-in-the door’ or as a
screening mechanism. Beyond simply helping firms to improve their footprint, there is potentially
a role for economic incentives to be tied to the use of an OEF, i.e. where funding, grants or soft-
loans, etc; are tied to the calculation, and potentially improvement, of an OEF. Similarly to
administrative incentives, an OEF score could also be used as a screening mechanism to
determine qualification for incentives. A design requirement for the use of OEF in this way is that
the benefit obtained has to be higher than the costs of carrying out an OEF analysis.
21Study on Incentives Driving Improvement of Environmental Performance of Companies
Reputational incentives can link to OEF through alignment with existing schemes, but need
to be complementary. Experience of existing reputational incentives suggests there is a
significant cohort of firms that are potentially interested in OEF. This offers an opportunity to
harness the progress that existing schemes have made, by cooperating with them, while
overcoming concerns that an EU OEF would compete with and/or displace existing schemes.
The potential that OEF offers as a basis for incentives depends on the simplicity,
transparency and credibility of the tool and of the associated indicators. This aligns with the
requirements of effective incentives.
There may be a need to consider a 'light' version for SMEs. The concept is of relevance to
improving the environmental performance of SMEs but there are concerns regarding the burden of
assessing performance. If a consistent method of subsidising these costs cannot be found there is
a case for developing a light touch procedure for SMEs.
Recommendations
Based on what can be concluded on incentive mixes and the desire to introduce a common
methodology for an OEF, it is recommended that:
10 The EU should shape the OEF to take account of the characteristics of effective
incentives, as follows:
Maintain communication with stakeholders and accept that the OEF is entering into an
existing footprinting market and as such opportunities to learn from, and dovetail with
existing schemes should be exploited.
Examples from other incentive schemes suggest that the OEF will need market-led buy in
(i.e. organisations will need to be convinced that participation will bring them benefits) to
achieve healthy take-up rates. This will be helped by clear alignment and complementarity
with existing schemes.
The OEF should be piloted in a limited number of priority sectors which have a prevalence
of large companies, since this is where it is most likely to succeed. The pilot should then
be extended on the basis of voluntary agreements (with MSs, investors, etc)
Alignment with existing incentives and schemes will be most productive where
organisations (especially SMEs) can clearly see benefits / rewards, for example by linking
to procurement criteria, or as part of administrative and economic incentives.
23Study on Incentives Driving Improvement of Environmental Performance of Companies
1 Introduction
1.1 Purpose of study
The primary purpose of this study is to improve understanding of how incentives can and do
influence companies to improve their environmental performance. This is consistent with the overall
objectives of the study, which were to analyse:
1. The effectiveness of incentives in changing the environmental behaviour of companies.
2. Incentive mixes.
The underlying questions to answer through the study are related to understanding how incentives
work, what the factors in their success and failure are and what can be learnt from this, i.e. what
can EU and other policy makers do to provide better incentives to firms so that they decide improve
their environmental performance? How does this relate to the regulatory reality faced by
companies, the potential application of incentives, their complementarity with existing schemes and
the level at which they should be offered (i.e. at EU or MS level)? and specifically, how can this
inform the development of an organisational environmental footprinting (OEF) initiative?
The overarching aim is to be able to incentivise positive behaviour change in all companies, i.e. not
just to reward / label existing good practice.
The specific research questions from the Term of Reference answered in this study are:
Which incentives are the most effective in changing the environmental behaviour of
organisations?
What are the success factors for effective incentives?
What is the nature of change induced by incentives (incremental, systemic)?
What type of measures (preventive, end-of-pipe, innovation, investment in technologies)do
incentives trigger?
Which incentives are more likely to drive continuous improvement instead of on-off actions?
Do incentives work differently in different sectors and Member States? In what way?
What type of companies (large companies, medium companies, small and micro companies,
multinationals, operating in significantly polluting sectors, those with an environmental
management system/ already environmentally active, companies lagging behind in this area,
etc.) are susceptible to change their behaviour based on incentives?
Which are the best incentives for SMEs, specially small and micro sized companies?
What obstacles/ disincentives for improving environmental performance can be identified?
This document is the final report for the DG Environment study on “Incentives
to improve the environmental performance of companies”. It presents a final
draft of the study findings, complete with conclusions and recommendations.
This chapter briefly presents the purpose of this study and the context in
which it was requested.
24 Study on Incentives Driving Improvement of Environmental Performance of Companies
What are the roles of the EU and MSs with regard to the design and implementation of
incentives?
What is the optimal mix of incentives, keeping in mind the principle of subsidiarity, the incentives
in the remit of the EU, of Member States, of regional/local level and the private sector?
For an EU scheme based on measuring environmental performance on the basis of a common
methodology (Organisation Environmental Footprint, OEF) what would be the optimal mix of
incentives and implementation levels (EU, Member States, etc.?)
1.2 Study Context
Resource efficiency has been improving in the EU, but slowly…
Over the last 50 years there has been a steady improvement in resource productivity throughout
Europe. A significant factor in this is the closure (and export) of parts of heavy industry over recent
decades as evidenced in the continued relative decline in industry as a proportion of GDP, and
declining EU shares of global markets4. This structural change to less resource intensive service
and knowledge economy requires less resource inputs per unit of GDP, improving measures of
resource productivity. In industry that has remained efficiency has also improved driven by other
factors such as innovation and increasing energy prices.
Resource Productivity, as a gross measure of sustainable consumption and production, has
increased by around 1% per annum for the past 10 years throughout the EU27. However, this trend
has been achieved by GDP (Gross Domestic Production) increasing faster than DMC (Domestic
Material Consumption) therefore an absolute decoupling of resource use and economic growth has
yet to be achieved5.
The role of companies in improving resource efficiency and environmental impact is crucial
Resource productivity alone does not reveal the full story of businesses impact upon the
environment and their micro level decisions that influence macro trends. A recent study conducted
by Ecorys6 has shown substantial improvements have taken place in industries’ environmental
performance, including in the areas of energy consumption, carbon dioxide emissions, renewable
energy usage, material consumption, waste generation and waste management.
One of the main forces driving improvements in resource efficiency are on-going increases in
energy and raw material costs7. This has driven the issue up the agenda of many organisations and
is likely to continue to do so for the foreseeable future. Energy security and exposure to
4 Ecorys (2011) EU Industry in a sustainable growth context: instruments, innovation and performance 5 Eurostat
http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&pcode=tsdpc100&language=en&toolbox=type. 6 Ecorys (2011) EU Industry in a Sustainable Growth Context. Brussels (Chapter 5 of the 2011 EU Competitiveness Report)
http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7002. 2011). 7 Ecorys (2011) Study on the Competitiveness of the European Companies and Resource Efficiency.
25Study on Incentives Driving Improvement of Environmental Performance of Companies
unpredictable resource availability/costs are also factors influencing business consumption and
production decisions.8
EU policy recognises this and there are initiatives directly targeting firms…
These issues are all relevant globally, in an increasingly global marketplace consumers and
producers everywhere face some pressure for greater sustainability. The global nature of many of
the environmental impacts and resource scarcity also makes it of high policy relevance to other
countries.
The EU has recognised these pressures on business and has instigated a strategic drive to
address these issues and minimise their negative impacts upon EU competitiveness. For example,
the recently launched EU 2020 Resource Efficiency Flagship initiative and the Roadmap to a
Resource Efficient Europe are addressing the resource efficiency challenge. The Roadmap
addresses key resources and key sectors (food, housing and mobility). Among other actions, the
Roadmap to a Resource Efficient Europe foresees policies in the area of sustainable consumption
and production, including:
"Establish a common methodological approach to enable Member States and the private sector to assess,
display and benchmark the environmental performance of products, services and companies based on a
comprehensive assessment of environmental impacts over the life-cycle ('environmental footprint') (in
2012);" and recommending Member States to "Put in place incentives that stimulate a large majority of
companies to measure, benchmark and improve their resource efficiency systematically (continuous)."
…but action to date has met with mixed success
Statistics of interest when looking at EU and global schemes designed to improve the
environmental performance of companies include the number of ISO 140019 registrations in the
EU, number of Carbon Disclosure Project (CDP10) participants, the number of Ecolabels11, and the
number of organisations with an Eco-Management and Audit Scheme (EMAS12) certification,
although it should be noted that being involved in a ‘scheme’ does not automatically label a
company as successful in terms of environmental performance. Environmental performance may
improve without the presence of labels or participation in schemes, however, it is more difficult to
gauge. Gauging environmental performance requires enterprise and sector data which can be
difficult or not possible to access.
The number of ISO 14001 registrations in the
EU has been increasing. For example between
2000 and 2010 the number of companies
registered in the EU went up from 10 971 to
103 126 respectively, which is approximately
eight times as many registered companies in
2010 than in 2000. The largest annual increase
in the number of registered companies has
been in 2000 and 2001 (51% and 64%
respectively), while this annual growth has
decreased to 15% in the most recent years.
Seven of the top 10 are EU27 Member States,
8 IDEA Consult on behalf of DG ENTR (2011). The role of non-energy industrial raw materials in the EU Chapter 4 of the
European Competitiveness Report 2011 http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7002. 9 ISO 14001 is the International Standards Organisation environmental management methodology. 10 The CDP collates and publishes the carbon emissions from large companies. 11 The Ecolabel is a voluntary scheme that companies can use on their products if they pass specific environmental criteria. 12 EMAS is a voluntary management and reporting tool relating to the environmental performance of companies.
Top ten countries for ISO 14001 certificates - 2010
1 China 69 784
2 Japan 35 016
3 Spain 18 347
4 Italy 17 064
5 United Kingdom 14 346
6 Korea, Republic of 9 681
7 Romania 7 418
8 Czech Republic 6 629
9 Germany 6 001
10 Sweden 4 622
26 Study on Incentives Driving Improvement of Environmental Performance of Companies
this covers big players such as Germany, Italy, the UK and Spain, but also new MS such as Czech
Republic and Romania.13
The number of EU companies participating in the Carbon Disclosure Project (CDP) suggests that
the Europe 300 (the 300 largest companies in Europe in terms of their market capitalisation were
asked to disclose their environmental performance according to the CDP questionnaire) are world
leaders with regard to their commitment to reporting and managing carbon. According to the CDP
Europe 300 Report 201114, the disclosure rates and reporting quality of the Europe 300 companies
continues to rise. In 2011 the EU disclosure rate was 90% (271 companies) compared to an 84%
disclosure rate in 2010 (253 companies). In an overall disclosure comparison, Europe 300 leads in
many areas and outperforms the Emerging 800 and the S&P 500. The results of the CDP vary
significantly across Member States, for example some new MS have lower response rates. Within
this region, the highest response rates for the year 2010 were from Hungarian (55.5%), Estonian
(33.3%) and Romanian (20%) companies. The companies from the other new MSs had a response
rate below 15% with several of them giving no response at all.15
The number of Ecolabels licensed more than doubled throughout the EU27 between 2007 and
2010, to a total of 1 150, suggesting that this has become a more popular scheme. However, the
numbers of products registered is still relatively low and the rate of uptake varies significantly
between Member States. This is particularly noticeable for new Member States. Italy is of particular
note as they make up a third of all licenses granted throughout the EU27.
The figures on EMAS registration are also telling, as there were just over one hundred new
registrations in 2009-2010 throughout the EU27. This suggests that the scheme has plateaued at
around 4 500 sites and action needs to be taken to reinvigorate this scheme. Again the difference
between the EU15 and new Member States is stark.
The use of Life Cycle Assessment (LCA) by companies is also increasing. LCA methodology
started as an academic method to analyse the environmental impact of products or processes
across their full life cycle. Companies are applying LCA to optimise their products and gain
competitiveness. According to a recent report16, increasing demands from customers and
regulators for improved environmental performance and increased transparency are driving the
increasing interest in LCA as a tool for continuous improvement and innovation and a way of
improving environmental. According to a survey of executives conducted for the report, 82% of
companies that did an LCA last year plan to do more in the coming 12 months.17
Companies often need incentives to improve their environmental performance as they
perceive it as an extra cost
The environmental performance of companies is a complicated subject and is dependent upon a
complex range of measurements and assessments. As commercial entities companies do not
naturally invest in environmental performance unless benefits are clear. At an economy level it is
important to note the competitiveness trade-offs typically associated, if not always actually present,
with improved environmental performance. These trade-offs are based on the assumption that
improved environmental performance increases firms costs and this either results in increased
product prices or decreased profits, which negatively impacts on firms international
13 http://www.iso.org/iso/iso-survey2010.pdf. 14 https://www.cdproject.net/CDPResults/CDP-2011-Europe-300-Report.pdf. 15 PwC (2010). Carbon Disclosure Project 2010. Central and Eastern Europe. 16 Green Research report, Life Cycle Assessment: A Guide for Sustainability and Strategy Executives. 17 http://greenresearch.com/2011/05/12/new-research-finds-torrid-growth-in-life-cycle-assessment/.
27Study on Incentives Driving Improvement of Environmental Performance of Companies
competitiveness, assuming international competitors are not subject to the same rules and cost
increases.
Although some companies remain sceptical, evidence shows that environmental
performance improvements can and do bring net business benefits
Evidence in this area is mixed, with many examples showing, that companies' competitiveness has
improved because of environmental performance improvements. The balance between benefit and
cost to individual firms and organisations varies, not all would see net benefit, but many could.
Nevertheless the perception remains among many firms and organisations that improving
environmental performance increases costs, with few business benefits. In the short term this is
true of many environmental performance improvements, with the up-front investment taking time to
pay-off in improved efficiency savings. In the medium-long term the benefits most often greatly
outweigh the costs, but many firms only operate with a short-medium term planning horizon and
other constraints within their organisation mean that they do not ‘see’ the longer term benefits or
value them as highly. Nevertheless, several studies indicate that the adoption of environmental
measures can sometimes also pay back in the short term.18
It is also possible for eco-innovative companies to profit from lower uncertainty in innovation due to
regulatory standards and demand-generating effects that can create higher revenues19.
Trade-offs can also exist within environmental performance itself, where improvement in one aspect
reduces performance in another, for example improving a factory emissions stack to emit less
acidifying air pollutants may then require more energy to be used in production processes, indirectly
increasing the amount of greenhouse gas emissions.
Emissions are increasingly being used to measure company environmental performance…
Greenhouse gas (GHG) emissions have become a useful proxy measure of environmental
performance over recent years. GHGs are measured in CO2 equivalents, which is a recognised unit
of measurement that can include a wide range of potentially polluting activities related to emission
of the six main GHGs. A study, "Company GHG Emissions Reporting – a Study on Methods and
Initiatives20" conducted for the European Commission in 2010, identified and analysed the existing
leading methodologies and initiatives in the field of company GHG reporting. The key conclusions
included:
Key risks of non disclosure of GHG emissions include: profit exposure, market value, brand
value, stakeholder reputation, insurance and investor relationships;
Costs involved with GHG reporting schemes vary widely, anywhere from 1-800,000 EUR.
Verification and voluntary assurance reporting costs also varied between 5-500,000 EUR. This
cost is not linearly related to the size of a business;
The main benefits identified were addressing the risks outlined above, improved credibility of
environmental reporting and providing the first step in effective carbon management
procedures. However, the monetary benefits of such schemes were more difficult to establish,
particularly for smaller non-energy intensive businesses and sectors.
18 http://www.environmental-savings.com/; http://www.bis.gov.uk/assets/biscore/business-sectors/docs/10-698-potential-
resource-efficiency-savings-for-businesses; https://www.cdproject.net/en-US/Results/Pages/CDP-Global-500-Report-2011.aspx.
19 K. Rennings and C. Rammer, (2010) The Impact of Regulation-driven Environmental Innovation on Innovation Success
and Firm Performance. ZEW Discussion Paper, 065. (10):1{34, 2010. 20 ERM (2010). Company GHG Emissions Reporting – a Study on Methods and Initiatives.
28 Study on Incentives Driving Improvement of Environmental Performance of Companies
..but there is also a desire for policy to look at the whole company environmental footprint
Besides reporting on the GHG emissions21, there is also a need for sustainable management of
other resources such as water, land, biodiversity and material flows (hazardous and non-
hazardous). This is because GHGs are only one dimension of environmental performance, which
can be more or less relevant to particular sectors. A wider range of indicators is needed, to give a
better and clearer picture of the environmental performance of a company. Considering all key
resources is also the goal of the recent Roadmap to a Resource Efficient Europe, adopted in
September 2011.
DG Environment and JRC IES22 are working on a guide to calculate the environmental footprint of
organisations on a life cycle basis (the "common methodology") along 14 impact categories.23 This
methodology is being tested on ten volunteer companies. The goal of the tests is to provide
feedback on the implementation of the draft methodology. It includes aspects like collection of data
(value added, implementation barriers, costs, accessibility to SMEs, data confidentiality issues…)
and the assessment of different environmental impacts, as well as the content of the reports.
1.3 Report Structure
The diagram below illustrates the structure of this report.
21 In Korea, water footprint for indirect emissions of company activities, e.g. emissions from purchased electricity for own use
is increasingly required by clients and the authorities. 22 Joint Research Centre Institute for Environment and Sustainability. 23 Available at http://ec.europa.eu/environment/eussd/corporate_footprint.htm; the impact categories are: climate change,
ozone depletion, human toxicity - cancer effects, human toxicity - non-cancer effects, particulate matter/respiratory
inorganics, ionising radiation (human health), photochemical ozone formation, acidification, eutrophication – terrestrial,
eutrophication – aquatic, ecotoxicity - freshwater aquatic, land use, resource depletion – water, resource depletion -
mineral, fossil and renewable.
29Study on Incentives Driving Improvement of Environmental Performance of Companies
2 Methodology
2.1 Approach
The overall objective of this report was to 'provide inputs for policy proposals on sustainable
production by analysing possible administrative, economic and reputational incentives to drive the
improvement of the environmental performance of companies and integrate environmental
performance as an element of their competitiveness’.
In order to achieve these objectives, and in line with the outputs requested by the ToR, our
fundamental approach can be summarised in the following task diagram.
This chapter summarises the approach taken for this study, explaining the
methodology used, the research tools, meetings, scoping, definitions and
outcomes.
30 Study on Incentives Driving Improvement of Environmental Performance of Companies
Inception Phase
The project began with a kick-off meeting to discuss and reiterate the main purpose of the work, to
confirm the approach and clarify any outstanding issues. The Inception report was submitted to the
Commission on 5 October 2011 taking into account all refinements made to the proposed approach
discussed during the inception meeting. It also included a detailed work plan, elaboration of the
methodology, and the proposed organisation of all planned activities.
2.2 Research
2.2.1 Step 1: Literature Review
This task involved the following sub steps:
Literature review;
Creation of a detailed database of incentives.
Literature review
To provide a theoretical background on the role of incentives to drive company environmental
performance and to identify existing incentives at the global, EU and Member State level, we
researched and analysed a range of key reports and articles in this field. These reports were
produced predominantly by international institutions, such as the European Commission and
OECD, but also by national governments and environmental agencies as well as academics in the
field. The general insights and conclusions from this literature have been presented in chapters
three and four of this report.
Database of incentives
This comprehensive literature review enabled the creation of a database of over 100 incentive
schemes. These were then short-listed for a more detailed analysis according to the following
criteria:
Incentive type coverage (different incentive groups recognised under administrative, economic
and reputational incentive types);
Geographical coverage;
Sector coverage;
Company size coverage; and
Link to organisations environmental footprinting.
The analysis of short-listed incentives is included in Chapter four of this report. The summary
database of all incentives identified is attached to this report in Annex B.
2.2.2 Step 2: Verification and Gap Filling
In order to verify the findings from literature review and attempt to fill any gaps in the information on
each incentive, we carried out expert and stakeholder interviews with those aware of, and involved
in, these incentives.
Consultation Interviews
We carried out 13 interviews with different types of stakeholders:
Companies;
Trade and industry associations/ federations;
Member State ministries and agencies;
Consumer associations;
Reporting initiative.
31Study on Incentives Driving Improvement of Environmental Performance of Companies
We were interested in three key issues:
Their experience with regard to key elements and drivers to improve companies’ environmental
performance;
Their opinion and experience on the mix of complimentary measures/incentives that would be
most effective and at which level (EU/MS);
The role for a common methodology for organisations environmental footprinting.
The results of these consultations are incorporated into Chapters four and five of this report. A list
of those we interviewed (some interviewees wished to remain anonymous) can be found in Annex
A of this report.
Gap filling for short-listed incentives
Further sources in the literature, incentive websites and evaluation reports were also analysed to
collect additional data for the selected incentives profiled in chapter four.
2.2.3 Step 3: Analysis
This step consisted of:
Analysing the information gathered from the interviews;
Analysing the information from the literature on the short-listed incentives;
Identifying the success factors of effective incentives;
Identifying the potential intervention logic (for application of incentives and linking to a
organisations environmental footprinting tool);
Verifying and filling any remaining gaps via a policy workshop.
Success factors
Key success factors of the different incentive types have been identified from the interviews and the
existing literature. They have been further aggregated according to their priority as regarded by the
interviewees. Any factors specific to an incentive have been associated with the corresponding
incentive type. The aim of the interviews was to collect insights on all of the incentive types and
subgroups. This was intended to enable the identification of common success factors, and which
factors are most important with regard to maximising specific outcomes.
This analysis is somewhat biased towards those incentives where we have more data and also
depending on the sample of persons we interviewed and their experience. However, those
incentives which appear most interesting and relevant are also those where the most time and
effort has been expended to collect and collate data.
Potential intervention design
Based on the identified success factors in incentive implementation, we were able to offer a number
of policy inputs centred on (as suggested in the ToR) linking incentives to an EU scheme based on
measuring environmental performance of companies on the basis of a common methodology,
including setting sectoral performance benchmarks. This also considers the range of incentives,
which could be implemented, at which level they are best applied i.e. should MSs apply them or
would they work better if implemented at an EU wide level and suggestions on policy form, e.g. how
MS cooperation can be encouraged.
Policy workshop
The workshop was based on testing the findings presented in the draft final report with a range of
stakeholders. Approximately 40 individuals participated in the workshop including representatives of
32 Study on Incentives Driving Improvement of Environmental Performance of Companies
the European Commission, industry, associations and others such as government agencies. The
participants were divided into four groups to discuss the findings and provide their opinions. These
insights were incorporated into our analysis in this final report.
2.3 Challenges and limitations
In carrying out this study we encountered the following challenges:
Overlaps in the classification of the incentives;
Lack of data to monetise effectiveness of incentives.
Three categories, administrative, economic and reputational, were proposed by the Commission to
classify the incentives. In practice we found that some incentives fall across these categories,
hence it is difficult to classify them into only one category. For example, the Environmental Ship
Index (ESI) provides an economic as well as reputational incentive for companies, in the form of
reduced port fees but also as a certification of good performance that can be used to enhance a
firm's reputation. This will be explained in greater detail in the following chapters.
Another challenge we faced has been that in the majority of cases the existing literature does not
go into quantitative detail about the effectiveness of incentives. There are a variety of reasons for
this, sometimes the incentives are subsumed within larger regulations or schemes and therefore it
is hard to focus on just the specific incentive elements of interest to us, while other incentives are
too small to have much data published. In both cases it is rare that the incentive has been
evaluated by a third party to substantiate findings and also the purpose of the data presented on
the incentives is promotional rather than analytical, so there is often a lack of insight into how and
why firms are attracted to it or not. In an attempt to fill these gaps we consulted relevant
stakeholders, including those directly involved with the incentive. However, this route also failed to
generate a large amount of incentive specific detail, though it did provide useful input on the
general concept of effectiveness and success factors for incentives.
A study by a UK ministry (DEFRA) in 200624 reported a similar challenge of insufficient or
conflicting empirical evidence to draw clear conclusions on the type of incentives that are most
effective in driving the environmental performance of companies (i.e. regulatory incentives compare
with financial and reputational measures). The same study also confirms our finding that there is
surprisingly little empirical research focusing on policy mixes.
The above points place some limitations on the findings of this study including:
A lack of data on distinction between the subgroups within an incentive type;
A lack of data on monetisation of effectiveness and budgetary implications.
As a result we have been unable to go into the level of detail necessary to answer some of the
original questions in this study. These limitations were discussed with the client through the course
of this study and research focus and objectives modified accordingly.
24 Webb, B., Chilvers, J. and Keeble, J., (2006) Improving Business Environmental Performance: Corporate Incentives and
Drivers in Decision Making.
33Study on Incentives Driving Improvement of Environmental Performance of Companies
3 Theoretical underpinnings of incentives
Incentive – a definition: a thing that motivates or encourages someone to do something.
Alternatively it can be a payment or concession to stimulate greater output or investment (Oxford
English Dictionary).
This chapter is focused on incentives as motivations for good corporate environmental performance
and seeking to understand how firms and organisations can be incentivised to improve their
environmental performance. Other issues addressed in this chapter include; why is company
environmental performance important? How and why do organisations change? And; how do
incentives fit into this?
3.1 The importance of company environmental performance
Companies are directly and indirectly responsible for much of the environmental degradation and
pollution that occurs worldwide. This means they have a crucial role to play in environmental
protection. For example phase III of the EU ETS, which requires GHG emissions reporting from
large EU companies, will cover ~50% of total EU GHG emissions25. They are vital players in society
with regard to reducing the consumption of natural resources and maximising the efficient use of
resources by reducing waste and increasing re-use and recycling. By taking actions of this nature
companies can not only protect the environment, but also help to preserve their own
competitiveness and survival in a highly competitive market. Increasingly environmental liabilities
are seen as a business, public relations and investment risk26.
Environmental policy is a driver of environmental performance
Environmental policy has played an important role in improving environmental performance over
recent decades. Whilst the perception amongst some is that environmental regulation has a
significant cost on business, statistical data indicates that annualised environmental costs are
typically less than 2% of production value.
25 http://ec.europa.eu/clima/policies/ets/index_en.htm http://ec.europa.eu/clima/policies/ets/index_en.htm. 26 OECD (2007). Environmental policy and corporate behaviour, chapter 1.
This chapter discusses the theoretical basis for incentives in the context of
company environmental performance. It sets out the importance of company
environmental performance and how organisations make decisions to
improve environmental performance. By looking at the drivers and barriers to
change a clear case can be made for incentives to empower and overcome
these. The chapter then looks at the major incentive types for this study,
defining them and explaining how they work in theory.
34 Study on Incentives Driving Improvement of Environmental Performance of Companies
Environmental policies have led to innovations in conservation of energy and resources, pollution
prevention and environmental clean-up. These innovations have reduced costs and reinforced the
competitiveness of EU industries, as ‘clean’ technologies developed in Europe have become
successful export products on the world market. Policy-induced environmental innovation has
directly and indirectly stimulated growth, competitiveness and jobs.
The net effects of environmental policies on employment are positive or neutral due to the growth in
labour intensive environmental activities (job creation potential: 1 million new jobs); the potential
shift of taxes from employment towards pollution (e.g. the German eco-tax contributed to the
creation of 250,000 jobs since 1999); promoting growth in eco-technology and eco-innovation27.
By adopting environmental protection measures companies help preserve accessibility to
materials that they depend upon
Resource depletion, inaccessibility of resources (in some cases) and increasing international
competition for natural resources has increased the importance of this driver. Realising these
challenges, many developing countries placed restrictions on the export of important natural
resources (rare earth metals, precious metals, minerals, hydrocarbons etc.) and are now competing
with EU firms over recyclable materials both in the EU and non-EU markets. This has placed further
accessibility and price constraints on EU firms, which then jeopardises their competitiveness and
even survival in international markets. Given these challenges, the conservation of natural
resources becomes an imperative for EU companies.
By adopting environmental protection measures, companies can increase their profit
margins
The adoption of environment protection measures can in many cases lead to increased profits and
increased competitiveness. Cost reductions and increases in resource efficiency contribute to
increased productivity and can spur innovation, drive growth and increase employment within an
organisation.
When less resources are used, or when resources are used more efficiently, there is a positive
relation between investment in environmental protection measures and improved profitability. This
is also likely to be related to increasing consumer demand for more environmentally friendly
products28. Resource efficiency has become of greater practical significance to increase
competitiveness for firms and governments alike.
Incremental changes are important at first, more fundamental changes will also be needed
A recent Ecorys led study, “The competitiveness of European companies and resource efficiency”
looked into the process of change that companies go through illustrating their varied organisational
learning approaches. This process involved two stages for companies, with each stage involving
the adoption of specific types of measures, as follows:
Incremental measures which involve small changes in part of the production or “additions” to
it. Examples of these types of measures are the introduction of wastewater treatment plants and
filters to reduce dust emissions. In general terms, the technology used for such change is called
“end-of-pipe”29, which aims at reducing the harmful emissions associated with production.
27 GHK, IVM, SERI and TML (2009). The economic benefits of environmental policy. 28 K. Rennings and C. Rammer (2009). Increasing Energy and resource efficiency through Innovation – An Explorative
Analysis using Innovation Survey Data. p. 442-3. Journal of Economics and Finance, 59, 2009, no.5. 29 The official OECD definition of end-of-pipe technology is as follows: Expenditure on “end-of-pipe” technologies used to
treat, handle or dispose of emissions and wastes from production. This type of spending is normally easily identified even
within the context of ancillary activity because it is usually directed toward an “add on” facility which removes, transforms
or reduces emissions and discharges at the end of the production process.
35Study on Incentives Driving Improvement of Environmental Performance of Companies
Incremental measures can also be more preventative, targeting reductions in the production of
by-products in processes, by increasing or maintaining the high share of recycling of materials
rates, or greater use of green and intelligent information technology;
Fundamental changes to industrial operations include the use of higher level technologies, or
moving toward green business models, involve changes that go beyond simple end of pipe
preventative measures. It involves the use of “cleaner technology”, as well as the introduction of
“new products and processes” that are more environmentally friendly. These fundamental
changes aim at reducing not only the by-products of the production process, but also at
reducing resource use (both as input and output to the production process)30. This type of
learning/adaptation involves a high degree of innovation and is usually associated with
investment in research and development.
Environmental Performance and the role of reporting
Greenhouse Gas (GHG) emission reporting has become widespread and mandatory for large
carbon intensive organisations under the EU Emissions Trading Scheme (EU ETS), targeted at the
companies responsible for 40% of European carbon emissions. The EU ETS system includes only
direct emissions, i.e. scope 1 and some of scope 2. It does not cover indirect impacts. Additionally,
many large organisations report on their carbon emissions as part of their wider environmental
reporting demanded by their shareholders. Emissions are often reported within, or as part of, a
wider Environmental Management System (EMS). Evidence suggests that measuring and reporting
emissions is an important first step in the “emission reduction management cycle” 31. This cycle is
seen as a key tool for embedding sustainability and environmental improvement within an
organisation. The cyclical nature of the process is effective at driving continuous improvements
within a company’s environmental performance. The following figure outlines the main stages of the
EU’s environmental management system EMAS, one of many environmental management
systems, consisting of a “plan, do, check, act” cycle common to various EMS methodologies.
Figure 3.1 The EMS Cycle
Source – EMAS.
This figure helps illustrate the underlying theory driving company environmental improvement.
Within this cycle there are a range of complimentary activities; everything from radical technical or
process innovation through to straightforward mandatory emissions reporting. It does not prioritise
30 M. Frondel, J. Horbach and K. Rennings (2006). End-of-Pipe or Cleaner Production? An Empirical Comparison of
Environmental Innovation Decisions Across OECD Countries. 31 DEFRA (2010). The contribution that reporting of GHG emissions has on the UK’s climate change objectives.
36 Study on Incentives Driving Improvement of Environmental Performance of Companies
one over another, but provides the “enabling” framework within which to effectively plan and action
these activities.
Quantifying the benefits of environmental reporting has proved problematic as there can be
significant differences over time and between sectors, dependant upon current competitive position.
Whilst the benefits to reducing environmental and investment risk is clear and increasingly well
understood by business. The general economic performance benefits of environmental
management and reporting is also well established32.
Innovation and company environmental performance
The EU has a role to play in driving and incentivising innovation amongst businesses that lead to
environmental improvements within their operations. The number of innovative environmental
products available is continually increasing, but companies often remain conservative in their
uptake of novel or new approaches33. Therefore, overcoming this resistance will be important in
driving the changes required in our future production and consumption patterns. Radical process or
business eco-innovation is often based on new technologies, but it should be remembered that
these innovations are usually enabled by non-technology changes, including changes in the policy
and regulatory environment and the incentives that exist34.
A study35 examined the motivations for company environmental improvements in relation to the
adoption of innovations. This identified eco-innovation as an important driver for many companies
and for national competitiveness in general. The resultant data outlines views on what acts as
drivers (and indirectly incentives) for business innovation. It also helps flesh out a link between
adoption of innovation and improved environmental performance, which is something many
incentive schemes assume. The figure below presents an analysis of the types of environmental
benefits that innovative firms report. These are grouped by country, innovation type, innovation
leaders, followers, moderate innovators and catching-up countries36. This is interesting to give
insight into whether innovation generally leads to environmental benefits for firms, in addition to the
perceived economic benefits.
32 R.D. Klassen and C.P. McLaughlin (1996). The impact of environmental management on firm performance, Management
Science, 1996. 33 Ecorys (2011) Lags in the EU Economy’s response to change 34 OECD (2009). Sustainable Manufacturing and Eco-Innovation; framework, practices and measurement. 35 Community Innovation Survey (CIS), 2008. 36 Innovation leaders: DK. UK. DE, FI, SE.
Innovation followers: SI, CY, EE, NL, FR, IE, BE, LU, AT.
Moderate innovators: LT, PL, HU, SK, MT, IT, EL, ES, PT, CZ.
Catching-up Countries: BG, LV, RO.
37Study on Incentives Driving Improvement of Environmental Performance of Companies
Figure 3.2 The percentage of innovative firms experiencing environmental benefits by type of benefit
and innovation class
Source: CIS 2008 (IDEA Consult).
Companies in the most innovative countries experience bigger environmental benefits
It is clear from the figure that enterprises in the most innovating countries report greater
environmental benefits than other country groups. For other country groups (from innovation
followers to catching-up countries), the proportion of innovating firms reporting environmental
benefits is lower and broadly similar across the groups. Exceptions include recycled waste, water
and materials where there appears to be a clearer link between innovation type and environmental
benefit. For these exceptional cases it should be remembered that these features will also be
connected to country characteristics and that countries with higher innovation capacities will
typically have better recycling and water infrastructures. Yet overall, it is impossible to make a clear
link from the data on the causality of innovation to environmental benefits, as environmental
benefits could have arisen in ways not linked to the innovation behaviour.
Energy savings are the most common environmental benefit derived from innovation, and the
manufacturing sector gains more than the service sector
Reduced energy use is the most commonly reported benefit. This may be related to the fact that it
is considered as a general target relevant for all sectors, whereas other benefits are only relevant to
specific sectors. Looking at the underlying data it is notable that industry reports more
environmental benefits than service sector organisations.
38 Study on Incentives Driving Improvement of Environmental Performance of Companies
High investment in eco-innovation does not always translate into high environmental benefits
The table above is consistent with analysis of eco-innovation detailed in the Flash Eurobarometer
315. According to this survey, about 42% of the enterprises that had introduced at least one type of
eco-innovation in the past two years said that such an innovation had led to a reduction in material
use37. Furthermore, by comparing CIS data with the Flash Eurobarometer 315 - it can be
established that there is no country wide relationship between eco-innovation and reporting an
environmental benefit, as the countries reporting the highest percentages of environmental benefits
are not the same as the ones reporting high percentages of eco-innovation investments.
3.2 Organisational change and environmental performance
With the importance of change and improved environmental performance established, the question
arises: How can this change be achieved? An important factor in this is organisational theory.
3.2.1 Theories of organisational change
Organisational change and organisational learning is a process whereby organisations develop
learning at all levels including those of individuals, groups and systems. Change is characterised by
two main aspects: the first is a dynamic interaction between the organisation and the environment
(internal and external), and the second is an identifiable product, i.e. change, which is the result of
this interaction.
There are various theories that try to explain why companies change. Some focus on the external
environment that surrounds them and others focus on their internal environment. In the table below,
we give a brief account of these theories and the underlying drivers for change.
Table 3.1 Theories of organisational change
Theories of organisational change Underlying drivers
Rational choice theory: argues that companies are fully rational and
will improve environmental performance (or move ‘beyond compliance’)
if profit maximisation and efficiency gains can be achieved
Markets;
Governments.
Institutional theory argues that companies pursue improvements in
response to pressures from external institutions, including social
institutions beyond government and the market
External factors; trade organisations;
and competitors.
Stakeholder theory which suggests that companies are responsive to
the preferences of a range of internal and external stakeholders.
External stakeholders.
Organisational change theory, which is related to internal drivers and
barriers to environmental decision-making and adaptation to external
pressure
Managers’ ability to convince others
of policy benefits and securing top
level commitment;
Corporate culture;
Process of company learning.
Theories of moral philosophy explains companies environmental
decisions in terms of the ethics, normative beliefs, and values of the
individuals or organisations
Norms, beliefs, and value of
individuals and organizations.
Source: Improving Business Environmental Performance: Corporate Incentives and Drivers in Decision Making
(DEFRA) 2006- adapted by Ecorys.
37 The Gallup Organization (2010), Attitude of European entrepreneurs towards eco-innovation”, Flash Eurobarometer 315,
pp. 6.
39Study on Incentives Driving Improvement of Environmental Performance of Companies
The organisational change process is characterised by a certain dynamism, where there is
continuous interaction between the external and internal environment of the companies, which
ultimately results in change. Therefore, it is not possible to single out one dimension, e.g. external
factors and tackle it in a separate manner; both external and internal dimensions contribute to
change. The figure below attempts to visualise this theory:
Figure 3.3 Influences on organisational change
Source: ECORYS Nederland B.V.
3.2.2 Drivers and barriers to improved company environmental performance
As shown above, the external and internal environment produces various drivers and barriers to
organisational behavioural change. Attempts have been made to classify these factors in the
context of behavioural change towards improved environmental performance; an example of this is
presented in the table below. The drivers and barriers are the key influences for behavioural
change.
Table 3.2 Organisational change: drivers and barriers
Internal factors External factors
Driv
ers
Financial impacts
Corporate culture, history, norms and
learning;
Leadership and top-level commitment;
Individual ethics;
Employees;
Operational risk;
Company status.
Government: national and EU
regulation/legislation;
Corporate image, reputation and associated
risk;
Media, NGOs/Interest groups, wider society;
Competitors;
Customers, Investors, Shareholders;
Suppliers and trading partners;
Insurers and other financial institutions;
Bar
riers
Lack of finance;
Corporate culture (including organisational
norms, structure, learning and
communication);
Demand on resources, staff and financial;
Regulations;
Markets;
Consumer behaviour;
Access to finance;
Shareholders.
40 Study on Incentives Driving Improvement of Environmental Performance of Companies
Internal factors External factors
Access to information / lack of knowledge;
Lack of top-level commitment;
Lack of employee participation/
acceptance;
Source: Adapted from improving Business Environmental Performance: Corporate Incentives and Drivers in
Decision Making. p.33-34. DEFRA 2006.
Incentives complement these drivers and barriers, acting to both accentuate and empower drivers
whilst minimising or mitigating the influence of barriers. To understand the potential role and power
of incentives it is important to fully understand the drivers and barriers to company behavioural
change, as these are what incentive schemes are trying to influence.
Drivers
Various drivers of behavioural change are identified in the above table. These have typically been
less of a focus in the context of improving company environmental performance, with a greater
focus placed on the barriers to change. Nevertheless, looking at a selection of drivers in more detail
some interesting lessons can be drawn.
The Regulatory framework remains a strong driver
Academic literature on environmental performance argues that environmental regulations may
enhance companies' competitiveness and can encourage technological development38. In practical
terms, Popp (2002) found that environmental regulations in the US succeeded in curbing negative
environmental impacts and induced technological development. Similarly in the paper and pulp
industry, regulatory pressure was the second main driver of green technology in Spain39.
Findings from the Community Innovation Survey (CIS) also re-emphasise this point. The figure
below presents the main findings on the motivations for firms to introduce environmental
innovations. Although the figures provide information on motivations for introducing an
environmental innovation and not on companies’ actual improvement in environmental performance
they can still be instructive. This shows that, in all but a handful of countries, firms report existing
environmental regulations or taxes on pollution as their main motivator for introducing
environmental innovations.
Looking deeper into the patterns in the figure two quite different types of environmental innovators
can be described. Those countries that could be termed “proactive innovators” (Belgium, Finland,
Luxembourg and Portugal), where companies mainly introduce environmental innovations as a
result of current or expected market demand and because of voluntary agreements within sectors;
and those that could be termed “defensive innovators” (Czech Republic, Lithuania, Malta, Romania
and Slovakia), where companies mainly react to regulation (existing or expected). The remaining
countries have mixed profiles where no clear motivation for environmental innovation is dominant.
Other factors such as voluntary codes, or agreements for environmental good practice within
sectors, are also important in many countries.
38 K. Rennings and C. Rammer (2009). Increasing Energy and resource efficiency through Innovation. p. 442-3. 39 K. Rennings and C. Rammer (2009). Increasing Energy and resource efficiency through Innovation. p. 446.
41Study on Incentives Driving Improvement of Environmental Performance of Companies
Figure 3.4 Motivation for introducing an environmental innovation (% enterprises with innovation
activity), 2008 – Industry (without construction)
Source: CIS 2008 (IDEA Consult).
There is some evidence that financial drivers are not as important as companies may believe
Financial success and implications are a key driver of company behaviour as whole, but an
interesting finding from the analysis of the CIS motivations was that grants, subsidies and other
financial incentives were in every case the weakest motivation for introducing an environmental
innovation/performance improvement, even where businesses stated otherwise. Less than 10% of
companies cited this as the main determining factor or motivation for taking action. This suggests
that financial incentives may only have a limited role in triggering environmental improvements and
process innovation.
A variety of reasons can be put forward to explain this finding, including that the available grants do
not provide a big enough incentive to European companies for investing in improvements and eco-
innovation; or that companies are unable to easily access these financial resources. The
42 Study on Incentives Driving Improvement of Environmental Performance of Companies
Eurobarometer survey found evidence to support this last point, where “barriers related to financing
and funds were a very, or somewhat, serious barrier to an accelerated development and uptake of
eco-innovation. For example, insufficient access to existing subsidies and fiscal incentives was
considered a barrier by 6 in 10 respondents.40” Other more sceptical reasons are based on there
being a difference between what companies say and what they actually do in relation to incentives,
and that when an eco-innovation makes business sense there may be no need for an additional
financial incentive. The conclusion being that there may be some uncertainty around the findings
stated in the survey.
Reputation / Corporate image is an increasingly important driver
Increasingly companies seek to enhance and protect their corporate image by demonstrating their
respect for the environment and by taking actions towards this objective. Some of the most
accomplished Corporate Social Responsibility (CSR) practitioners of today, originally began
reporting their impacts due to negative publicity and brand image damage generated by consumer
campaigns and boycotts of their products in the 70s and 80s. They saw transparency of information
as the only way to rebuild consumer confidence. The rising importance of corporate
image/reputation relates to increasing consumer pressure, increased awareness of environmental
matters and the increasing pressure on performance transparency and reporting requirements.
Examples of this include initiatives such as the Global Reporting Initiative and Carbon Disclosure
Project which aim to make visible companies impacts and activities in this area. A study found that
the adoption of green technology within the pulp and paper industry in Spain was largely driven by
industry’s desire to maintain and improve their corporate image/reputation41.
By reducing the cost of risks imposed by environmental, economic and social issues, companies
increase their reputation, competitiveness and market position. Poor environmental performance
hurts company reputation and value. For example, the April 2010 blowout at the Deepwater Horizon
rig in the Gulf of Mexico. This accident killed 11 people and released a total of nearly five million
barrels (780 000 m3) of oil into the sea. The operator (BP) has set up a 20 billion USD fund to cover
the costs including compensatory payments, cleanup costs, settlements and fines. But regardless
of these costs it is difficult to quantify how much this accident affected and is still affecting BP’s
reputation. Following the Deepwater Horizon disaster, BP saw its share price fall by 52% in 50
days42 due to its handling of the accident, and even now the share price has not recovered to pre-
accident levels, a clear financial cost, yet unclear reputational cost..
Companies increasingly recognise these types of risks and are becoming more interested in
reducing pollution, going beyond just legal compliance and to portray externally an image of being
environmentally concerned, because they are rewarded in the marketplace and in market valuation.
For example, in an study by Konar and Cohen (2001), of manufacturing firms in the S&P 500 it was
found that poor environmental performance has a negative effect on the intangible asset value of
firms (e.g. trademarks, proprietary raw material sources, brand names, and goodwill). The study
concluded that legally emitted toxic chemicals have a significant effect on the intangible asset value
of publicly traded companies. A 10% reduction in emissions of toxic chemicals results in a $34
million increase in market value. The magnitude of these effects varied across industries, with
larger losses accruing to the traditionally polluting industries.
40 The Gallup Organization (2010), Attitude of European entrepreneurs towards eco-innovation”, Flash Eurobarometer 315,
pp. 6. 41 K. Rennings and C. Rammer (2009). Increasing Energy and resource efficiency through Innovation. p. 446. 42 http://www.environmentalleader.com/2011/12/06/deepwater-horizon-one-year-on/.
43Study on Incentives Driving Improvement of Environmental Performance of Companies
Investor relations and position in the value chain can be a strong driver
Investor relations and the position of companies along the value chain provide a strong incentive to
environmental protection measures- as evidenced through the ECORYS study on the
Competitiveness of European Companies and resource efficiency43. For example, buyers along the
value chain, through the exercise of buyer power, can drive suppliers to adopt measures and
standards that would guarantee higher sales of products improving the image of the supply chain.
Investors are increasingly concerned about issues such as climate change and resource scarcity.
This concern is reflected in investment decisions and is gaining more importance in the financial
analysis of industries and companies. The growth in investor interest in, and commitment to,
sustainability is impressive – the UN Principles of Responsible Investment now has over 900
signatories, representing over USD 25 trillion in assets under management44.
Investors also take into consideration issues such as pollution, resource depletion, ecosystem
change, waste disposal, the use of toxic chemicals, the license to operate in communities, and
other environmental issues, in order to fully understand the environmental risks and opportunities
facing them before they invest45. As such, some investors are more willing to invest in companies
that are more socially and environmentally responsible. For investors, the success of an investment
depends on their ability to discern the factors that influence the market's valuation of the firm in
which an investment may be made and then judge the accuracy of that valuation.
Barriers
Various barriers to behavioural change were also identified in table 3.2, looking at these in more
detail some interesting lessons can be drawn, including:
Economic uncertainty and business environment stability can be barriers
The stability of the business environment is an important factor that determines companies’
decisions regarding investments in environmental performance improvement46. Tax and interest
rates are among the main indicators measuring stability of the business environment. An unstable
business environment would be one with high variability in taxes and interest rates, and perhaps
also accompanying regulations. This creates real problems for firms planning their long-term
business strategy. It could potentially lead to inactivity and business stagnation, where no
investments are made for fear of being caught out by subsequent changes in the business
environment. Empirical evidence has confirmed this, revealing that uncertainties around exchange
rates and volatility of exchange rates generally influence companies’ investment decisions
negatively47.
Uncertainty may also be associated with operational issues within companies, such as the
companies’ capacity to absorb and implement the change required to improve environmental
performance. These include uncertainty about the most appropriate technology to be used and the
lack of availability of knowledge on how to incorporate novel technologies or processes within their
business structure.
43 Ecorys (2011) Competitiveness of European Companies and resource efficiency 44 SustainAbility (2011). Rate the raters, phase 4, The necessary future of ratings. 45 CFA Institute - Centre for Financial Market Integrity (2008). Environmental, Social and Governance Factors at Listed
Companies, A Manual for Investors. 46 S. Bowles, R. Edwards and F. Roosevelt (2005). Understanding Capitalism, Competition, Command and Change. p. 437. 47 Godfred A. Bokpin, Joseph M. Onumah (2009). An Empirical Analysis of the Determinants of Corporate Investment
Decisions: Evidence from Emerging Market Firms. P. 136.
44 Study on Incentives Driving Improvement of Environmental Performance of Companies
Financial factors can be barriers
Technopolis’ final report on eco-innovation (2008) identified the existence of financial barriers to the
take up of environmental protection measures48 particularly with regard to access to sources of
financing. This is particularly true since many investments in improved environmental performance
require large up front finance and/or investments in innovation. Uncertainty about the application
and performance of new technology means that returns on investment are perceived as relatively
high risk. This in turn can lead to the use of relatively high discount rates for investments in
improved environmental performance49.
The key factor of capital markets that acts as a barrier for long-term investments, such as in
improving environmental performance is that markets are short-termist. Investors and other market
participants look at profit maximisation and accounting-driven metrics such as earnings per share
and make decisions in order to hit short term targets. Such decisions usually involve focus on short-
term results at the expense of long-term investments.
However, according to a 2011 report, ‘Accelerating Low Carbon Growth50’, 59% of emissions
reduction activities reported by Global 500 respondents (the Global 500 are the largest companies
by market capitalization included in the FTSE Global Equity Index Series) have a payback period of
three years or less and 41% of initiatives have paybacks of over three years. This willingness to
invest in activities with a medium to long term payback suggests that some companies regard
energy and emissions reduction as an important strategic priority.
Similar information is provided by other initiatives such as ‘The Money back through the window
(MBW) project, the most successful programme of the KOVET Association for Sustainable
Economies.51 According to the results of their surveys during 6 years (1991-2007), 262
environmental protection measures from 56 different organisations with a short payback period (95
measures immediate payback as no cost, 106 measures with payback within 3 years, and 61
measures with an average of 8 years payback) with a total saving of EUR 58.8 million.
The Department for Business Innovation and Skills of the UK Government in their study on the
potential for resource efficiency savings for businesses52 found that investments within the
environmental technology sector in resource reduction had payback periods as short as one and a
half months. However, similar investments within the Energy, Power and Utilities sector had pay
back periods of three years and five months.
Other internal financial factors can negatively influence companies’ decisions. For example, the
U.S. Environmental Protection Agency53 found that competition for capital within a company can
suppress investment in environmental protection (in the case of energy efficiency for example).
Smaller organisations are less likely to be willing to accept this cost as they have numerous other
business critical demands on their resources.
48 Eco-innovation is defined as “creation of novel and competitively priced goods, processes, systems services, and
procedures designed to satisfy human needs and provide a better quality of life for everyone with a life-cycle minimal use
of natural resources (materials including energy and surface area) per unit output, and a minimal release of toxic
substances”. In that sense, the definition encompasses the three dimensions used in this study, material, natural and
waste. It also encompasses the two types of measures referred to under the typology section 4.1.1. 49 A. Jaffe, R. Newell and R. Stavins (2002), Environmental Policy and Technological Change. P.49. Environmental and
Resources Economics 22: 41-69, 2002. 50 https://www.cdproject.net/en-US/Results/Pages/CDP-Global-500-Report-2011.aspx. 51 http://www.environmental-savings.com/. 52 Urban Mines (2010). Potential for Resource Efficiency Savings for Business. 53 U.S. Environmental Protection Agency (2007) Energy Trends in Selected Manufacturing Sectors: Opportunities and
Challenges for Environmentally Preferable Energy Outcomes. p. 4.
45Study on Incentives Driving Improvement of Environmental Performance of Companies
Perceived upfront cost of improving environmental performance
Most firms perceive improving their environmental performance will involve upfront costs and some
are unwilling to pay. One area this is particularly perceived is in the area of environmental reporting
and the associated costs of registering, monitoring, auditing and verifying. Research from the UK
indicates that in 2009 62% of FTSE listed companies reported quantified figures on their
environmental GHG emissions; however this was mainly due to regulatory requirements. The
associated cost of reporting their emissions was between £25,000 - 400,00054. This does not take
into account the costs involved with measuring their emissions and only represents one aspect of
their environmental impact. This suggests that the costs of measuring and reporting a companies’
environmental footprint may be significant. The study also identified that the majority of businesses
experienced a net cost of reporting, although the wider business benefits were not fully taken into
account. The role of environmental reporting and benchmarking in the wider behavioural change
process was highlighted as important.
Perception of, and actual, consumer behaviour is a powerful factor in firms' decision making
Environmental products are known to carry a price premium, in many cases businesses also
associate this cost with environmental business practices, although often the opposite is true.
Despite increased environmental awareness and increased consumer pressure for environmentally
friendly products, the primary determinant of a consumer's purchase decision is the product price.
Therefore, for producers, uncertainty about the market acceptance of new products can hinder the
uptake of new measures or investment in higher environmental performance. A recent study by
Ecorys on “Lags in the EU economy's response to change”55 has shown evidence from the
automotive industry where the lag in the adoption of alternative vehicle technologies was attributed
to consumer’s perception and consumption habits with regard to petrol engine vehicles. This
perception made it difficult for consumers to accept / rely on an alternative technology. On the
contrary to this, habits and consumers signals can also enhance better environmental performance,
as in the case of the adoption of Hybrid Electric Vehicles (HEVs). These managed to avoid gaining
a negative perception based on performance and although apparently reliant on early adopters
willing to pay a premium for the environmental qualities of the vehicles, have now established
themselves in the market. The explanation of the willingness to pay the premium is interesting to
the extent that early adopters may have invested in them as a status symbol, with the positive
social values assigned to HEVs acting as a display of status, evident in their publicised purchase by
celebrities. Hence, these consumer signals are likely to affect a company's decision to go or not to
go for certain investments.
The Flash Eurobarometer survey referred to previously also provides evidence on this point. It
found that about two thirds of managers said that uncertain market demand was a barrier to a faster
uptake of eco-innovation in their company56. This uncertainty could play a role in poor
environmental performance, with firms unwilling to take a lead in market demand and voluntary
agreements.
Access to information can be a significant barrier
As long as information and knowledge are not available to industries, environmental policies are not
likely to produce further efficiency, argued Jaffe et al. (2002), because companies will continue to
do their best within the limits of knowledge they have access to. Similarly, the U.S. Environmental
54 Price Waterhouse Cooper (2009). Carbon Disclosure Project 2009, Global 500 Report. 55 Ecorys (2011) Lags in the EU economy's response to change 56 The Gallup Organization (2010), Attitude of European entrepreneurs towards eco-innovation”, Flash Eurobarometer 315,
pp. 6.
46 Study on Incentives Driving Improvement of Environmental Performance of Companies
Protection Agency found that information barriers exist among U.S industries, particularly in the
area of energy efficiency. It found that there is lack of a systematic approach to energy
management, and a lack of leading-edge knowledge on energy efficient technology. An excess of
knowledge combined with an inadequate capacity to evaluate and select the appropriate
technologies can also constitute a barrier. In addition, a lack of coordination among the different
“knowledge bodies" of relevance to a sector creates a market failure and causes a sub-optimal use
of the available information57.
One of the conclusions of the EU eco-industry competitiveness study58 was that there is
asymmetric information between the environmental solution providers (the EU eco-industries) and
the client businesses. This market failure was prominent for SMEs. Potential clients of the EU eco-
industries are not always aware of the environmental solutions that are available. This can be partly
explained by the complexity of the environmental solutions and the relative novelty of the methods
and techniques employed.
A lack of information exists around the costs and benefits of environmental investments. Rapid
worldwide environmental degradation, alongside slow improvements on many EU environmental
objectives related to environmental performance, can give the impression that investing in
environmental performance improvements is not economically prudent in the current climate.
Lack of knowledge, experience and skills to take appropriate action
A lack of know-how for turning environmental performance information into a company asset may
also be an issue. Where the costs of gaining this expertise is significant the long term business
benefits of action should be highlighted and communicated at an early stage to prevent this
becoming a barrier.
Even companies that understand and measure their environmental performance and have
sophisticated reporting procedures, often do not consider or include their indirect impacts due to the
time and cost involved in accurately assessing these.59 However, difficulty of measurement does
not decrease their potential importance.
Potential for improvement in the environmental performance of companies also depends on the
quality of measurement as well as on particular policy goals. Preparatory research by Öko-Institut
for the IMPACT project has proven that corporate measurement still falls behind on issues such as
resource protection, as well as on the protection of environmental resources in supplying countries.
Companies have not yet developed suitable Key Performance Indicators in order to measure their
progress within these policy fields. They also found that reporting of carbon emissions has evolved
significantly, not least due to initiatives such as the Carbon Disclosure Project and the GHG
Protocol. However, companies still often fall behind on their pre-defined carbon reduction targets60.
The key finding is that knowledge and the ability to measure corporate environmental performance
are both important pre-conditions for an improvement of environmental performance.61
57 U.S. Environmental Protection Agency (2007) Energy Trends in Selected Manufacturing Sectors: Opportunities and
Challenges for Environmentally Preferable Energy Outcomes. p. 4. 58 See http://ec.europa.eu/enterprise/newsroom/cf/itemlongdetail.cfm?item_id=3769&tpa_id=203&lang=en Report 1, page
169-170. 59 See Carbon Disclosure Project and the number of companies reporting on scope 1-2 emissions as opposed to scope 3
(=indirect) emissions.
61 Wolff, F.; Barth, R.; Hochfeld, C.; Schmitt, K. (2009). Rhetoric and realities in CSR: main findings and implications for
public policy and Research.
47Study on Incentives Driving Improvement of Environmental Performance of Companies
Whilst the risks of not reporting environmental performance are increasingly understood (such as
profit risk, market share, brand value, stakeholder reputation, insurance/credit rating risk and
investor confidence) there is significant variance in the boundaries selected for environmental
reporting. This means that the system boundary i.e. the proportion of a businesses impact that is
measured and reported, can vary at the discretion of the organisation under examination. This
interpretation by organisations could be open to manipulation and further complicates comparison
between organisations.
Multiple competing methods of reporting
Companies are required by their stakeholders (potential investors and existing shareholders) to
report similar environmental performance information in a number of different ways, dependant
upon who is asking, and what scheme or methodology they adhere to. This variety of environmental
information demand can be time consuming for companies to deal with.
For emissions reporting alone, recent research reveals that there are over 80 company GHG
reporting methods and initiatives active around the globe, with 30 dominant methodologies
emerging62. This can cause confusion amongst companies, customers, investors and policy makers
who only desire clear, comparable and transparent information on company impacts. Minimum
standards have not been set and there is limited compatibility between schemes. This has resulted
in company environmental reports having limited comparability between organisations.
Empirical evidence about the specific factors (be it incentive/disincentive/driver or barrier) can be
useful in understanding firms behaviour towards change. However, it does not provide a
comprehensive overview of how these factors rank in terms of their contribution to companies’
decision making. Also their interaction with the various internal and external factors requires further
research.
3.3 Incentives: need and type
Having discussed the main drivers and barriers to how organisations and firms change their
behaviour this section now focuses on incentives.
Incentives empower drivers and reduce barriers
The role of incentives is to change the weight of these drivers and barriers in the decisions
companies make regarding their environmental performance. The idea is to empower the drivers,
i.e. improve the potential for financial gains, or increase the power of company image; and to
reduce the barriers, for example by improving access to information or creating ‘smart’ regulation.
In doing so, incentives help companies to make the ‘right’ decision to improve their environmental
performance.
Based on this we ask in this section - how can incentives be used to change behaviour towards
better environmental performance? And what types of incentives exist?
3.3.1 Why are incentives needed?
Companies have increasingly been taking up a number of measures to improve their environmental
performance, including measuring their impacts, reporting their emissions and implementing
management systems and measures to address these impacts. This points to the fact that many
62 ERM ( 2010). Company GHG emissions reporting – a study on methods and initiatives.
48 Study on Incentives Driving Improvement of Environmental Performance of Companies
companies accept the business case that improving their environmental performance 63 brings
benefits such as cost savings, reduced environmental risk, staff engagement, reduced regulation,
work winning, marketing opportunities etc.
However, there is also an associated upfront cost, which might prevent some companies from
embarking on measuring and improving environmental performance. This cost, alongside apathy on
the part of some businesses, can prove a barrier to companies improving their environmental
performance.
This raises the question of what makes companies decide to invest to improve their environmental
performance? How far are they willing to go in investments of this nature? Are they willing to invest
only to the level where they can meet the minimum requirements, making incremental changes to
their way of work? Or are they willing to go the “extra-mile” by investing more and making more
fundamental changes to the way they work? These an important questions that help our
understanding of why incentives are needed and what incentive structures need to be in place to
make drivers sufficiently powerful for companies to invest in improved environmental performance.
In the past there was a focus on ‘hard’ regulatory drivers
Historically, environmental regulation was very much focused on correcting market imperfections; in
economic terms this implied that in a cost competitive market, companies had limited incentive to
invest in environmental performance improvements. This traditional regulatory environment was
used to drive change throughout industries, irrespective of competitive position, organisational
efficiency or actual environmental benefit created. The business and policy landscape of today is
more sophisticated than this model.
This regulatory approach to environmental protection has typically been achieved through
centralised command and control regulations that target specific, environmentally harmful
emissions or behaviours. Throughout Europe, local, national and international regulatory agencies
have the responsibility to enforce regulations through resource-intensive on-site inspections and
formal enforcement actions. Whilst this approach has achieved significant improvements in
performance across industries it is resource-intensive, both in terms of regulation and compliance.
Furthermore, current systems of this type are often uneven in their application (with some industries
feeling they are over-regulated, whilst others are arguably under regulated) and uneven in their
enforcement (differences exist between enforcement levels between different Member States).
There is now increasing recognition that there are ‘softer’ ways to achieve results
Increasingly, both business and government are realising that there is considerable room for
improvement and that the same, if not better, environmental performance could be achieved at a
lower cost to all involved64. To move the focus away from the ‘stick’ of direct drivers such as
regulation, towards a more ‘carrot’-led approach where companies can be incentivised to go
beyond compliance and see their own self-interest in improved environmental performance.
This is not to say that there is no role for regulation, indeed it is often an important starting point for
many environmental performance improvements and will remain an important part of any incentive
mix, particularly in deterring and punishing poor performers. More clearly the role of ‘softer’
incentives is intended to drive improvement in environmental performance beyond existing
regulation.
63 IEMA, Benefits of an EMS, http://www.iema.net/ems/emsbenefits. 64 Global Environmental Management Initiative (1999). Environmental Improvement through business incentives.
49Study on Incentives Driving Improvement of Environmental Performance of Companies
Using incentives can make drivers more effective and help achieve environmental
improvements for a lower cost
Incentives are not intended to replace traditional command and control regulations, but rather to
complement existing regulations and drive environmental performance. They can also be better
suited to dealing with environmental issues that are caused by a large number of diffuse, periodic
pollution sources e.g. eutrophication caused by nitrogen runoff from farming. In this case,
estimating point emissions and assigning responsibility make enforcement extremely difficult,
thereby favouring policy mechanisms which incentivise positive behaviours to reduce the cause of
the problem65. Another key benefit of incentive schemes is that they can be designed to utilise
market forces to bring about environmental improvements at lower cost (to both the regulator and
the regulated) and at a faster rate than prescriptive regulations66.
3.3.2 Types of incentive schemes
Incentives can take various forms, it is important to distinguish that these go beyond being drivers,
for example regulation can be a driver, pushing firms to take action to improve their performance,
but it is not an incentive. It does not motivate a company to take additional measures. For the
purposes of this study this is an important distinction to make. Pull characteristics of incentives can
be used to accentuate drivers, to make their effects (both positive or negative) more powerful, or to
reduce or remove barriers to positive behavioural change.
The following table provides some hypothetical examples of the relationship between typical
barriers and drivers (as described in table 3.2 and the previous section) and the way in which
incentives can be used to address barriers and strengthen drivers.
Table 3.3 Examples of typical individual barriers and drivers to improved environmental performance
and example incentives and incentive mechanism to address these
Barrier Example Incentive Driver Incentive Mechanism
Cost of
environmental
investment
Financial tax break for
environmental
investments
Long term
financial/environmental
benefits from investment
Reduction in up-front cost
to business, to help
overcome upfront (more
short term) financial
concerns
Reluctance to
publish
environmental
data
Reputational league
tables such as the CDP.
Naming and shaming of
all organisations
environmental data.
Reputation with customers
and suppliers
Desire to perform better
than competitors and
attractiveness to investors
Cost and time
associated with
achieving an EMS/
environmental
footprint
Reduced regulation /
inspection schedule and
extended permitting
period based on
possessing a certified
EMS
Reduced administrative costs Reduction in regulatory
costs allowing more focus
on core business functions
65 C. Russell (1993). Theory, modelling, and experience in the management of non-point source pollution. 66 OECD (2003). Reviews of Regulatory Reform, Regulatory alternatives.
50 Study on Incentives Driving Improvement of Environmental Performance of Companies
Company
environmental
performance not
valued by
investors
Environmental tracking
index series
Improved financial
performance and
attractiveness to investors
Promotes investment
systems that transform
environmental
performance into financial
performance
This study defines three types of incentives: administrative, economic and reputational. A short
description of each, the specific types of incentives these represent and their route to impact is
provided below.
3.3.3 Administrative
Administrative incentives aim to encourage companies to reduce their environmental impact and
facilitate compliance with existing legislation by designing instruments that reduce the burden (and /
or cost) of regulatory compliance. Traditional approaches to environmental regulation have relied
heavily upon detailed sector specific guidance and technical specifications that govern virtually all
of a businesses' environmental impact. This approach has led to companies investing heavily in
pollution control equipment and staff to ensure compliance, but not necessarily led to innovative
environmental practices. Whilst this approach has had considerable success it is also been very
resource intensive, both for the regulator and the regulated companies themselves67.
By being tied to regulation, administrative incentives are only applicable to firms subject to such
regulation, this can limit the scope of their effectiveness in comparison to economic and
reputational incentives. This is a factor in their typically being less commonly used than other
incentives, alongside other factors such as bureaucratic inertia and a reluctance for administrative
authorities to change practices or receive reduced income from administrative fees.
Any measures to reduce the administrative and or regulatory burden on businesses, particularly in
the current weak economic climate, can be expected to act as a strong incentive for companies to
improve their environmental performance. Indeed, finding a middle path is important for these
incentives, treading the line between highly detailed mandatory sector regulation which is
67 Global Environmental Management Initiative (1999). Environmental Improvement through business incentives.
51Study on Incentives Driving Improvement of Environmental Performance of Companies
environmentally successful but costly, and less detailed non-sector specific regulation that has only
a weak environmental impact and/or upsets firms for not taking into account their (sector) specific
circumstances.
Some examples of administrative incentives include:
Reduced inspection frequency and permit extensions
Inspections can be a major administrative burden to firms, particularly those in certain high risk
sectors, such as chemicals, waste and energy. The staff time, permitting, monitoring and reporting
requirements of inspections all impose costs to firms. Firms' drive to reduce costs means that
schemes that offer to reduce inspection frequency or severity, or that move to longer permitting
periods, in exchange for proof of environmental management systems or good environmental
performance can be powerful incentives for firms to act in these areas.
Favourable thresholds for administrative obligations
Administrative requirements are often scaled, with minimum thresholds before firms have to provide
information, register with authorities or otherwise be obliged to interact with the environmental
protection authorities. Typically firms will prefer to keep these interactions to a minimum; this can be
particularly true for small firms where capacity constraints are higher and in-turn the related relative
burden of administration. Offering increased thresholds for obligations, to enable firms to stay below
the thresholds, in exchange for proof of environmental management systems or good
environmental performance can also be a powerful incentive for firms to act. Permit flexibility on
regulated air emissions has proven attractive for US manufacturing firms industries where
production levels can vary significantly68.
3.3.4 Economic
Economic incentives are delivered through initiatives (mandatory or voluntary) that encourage
behaviour through price signals rather than through explicit instructions on pollution control levels or
methods. These incentives influence the costs and benefits of processes or technologies, as well
as the relative prices of products, raw materials and other inputs. Well designed economic
incentives with environmental objectives attempt to ‘get the prices right’ by internalising the costs
associated with environmental degradation, into the cost of production for the company. The
overarching aim is to provide an economic reward, for companies that exceed minimum
environmental performance standards. This will strengthen the market-based drivers to firms.
Economic incentives can take a variety of forms, among the most common are:
Reduced charges
This is a mechanism, whose incentive function is intended to work through companies experiencing
reduced charges based on their good environmental performance or certification to a certain
standard. Examples include ports that offer reduced harbour fees to vessels which score highly on
the Environmental Ship Index (ESI)69 and the state government in Bavaria offering reduced waste
charges for firms with EMAS certification.
Environmental taxes
Environmental taxes are particularly effective tools for the internalisation of economic
(environmental) externalities70 i.e. the incorporation of costs of environmental services and
68 Global Environmental Management Initiative (1999). Environmental Improvement through business incentives. 69 See: http://www.environmentalshipindex.org/Public/Home. 70 European Environment Agency (1996). Environmental taxes, implementation and environmental effectiveness.
52 Study on Incentives Driving Improvement of Environmental Performance of Companies
damages (and their remediation) directly into the prices of goods, services or activities that caused
them. Generally, environmental taxes charge polluters for the units of pollution that they generate,
or are used as a tool to raise capital to fund measures to redress or mitigate environmental
damage. Taxes used in these ways act as a disincentive to companies, encouraging the lowest
cost abatement measures across polluters, hence environmental taxes can be cost-efficient.
However, an environmental tax is not an incentive per se, as it is a non-optional fiscal measure that
everyone has to pay.
The main types of environmental taxes are as follows:
Cost covering charges – designed to cover the costs of environmental services and
abatement measures e.g. water treatment charges;
Incentive taxes – designed to drive change in consumers and/or producers e.g. tax
reductions/exemptions of low carbon vehicles;
Fiscal environmental taxes – simply designed to raise revenue and “dis-incentivise” certain
polluting activities e.g. Sulphur dioxide emission taxes.
In reality many countries employ a mixture of these three tax types simultaneously, alongside an
array of associated complimentary policy initiatives. The complexities of the European tax system
are not to be underestimated and their intricacies are largely beyond the scope of this research.
The point at which the desire to reduce a disincentive (such as an environmental tax) becomes an
incentive (to save money) is largely down to an individual organisation's outlook.
Whilst mainstream environmental taxes have been shown to be cost effective mechanisms to drive
environmental performance, their utility in relation to incentives is outside the scope of this study.
Tax based incentives
The targeted nature, flexibility and speed of implementation make tax incentives attractive to policy
makers looking to incentivise environmental performance amongst businesses. The following
outlines some of the common ways taxes are used within a wider policy environment:
Classical environmental taxation;
Taxes used within tradable permit systems, in order to:
- reduce compliance cost uncertainty;
- penalise non-compliance;
- capture windfall rents.
Taxes used in combination with labelling schemes;
Taxes used in combination with negotiated agreements;
Taxes used in combination with subsidies71.
Effective environmental tax regimes for behavioural change combine incentive schemes for “good”
behaviour, this creates clarity of purpose for participants who can see how the revenue generated
is being redirected to their better performing competitors.
Examples of tax-based incentives include Effluent Charging Acts in Germany, France and the
Netherlands, Switzerland’s CO2 levy on Heating Fuels and the Climate Change Levy Agreement in
the UK.
71 OECD ( 2006). The political economy of environmentally related taxes.
53Study on Incentives Driving Improvement of Environmental Performance of Companies
Environmental taxes
In the classic sense provide a direct incentive to firms based on the item being taxed. For example
if they are taxed per tonne of emissions to air or water then they have a direct incentive to reduce
the volume emitted or to maximise their own financial gain per tonne emitted.
Tax rate reductions and exemptions
Are an incentive applied to firms that meet certain criteria set by the tax authorities. Tax reductions
and exemptions are often applied to firms simply on the basis of size, with smaller firms typically
benefiting from lower taxes. More sophisticated reductions and exemptions can be applied based
on the actual environmental impact of a firms activities or through firms meeting certain
performance criteria, for example discharges of chemicals with low impacts may be exempted from
tax laws affecting others of a similar type, or if a firm is able to demonstrate low emissions it may
qualify for reduced rates.
Tax-and-refund (rebate) schemes
Are a variation on reduction and exemption incentives. These function through a reallocation of the
tax revenues back to those on which the tax is levied. Generally the principle behind this is that
revenues are recycled back to firms on the basis of good environmental performance, so that good
performers receive higher rebates funded through the income from corresponding increased taxes
on “badly” behaving companies. Alternatives involve more general recycling of revenues, through
reduced labour taxes to all affected firms, which by offsetting the tax costs to firms frees up money
for them to potentially spend on environmental improvement or improved competitiveness. This is
related to double dividend taxation, i.e. tax designed to deliver economic and environmental
benefits to society. Furthermore, these tax schemes can double their effectiveness, as participants
both act to avoid the disincentive whilst also striving to achieve the incentive72.
Tax credits
Allow companies to offset investments against future tax costs. For example, in the UK companies
may claim tax relief for all their qualifying R& D expenditure in a given accounting period (typically
one year) in the form of an enhanced tax deduction when calculating their taxable profits. The
scheme, introduced in 2000, has proven effective at incentivising R&D investment in high growth
high tech businesses. An evaluation of the scheme indicates that up to £3 of R&D investment might
be stimulated for every £1 of tax foregone73.
Subsidies
Although no widely accepted definition of a subsidy exists the WTO’s simplified definition is; a
financial contribution, by a government of public body, that confers a benefit74. The basic
characteristic of a subsidy is to reduce the market price of an item below its cost of production. This
could take the form of an economic benefit (i.e. a tax allowance, duty rebate or grant) from
government. The objective of a subsidy is usually to achieve one of the following; support a
desirable activity, keep prices of staples low, maintain the income of strategically important
production, maintain employment or induce investment to reduce unemployment. Whilst these
objectives are of a systemic and strategic nature, the mechanisms by which they operate (tax
allowances, duty rebates, cash grants or soft loans) are also utilised within company behaviour
changing incentive schemes.
72 See; World future council, Future policy, Incentives and Disincentives at http://www.futurepolicy.org/2817.html. 73 HMRC (2005). An evaluation of the research and development tax credits. 74 International Economics glossary.
54 Study on Incentives Driving Improvement of Environmental Performance of Companies
Tax-related incentives are often preferred to subsidies as they are simpler and faster to introduce
than comparable subsidy schemes, which can be a drain on treasury finances, be difficult to
withdraw once introduced and must also comply with complex international trade regulations75.
Public Funding
This incentive provides direct funding to firms to improve their environmental performance. State
funding of this type raises questions of market distortion and being anti-competitive and is restricted
by EU and global trade rules. A number of exclusions have been made for State Aid that is directed
towards improved environmental performance.
Common vehicles for this type of public funding include going beyond existing environmental
standards, research, energy efficiency, renewable energy, waste management and land
remediation. The purpose of this funding is often to encourage innovation and innovation adoption,
with twin objectives of improved competitiveness and environmental performance.
The funding can take the form of direct grants for some or all of an investment, match funding, or
preferential access to public loans, which each operate as incentives in slightly different ways. The
justification for public support is based on the benefits from the improvements accruing to society
as a whole (e.g. reduced air pollution), rather than solely to the firm itself. Another reason that
public support is needed is that private investors feel it is too risky to invest in new technologies76.
Access to private funds, environmental investment capital
Funding for companies to improve their environmental performance can also come from industry
associations, NGOs, investors and philanthropists. Socially Responsible Investment77 (SRI) funds
take consideration of company environmental risks, CSR reporting and other ethical criteria when
assessing investment opportunities. This investor pressure can be a strong motivating factor,
particularly amongst large publically-listed firms. Investors that profile firm's environmental risk and
the environmental factors in firm's costs and profitability, will look at the potential exposure of their
investment and adjust their investment portfolios accordingly. Some specialised investment
vehicles specifically focus on environmental or ethical criteria. Firms will be conscious of this fact
and be incentivised to score highly in their environmental profiles to maintain existing investors and
potentially attract new investment.
Lower insurance premiums
Due to the liabilities that insurance companies hold, they are concerned with the impacts of climate
change and the likelihood of increased extreme weather events and the increased risks of weather
related damage insurance claims. For this reason insurance companies have recognised the
benefits of firms proactively managing their environmental performance, as this leads to reduced
levels of risk of insurance claims based on environmental damage, whilst also minimising their role
in contributing to climate change. Governmental advice throughout Europe highlights environmental
performance improvements as a means of reducing insurance costs78. This is relevant to all firms,
but particularly in sectors with high potential environmental impacts.
75 See: WTO, Subsidy and Countervailing measure overview (SCM Agreement) at
http://www.wto.org/english/tratop_e/scm_e/subs_e.htm. 76 THINK (2011). Public Support for the Financing of RD&D Activities in New Clean Energy Technologies. 77 J. Wiles and Sons (2008). Handbook of Finance - Socially Responsible Investment. 78 See: Benefits of Improving your environmental performance at
http://www.business.scotland.gov.uk/bdotg/action/detail?itemId=1079422341&site=202&type=RESOURCES.
55Study on Incentives Driving Improvement of Environmental Performance of Companies
Tradable permits
Tradable permit schemes have become increasingly popular in recent years following successful
implementation of such programmes in the US, UK and the EU. The highest profile current example
is the EU Emissions Trading Scheme (EU-ETS) for large greenhouse gas emitters. These schemes
are typically based on a particular environmental impact, such as emissions to air, where a cap is
set and all firms that participate are allocated (or ideally, have to purchase) permits for units of
pollution up to the total value of the cap. This provides an incentive to companies to reduce their
emissions, so they have to purchase less permits, or can sell those that they don’t need. This
market-based approach can be an economically efficient approach in certain circumstances,
although this requires meaningful caps, full auctioning of permits, low transaction costs and
adequate monitoring and enforcement.
Preferred supplier status (Green Procurement)
Green procurement can provide significant economic incentives to firms to improve their
environmental performance. This works through public and private organisations having purchase
assessment criteria related to the environmental performance of the goods they purchase (including
the environmental performance of the companies which manufacture the goods). These can take
the form of exclusion criteria, i.e. only firms certified to a recognised EMS standard are allowed to
be considered; or assessment criteria, i.e. a firms environmental performance is scored on a scale
and the result is part of the judgment. These types of clauses are also increasingly applicable within
supply chains with firms demanding their suppliers implement environmental standards that reflect
their levels of concern and actions towards the environment.
3.3.5 Reputational
Reputational incentives motivate companies to change their behaviour as a result of the value they
put on their visible performance and perception among consumers, NGOs and the community at
large. Reputational incentive schemes include:
Carbon emissions publication, sustainability indices, benchmarking and league tables
There are internal and external aspects to information and reputational incentives. Many firms now
take it upon themselves to publish their environmental plans and performance, seeing it as both a
demand of their stakeholders (investors, suppliers, clients, staff, NGOs etc.) and also a potential
marketing tool. Some firms participate in these schemes because of their own ethical policy, or a
particularly driven executive.
In addition to the internal motivations there are also external drivers to participate. Many schemes
have been set-up by stakeholders to independently analyse, compare, rank and benchmark firms
environmental performance. This provides an external incentive to firms who wish to be ranked
higher than their competitors.
These types of external rankings most commonly relate to company greenhouse gas (GHG)
emissions. A recent EU study into this79 identified and analysed leading methods and initiatives on
GHG emission reporting within and outside the EU ETS, and found 30 major GHG reporting
methods and initiatives.
79 ERM (2010). Company GHG Emissions Reporting – a Study on Methods and Initiatives.
56 Study on Incentives Driving Improvement of Environmental Performance of Companies
Awards and recognition schemes
Awards and recognition schemes draw attention to firms and influence stakeholders, these can be
positive or negative, highlighting good or bad environmental performance. Award schemes can
also, in some cases, provide financial rewards. Both these aspects are important drivers for firms,
which see the value in maintaining a good reputation among their key stakeholders, and more
specifically, in the case of awards establishing a reputation for excellence and being at the top of
their field. This can provide an incentives for firms to invest in improving their environmental
performance. Modern business management tools, such as the “balanced scorecard” approach80,
result in executives paying added attention to their customers and how their business is perceived.
There is limited evidence quantifying the effectiveness of award schemes at incentivising company
behaviour change.
3.4 Summary of findings
The following summary of findings can be drawn from the preceding section:
Business Improvements
Companies play an important role in driving the EU’s environmental impacts and must be at the
forefront of all planned activity on resource efficiency and emission/waste reduction initiatives.
Environmental improvements have been made by many industries on an aggregate level, but much
progress remains to be made.
Company interest and motivation is increasing, motivated by resource security and energy prices,
as well as the potential to differentiate their products on green credentials, although price remains
the key differentiator in many markets.
Organisational Change
The process of organisational change is complex, with various drivers and barriers interacting. To
drive further change appropriate incentives must be identified and modified, dependant upon the
objective and contextual situation including, sectoral, national and internal factors. Organisational
change is influenced by ingrained company practices, can be slow and is affected by a myriad of
internal and external factors. Change in companies occurs at different rates, this can be
incremental, (resulting in end-of-pipe solutions) or more fundamental in nature (involving eco-
innovation and radically different business practices).
Company Reporting
Company reporting has the potential to drive changes in the environmental performance of
companies, but it must overcome a number of challenges, including:
Reporting in isolation is no guarantee of meaningful action;
Competing methodologies;
Lack of comparability between reporting procedures;
Lack of transparency;
Limited target setting or minimum standards;
Analysis of costs and benefits of reporting is not always clear;
For large organisations multiple reporting is an issue, as is its link to carbon reporting standards.
80 R. Kaplan and D. Norton (1992). The balanced scorecard – measures that drive performance.
57Study on Incentives Driving Improvement of Environmental Performance of Companies
The proposed common methodology for organisations environmental footprinting may be able to
play a role in standardising the complex and often opaque world of company measurement,
reporting, benchmarking and environmental performance.
There is a perception among some businesses of high costs associated with making environmental
improvements, however this perception can be untrue. The upfront costs can be offset through
effective incentive design and will result in benefits to companies, governments and customers
alike.
The role of effective incentive design
There is clear potential to improve economic and environmental performance via incentives. The
design and implementation of these measures is key to their effectiveness. Incentives are needed
where traditional regulatory approaches cannot be used alone, for example if no innovative
technologies are available or if they are not yet mature. In these cases, incentives can work as ‘pull’
measures to stimulate investment in such technologies alongside the “push” measures that
traditional regulatory approaches offer. Evidence suggests that incentives are effective in such
cases. The distinction between (and understanding of) companies underlying drivers and barriers to
change, and how incentives impact upon these, is vitally important to effective incentive design.
Regulatory and financial measures have been shown to be effective, but reputational incentives are
increasingly important, particularly in relation to brand image and the power of marketing. However,
practically speaking, as shown in the next chapter, ranking the incentives depends on the company
profile and other factors. This is discussed in greater detail in the next chapter.
The majority of incentives to change are specific to a type of sector, i.e. different incentives work for
different groups of sectors. Despite the fact that there is a lack of understanding on the relative
importance of the external and internal factors affecting companies’ behavioural change; some
literature has provided evidence linking incentives to environmental performance. Detailed analysis
of optimum incentive mixes is notable by its absence. This is an area for further study and will be
examined in the latter stages of this report.
There are multiple ways to classify incentives and there is a great opportunity to maximise their
effectiveness via careful policy analysis and design. There are multiple factors to consider
including:
The wide variation between sectors in terms of what drives their behaviour;
The same is true for position in the value / supply chain;
The overall regulatory picture;
Reputation is increasingly important, including investor relations;
Companies respond better to stable and certain incentives;
The presence and ease of discerning consumer signals is key;
Access to information and finance remain key barriers to improving company environmental
performance.
59Study on Incentives Driving Improvement of Environmental Performance of Companies
4 Findings: Specific incentives in practice
For the purposes of this study we are focusing on schemes and arrangements aimed at businesses
that offer a reward for improved environmental behaviour. In particular we are interested in
incentive schemes that add to drivers for tangible environmental benefits (such as waste
reductions, emission reductions, cleaner production processes, and reduced transport energy use)
that will have a direct impact upon the carbon footprint of an organisation.
4.1 Existing Incentives
4.1.1 Incentives data-search
We conducted a search for incentive schemes to improve company environmental performance
that are operational around the world. The intention was to build up a picture of what types of
incentives are most commonly used and to target some specific examples for a more detailed
quantitative and qualitative assessment. These detailed examples are presented in later sections.
Our search identified and classified 106 incentive schemes across the EU and OECD countries,
these are listed in the annexes to this report. Most of the incentives that we found could be classed
as economic and reputational incentives, or both. Relatively few administrative incentives were
identified with most of those we did find being related to EMS.
A broad analysis of the incentives that were identified revealed the following:
Many incentives go across the categories of administrative, economic and reputational;
Of the 106 identified: 22 were judged to be administrative incentives, 70 economic incentives
and 51 reputational incentives. 8 of the incentives were judged to provide incentives across all 3
dimensions;
The most common types of incentives identified were:
- GHG reporting type measures (14) – including ranking and benchmarking company
performance;
- Product rating / ranking (12) – these measures were not considered for further analysis;
- Tax-based measures (11);
This chapter builds on the theoretical understanding of incentives set out in
chapter 3 and presents our findings from looking at the application of
incentive schemes in practice. The results of our broad search for incentive
schemes globally is presented first. Our findings are then grouped into the
administrative, economic and reputational incentive types, in each case
providing a number of examples of these schemes in practice. The analysis
draws together findings from practical application and stakeholders on the
effectiveness of such schemes, the factors in their success, barriers and their
potential applicability at EU and MS level in the context of a organisations'
environmental footprinting scheme.
60 Study on Incentives Driving Improvement of Environmental Performance of Companies
- Information tools and support (10);
- Tradable permit schemes (8);
- Reduced taxes or charges (6);
- Subsidies, grants or loans (5);
- Environmental management system assistance (4);
- Investor / finance related (3);
- Reduced administrative obligations (3);
- Company visibility (3);
- Award schemes (2).
The analysis shows that there are already a range of measures, schemes and incentives to track
and footprint companies in terms of their GHG emissions. This is interesting in relation to the
proposed organisations' footprinting as there will be learning and experience from these schemes
that should be of use. However, the existence of so many other reporting/footprinting systems,
although narrower in focus, points to potential problems with competition and duplication. Additional
observations from the larger sample include:
Of the incentives where it was apparent, the majority (55) were voluntary measures, while less
(18) were mandatory;
Geographically there was a strong focus on incentives at the national level, with 65 of the 106
being national schemes. There were some international (12) and EU (15) level schemes and
(13) of sub-national/regional incentives;
The national breakdown shows a focus on measures almost exclusively in the developed world,
the majority in the EU.
A selection of incentives are used as examples in subsequent sections, these were selected by
judgement, on the basis of various criteria including their reported effectiveness, data availability,
suitability to organisations' environmental footprinting and potential wider applicability.
4.2 Administrative Incentives
The general search for incentives found administrative incentives the most difficult to identify,
producing only 22 examples. Yet these incentives are important as they can be quickly and simply
implemented and they offer benefits in reduced public sector administration costs and company
administrative burdens.
Of the administrative incentives we identified many were wrapped up in, or were a minor element
of, wider economic incentives. Others, such as EMAS, were more general or of only indirect
relevance to administrative incentives.
Four of the most interesting examples are summarised in the following table, with a short
description of the scheme and also a summary of how this could be related to organisations'
environmental footprinting. These examples are discussed further in the following sections,
supported by more general examples and comments, they are used to frame a discussion and
analysis of administrative incentives and their effectiveness, factors in success and applicability of
these to a footprinting initiative.
Study on Incentives Driving Improvement of Environmental Performance of Companies
Table 4.1 Overview of selected administrative incentives
Incentive Description Mandatory/
Voluntary
Geographic
Area
Potential relevance to Corporate Footprinting
Ext
ende
d pe
rmitt
ing/
red
uced
insp
ectio
n
UK Environment
Agency extended
permitting/reduced
inspections
Companies that have certified environmental
management systems (EMS) are inspected less
frequently, reducing company's administrative
obligations. This code of practice requires
regulators to take a risk-based approach to
inspection and enforcement.
Mandatory United
Kingdom
Certified EMS serves as an instrument that reflects
company's motivation to improve environmental
performance. The incentive of reducing inspection frequency
could potentially be linked with the adoption of the common
footprinting methodology as using this methodology could be
another way how the Agency could monitor environmental
performance of companies . Since usually only ‘good
performing’ companies tend to report their environmental
impacts, using this tool could be a signal that a company is
committed to improve its environmental performance. This
would need some form of verification and monitoring to
follow up on actual performance. Similar approaches already
have a basis in existing EU regulation such as the Industrial
Emissions Directive (2010/75/EU).
EPA Project XL -
Permit extensions
The US Environmental Protection agency allows
facilities to extend their permitting schedule if they
can comply with certain standards or participate in
the XL (eXcellence and Leadership) programme.
This was a national pilot programme that allowed
facilities to develop with EPA innovative strategies
to test better or more cost-effective ways of
achieving environmental and public health
protection.
Voluntary USA
Adoption of the common methodology in combination with
this type of incentive scheme could be used as one of the
tools to monitor environmental performance of companies.
Achieving a certain threshold by using this methodology
could be set as one of the standards that a company needs
to comply with to allow extending its permit.
EPA
Environmental
Performance
Track
A partnership program that recognises and rewards
private and public facilities that demonstrate strong
environmental performance beyond current
requirements. Implemented in each state, i.e. in
Arizona participating departments will consider
inspections of Performance Track members a low
priority, reducing the frequency of routine (i.e. non-
Voluntary USA
Linking corporate footprinting methodology with this type of
incentive scheme also seems plausible as it could be
presented as one of the standards to be taken on board in
order to benefit from a decreased inspection rate. Reporting
on corporate footprint based on this methodology shows the
motivation of the company to monitor and improve its
environmental performance under the assumption that only
Study on Incentives Driving Improvement of Environmental Performance of Companies
Incentive Description Mandatory/
Voluntary
Geographic
Area
Potential relevance to Corporate Footprinting
complaint based) inspections by at least 50% for
those facilities without a frequency specified in
statute or rule.
‘good performing’ companies use this methodology to report
their environmental impacts. F
avou
rabl
e th
resh
olds
for
adm
inis
trat
ive
oblig
atio
ns
Emilia-Romagna
In Emilia-Romagna waste fees are reduced by 30%
for EMAS-registered companies and by 10% for
ISO 14001 ones; times and costs of permitting
under IPPC is reduced for them; and for EIAs the
threshold is higher.
Voluntary
Emilia-
Romagna
region, Italy
This type of incentive could be linked to organisations'
environmental footprinting, with a good footprint also used as
a measure that allows firms to have lower thresholds for
administrative obligations such as EIAs. This would
incentivise improved company environmental performance to
reduce administrative burdens, it could also be linked to fee
reductions, as in this case. This could help explain why
EMAS registration is high in Italy.
63Study on Incentives Driving Improvement of Environmental Performance of Companies
4.2.1 Effectiveness of administrative incentives
Administrative incentives provide an advantage to companies by reducing the time and resources
they need to devote to compliance with regulation and fulfilling legal requirements. Analysing the
effectiveness of this type of incentive involves building the link between firms deciding to improve
their environmental performance, their perception of administration as a burden and also their
expectations that good environmental performance may lead to reduced administrative burdens.
Assessing the actual value of these administrative burdens is difficult, as companies are unlikely to
have quantitatively assessed it and are even less likely to have published it. This means that our
findings are qualitative.
Examples of specific incentive effectiveness
Evidence in chapter three suggests that firms perceive regulation and legal requirements as major
drivers of their improved environmental performance. The administrative burden of compliance can
be high in terms of time and/or money allocated. These costs seem to affect small companies the
most. For example, in a government study in the UK81 it was found that regulators send out 2.6
million forms for businesses to complete every year. Furthermore, businesses with two employees
spent four hours more per month per employee on regulation related paperwork, than businesses
with over 50 employees. The same study also found that this is true in other countries with
businesses with fewer than 20 employees bearing a burden five times greater than businesses with
more than 50 staff.
The example from the UK Environment Agency works by linking the frequency and depth of firm's
inspection, monitoring and reporting requirements to its environmental performance. Environmental
performance is one element within the systemised risk assessment tool, OPRA (Operational Risk
Appraisal) that is used by the Agency for thousands of firms and sites across England and Wales.
This assesses the risk and potential environmental impact of a firm or site, and in-line with the
demands of regulation and the flexibility that is allowed under it then designates a compliance
regime. This risk assessment is assessed against five criteria (see example below) and is updated
each time the Agency interacts with the firm/site, i.e. after an inspection. If a firm can demonstrate it
has taken action to improve its environmental performance or risk, for example by introducing an
EMS and becoming certified or by setting out a management plan, this is taken on board by the
Agency. They then update scores on the OPRA system and this can lead to benefits for firms such
as lower inspection frequencies. This also has benefits for the Agency, as they can move their
limited inspector resources to focus on the relatively weak performers, with high risks.
81 HM Treasury - Philip Hampton (2005) Reducing administrative burdens: effective inspection and enforcement.
64 Study on Incentives Driving Improvement of Environmental Performance of Companies
Figure 4.1 UK Environment Agency Site Risk Appraisal
Source: National Audit Office (UK) (2008) Effective inspection and enforcement: implementing the Hampton
vision in the Environment Agency.
In the US, the Environmental Protection Agency (EPA) ran a project XL scheme which provided
incentives for firms to take part in innovative projects to improve environmental performance. Part
of the benefits of this programme to firms was that they were able to use simplified procedures to
extend their environmental permits. This programme ran from 1995-2002 and supported 50
projects. Examples of benefits include Intel, which was able to move to a compliance regime that
reduced the number of annual inspections by 30-50 at a facility in Chandler, Arizona, this is
estimated to have saved millions of dollars, by reducing the number of production stops required
due to inspections82.
The US EPA also runs the Environmental Performance Track, which is a voluntary scheme,
introduced in 2005 which offers reduced inspection frequencies to firms and organisations that
demonstrate good environmental performance. As an example, in Arizona, this opportunity was
primarily extended to low risk sites where there was no specific reason to inspect, i.e. no complaints
received, and allowed these sites to self-report. To receive this exemption a company is required to
demonstrate various things, including that it has an EMS that has been verified by a third party
organisation and also demonstrate continual environmental improvement through its EPA reporting.
These conditions are relaxed for smaller firms. The track in Arizona has eight members registered
on its website, and the EPA recorded 547 members nationally at programme termination in 2009.
The Emilia-Romagna region in North Italy has implemented an administrative incentive scheme that
links possession of an EMS to reduce administrative obligations. This is reflected both in reduced
costs and frequency for IPPC permit applications and also a higher threshold for requiring an
Environmental Impact Assessment (EIA). Also linked to these administrative incentives are
economic incentives in reduced fees and charges for municipal waste. There are over 430,000
SMEs in the Emilia-Romagna region. By 2011 there were 192 EMAS registrations in the region
(compared to 182 registrations in 2009) and 1,558 companies were ISO 14001 certified (1,352 in
82 US EPA (2001). Project XL Comprehensive Report – Project Accomplishments.
65Study on Incentives Driving Improvement of Environmental Performance of Companies
2010). These numbers of environmental certifications in Emilia-Romagna are among the highest in
Italy: the first in Italy for EMAS certification, the second for both ISO 14001. Some of the actions
that have contributed to this growth in registrations include previous pilot schemes in the region to
support companies in developing EMS and EMAS certifications and the co-ordination role of local
government, which also called for 500,000 euros to become EMAS registered. The number of
certifications differ across productive sectors, the Ervet survey identifies the metal sector as having
the highest number of certifications, with 28% of the total. Followed by the construction sector (17%
of total) and professional services companies (13%).
In summary, each of the four incentives profiled here is understood to have supported firms in
improving their environmental performance. Some of the results of this are published, with
impressive claims of improved performance from the project XL scheme in the US. However there
is less information and evidence of impact regarding the effectiveness of the incentives in
influencing company decisions to improve their environmental performance.
Factors in incentive effectiveness
Based on these examples, consultation feedback and other literature we now look at some specific
factors in incentive effectiveness.
Impact of company size
The evidence suggests that administrative incentives should be relatively more important to SMEs
as proportionally administration is a larger burden to them than to large companies and they have
less resources available to dedicate to it. To balance this, an SME may receive less attention, i.e.
exemptions from reporting requirements, or lower inspection frequencies, due to their size and
typically smaller potential environmental impact. The approach to SMEs varies by MS. The
examples in the US achieved only relatively low levels of engagement given the number of firms
and the majority of firms involved in these programmes were large companies or public
organisations. This suggests that voluntary administrative incentives, based on specific
programmes of this type, tend to be more popular among large firms.
The schemes in the UK and Emilia-Romagna are applied automatically by public agencies, and are
either independent or related to more recognised standards such as ISO14001 or EMAS. As a
result they appear to have engaged with a wider range of firms.
Supply chain pressures and green procurement standards and practices to drive environmental
improvements within businesses are related to administrative incentives. Workshop participants
highlighted the fact that when contracts and tenders stipulate environmental management systems,
or specific environmental performance criteria (administrative incentive) this acts as a strong
financial incentive for companies pursuing these tender opportunities. SMEs, that are reliant upon
larger organisations for much of their order book, are particularly sensitive to this type of incentive.
Differences across sectors, i.e. services vs. manufacturing
No real differences were detected along sector lines. It would be expected that administrative
incentives would be most effective in group of sectors that face high numbers of inspections or
regulatory obligations, such as food and drink, chemicals, waste, energy and manufacturing.
Impact of existing good / poor environmental performance
The schemes in the US both were focused on rewarding firms that engage with the programmes
and processes. The Environmental Track Programme required significant evidence of previous
good performance. This is likely to be a factor in the relatively low numbers of participants.
66 Study on Incentives Driving Improvement of Environmental Performance of Companies
The incentive in Italy is also focused on firms that can demonstrate good performance, through
possession of an EMS. This, in tandem with previous pilot projects and continued support and co-
ordination by regional government, appears to have provided an incentive for firms to improve their
performance and become EMS certified. This is evident from the high number of registrations
compared to other regions in Italy, though the exact cause and effect is unclear.
The scheme in the UK is designed to work as both a potential punishment and reward incentive,
signalling to firms that good performance will result in fewer obligations and that poor performance
will result in more. No data could be found on the extent to which this has actually taken effect in
practice.
4.2.2 Success factors and challenges
While each of the administrative incentives profiled above were successful to a degree, there is little
follow-up for the voluntary measures on what made firms decide to join them or not and for the
mandatory ones, to what extent the allowances acted as an incentive. This makes it impossible to
comment directly on the main factors in success.
What is clear from the examples is that for the voluntary schemes the main challenge was engaging
firms. The two examples in the US, while being relatively effective, show relatively low levels of
take-up, and specifically low take-up among SMEs.
The mandatory schemes in the UK and Italy are thought to be more successful because of their
wider scope, taking in all firms under the regulatory system. Yet it is not clear to what extent the
benefits offered through the scheme have acted as incentives to firms. For the UK example an audit
found that the system was not being fully optimised to incentivise good performance, as good
performance and compliance was not necessarily receiving the same weighting as other criteria
with the result being that good performance would not always translate into benefits to the firms83.
This points to a lesson from the scheme in that the benefits to the firm from the incentive need to be
clear and real in order to incentivise behaviour. This will enable them to potentially put a cost
(saving) figure on a behaviour change that they can use to inform their investment or business
strategy.
Workshop participants also highlighted the importance of quick returns from administrative
incentives, particularly in relation to SMEs. Our professional experience has led to a recognition of
the important balance that must be struck between having a clear and verifiable audit trail and
achieving quick returns for participating organisations. Similarly, SMEs could potentially be put off
by overly complex application procedures.
4.2.3 Potential applicability to environmental footprinting
A further objective of this project is to identify and discuss how the identified incentives (that drive
improvement of environmental performance) could be used alongside the common methodology for
environmental footprinting that is being developed. In practical terms, the adoption of a common
organisations' environmental footprinting methodology, would allow for the ranking and rating of
firms and their environmental impact and performance. As noted previously, this ranking or rating
could be voluntary or mandatory, subject to firms receiving third party verification or restricted to
specific sectors or firms (by size or type).
83 National Audit Office (UK) (2008) Effective inspection and enforcement: implementing the Hampton vision in the
Environment Agency.
67Study on Incentives Driving Improvement of Environmental Performance of Companies
Administrative incentives as discussed above typically require an agreed target, standard,
performance level or certification to be achieved, i.e. that a firm possesses an EMS, has previously
good performance or has a project with agreed environmental performance targets. The footprinting
methodology could provide a basis to judge entitlement to administrative incentives, which would
represent all relevant components of environmental performance throughout the life cycle. If used
as a common basis for providing incentives and eventually also for measuring environmental
impacts in the framework of the legislation concerned, it could simplify the incentive systems, and at
the same time broaden them in scope to all the different environmental impacts incorporated into a
footprint. The OPRA tool used by the Environment Agency in the UK is a similar tool in this sense.
Areas of difficulty or of critical importance during incentive design include:
Setting appropriate benchmarks or targets by MS or geographical region; sector or sub-sector;
firm size; or environmental risk/ impact.
The need to for lighter requirements for SMEs – as lower administrative burdens are particularly
important for SMEs, lighter, but reliable, modes of participation need to be foreseen;
Relative costs/benefits (including third party verification, a key cost that risks rendering
administrative incentives less attractive, potentially negating all benefits);
Perceived reliability by users (confidence of public administrations and companies in
performance levels determined based on environmental footprinting, third party verification).
There is some data on the costs of compliance, for example the two percent administrative costs for
large companies and some (albeit varied) data on the cost of achieving EMAS registration in a
recent report on the costs and benefits of EMAS84. However, a meaningful analysis would require
incentive- and company-specific data on the costs and benefits. We could not identify such data in
the literature and sourcing primary data goes beyond the scope of this project.
4.3 Economic Incentives
Incentives with an economic aspect were the most common among the incentives we identified,
with 70 of the 106 found deemed to have an economic element to them. This is not surprising as
economic benefits are arguably the simplest way of persuading firms to act to improve their
environmental performance.
The economic incentives we identified varied across the types identified in section 3.3. Among the
most common were tax incentive measures. These took two broad forms, taxes penalising poor
environmental performance and tax reductions to favour investments leading to improved
environmental performance.
Tradable permit type schemes were also popular and were most numerous in North America,
where rather than a single scheme (like the ETS in the EU), multiple schemes were developed on a
state or multi-state (regional) basis. These permit schemes most commonly dealt with GHG and
other air pollution emissions. There was an interesting variation in these schemes, with a mixture of
mandatory and voluntary designs.
84 http://ec.europa.eu/environment/emas/pdf/news/costs_and_benefits_of_emas.pdf.
68 Study on Incentives Driving Improvement of Environmental Performance of Companies
A number of direct economic incentives in the form of loans, grants and subsidies were also
identified. These offered financial benefits or inducements to companies to further invest in
environmentally beneficial technologies or improved performance. Access to private funding has
been also identified as an increasingly important incentive. Close ties were also found between the
economic aspects and reputational incentives with the two often thought to go hand-in-hand.
13 of the most interesting examples are summarised in the following table, with a short description
of the scheme and also a summary of how this could be related to organisations' environmental
footprinting. These examples are discussed further in the following sections, supported by more
general examples and comments, they are used to frame a discussion and analysis of economic
incentives and their effectiveness, factors in success and the applicability of these to a footprinting
initiative.
Study on Incentives Driving Improvement of Environmental Performance of Companies
Table 4.2 Overview of selected examples of economic incentives
Economic Incentive Description Mandatory/
Voluntary
Geographic
Area
Potential relevance to Corporate Footprinting
Red
uced
Cha
rge
s
Environmental
Shipping
Index
A number of ports offer reduced charges to vessels which
score highly on the Environmental Ship Index (ESI). Ships
pay lower harbour charges if the environmental
performance of the ship is calculated as good, i.e. more
efficient propulsion system, lower emissions. This index
measures a ship’s emissions based on the amount of
nitrogen oxide (NOx), sulphur oxide (SOx), particulate
matter (PM) and greenhouse gas it releases.
Voluntary International
An incentive type which reduces charges could be
linked to environmental footprinting by rewarding well-
performing companies with reduced rates as measured
by their environmental impact. Linked to reputational
and administrative incentives.
Umweltpakt
Bayern
Agreement between local government and SMEs
whereby companies receive preferential treatment
(reduced costs) if they can commit to environmental
performance improvements. E.g. 30% EMAS costs
covered, 30% reduction in permitting costs, 50%
reduction on water abstraction costs.
Voluntary Regional,
Germany
Footprint scores could be used as a basis to offer
similar charge reductions, depending on the
components of the footprint and how these match to
charge categories, i.e. water and waste charges.
Tuscany
The mechanism consists in giving a tax concession of
0,75 percentage point to EMAS registered firms, and of
0,40 percentage point to ISO 14001 certified ones. In
Tuscany action is focussed on a differentiated reduction
of IRAP based on ISO 14001 and EMAS. This caused a
significant raise in the number of EMAS registered
companies in the region. They are currently mapping
further possibilities.
Voluntary Regional -
Italy
Possession of a footprint score, or of a particular level of
score could be used as a basis for offering reduced
charges as an incentive.
Incr
ease
d T
axes
/ L
evie
s /
Cha
rges
Effluent
Pollution
Charging
The charge is calculated according to the amount and
harmfulness of the respective substances discharged.
Implemented to take up the adoption of pollution
abatement measures, finance the establishment,
maintenance and upgrading of the wastewater
infrastructure.
Mandatory Germany
This type of incentive has potential to relate to corporate
footprinting by focussing on the environmental impact
the tax deals with, in this case effluent. If impact on
water pollution is within the footprint score then this type
of tax incentive would work with the reputational effect
of the footprint scheme to incentivise performance
improvement, i.e. if a firm scores poorly on its water
footprint the reputational incentive gives a push and the
Study on Incentives Driving Improvement of Environmental Performance of Companies
Economic Incentive Description Mandatory/
Voluntary
Geographic
Area
Potential relevance to Corporate Footprinting
economic tax incentive a pull towards improved
performance. This could be applied to almost any
environmental impact.
Landfill Tax
escalator
Tax on waste sent to landfill, charged by tonne. Systemic
annual increase in taxation on an environmentally harmful
company behaviour i.e. waste generation.
Mandatory UK
Similar to the tax measure above, this could link to a
specific sector or environmental aspect under a
footprinting initiative to incentivise improvement in
footprint scores, this time the reputational and economic
incentives both working as push factors. There is also
potential to vary individual tax rates by footprint scores.
Sof
t Loa
ns &
Gra
nts
REMAKE
vouchers
This EU funded programme provides vouchers to
companies for free consultancy support to businesses to
investigate their operations and how resource efficiency
can be increased. Lifecycle analysis of production
processes analyses where improvements can be made.
Voluntary
EU –
Germany,
France,
Spain, UK
Grants of this type, that offer companies free services to
improve their environmental performance could benefit
from a footprinting scheme in monitoring impact and
targeting of improvements based on footprint scores.
Carbon Trust
Energy
Efficiency
Loan Scheme
100% Interest free loan available for SMEs to invest in
new energy efficiency technologies from the Carbon
Trust. No longer interest free. Program now funded by
Siemens and has commercial interest rates. No data
available on the change in uptake of the programme as a
result of this change.
Voluntary UK
Similar potential relevance to that above. In addition
loan eligibility or suitability could be linked to footprint
scores.
Improving
Your
Resource
Efficiency
Grant scheme that provides free audits and then up to
50% grant for SMEs to invest in the recommended
resource efficient technologies.
Voluntary Regional -
UK
Similar potential relevance as for the REMAKE
vouchers.
Preferred
Supplier
status /
Sustainable
Procurement
EKU
Ecologically
Sustainable
Procurement
Green procurement standards for firms for public tenders. Sweden
The existence of a footprinting scheme could be
integrated with sustainable procurement incentives and
preferred supplier schemes such as this. Footprint
scores could be used as exclusion or ranking criteria for
selecting suppliers.
Study on Incentives Driving Improvement of Environmental Performance of Companies
Economic Incentive Description Mandatory/
Voluntary
Geographic
Area
Potential relevance to Corporate Footprinting
Reduced
insurance
premiums
Eco-driving
test
Drivers from transport companies save up to 30% on
damages and fuel, thereby reducing the CO2 emissions by
taking eco-driving test. Insurance premiums
correspondingly decrease.
Voluntary Sweden
A footprinting score could be used by insurance firms as
a way of modifying premiums so that they reward and
incentivise firms that have good environmental risk
profiles and performance.
Access to
private
funding
(investors)
Carbon
Disclosure
Project
An investor mandated reporting initiative, hosting the
world’s largest database on climate-related data from
companies. More than 530 institutional investors globally
act as signatory investors to CDP, meaning they support
the initiative and make use of its data in their investment
process.
Voluntary International
Could be linked to corporate footprinting if the
programme encourages the use of the common
methodology and extends the scope to more impact
categories.
Fre
e co
nsul
tanc
y se
rvic
es /
Bus
ines
s su
ppor
t
National
Industrial
Symbiosis
Network
(NISP)
An industrial symbiosis initiative which brings together
traditionally separate industries and organisations from all
business sectors with the aim of improving cross industry
resource efficiency and sustainability; involving the
physical exchange of materials, energy, water and/or by-
products together with the shared use of assets, logistics
and expertise.
Voluntary UK
No direct relevance to footprinting is seen, but such a
scheme, by utilising waste streams would be likely to
improve firms' footprint.
72 Study on Incentives Driving Improvement of Environmental Performance of Companies
4.3.1 Effectiveness of economic incentives
Economic incentives provide clear signals to companies to change their behaviour by reducing the
financial cost to them of taking action, or appealing to their desire for new / increased income or
investment. Analysing the effectiveness of this type of incentive involves identifying the link
between these economic inducements and firms deciding to improve their environmental
performance.
Evidence in chapter 3 showed that financial performance is a driver for organisational change within
firms, though this driver is often external to the firm itself and from investors and shareholders.
Internally, financial performance was seen as a driver but also, more commonly, as a barrier to
change. This highlights that firms often perceive higher costs or competitiveness concerns as a
barrier to change, such as improving their environmental performance.
Examples of specific incentive effectiveness
There are many examples of economic incentives and a range of analytical work on this the issue,
although relatively little of this work aims to understand how economic incentives work in
influencing company behaviour at a micro (single firm) level. There has been more focus on how
economic (market-based) incentives work at the macro level. A 2006 study by the European
Environment Agency85 investigated this and found that market-based instruments could be very
effective, as part of a mix of instruments, to address environmental impacts. It also found that the
barriers to their effectiveness, such as perceived impacts on competitiveness, equity considerations
(e.g. cost to households) and existing rules and legacies, need not prevent action.
The same study from the EEA profiled an example on Swedish charges for NOx emissions
where revenues from a tax on emissions were recycled back to the sector. The Swedish charge on
NOx emissions for large energy producers was introduced in 1992 and since then NOx emissions
per unit of useful energy produced by regulated plants have declined by 50%. According to studies
by the Swedish Environmental Protection Agency (SEPA) the taxed plants were able to reduce
emissions at an average cost per kg of approximately 10 SEK in 1992, which was lower than the 40
SEK per kg tax rate. Costs have ranged from 5 to 20 SEK per kg. This demonstrates a relatively
high charge rate, but is successful and acceptable because the revenues of the charge are
refunded to the payers.86 An explanation for this is that with an emission charge with output-based
refunding, such as the Swedish charge on NOx, results in plants performing worse than the group
average making a net payment to the system and plants performing better than the average
receiving a positive net refund. In this way, it is beneficial for plants to continually improve their
environmental performance relative to other plants in the system87. One downside to this
competitive system is that the charge could hinder the willingness of firms/plants to share
innovations with other regulated plants, since a spread of the innovation to other regulated firms
would reduce a firm's own refund.
The aggregates levy is an economic tax incentive which has been successfully applied in the UK.
It was introduced in 2002 and imposes a levy of £2.10 on each tonne of virgin aggregate (gravel
and stone) extracted (i.e. quarried from the ground), which serves to increase the average price per
tonne by approximately 25%. In 2008/9 the levy raised approximately 334 million in tax revenue,
90% of which is recycled back to firms in the sector through reduced national insurance (employer
social security contributions per employee) and10% is provided to fund research into reducing the
environmental impact of aggregates and their recycling and disposal. The levy is believed to have
85 EEA (2006). Using the market for cost-effective environmental policy: market based instruments in Europa. 86 EEA (2006). Using the market for cost-effective environmental policy: market based instruments in Europa. 87 OECD (2009). Innovation Effects of the Swedish NOx Charge.
73Study on Incentives Driving Improvement of Environmental Performance of Companies
been the primary factor in a decrease of around 18 million tonnes of virgin aggregates use between
2001 and 2005, and also for aggregates recycling rates of around 25%. The evidence suggests that
this recycling rate has been by far the highest in Europe, almost double the rate of the next best
performing Member State.88 At the same time there are also concerns that the levy has encouraged
greater imports of materials, exempt from the levy, with greater environmental impacts. Recycling
tax revenues back to the sector is understood to have been beneficial economically, transferring the
cost burden to resources and away from labour, this is believed to have increased the employment
and value of the sector. Along with the environmental improvements this is providing the sought
after double-dividend to society89.
Reduced charges
The Environmental Shipping Index (ESI) is an example of an incentive that is operated by nine
ports in Europe that provides reduced charges to firms based on the environmental performance of
the ships operated by a company. This is a logical step for the port as it can reduce the
environmental risk of the ships berthed in its harbour, primarily in terms of GHG, SOx and NOx
emissions, which are the basis of a ships rating, but also through associated risks including
discharges and contamination, which often come back to the ports as costs in dredging, other
corrective actions and poor stakeholder relations. The economic incentive to the firms is clear, by
paying lower port fees then each ship can be more profitable. The clients of the ports estimate the
extra costs required to achieve the higher environmental performance standard against the benefits
in terms of reduced port fees, and potentially related benefits in reduced fuel use, less health and
safety risk and improved reputation. 517 ships have registered with the ESI scheme.
Figure 4.2 Benefits of the Environmental Shipping Index (ESI) Scheme
Source: http://www.wpci-esi.org/Public/Home.
From a discussion with the Port of Rotterdam, auditing requirements imposed by law and lack of
environmental space (legally imposed limits on emissions and the requirements of permits in this
industry) are a key driver to stimulate their clients (ships) to be more sustainable. In addition, a non-
legal driver is the port’s vision of wishing to be sustainable. Stakeholder's (civil society) requiring
good environmental performance are a social driver, and in general it is acknowledged that
decoupling of emissions from growth is needed to remain profitable (economic driver). In the Port of
Rotterdam there are currently around 6 ships registered in the ESI scheme, mainly from large
companies that can afford to upgrade their vessels. These are usually the first movers, the leaders
of the industry, whose main incentive is lower charges, hence economic incentives. No SME
participates in this scheme as they cannot afford it.
88 In the Netherlands, a current report (2011) of the Ministry of Infrastructure and Environment mentions a 98% recycling rate
of construction and demolition waste. This is the highest in Europe, simply because the Dutch law prohibits landfilling of
construction waste. See http://www.vvtb.nl/library/nieuws/afvalbrief.pdf 89 A more complete case study, with comparison to a similar tax incentive in Sweden, will be published in the forthcoming
report by Ecorys for DG Environment - The role of Market Based Instruments in achieving a resource efficient economy.
74 Study on Incentives Driving Improvement of Environmental Performance of Companies
The Umweltpakt Bayern example is an agreement between local government and SMEs in the
state of Bavaria in Germany. It allows for firms to receive preferential treatment in their municipal
tax/charge obligations if they commit to environmental performance improvements. It also provides
support to firms to improve their environmental performance, allowing up to 30% of the costs of
securing EMAS certification to be paid through the scheme. Firms that achieve EMAS certification
are able to receive a 30% reduction in their permitting costs and a 50% reduction in their water
abstraction costs. Similar exemptions and reductions are applicable to firms with ISO14001 or other
local, regional or national environmental certifications.
In the Tuscany region of Italy a mechanism has been introduced to reduce regional business tax
rates based on firms possessing a certified EMS such as ISO14001 or EMAS. Specifically, the
mechanism provides a 0.75% reduction in taxes for an EMAS registered firm, and a 0.4% reduction
to ISO 14001 certified firms. The regional government increased taxes on waste disposal at landfill
to replace revenue foregone with this measure. Overall the measure has reportedly led to a
significant increase in the number of EMAS registered companies in the region90. They are
currently mapping further possibilities for this type of measure.
Increased taxes, levies or charges
Charging firms for their effluent discharges to watercourses or public wastewater treatment
systems has been a commonly used tax incentive in a number of European countries such as
Germany, France, the Netherlands and the United Kingdom91. The charge in Germany is applied to
the effluent discharges of firms and is calculated according to the amount and harmfulness of the
respective substances discharged. The tax was applied in a way where firms were able to be
exempted from up to 50% of the charges if they could demonstrate investment in technology or
other measures to treat their effluent streams. In this way the scheme incentivised the adoption of
best available technology and improved standards and environmental performance across the
whole country.
The landfill tax escalator in the UK is a tax-based incentive that charges for disposal of waste at
landfill sites. Introduced in 1996 the tax was initially set at GBP seven / tonne of active waste and
GBP two / tonne of inactive (inert waste). The price for active waste has risen annually and stands
at GBP 56 / tonne in 2011, and is scheduled to rise by GBP eight / year over next three years. In
the fiscal year 2009/2010 the tax raised a total of GBP 1 018 million. On average around six to
seven percent of the tax is re-credited to those liable on the basis of their contributions to
environmental bodies. The incentive to most firms has been applied somewhat indirectly as the
landfill charges are paid by the municipalities and this is reflected then in business rates / waste
disposal charges, although some large firms have direct contracts with waste companies and see
the charge more clearly. Nevertheless since the introduction of the tax, the proportion of waste sent
to landfill has fallen by around a third, and this has been accompanied by a similar increase in
recycling.
Soft loans and grants
The example of the REMAKE scheme, is a grant type scheme that provides free consultancy
services to SMEs. The scheme is funded under the EC Eco-innovation platform, operates in
90 Regional registration data is unavailable but for Italy as a whole EMAS registrations increased from 255 in 2004, when the
tax reduction was introduced, to 836 in 2008, nearly quadrupling in 4 years. 91 A detailed case study of the application of effluent charging as a market-based instrument will be available in the
forthcoming report by Ecorys for DG Environment - The role of Market Based Instruments in achieving a resource efficient
economy.
75Study on Incentives Driving Improvement of Environmental Performance of Companies
Germany, France, Spain, Italy and the UK and is run by municipalities and companies in each
country. SMEs can apply to the programme for free consultancy, typically worth 10-15 thousand
euros, to improve their resource efficiency, this in turn can improve their financial and
environmental performance. The incentive to firms is both in terms of the free services and the
benefits that can come when the recommendations are implemented. The programme is currently
mid-way to completion, but has achieved a number of successes in improving firms' environmental
performance.
The Carbon Trust in the UK has managed an energy efficiency loan scheme for SMEs. This
provided unsecured 100% interest-free loans of between £3 000 - 500 000 to firms to fund
investments that would improve their energy efficiency. The assessment for the loan considered
how the energy saved by the investment would repay the capital, so that it would pay for itself
within the loan repayment period of 4 years. The loans were often recommended following a free
energy assessment also provided by the Carbon Trust. The scheme provided approximately £60
million in loans to 1 847 companies up to March 2010. The scheme has now been taken over by
Siemens and is now: no longer interest-free, has a cap of £100 000, requires a more detailed initial
energy audit and applies closer to commercial interest rates to the loan.
The Improving Your Resource Efficiency (IYRE) programme in the UK is managed on a regional
basis. It typically relies on referrals from business support services such as Business Link, which
any business can contact for advice on any subject, although IYRE only targets SMEs. Once a
referral is received an appointment is made for a free resource efficiency audit, where a specialist
will visit the firm and conduct the audit, producing a report on potential savings options and
providing either links to the programmes support, for a grant of up to 50% of the costs, or advice on
how the firm can access other public funding schemes to implement the recommendations. In the
East of England region the scheme has provided audits for over 750 businesses and identified £4.5
million in cost savings to firms.
Preferred supplier status – sustainable procurement
The EKU (ecologically sustainable procurement) scheme in Sweden is an example of using
sustainable procurement processes as an incentive for firms to demonstrate good environmental
performance. The scheme ranks products not covered by existing legislation or initiatives, such as
Ecodesign or the Nordic Swan, by environmental criteria consistent with Swedish and EU
regulations. The objective is to create a source for procurement professionals to understand how to
rate and rank products by their environmental and social impacts. The criteria are set through multi-
stakeholder discussion to ensure a fair and transparent process. The criteria are applied across 10
product areas. The scheme has had some success though limitations on its impact were identified
in a study on its effectiveness92. This study found that among public procurement officials there was
a preference for simple environmental criteria, e.g. that a company has an EMS, this was also a
reflection of there being only limited administrative resources, limited budgets to choose often more
expensive, but better environmentally performing, firms and that the legal system, with a right of
bidder legal appeal, created risk-averse behaviour.
Reduced insurance premiums
In the Nordic countries it is more common for insurance premiums to be varied based on
environmental performance. A report by Norden on the role of insurance in environmental policy93
identified examples where insurance rates are lowered when individuals or firms can demonstrate
environmental awareness or where additional funding is paid out for a claim when environmental
92 L. Carlsson and F. Waara (2000). Environmental Concerns in Swedish Local Government Procurement. 93 Norden (2011). The role of the insurance industry in environmental policy in the Nordic countries.
76 Study on Incentives Driving Improvement of Environmental Performance of Companies
measures are incorporated. Part of the logic for this, is that insurance companies will reduce their
future exposure, as better environmental performance is more likely to be associated with resilience
and better safety performance. Analysis in the Norden report states that transport companies
putting their drivers through eco-driving courses, has reduced average damage and fuel costs by
30%, with consequent good performance keeping insurance premiums down.
Access to finance (private funding)
The improvement of environmental performance by companies often requires investment. This is
the case when new technology is needed. Access to finance is identified as one of the barriers to
potential energy savings for companies, 31% out of 795 executives in the private and public sector
identify capital availability as the most important barriers to save energy, the other barriers identified
included insufficient payback/ROI (19%), uncertainty savings/performance (13%), technical
expertise (10%) split incentives (9%), lacking awareness on opportunity (8%) and unclear
ownership/ management attention (8%)94. Some examples of Energy efficiency funds include the
SUSI Energy Efficiency Fund for Institutional Investors which offers an upfront financing of the
project and the proceeds from the resulting energy savings being split between the building owner
and the Fund for a period of time.
The Carbon Disclosure Project (CDP), is a London based NGO, that hosts the world’s largest
database on climate-related data from companies. More than 2 500 of the world’s largest
corporations (approximately 700 companies in Europe) in 60 countries respond to CDP via an
annual questionnaire. CDP asks for risks and opportunities arising from climate change as well as
for strategies on how to cope with climate change and GHG emissions data (Scope 1, 2, and 395).
Several annual reports analyse the data and show how businesses transform on their way to a low-
carbon-economy. More than 530 institutional investors (around 240 Europe-based investors) act as
signatory investors to the CDP, meaning they support the initiative and make use of the data in their
investment process. The CDP uptake of companies worldwide has grown over time, 2 456
companies participated in 2009 and 3 050 companies in 2010. CDP data is used by:
Investment managers and asset owners – to analyse risks and opportunities, rank, score and
screen companies, conduct peer analysis and portfolio analysis, undertake climate foot printing
of portfolios to evaluate carbon sensitivities of investments, etc.;
Banks, brokers and investment banks – to provide broker recommendations, conduct
investment research and peer analysis and sector analysis and develop country risk profiles;
Investment advisors – to conduct ESG (environmental, social and governance) and investment
research, develop risk models, sector analysis and country risk profiles;
Data providers – to integrate CDP data with financial data, to rank, score and screen
companies;
Index providers – use CDP data in indices, such as Markit Carbon Disclosure Leadership index,
FTSE CDP Carbon Strategy Index, or BNEF Global Corporate Renewable Energy Index; and
Research providers – to conduct ESG and investment research and support engagement with
companies on behalf of investors.
Free consultancy or business support services
The National Industrial Symbiosis Programme (NISP) was launched in the UK in 2005, and
provides an information, networking and matching service for firms. The purpose of the scheme is
to match firms' waste products with other firms' material needs, to bring a symbiosis between them
94 Susi Partners Sustainable Investments and Institute for Building Efficiency (2011) Energy Efficiency Indicator: European
Regional Results. 95 See http://www.ghgprotocol.org/. Scope 1 is direct emissions, Scope 2 includes the emissions from purchased electricity
and Scope 3 includes all other indirect emissions.
77Study on Incentives Driving Improvement of Environmental Performance of Companies
and improve resource efficiency, find new resources streams and improve competitiveness. The
economic incentive for firms lies in turning their waste streams into an asset and/or finding new,
cheaper material sources. Environmental performance is improved by reducing the environmental
impact of waste streams and also in the extraction and supply of material resources. The approach
is understood to have been highly successful, with over 12 500 members. An independent
evaluation presented verified results of 7 million tonnes diverted from landfill, 6 million tonnes CO2
emissions avoided, 9.7 million tonnes virgin materials saved, 363,600 tonnes of hazardous waste
eliminated, 9.5 million tonnes of water saved. It has also had a significant economic impact with
estimated cost savings to firms of £156 million and new sales of £176 million. Creating 3 680 jobs
and saving over 5 000 jobs. Administration of the programme through public money cost £27.6
million pounds over 5 years. Each invested pound brought nine pounds of income to the
administration.
Factors in incentive effectiveness
Based on these examples, consultation feedback and other literature we now look at some specific
factors in incentive effectiveness.
Impact of company size
Literature suggests that, compared to SMEs, large companies are subject to greater pressure to
demonstrate their environmental performance and engage in environmental initiatives. Pavelin and
Porter (2008) argue that large firms are subject to greater pressure to demonstrate their
performance and have more money to invest in CSR, even when the returns to their activity happen
in the long run. 96 In contrast, smaller firms may not exhibit as much socially responsible behaviour
as larger firms do because they are not exposed to a wide circle of stakeholders. However, this
changes as they mature and grow, and hence attract more attention from stakeholders.
Based on the examples analysed, we could conclude that for large companies, access to capital
and reputational elements are key, whilst for SMEs it's requests from consumers that drive them to
change.
Across the examples illustrated above there was some variation in how the schemes affected
companies of different size. It is apparent that many of the tax based measures and measures such
as insurance premiums and green procurement are available to all firms on the same basis, though
the relative effect of the incentives may differ by firm size. The result is that some SMEs could be
affected by incentives proportionally more than large firms, but at the same time they typically have
lower tax thresholds and other exemptions. Capacity to understand and take advantage of the
economic incentives is an area where it would be expected that SMEs are at a disadvantage
compared to larger firms.
Of the other types of incentives, such as grants, loans, funding and free support, the majority of
those profiled were targeted at SMEs, with limits to what was available or exclusion criteria that
would deter larger firms. This appears to demonstrate a recognition among policy makers that
larger firms are more self-sufficient and that there is a real need to economically incentivise SMEs
so that they improve their environmental performance. For large companies, access to capital and
reputational elements were identified as key.
At the same time it should be noted that a variety of grants, loans and funding incentives are also
available to all firms, EU programmes, such as the Research Framework Programme (FP)and
96 S. Pavelin and L. Porter (2008). The Corporate Social Performance Content of Innovation in the U.K.
78 Study on Incentives Driving Improvement of Environmental Performance of Companies
Interreg, being examples of this. For these programmes it is more typical for larger firms to
participate than for SMEs, for this reason many of the programmes have SME participation targets
set in percentage terms, e.g. 15% for the FP.
A factor that does seem to be apparent from these schemes is the relatively low take up by all
firms, but particularly SMEs. Given the very large number of SMEs that are potential targets, i.e. the
430,000 in the Emilia-Romagna region of Italy, the numbers of participants are proportionally,
extremely low, despite this being a relatively successful initiative. This illustrates that, at present,
these incentives are not effective at a significant scale. The reasons for this are unclear. It could
potentially be any, or any combination, of the following factors: lack of interest, lack of knowledge,
incentives being too low or restricted funding availability or complexity of obtaining the incentive.
Differences across sectors, i.e. services vs. manufacturing
The incentives we have identified tend to be designed towards incentivising firms in primary and
secondary industries rather than services. This is not surprising given the desire to improve energy,
resource and process efficiency, and the greater potential for such improvements in non service
firms. Some service sectors can also have significant associated environmental impacts, e.g.
tourism. This could, and probably should, make them a target of economic incentives, although
these appear to be less prevalent at present, though for the tourism example moving aviation
emissions into the EU ETS could make a difference. This points to a need for a sector based
approach, considering the specific environmental impacts of a sector, which are often more
nuanced than simply: manufacturing = high, services = low.
Few other significant sectoral variations were detected, though some of the examples, such as the
aggregates levy in the UK show how an incentive applied to a specific sector can be successful.
The reasons include simplicity of the measure and the use of revenues being oriented to long term
environmental improvement and to offsetting the competitiveness impacts, by reducing labour
costs.
Impact of existing good / poor environmental performance
The economic incentives tend to work in both a ‘carrot and stick’ way. The ‘stick’ providing
punishment for poor performers through tax costs, e.g. improving company performance in effluent
discharges in Germany. The ‘carrot’ offering economic rewards for high performers, with proven
achievements in environmental performance, e.g. through acquiring a certified EMS, resulting in
lower fees or taxes.
There are also a variety of economic incentives that work more as enablers, tending to target firms
that are not already good performers, with the purpose of enabling them to improve their
performance. The free consultancy and business support services and soft loans and grants
examples are successful examples of this approach.
Geographical level of implementation
There are issues of sovereignty and subsidiarity in the economic incentives related to public
funding, such as taxes and charges as well as subsidies and preferential loans.
There are economic incentives at both national and regional levels, though many of the project
based incentives are applied regionally or locally. Tax-based incentives were identified from the
wider sample as relevant at both national and regional level, indeed some of the more innovative
examples of these incentives were regional applications of tax discounts in Bavaria in Germany and
Emilia-Romagna in Italy.
79Study on Incentives Driving Improvement of Environmental Performance of Companies
There was some EU involvement or link in a number of the incentives, reductions often being based
on achieving EMAS, support being given towards eco-label certification and/or EU funding as part
of the REMAKE and IYRE incentives.
4.3.2 Success factors and challenges
The economic incentives profiled above were successful to varying degrees. As with administrative
incentives there was little follow-up on what made firms decide to take-up these incentives.
Evaluation, where it was available, tended to focus on the achievements of the incentive in raising
revenue or securing environmental improvements, rather than on the reasons why firms signed up
for them. This potentially reflects an unchallenged underlying assumption among policy makers that
economic incentives are self-explanatory in their appeal, this somewhat contradicts the findings in
chapter three on the reported low influence of financial incentives.
Raising revenues and securing environmental improvements are the key factors in the success or
failure of a scheme. Achieving these objectives is key at both the initial stages of policy design and
evidencing them is key to maintaining support and funding for a scheme. A scheme that can
demonstrate it is revenue neutral or can raise revenues is likely to be looked on more politically
favourably, and be more successful, than an incentive that simply adds to public expenditure.
Though equally the incentive also needs to accommodate views that equate revenue to additional
business costs. These financial issues are particularly relevant in the current economic climate.
Tax schemes
Were generally found to have been successful, in steering company behaviour towards
environmental improvement. The examples identified a number of challenges in the design of such
measures in terms of the level a tax is set at and how revenues are used. On the latter point it was
evident that there was a preference from industry for tax measures designed to improve
environmental performance to move towards revenue neutrality, i.e. that revenues are recycled
back to the sector. In the UK, the aggregates levy provides an example of how this is thought to
have led to a double-dividend.
Reduced charges
Saw some take-up by firms and this appears to have incentivised firms to pursue EMS certification.
Access to private funding
Based on discussions during an investor’s workshop hosted by the European Commission on 14th
December 2011, the key challenge identified in using the influence of investors to incentivise
companies to improve their environmental performance is the view among the investors that the
size of the market for 'green' products, e.g. energy efficiency is not yet large enough for them to
claim environmental criteria as an important factor in their decision making process. Investors need
to choose investments that result in positive additions to their balance sheet and assessing the
risks to potential investments is key to this. Since markets are short-termist due to the desire to
keep capital liquid, the investors felt that there need to be separate mechanisms for projects with
medium and long term returns, e.g. sustainability investment funds, as discussed in chapter 3.
According to Eurosif data on Sustainable and Responsible Investment (SRI), the market almost
doubled recently from €2.7 trillion in 2007 to €5 trillion in 2009. However, core SRI assets represent
only 10% of the asset management industry in Europe97.
97 Eurosif European SRI study 2010
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Progress could be quicker if more major players could supported SRI and if general investment
framework conditions would further encourage it.
From an investors’ perspective the following policy initiatives were suggested as a way of filling this
gap:
Create guarantees for private funds to develop the market;
Mandatory reporting to provide comparability and benchmarking – and to correlate leadership
and financial return;
Regulatory stability, e.g. via providing a roadmap that would allow companies to prepare and
invest;
Get leaders in sustainability investments to discuss and provide expertise;
The fact that investors take environmental issues into consideration has also been reported in the
literature discussed in chapter 3.
Preferred supplier status – sustainable procurement
In the case of sustainable or ‘green’ procurement criteria a challenge that was identified related to
the workload of procurement staff, with sophisticated environmental performance methodologies
taking too much time and a preference expressed for simpler, yes / no criteria.
General factors
The success factors are often tied to competitiveness, with many of the examples we profiled
appealing to firms on the basis of using the economic incentive to reduce costs, through improving
production processes, or using less energy and / or resources. This links to one of the major
challenges for incentives of all types, i.e. persuading firms that improved environmental
performance can actually deliver economic gains, as many firms remain sceptical on this point.
As with administrative incentives a significant challenge for voluntary schemes was engaging firms.
The examples demonstrate a range of useful and effective incentives but they are all at a relatively
small scale with low take-up. This suggests that an important constraint could be the amount of
funding available to provide such incentives, with the small scale leading to concerns about over-
subscription.
A further challenge identified for economic incentives was for schemes where incentives were
judged against a sector benchmark, as in the Swedish NOx emissions example. These created
situations that could hamper the rapid diffusion of innovation and sharing of best practice as firms
keep advances to themselves in order to maximise their own rewards. It could also be argued that
this would create a more competitive environment for innovation and spur greater investment in it.
4.3.3 Potential applicability to environmental footprinting
There is a need and desire to encourage companies to become more sustainable and part of this is
providing them with the economic incentives so that improved environmental performance also
equates to improved financial performance and growth.
The examples discussed above highlight a number of potentially directly applicable economic
incentives that could be introduced at different levels. Tax measures are more difficult to implement
at the EU level than at the MS level, though providing project and grant funding and preferential
loans, in addition to continuing support for Green Public Procurement are feasible at the EU level.
Other economic incentives appear more suitable for implementation at Member State, regional or
local level. A number of these incentives appear relevant to footprinting. These revolve around
using footprint scores as a basis for providing fee exemptions or reductions, procurement criteria or
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free support and services. This would use footprinting as a way to both screen firms for eligibility
and also to set targets and rewards linked to changes in scores.
An important potential economic instrument is free support to firms, particularly SMEs, this would
provide a ‘foot-in-the-door’ for a footprinting initiative. It would enable the creation of a base of
footprint data for firms across the EU, it would also help engage firms in the process making it
easier to monitor the actual benefits to the firms from free support.
4.4 Reputational Incentives
Reputational incentives take a number of forms and reputation can be an intrinsic driver in the other
types of incentives. Their key feature is that a company's reputation is the driving motivation behind
their involvement and is the spur to better environmental performance. They rely on companies'
concern about their image, both internally to their employees, and externally to their customers,
investors, competitors and the wider business community. They are mainly voluntary schemes that
reward or recognise above average, or exemplary, environmental performance, but they can also
highlight the worst performing organisations. The basic mechanism of reputational incentives can
be utilised within a wide range of different situations and applications and they are often used in
conjunction with other types of incentives.
Of the 106 incentive schemes identified within this study 51 were deemed to be reputational
incentives, another eight had features of all three incentive types. The majority identified related to
GHG reporting schemes and product rating initiatives (although these were deemed to be outside
the scope of this study). The remainder of the schemes examined included information tools,
environmental management tools and awards/recognition schemes.
In order to investigate the mechanisms and utility of reputational incentives in more depth, a
selection of eight representative examples were identified for further study. They include two
international carbon disclosure schemes (Carbon Disclosure Project and Global Reporting
Initiative), a US multi-regional emissions registry (the Climate Registry), two innovative
environmental reporting schemes targeted at SMEs (Entreprises Eco-Dinamiques and EnVol), a
multi-functional investor focussed scheme (the Environmental Tracking Index) an award scheme
(the European Business Awards for the Environment) and a product awards schemes that also
incentivises business behaviour (Eurotopten).
The table below presents an overview of the incentive schemes and why they are relevant to
incentivising organisations' environmental footprinting.
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Table 4.3 Overview of selected reputational incentives
Reputational Incentive Description Mandatory/
Voluntary
Geographic
Area
Potential relevance to Corporate Footprinting
Car
bon
Dis
clos
ure
sche
mes
Carbon
Disclosure
Project (CDP)
CDP is an investor-led programme with high uptake among
top firms. The programme, by ranking firms in relation to
their carbon performance, provides a guide to investors
wishing to make ethical choices or considering long term
investments.
Voluntary International Could be linked to corporate footprinting if the
programme encourages the use of the common
methodology by CDP and extends the scope to more
impact categories. It may be worth considering
cooperation with the CDP in developing such an OEF
initiative.
Global
Reporting
Initiative
Scheme for sustainable reporting is primarily based on a
global sustainability reporting methodology. Organisations
and firms are encouraged to publish environmental,
economic and social performance on the website. Reports
can be benchmarked against each other.
Voluntary International Could be linked to corporate footprinting if the common
methodology is encouraged as a tool to calculate a GRI
corporate footprint that could be used within
sustainability reports. It may be worth considering
cooperation with the GRI in developing such an OEF
initiative.
The Climate
Registry (The
California
climate action
registry)
The Climate Registry is a non-profit collaboration among
North American states, provinces, territories and Native
Sovereign Nations that sets consistent and transparent
standards to calculate, verify and publicly report
greenhouse gas emissions into a single registry. The
Registry supports both voluntary and mandatory reporting
programs and provides comprehensive, accurate data to
reduce greenhouse gas emissions.
Voluntary /
Mandatory
Multi-
regional
This example is relevant to corporate footprinting
because whilst largely being a reputational incentive, it
also included a link to legislation and rewards, where
firms that took early action received certain benefits.
Another interesting feature is that it began as a multitude
of similar state-wide registries, but recognised the
practical benefits of covering a wider geography.
Entreprises Eco-
Dinamiques
Entreprise écodynamique is a free environmental labelling
scheme for all companies in the Brussels-Capital region.
Based on the company’s performance in eight
environmental categories (Energy use, Water use. Waste
management, Mobility of the work force, Air pollution,
Noise, Soil, Nature and Green Spaces), it receives one to
three (best performance) stars. Candidates for the label
receive technical assistance from environmental experts in
the process of becoming more environmentally friendly.
Voluntary Brussels This scheme demonstrates the role of technical
assistance in influencing SME company behaviour. It
also provides a blueprint for how SMEs can be engaged
in their wider environmental footprint and take steps to
minimise these impacts.
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EnVol
(Engagement
volontaire de
l’enterprise pour
l’environnement)
An environmental management scheme targeting (very)
small to medium-sized companies. EnVol is based on the
reference system AFNOR FDX30 which proposes three
different performance levels to companies. EnVol
corresponds to the first of these levels, ISO 14001 and
EMAS to the third level.
Voluntary France Whilst of limited use in relation to corporate footprinting,
it does represent a simplified approach that could
influence how corporate footprinting could be voluntarily
introduced to SMEs in a systematic manner. Le
ague
Tab
les,
Sus
tain
abili
ty In
dice
s/M
etric
s
Environmental
Tracking Index
series
NGO that tracks environmental performance (particularly
GHG emissions) of the top 1300 firms in the world and
then ranks them. Companies are tracked automatically and
cannot opt in or out of being tracked. Their research
promotes investment systems that incentivise global
corporate emissions reductions.
Automatic International Interesting due to its global nature and the fact that it is
aimed specifically at influencing investment decisions. It
does this through rankings (spotlight effect), the ET index
series (investor incentives to drive supply and demand
pressures) and engagement activities (improving
standards of disclosure). All of these tools and the
learning gleaned from them have applicability to
corporate footprinting.
CRC Energy
Efficiency
Scheme
(formerly the
Carbon
Reduction
Commitment)
Scheme aimed at improving energy efficiency and cutting
emissions in large public and private organisations through
a range of reputational, financial and behavioural drivers to
promote energy management. Includes a CRC
performance league table.
Mandatory UK Includes a league table of performance within the
scheme, as the main reputational driver, alongside
associated financial incentives. Provides an interesting
combination of mandatory financial and reputational
drivers at work. Shares similarities with carbon
footprinting through its wide ranging cross sectoral
nature.
European
Business
Awards for the
Environment
Scheme of DG Environment, firms can apply to receive
awards for innovation for sustainability. Rewards best of
best. Detailed evaluation process.
Voluntary EU Scheme is based on self selected “best” performers, and
awarded by panel based on an application process.
Corporate footprinting could replace, or complement, this
with awards based on quantifiable data.
Euro topten Provides up-to-date snapshot of the most efficient products
across a range of popular product categories.
Mandatory EU This not only acts as an incentive to product
manufacturers to improve their products, but acts as a
guide to the wider business community on how to reduce
their company footprint through their procurement. It is
an interesting example as it represents both technical
push and consumer pull drivers simultaneously.
84 Study on Incentives Driving Improvement of Environmental Performance of Companies
4.4.1 Effectiveness of reputational incentives
Generally speaking reputational incentives have recently grown more rapidly than the other types of
incentive schemes. Their largely voluntary nature and the flexibility of their objectives means that
they are highly adaptable. They can be devised and set up at a relatively low cost and can be
applied to any number of niche applications, objectives or sectors. This has led to their widespread
uptake by city regions, industry sectors, product manufacturers, trade associations, publishers,
governments and international NGOs.
Reputational incentives are often used in parallel to, or in addition to, other incentive schemes. An
example of this is the UK Carbon Reduction Commitment (CRC) which is a mandatory scheme on
companies with significant carbon emissions, which also publishes an annual league table of
performance to name and shame good/bad performing companies.
The range of incentivising drivers that they employ is considerable; some of the motivating drivers
they employ include the following:
The desire to be recognised as the best;
The desire not to be the bottom of a league table;
The desire to be recognised as better than the competition;
The desire to provide customers (and/or investors) with clear environmental performance
information;
The desire to reduce an organisations environmental impact;
The desire to make cost savings.
Many of the above motivations rely on companies’ desire for positive marketing and to stand out
from the competition. This is a powerful driver for some, whilst others may be driven by the altruistic
desire to limit their impact upon the environment. Effective incentives must recognise this diversity
of motivations.
Reputational incentive schemes have been shown to generate positive impacts upon
competitiveness, however quantitative evidence of this is limited. Anecdotal evidence suggests the
brand awareness, customer goodwill and investor confidence (whilst notoriously difficult to
examine) all have a positive impact upon long term competitiveness.
Feedback from workshop participants also highlighted the risk of reputational incentives
oversimplifying comparisons, by focussing on certain issues at the exclusion of others. To be
effective, they should be developed in collaboration with, and contain indicators relevant to, the
industry that they will impact upon. The example of the UK Environment Agency resource efficiency
report was highlighted as a scheme which employed poor indicators.
Factors in incentive effectiveness
Based on these examples, consultation feedback and other literature we now look at some specific
factors in incentive effectiveness.
Impact of company size
Anecdotal evidence suggests that there is a link between the size of a participating company and
the scale upon which a scheme is deployed. For example large multinational organisations have
the resources and reach to engage effectively with international reporting schemes and initiatives
such as the Carbon Disclosure Project and Global Reporting Initiative. However, this is beyond the
means of most SMEs who will be more highly motivated by local or regional award and recognition
schemes that will raise their profile and potentially lead to associated commercial opportunities
(anecdotal). As marketing budgets are often limited, or even non-existent, applying for awards can
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be a cost effective way of raising SMEs' profile in terms of exemplar environmental performance
and free marketing.
Cost of reporting and lack of resources (including access to finance) are often cited as barriers to
SME uptake of environmental measures and improvements. The examples of EnVol and
Entreprises EcoDinamiques are interesting as they represent very localised schemes, designed
specifically with SMEs in mind. Learning from their design and roll out should inform potential future
standardised corporate footprinting.
Similarly, investor related schemes that seek to incentivise corporate behaviour have limited
applicability for smaller organisations. Smaller companies will be more likely to be attracted by
incentive schemes that raise their profile and brand awareness amongst their customer base, or
offer an additional business benefit.
Moreover, incentives for SMEs could be provided via supply chain initiatives. By applying
reputational mechanisms, buyers can clearly show a preference for suppliers, among whom SMEs
can be found, who are “greener”. Hence, a SME as a supplier can build reputation within its supply
chain which could create business benefit for it.
Workshop participants highlighted the importance of international comparability, particularly to large
organisations that trade globally. One reputational incentive scheme that was mentioned as
demonstrating this is closely linked to efficient manufacturing processes and financial viability, is the
league table of aluminium smelting energy use. This scheme was reported as being widely used in
the industry, with all smelting plants aware of their score and continually trying to improve their
position in the table, such data is privately held within the industry and this study has been unable
to find further data to confirm or clarify its actual impact.
Differences across and within sectors
Whilst we have not identified any sector specific incentive schemes for further study, there will likely
be significant differences between and amongst different industry sectors in terms of uptake,
motivation and business objectives. Respondents to this study have repeatedly stressed that a “one
size fits all” approach to corporate footprinting is unlikely to be effective, due to the diversity of
business types throughout Europe.
During the interviews, reputational incentives were identified as being of high interest for sectors
directly facing end consumers e.g. retail, consumer products, hi-tech, healthcare, automotive,
textile, etc.) In these sectors, impact on reputation is an important consideration. Companies in
these sectors would pass on the pressure to their suppliers in other sectors, such as mining,
agriculture, manufacturing, process, chemical, or transport.
Service sector organisations have traditionally been early adopters of reputational incentives such
as awards and recognition schemes (e.g. sustainable tourism awards, AA/Michelin star guide to
hotels and restaurants, etc.) This may be due to the large impact that word of mouth advertising
and reputation has upon their business success. The construction and agricultural industries are
also examples of sectors that have very industry specific targets, support frameworks, incentives
and relationships with their customers.
Even within specific sectors the uptake and utility of incentives will vary greatly. Top performing
companies will likely seek out and apply for (self selecting) award type incentives and league
tables, whilst the worst performing companies would actively avoid such schemes.
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An approach that would capture and possibly incentivise the full range of performance levels is
comprehensive league tables. These can provide the double incentive of incentivising top
performers to outdo their rivals whilst also shaming the organisations at the bottom of the table into
action. When these are published on a regular basis, they also provide a measure of how their
environmental performance has changed over time compared with their competitors. This third
layer of incentive can be a powerful driver for companies. However, it should be noted that this
approach may not work in all sectors, particularly those that are unwilling to reveal commercially
sensitive information to their competitors.
Geographical level of implementation
There are local, regional, national and international examples of reputational incentive schemes.
Local schemes have the benefit of being able to be tailored to the local business environment and
community and as such are of more relevance to SMEs. In contrast, international schemes need to
be more generic so that they apply to the widest possible audience and allow for the complexities of
multinational conglomerates. Between these two extremes national and EU-level incentives can
more effectively target specific sectors or business types at a scale more appropriate to their
operations or environmental impact.
4.4.2 Success factors and challenges
Success Factors
Some of the main success factors identified include the following98:
Simplicity – simple incentive schemes that are inherently easy to understand have the widest
uptake and utility;
Standardisation and comparability – successful incentive schemes need to provide a
standardised framework within which meaningful comparisons can be made between
organisations;
Transparency – for confidence in the scheme/award/standard there needs to be transparency of
information and purpose, including the schemes application processes, weightings and
verification procedures. Otherwise, they are open to criticism and risk losing stakeholder
confidence;
Inclusiveness - is an important success factor for effective incentive design. For example, a
Carbon or environmental reporting initiative is only meaningful if all companies are included. If
companies are easily able to opt out, then the meaning of the scheme can be diluted. The
Carbon Disclosure Project has got around this challenge by utilising publicly available data on
all companies. Refusal to respond to further data requests are seen as a sign of weakness and
companies marked down accordingly, although this can disadvantage companies that are
involved in alternative reporting arrangements. Inclusion in social responsibility indices, such as
FTSE4Good and the DJSI and/or to be included in socially responsible funds or environmental
funds are important drivers for CDP participants;
Aligning incentives optimally – reputational incentives have been shown to be effective as an
additional layer upon/in parallel to, other complimentary incentive scheme e.g. financial or
administrative;
Communication strategy important – as reputation is based on what relevant stakeholders think
and believe an effective communication strategy is essential.
98 SustainAbility (2011). Rate the raters, phases 1-4
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Challenges
Some of the challenges facing effective reputational incentive schemes were identified as the
following:99
Lack of transparency – emission reporting schemes and award bodies are both guilty of not
always having transparent internal application, reporting and awarding processes. In the future,
increased public disclosure, open source information and transparent reporting systems are
needed;
Trust – the body or organisation administering the scheme has a bearing upon how much
trust/confidence stakeholders have in the scheme. Government generally scores highly in this
respect, whilst industry schemes suffer in this respect (as stakeholders almost expect
greenwash);
Comparability of GHG reporting schedules – in emissions reporting the multitude of systems,
with different underlying methodologies, has resulted in issues of lack of comparability. This
adds to the costs of participation for businesses whilst diminishing the value of the competing
schemes;
Discord between rhetoric and action – many of the incentive schemes in this area are based
upon emissions reporting. However, sophisticated reporting does not necessarily lead to
significant emission reductions;
Crowded marketplace/competing schemes – there has been a proliferation of schemes and
initiatives over recent. This threatens to create confusion amongst stakeholders and reduce
their utility and effectiveness. In future there will likely be greater demand for fewer emissions
reporting schemes;
Turning rankings into rewards – ranking and reporting of emissions has proven a beneficial first
step, but for real change to happen on the scale required, rewards need to be developed
(beyond just reputational) to drive dramatic emissions reductions within businesses.
4.4.3 Potential applicability to environmental footprinting
There a number of ways in which the reputational incentives examined within this study could be
applied to incentivise environmental improvement in the context of corporate footprinting. The
digital economy and increased media diversity and saturation arguably means that reputation has
never been as important to businesses as it is now. This trend is likely to continue to increase and
the power of this social change should be utilised within incentives to drive behavioural change of
benefit to society as a whole, such as improvements in environmental behaviour.
Reputational incentives can link well with the OEF, in that the common methodology helps to
address one of the main limitations of this type of incentives – the consistency, robustness and trust
in data. This can strengthen the competitive edge / relative benchmarking effect of reputational
incentives so that firms voluntarily improve their performance. This could be used along other
incentives to further support the incentive effect.
Other lessons that can be drawn from the reputational incentives discussed here relates to the use
of league tables. Theoretically, these are more effective than simple awards or negative prizes for
poor performance, as they incentivise the best and worst performing companies whilst driving
continuous, competitive improvements across all firms.
99 ERM ( 2010). Company GHG emissions reporting – a study on methods and initiatives
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Many of the success factors and challenges described above (e.g. simplicity, transparency, trust,
external verification etc.) are equally valid for corporate footprinting. In fact a “common
methodology” covering environmental performance would be likely to have a positive impact upon
many of these features. Even practitioners from leading emissions reporting schemes welcome its
introduction. However, they also stressed that any new scheme must complement, and not
compete with, existing frameworks. Lessons learnt from emission reporting also suggest that any
attempt at a common methodology should aim to be globally applicable.
The size of organisation should not be overlooked. Whilst the common methodology has potential
to impact upon the reporting practices of large organisations, SMEs should also be taken into
account. It may be that they require an alternate “footprinting light” approach with its own set of
complimentary incentives appropriate to their sector and or geography.
4.5 Summary
This chapter explored the existence and effect of incentives by looking at their real-world
application. The findings, based on literature review, stakeholder interviews and the comments of
our workshop participants, can be summarised as follows:
Existing Incentives
A significant range of incentives exist. This study identified 106 incentives in use in the EU and
internationally. Profiling these indicates that the most common incentive type was economic (70),
followed by reputational (51) and administrative (22). It is also notable that many incentives work in
more than one way, with reputational and economic incentives being particularly closely related.
The most common types of incentives were related to GHG emissions reporting. These were
closely followed by tax-based measures, information and support, tradable permit schemes,
reduced charges and subsidies, grants and loans.
The majority (56) of measures were voluntary, while fewer (18) were mandatory. The majority of the
incentives that were identified (65) were applied at a national level, but EU, international and
regional schemes were also all present.
Administrative incentives
This was the least common type of incentive identified and those that were identified tended to be
linked into economic incentives or other certifications, particularly EMS systems such as EMAS or
ISO14001. Administrative burden was identified as a major frustration and cost for firms.
Data on these incentives is relatively limited, so establishing their effectiveness is problematic,
however the types of approaches used were instructive in how incentives could be deployed in
future. This involved the potential to link project funding and monitoring to environmental
performance targets. Administrative monitoring systems could be utilised to better account for and
reward positive environmental behaviours, through recognition of good performance in risk
assessment and subsequent inspection requirements. In this way evidence of good environmental
performance can be translated into reduced administrative obligations.
It was identified that linking administrative incentives to participation in specific projects implies that
only those eligible, willing and able to participate in the project will be able to benefit from the
incentive. This can exclude some groups, particularly SMEs. Blanket application of an incentive
removes this issue.
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It was also identified that most administrative incentives were designed to reward good performers
rather than to provide significant incentives to poorer performers. Incentivisation via an on-going
risk appraisal methodology offers all firms an incentive to improve their performance, although it is
likely, and natural, that only above average performers would be rewarded in this way and that
firms exempt from requirements in the first place are not incentivised by these measures.
Engagement with administrative incentives was found to be quite low, with low take-up of the
voluntary measures.
The applicability of administrative incentives to environmental footprinting was seen as quite strong.
A crucial aspect of this was the issue of verification of footprints so that administrative authorities
could justify the incentives granted. This presented a difficult issue as it implies an additional
administrative step (verification) which risks reducing or even cancelling out the benefits.
Economic incentives
This was the most common type of incentive identified, with a wide range of different incentive
types used; tax-based measures being the most numerous. Economic incentives often also had a
close tie to reputational incentives.
Economic incentives are generally accepted as among the most logical ways to incentivise
companies to change their behaviour, indeed this is something of an implicit assumption in all the
incentives. However, this conflicts with the findings in chapter three that financial incentives were
only a weak influence on environmental improvement in firms.
The evidence reviewed included successful application of economic tax instruments in Sweden and
the UK. One of the shared factors in the success of these examples was the recycling of revenues
back into the sector to make the measure revenue neutral. In the UK this was on a general basis,
while in Sweden this was relative to a firm's performance against benchmarks, in such a way that
poor performers were penalised and good performers rewarded. Both approaches had success,
with associated pros and cons. Issues that were identified included a need to set an incentive of
this type at the ‘right’ level, with use of revenues being important in determining this, and a further
issue relating to relative reward systems in that it could hinder the diffusion of innovation and best
practice as firms adopt more self-protective attitudes.
Effective economic incentives were identified that work as ‘carrots’ for high performers, or as ‘sticks’
for low performers, or as enablers for all. Overall, the range of incentives appear successful,
engaging with firms and leading to environmental improvements that may not otherwise have taken
place. As with the administrative incentives the main problem for effectiveness was the relatively
small scale or low take-up of many of the voluntary incentives.
The contradiction on the power of economic incentives appears to be a matter of perception within
firms, and a slight nuance in the subject being considered, The initial finding was based on the CIS
survey, reporting that firms stated direct (external) financial incentives were rarely the reason they
invested in innovations to improve their environmental performance. In reality, as shown by the
examples in this chapter, economic incentives clearly do work, at least on a more general level. It is
unclear if firms realise they have been ‘incentivised’ or whether they see the stimulus for action as
internal, not perceiving any external incentive effect from policy.
Incentives were applied in different ways. Tax based measures were applied universally or were
targeted on a specific activity or sector, some with exemptions for small firms.
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Economic incentives were relatively well adapted to SMEs with a profusion of grants, loans, funding
and free support focusing on them. Despite this, take-up of these incentives remained low in almost
every example, highlighting the difficulty in engaging with this group. For these measures there
appears to be an assumption that larger firms are self-sufficient or already good performers.
Economic incentives tended to be focused on firms in the primary and secondary sector, rather
than the services sector.
Economic incentives were successfully applied at all geographical levels, with success in Italy and
Germany for regional incentives. The role for the EU in this area is somewhat mixed, particularly as
taxation is a competence of Member States, but green procurement, direct funding through EU
programmes and working with member states on issues such as subsidies and taxes are all
effective ways for the EU to apply economic incentives.
There are a variety of ways in which economic incentives can be made relevant to the
organisations' environmental footprinting initiative. This can be both with a footprint being used as a
condition, screening tool or requirement to qualify for an economic incentive and /or for economic
incentives being relevant to assisting companies to improve their footprint. The former option
appears to be of most interest within Member States, where reduced charges, levies and taxes can
could easily be linked to such a scheme and potential additional financial support (e.g. free
consultancy) or pressure (e.g. higher charges) applied to those with poor footprint scores.
Practical opportunities to explore this are possible at an EU level via linking project funding,
preferential loans and green procurement to a footprinting initiative. An idea of particular interest
may be in working along the lines of free support or grants, where a footprint assessment is offered
free of charge, along with recommendations to a firm to improve aspects of this, based on energy,
water, waste, resource or other relevant environmental impacts.
Reputational incentives
This type of incentive was relatively common, with 51 examples identified across the two broad
categories of carbon emission disclosure schemes and other information tools such as awards,
indexes and rankings. These incentives operate through companies' concerns about their image,
both internally and externally.
The effectiveness of reputational incentives is in part related to the potential ease and low cost with
which they can be set up and implemented. For this reason they have been taken-up by a variety of
organisations and at a variety of levels.
The success of the schemes revolves around harnessing companies self interest and competitive
drive. Brand image and competitive advantage are closely intertwined with how a company will be
perceived in their marketplace. This perception can have a significant impact upon their financial
bottom line.
The effectiveness of reputational incentives is thought to vary by geographical scale and company
size. Schemes over wide geographic areas appear to be more effective for larger companies, as
these tend to be able to be more marketing oriented and image conscious. They also have a
geographically wider range of stakeholders and investors whose opinion is of interest.
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Reputational incentives are also important for SMEs, but their interest and motivation will be geared
more to the local, or regional, markets they operate in. They are more reliant upon customer
feedback and referrals, as opposed to formalised league table-type awards and accreditation.
Reputational incentives have a role to play in complementing environmental footprinting taking
advantage of the fact that brand image and customer perception have never been more important,
particularly to large organisations, and because of this they will also wish to have a ‘good’ footprint.
A common theme emerging for all of the incentive types described above was the difficulty in
establishing a “one size fits all” approach. Many firms and sectors highlighted the importance of
understanding the relevant features and contextual factors of their sectors when designing incentive
schemes. With this in mind it will be useful that any incentives take into account at least the type of
sector a firm is in, to offer some nuance and fairness to a reputational incentive, so that like is
compared with like, or some context is given. Equally, it may not be feasible to have very specific
sector-type measures as these then quickly become too specific to be effective beyond small
niches and require much more effort to set-up.
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5 Findings: Incentives in general
Based on the interviews and workshop we have been able to identify key factors in successfully
driving an improvement in the environmental performance of companies, the key barriers to this
and the role for organisations' environmental footprint. These findings are supported by material
from our literature review.
5.1 Factors in success
The effectiveness of a business incentive will vary considerably between different regions, industry
sectors and sizes of organisation. Therefore, industry (or sector) specific incentives schemes that
work in one industry may not necessarily have the desired impact in another industry/sector.
Equally, what drives an SME to take action is usually quite different from the drivers for an
international corporation. However, simple and effective incentive design can cater for, and drive
change throughout, the whole spectrum of business. What incentives work best under which
circumstances is discussed in relation to designing effective incentives for company footprinting.
The discussion of success factors is structured under the following four headings:
Incentive design;
Company size;
Sector; and
Level of implementation.
Incentive design describes the key elements that the variety of stakeholders identified as crucial
when companies make decisions to invest in their improved environmental performance. Company
size broadly distinguishes between large companies and SMEs. Similar analysis is done for
different sectors. Next, what works at which level of implementation is analysed, i.e. the role of the
EU and Member States in implementation. We also give an indication of which incentives might
work for which regions.
5.1.1 Incentive Design
The following table identifies the key drivers/elements described by stakeholders during the
interviews and workshop as important for companies to improve their environmental performance.
This chapter presents a summary of the findings on incentives in general
primarily based on the feedback received via consultations and the
stakeholder workshop, but also incorporating relevant literature and data as
appropriate. The findings focus on factors in success, barriers, the role of an
organisational environmental footprinting tool and incentive mixes.
Study on Incentives Driving Improvement of Environmental Performance of Companies
Table 5.1 Key elements for incentive design
Key element Description Example
Positive impact on
profitability
According to all stakeholders the key driver behind any company decision, including
the decision to improve environmental performance is to improve the profitability of a
company. Companies care about their costs and adapt their situation to current market
conditions. Cost savings, the banking crisis and resultant economic downturn means
that companies are more focussed on the bottom line than ever before. Efficiency
savings are the main driver for EU policy and a significant selling point for businesses.
This commercial link to incentives also appears to be crucial when considering
voluntary measures, such as CDP, which are based on reputation.
Economic incentives such as access to funding, reduced charges or tax advantages
have been identified as having a positive impact on the bottom line. The Environmental
Shipping Index scheme which offers reduced charges to registered firms is an
example. This commercial link to incentives appears crucial.
Tangible, preferably
short-term benefits
Several stakeholders reported that for any incentive to work, the benefits to companies
must be clear. This is because companies need payback for the business. The
benefits that an incentive can offer however differ per type of company and sector.
Majority of stakeholders identified financial short-term benefits as preferable, e.g.
access to finance at low or no cost, or tax reduction/rebates (economic incentives).
No “one size fits all” During the interviews and workshop discussions, it has been stressed that the drivers
vary from business to business, hence it is difficult to generalise which incentives
would work. There is no “one size fits all” solution or approach that can work for all
sectors, businesses and business models that exist. Some elements of the business
community do not consider the environment to be a priority at all and hence have
limited interest in improving their environmental performance. Balancing the need to
adjust and account for specific circumstances, with the need for incentives to be
transparent and have wider applicability a more generic ‘type of sector’ approach is
probably the best compromise, grouping similar types of sectors/environmental
impacts together.
CDP (an investor mandated reputational incentive) - the benefits of this scheme vary
across sectors – e.g. the scheme is successful in services where financial companies
are more inclined to participate, whereas sectors with higher environmental impacts
are not interested.
Clear targets Several stakeholders mentioned clear targets combined with an incentive would be
helpful for companies wishing to improve their environmental performance. It has been
stated that a policy should give clear targets and leave it to industry to reach it.
Certainty is a crucial component of company investment decisions. Certainty on the
goal, target and demands on firms enables them to plan accordingly, preferably with
stability in these targets over the medium-long term. The Swedish charge on nitrogen
oxides scheme (economic incentive) is connected to several of the 15 national
environmental quality objectives, such as Natural acidification. The acidification
objective has an interim target, stating that emissions of nitrogen oxides are to be
reduced to 148 000 tonnes per year by 2010. This national target is used as a target
within the scheme.
Flexibility Several stakeholders mentioned that companies prefer instruments that offer flexibility,
i.e. they can be adapted to changing market and company conditions, e.g. during an
Firms prefer to be able to choose their own approach to improve performance,
providing this flexibility within schemes is important. Economic incentives, such as
Study on Incentives Driving Improvement of Environmental Performance of Companies
Key element Description Example
economic crisis. In addition, any common methodology for corporate footprinting
should also be flexible.
tradable permits, have this type of flexibility and reward incentive built in as part of their
rationale for greater economic efficiency. An example of such ‘flexible’ incentives were
tax incentives or access to funds such as the Carbon Trust in the UK which has
managed an energy efficiency loan scheme for SMEs.
Not jeopardise
competitiveness
A key issue mainly for internationally oriented companies has been the effect of
incentives on competitiveness of the company. Effective incentives would help improve
competitiveness since being best in class is a strong strategic driver for company
decision-making.
Creating a level-playing field and global agreements on improving environmental
performance will not overburden and create disadvantages for companies operating in
one region against those in another. For example, reputational incentives, such as
CDP which are global could improve the competitiveness of international companies.
Reputation/branding Reputation has been reported as another key element for driving improvement of
environmental performance. However, the responses of stakeholders varied on its
effectiveness. Reputation has been mainly identified as a strategy that benefits the
bottom line, i.e. the profitability. The power of reputation depends on the industry (e.g.
in food & drink, materials handing reputation matters) as well as geography (in
Western, Nordic countries reputation matters) and market conditions (in a growing
economy, reputation matters).
A clear example where reputational incentives work is if company environmental
information is used by e.g. financial analysts or consumer (e.g. CDP). For some
industries, e.g. non-ferrous metals, customer request for green products is currently a
minor point in decision-making.
Regulatory
measures
The stakeholders were divided on the role of regulatory measures as a driving factor to
improve company’s environmental performance. The responses show that some
business areas benefit from regulatory measures as these create the market demand
and financial reward to start growing this area of business. Other business areas, e.g.
waste and water sector stated that regulatory measures merely provide a structure,
and that some businesses go beyond what is required by regulation.
Often thought as the ‘stick’ to go with the carrots of the other incentives, these can be
particularly relevant to address widespread poor performance or minimal previous
intervention on environmental performance. The need for regulation has been
identified as a key driver to implement access to private funding incentives (economic
incentives) as investors and other market participants are short termist and hence the
market for medium/long term environmental investments is currently not sufficient.
Supply chain
pressures
Supply chain pressures are also a strong driver for companies to change their
behaviour. This is because buyers can use their purchasing power to influence
suppliers. This has been identified as a successful element by both large companies
and SMEs in changing their environmental behaviour. Hence incentives that
encourage buyers to require better environmental performance suppliers could be
effective.
Awards/support in supply chain (economic incentive) have been identified by workshop
participants as incentives that could be effective. Buyers who choose suppliers based
on their reputation as a green supplier (reputational incentives) are another example.
Creating peer
pressures /
benchmarking
Soft enforcement via peer groups (investors, other companies, consumers, etc.) and
benchmarking (and its publication) of companies also creates incentives for companies
to improve their environmental performance. This however works under the
assumption that the company operates in an environment where it matters (e.g.
publicly listed, top rated company).
Peer pressure works as a driver if reputational incentives are in place. For example,
schemes such as ISO 14001 is popular in the Netherlands because stakeholders ask
for it.
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Key element Description Example
Turning rankings
into rewards
Rewards have been identified by several stakeholders as a very powerful tool.
Recognition of efforts, whether in terms of ranking or rewards is seen as positive. This
is particularly true for good-performing companies.
Reputational incentives such as the Environmental Tracking Index is a an example of
how rankings can translate into rewards through investor response..
Sustainability is part
of company values
Several stakeholders responded that they are dedicated to improving their
environmental performance because this is part of their corporate values. This is one
of the reasons why they get involved in the different (voluntary) initiatives.
CDP or Dow Jones Sustainability Index is a strong driver for company’s brand
recognition and clearly demonstrates company’s dedication to transparency.
Consensus on the
‘hot spots’ at EU
level (key
environmental
priority areas for
action)
Workshop participants identified the lack of a clear consensus on the priority areas (the
‘hot spots’) at EU level to be tackled and conflicting policies at EU and MS level as
disincentives for setting-up actions that improve environmental performance of
companies. Drivers should focus more on the “true” benefits, meaning environmental
ones. For this to occur a common understanding of the hot spots is required.
An example was given about the EU action to replace light bulbs and plastic bags.
While these are very interesting initiatives in terms of creating public awareness and
have quick results in terms of reputational effects, the environmental significance is
relatively small (based on e.g. extended environmental IO analyses and LCA
analyses).
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Comparing these findings with the theoretical overview of drivers behind organisational change
discussed in chapter three reveals the following common points:
Regulation is a key driver of change;
Corporate culture and the vision of the company are important;
Leadership and being the best in class is a strategic driver;
Reputation/image is of increasing importance;
Competitiveness is an issue for companies;
Buyers along the value/supply can be important drivers for organisational change among
suppliers; and
Any common methodology for organisations environmental footprint should be simple and
standardised, but retain some flexibility.
An apparent contradiction between some of the studies and the empirical evidence is the
importance of financial drivers/incentives on organisation's change. As explained in chapter three,
this might be for a variety of reasons:
1. the grants/funding available are not a big enough incentive for European companies;
2. companies do not have an easy access to such funding;
3. companies answer differently to how they actually act; and/or
4. finance is not as important an issue their decision.
However, based on the findings from the interviews and workshop, financial incentives have been
identified as a key variable, as they impact the bottom line, the profitability, of a company. This
finding is supported by the EEF (a manufacturers’ organisation in the UK) study which surveyed
285 of its member companies. The study identified cost savings as the main motivation factor for
manufacturers to adopt environmental strategies, with 79% of respondents citing cost reduction as
the main driver followed by legislation.100
The short-termist focus of financial markets and their participants discussed in chapter three is also
of relevance here as this suggests that financial returns should be of utmost importance to
companies.
5.1.2 Company Size
The size of the company can play an important role in determining the success of incentives.
Eurostat estimates that there are around 20 million enterprises in the EU of which more than 99%
are SMEs with fewer than 250 persons employed.101
Table 5.2 Enterprise structure of the EU (2006)
Source: Planet SA and Danish Technological Institute (2010).
100 EEF, the manufacturers’ organization (2010). Measuring Performance, Environment Survey (2009). 101 PLANET SA and Danish Technological Institute, Published by European Commission, DG Enterprise and Industry
Calogirou (2010) SMEs and the environment in the European Union.
Enterprise Structure of the EU27 by size (2006)
Total Large
(250+ persons employed)
Medium
(50-249
persons
employed)
Small
(10-49
persons
employed)
Micro
(1-9
persons
employed)
Number of enterprises 20 156 779 42 245 219 956 1 388 759 18 505 812
Percentage of enterprises 100% <1% 1% 7% 92%
Number of persons employed 129 754 720 42 360 134 22 027 245 26 938 777 18 505 812
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The impact of environmental measures, as well as the subsequent environmental impact will differ
between SMEs and large companies. For instance, the recent study by Planet and Danish
Technological Institute (2010) – which focuses on SMEs and their impact on the environment in the
EU27 – estimates that SMEs account for 64% to 70% (depending on sector) of the industrial
pollution in Europe (SMEs account for 99% of all firms), while large firms (1% of EU enterprises)
account for 30 to 36% of all impacts. From this we can imply that large companies do have a
significant environmental impact and hence could be legitimately targeted when designing incentive
schemes. The main impacts under consideration in this study are energy use, CO2, SO2, NOx,
PM10, nmVOC, waste and hazardous waste).
The key findings on what works for SMEs and large companies, as described by stakeholders
during the interviews and workshop are presented below.
Large firms tend to have more resources and capacity to respond to incentives than SMEs
Feedback received from stakeholders during interviews and the workshop suggests that large
companies usually have more resources to act and are more likely to care about improving their
environmental performance than SMEs. This holds for large companies operating across industries,
sectors and countries. This finding confirms the evidence found in the literature discussed in
chapter three suggesting that in general large firms have more resources to invest and a greater
pressure from stakeholders compared to SMEs.102 Large companies tend to be more likely to join
different initiatives, be it regional or international on a voluntary basis given it makes business
sense. The results of a study that Suez Environment (2011) conducted among large multinational
firms show that all companies interviewed (15 manufacturers and 9 municipalities) were committed
to some form of environmental performance, and have a quantified framework to achieve results in
environmental performance, such as working with baselines, performance indicators and targets to
be achieved.103 This is not to say that SMEs do not react to incentives, but that often more effort is
required to engage with them and encourage incentive take-up.
The three key drivers for large companies are economic performance, brand image and
being in harmony with overall goals of the company
Companies interviewed within the Suez Environment study expressed the view that their three key
drivers were first, economic performance (to be best in class) which was a strategic driver, related
to productivity to better produce and improve the quality. Economic incentives are the best way of
enhancing this driver.
The second key driver was brand image, where reputational incentives would be key. As discussed
in chapter three, the existing literature shows evidence that large companies care and devote
resources to building a “green” image. Anecdotal evidence discussed in chapter four also suggests
that large companies are likely to engage pro-actively in voluntary schemes such as the CDP or
Global Reporting Initiative. For example disclosure rates of the Europe 300 companies (300 largest
companies by market capitalization) continues to rise. In 2011 the EU disclosure rate was 90% (271
companies) compared to 84% disclosure rate in 2010 (253 companies). Similarly, since 2004, the
number of companies making reference to GRI in their sustainability reports has more than doubled
from 24 to 55 of the S&P 100.104
102 Pavelin and Porter (2008). The Corporate Social Performance Content of Innovation in the U.K. 103 The report itself is confidential. The results were discussed with Ecorys during an interview with Suez Environment as well
as presented to stakeholders during the workshop. 104 Sustainable Investment Research Analyst Network, SIRAN (2010). S&P 100 Sustainability Reporting Comparison.
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The third key driver focused on by stakeholders was to be in harmony with the overall goals of the
company vision, mission statements, and the fact that resources are becoming more expensive
were identified as being common goals.
Large companies often function ‘beyond’ regulation
Interviews showed that environmental legislation remains one of the main drivers of behavioural
change. Some companies look to differentiate themselves via high environmental
performance/responsibility in order to gain competitive advantage. According to the study
conducted by Suez Environment, and the discussion with stakeholders during the workshop, some
large companies function ‘beyond’ regulation. Such companies are usually large multinationals who
are first movers in the field of environmental performance since legislation and regulation, the
economics of resources, corporate image and operation in multiple markets drives their need to
comply with the law and/or go even beyond. For instance, Konar and Cohen (2001) found that
major corporations voluntarily over-comply with environmental regulations and externally portray an
image of being environmentally concerned; and these firms are rewarded in the marketplace with a
market value increase.
To incentivise SMEs, a framework of support should contain four key elements
These are: access to reliable and clear information, tailored technical assistance and support,
specialist skills and access to finance. The key driver remains environmental legislation. The
underlying challenge identified during interviews facing many SMEs is the lack of resources to
undertake environmental improvements. This point is echoed in the DG Enterprise and Industry
study on SMEs and the environment in the EU (2010), which states:
“The two main reasons for investing in environmental solutions in the interviewed SMEs are either rising
cost of energy, water or materials and new environmental legislation (both EU and national). In other
words, the SMEs have more or less been forced into investing in solutions that can reduce the impact of
the rising costs or complying with new environmental legislation. Although companies often see the
potential and a return of investment in the long term, only few companies have invested in, e.g., clean
technologies on a voluntary basis, i.e. not having to deal with rising costs of energy/water, compliance with
environmental legislation or customer demand. The single most important reason for this is lack of financial
resources through the SMEs’ own capital stock or access to funding.” 105
A favourable framework of support with the above elements, is required to incentivise SMEs. During
the workshop, stakeholders provided ideas on how to tackle some of the challenges faced by
SMEs. For instance, identifying hot spots (in terms of priorities for environmental action), rather
than having a broad approach would be more beneficial for SMEs since it implies that they can
focus their efforts more effectively and efficiently. During the workshop, participants mentioned that
the current policy framework is too generic, providing little or no incentive for SMEs to follow-up
what is going on in the field of environmental improvement, other than the ones which are clearly
perceived to have commercial benefits.
Reputational incentives seem to be less of a concern for SMEs
These might only work when applied locally and/or within the supply chain. Unlike the anecdotal
evidence discussed in chapter four on the lack of means and interest of SMEs to improve their
“green” image, feedback received from some stakeholders during the workshop and interviews
suggests that the risk of negative reputational impact has an influence across sectors as well as
company sizes, i.e. not just large resource intensive companies are affected but companies
105 PLANET SA and Danish Technological Institute (2010). SMEs and the environment in the European Union.
100 Study on Incentives Driving Improvement of Environmental Performance of Companies
producing small consumer products are at risk too. EnVol and Entreprises EcoDinamiques
(discussed in chapter four) are examples of localised schemes designed particularly for SMEs. A
Polish survey of 107 SMEs from the Clean Business Programme showed that improving the
corporate image is the second most important motive behind pro-environmental activities for 55% of
SMEs within the sample. The other main motives are the reduction of operating expenses (76%),
the desire to improve the surrounding environment (without economic incentives) and the need for
technology upgrades resulting from existing legislation (43%).106
The existing literature and studies discussed in chapter three focused primarily on measuring
impacts on reputation of large companies, hence strong empirical evidence supporting or rejecting
the above claim is missing.
Another circumstance where reputational incentives might work for SMEs is within the supply chain.
As discussed in chapter four, via supply chain pressure, large corporations can require their
suppliers to become “greener”. Similarly a “green” reputation can help a supplier to attract buyers.
For example, Labonne and Johnstone (2007) used the OECD database to indicate that EMS
certification is often also used to signal good intentions, and while large facilities target public
authorities, perhaps seeking to reduce inspection frequency, small facilities target supply chain
partners.
Supply chain pressure is likely to be a key driver of behavioural change for SMEs
From the interviews and the workshop discussion, it was identified that supply chain pressures are
likely to become a bigger driver in the future. As large companies start to require environmental
data reporting from their suppliers this will drive demand for reporting methodologies and provide a
real financial business incentive to become involved. If big companies are going to put pressure on
their SME suppliers or customers in the future, we believe that SMEs will have a hard time
complying unless large companies support them in achieving the respective goals. An empirical
study on attitudes and behaviours of 103 UK SMEs, supports this finding. Most SME
owners/managers stated that the inclusion of social and environmental requirements as
preconditions to supply would increase their motivation to engage in CSR (82% for environmental
criteria and 55% for social criteria). However, a quarter would be put off tendering and 12% thought
that such criteria would be counter productive107.
Promising systems specific to SMEs have employed voluntary measures supported by
financial and administrative measures
Promising systems specific to SMEs have employed voluntary measures (e.g. knowledge
networks/business clubs) supported by financial and administrative measures (reduced regulation &
costs, grants, technical advice, audits etc.). Regarding the best combination of incentives for SMEs,
the interviewees expressed the view that the best combination is a mix of financial and regulatory
incentives.
An example of good practice is the voluntary agreement in Finland (administered by Motiva Oy) set
up for the implementation of the Energy Services Directive where companies commit to saving
energy, by drafting specific action plans for energy intensive industry or SMEs, then report their
performance on a public knowledge hub where best practice can be shared. Companies that signed
up to the voluntary agreement then have an obligation to improve their energy performance, which,
in the case of SMEs, is complemented by a 50% subsidy to achieve energy saving improvements
106 PLANET SA and Danish Technological Institute (2010). SMEs and the environment in the European Union. 107 D A Baden, A Harwood, and D G Woodward (2009) The effect of buyer pressure on suppliers in SMEs to demonstrate
CSR: an added incentive or counter productive?
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through conventional technologies, whereas companies outside the scheme only get the subsidy
for implementing state of the art, more expensive, technological improvements.
On the other hand, through the interviews it was identified that in the Czech Republic only a few
SMEs participate in voluntary agreements since environmental performance is not their priority. It
was suggested that workshops and seminars might help increase the uptake of SMEs in voluntary
schemes. Voluntary mechanisms such CDP support this finding, results on CSP show that new
MSs have a response rate of below 15% with several of them giving no response at all.108 The
range of evidence provided in this study is not deep enough to offer specific geographical
approaches, in each case we would recommend working closely with local, regional and national
bodies to best tailor incentives to the local context.
SMEs are likely to favour incentives that reduce their administrative/regulatory burden
Lack of resources is a key issue for SMEs wishing to make environmental improvements.
Administrative obligations use up these scarce resources, hence SMEs are likely to favour
incentives that reduce their administrative/regulatory burden. Lessened reporting, inspections etc.
mean a business can spend more time and resources on its core business. Simplification of
administrative procedures for SMEs is also recommended in the Planet & Danish Technological
Institute (2010) study. Particularly in reference to EMS the study recommended that simple low-cost
systems, rather than more expensive and complex formal certification EMS should be promoted to
SMEs with low environmental impacts. The threshold for more scrutiny should fall on firms that
have larger or more serious environmental impacts, although these can also include SMEs.
Motivation of individuals, within companies, and consumers is the key to changing firms
behaviour and reducing their environmental impact
During the interviews and workshop it was pointed out that there is a need to understand the
importance of individual motivation (and behaviour change) to reducing environmental impact of a
company. This includes motivated individuals within companies, who can inspire all employees to
become more sustainable. It was also stated that raising the level of general consumer interest is
also important in getting companies interested, as increased consumer interest would convince the
companies that action is what their customers require.
5.1.3 Views on Sector importance to incentive success
Sectoral characteristics
To some extent drivers and incentives are common to all firms and organisations
There is an argument to be made that the underlying drivers and incentives for firms are common
across all sectors. Indeed, according to a recent study conducted by Ecorys on the
Competitiveness of the European Companies and Resource efficiency109, conformity with
regulations and competitiveness improvement, exemplified in cost reduction and improved
corporate image were the strongest factors that incentivised firms to improve their environmental
performance.
…but it is clear that sectoral characteristics can vary significantly and are important
Yet it is clear that there are important differences across sectors and these can affect which
incentives will be successful. The study referred to in the previous paragraph recognised this,
108 PwC (2010). Carbon Disclosure Project 2010. Central and Eastern Europe. 109 Available at http://ec.europa.eu/enterprise/policies/sustainable-
business/files/competitiveness_of_european_companies_150711_en.pdf.
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noting that a firm's position within the value chain is an important factor in organisational change.
The importance of sector goes beyond this, drawing in a range of factors relevant to the successful
function of incentives, including:
The environmental impact and risk (real or perceived) of a sector: can play an important role in
determining its responsiveness to certain incentive types, feedback received in consultations and
the workshop suggests that sectors with relatively low environmental impacts, such as professional
or financial services, are in general more open to all incentives. While sectors with higher
environmental impacts prefer more targeted incentives that take into account the specific risks and
feasibility of them improving their environmental performance. Related to this, it was felt that it is
more common for companies with higher environmental risk to have an EMS in place, e.g. around
half of firms in the chemical sector are certified to an ISO type standard, while this is perceived to
be much lower in the public or financial sectors. Incentives should take these differing sectoral
environmental hot-spots, risks and feasibilities into account, realising that not all aspects, i.e.
energy, water, waste, are equally relevant for sectors.
The regulatory context of the sector: can vary significantly and is often closely related to risk, for
example the chemical industry is subject to a much greater range of environmental and health and
safety regulation than the furniture retail industry. This can also vary significantly with the global
orientation of a sector, with those more export orientated having to comply with many more different
regulations from different countries, an example being the materials handling sector, the result
being that firms often opt to meet the highest regulatory standards, so that they meet all regulatory
standards they are subject to. This relation to regulation is important and drives diverse responses
to incentives, including, sectors subject to high levels of regulation creating their own voluntary
sectoral mechanisms to pre-empt and avoid further regulation, and also being more responsive to
administrative incentives.
The proportion of SMEs within a sector: the previous section noted how company size can play
an important role in determining the success of incentives. The distribution and importance of SMEs
can vary significantly across sectors, with some sectors having relatively high proportions of large
firms (e.g. utilities, extraction, chemicals and metals), while others have fewer larger firms and are
largely dominated by SMEs (e.g. construction). Incentives can be better designed and implemented
on a sector basis, understanding the balance between large firms and SMEs in a sector and then
taking the points raised on company profiles into account on this basis, with for example, firms with
a concentration of a few large players being more responsive to a published rankings/rewards
system, than a sector with a much higher proportion of SMEs that would respond better to free
support and regulatory measures.
The closeness of a sector to the public as a customer: sectors vary in their main customers, not
all sell to the public, many will have other sectors and firms as their customers. This changes the
way in which these firms respond to reputational incentives. The example of the food and drink
sector was given for a sector that is highly sensitive to reputational incentives, as public perception
is vital to their products. This was seen to be less the case for other sectors, such as oil and gas,
where regulation or economic incentives were more important in driving change. For firms further
from the public, for reputational incentives to take effect, it is important to have good stakeholder
dialogue and inter-firm cooperation. In general for these types of firms administrative and economic
incentives can be better recommended.
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Advantages of applying incentives on a sectoral basis
Very strong support for sector-based approaches among stakeholders
It was clear from all the literature, consultations and the workshop, that there was strong support
from stakeholders for sector-based approaches to incentives and particularly the footprinting
mechanism. The root of this was to re-assure firms that they would not be unfairly compared, e.g.
comparing the footprint of a pharmaceutical firm and a bank, would not be fair on the
pharmaceutical firm as it naturally has a higher footprint.
It is fairer to benchmark firms with similar firms in their sector
The idea of a benchmark as a basis for awarding or scaling an incentive is useful in design and
implementation as it provides something to measure performance against, to judge if firms are
good/poor performers and if they are improving faster or slower than average. Developing from the
first point there was a clear sense that any benchmarks should be set at the sectoral level to
provide a fairer measure of firms performance and efforts. Stakeholders saw a crucial role for
sectoral organisations in developing these benchmarks through providing tailored guidelines,
support and advice. It was noted that the construction sector is already quite active in these terms
and also that the complex supply chain in the food and drink sector may make it more difficult to
implement.
Benchmarks are already successfully deployed and used in certain sectors, for example in the
aluminium industry a league table of energy use in smelting is a much used comparator for firms,
who monitor their ratings and target improvements. There remains some debate over the extent to
which individual benchmarking is supported by firms, with the evidence suggesting many firms are
reluctant to be compared in this way as it could give away competitiveness information and also
reflect unfavourably upon them. One suggestion to overcome this is to report sector averages only,
though this would appear to only be of limited usefulness in incentivising company level
improvements.
A sector-based approach can be more effective
In addition to being felt to be fairer, evidence from DEFRA in the UK also suggests that a sectoral
approach may be more effective as it overcomes some of the difficulties in comparing firms across
unrelated industries. The similarity of firms in sectors makes them easier to compare and helps
reduce the distortions created by incentives that differ considerably across sectors. One condition
for a successful sector-based approach is that the approach taken must be relevant to the sectors
in question, i.e. looking at aspects, measures and indicators that are meaningful to it. For some
particular sectors typical LCA indicators have already been suggested.
The development of targeted incentives for sectors is part of this, examples suggested include use
of measures such as green certificates or labels, in the waste industry to help stimulate demand for
products made from recycled materials and to increase resource efficiency.
It can take supply chain effects into account
Incentivising environmental improvement across the value chain is important for overall
improvement. A sectoral approach brings a natural focus to firms along value chains. Incentives
that work along value chains can be highly effective in some sectors, i.e. sustainability assurance of
soya and palm oil suppliers has been incentivised by consumer pressure being passed onto
farmers by retailers. At the same time there can also be other over-riding factors at work, for
example in the food and drink sector sustainable procurement is increasingly important, but
purchasing is even more reliant on supply, which is dependent on yields which can vary for
numerous reasons, such as weather or conflict. Economic and reputational protection is closely
associated with firms being incentivised in this way.
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Limitations of sectoral approaches
While a sector-based approach has advantages and widespread support among stakeholders there
are also some drawbacks and dissenting voices, these include:
Some firms prefer voluntary schemes
Voluntary schemes can provide interesting incentives at a sector level, and firms can be keen to
use voluntary measures as a way to head-off mandatory regulation or other measures, as is seen in
industries such as non-ferrous metal production and voluntary schemes to reduce emissions to air.
This type of sectoral approach has limitations, including that it only applies to the firms willing to
engage with the scheme and is often much more loosely interpreted and/or enforced than a
mandatory scheme. These types of incentives remain popular in more resource-intensive industries
with higher environmental impact, and therefore higher ‘regulatory risk’. They are also popular in
some less resource-intensive sectors as they can provide a simple way to improve reputation while
often requiring little action.
…others prefer no new action, for reasons of feasibility and relevance
Some firms are simply not yet interested in changing or improving their performance. Other
limitations include technology limitations, i.e. that it is no longer technically (and economically)
feasible for firms to further improve their environmental performance. Lack of relevance of
incentives was highlighted in the materials handling sector with a view that incentives to encourage
EMAS registration were irrelevant as the industry has a major global export element and EMAS is
not known globally, firms therefore register with ISO14001 as this is more visible.
Differences exist both within and between sectors this can lead to harmful comparisons
Sectors can also perceive, particularly in the case of reputational incentives, that incentives can
over-simplify certain issues, and exclude others. This can lead to harmful comparisons and
conclusions being drawn. It was proposed that industry should be involved in the development of
incentives and indicators to avoid these issues, although it seems inevitable that some cross-
sectoral comparison would be carried out which will, without an understanding of the context, reflect
poorly on resource-intensive sectors. This points to a tension at the heart of incentive development:
that incentives need to push and pull firms to change their behaviour, to something they have not
already chosen to do themselves; but that there is also a need to accommodate wider business and
economic issues to be successful.
Focus on specific sectors may lead to less action in other important sectors
The launch of incentives targeting specific sectors is time consuming, this typically results in a
phased approach to their introduction. It is likely that the launch of incentives on this basis would
target the sectors with the largest environmental impact or most potential for improvement. This is a
logical step but does run the risk that certain sectors will receive little attention.
Summary
It is clear that sector-based incentives can play an important role in improving company
environmental performance and can help overcome the concerns expressed by firms relating to
how an organisational environmental footprint would be implemented and results presented. In
doing so it is important to note the particular characteristics of sectors and how this should affect
incentive design. Equally, it is important to recognise the limitations of a sectoral approach.
A further aspect that remains important is that sectoral situations in terms of economic
competitiveness and regulatory challenges remain among the key driving factors for action.
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5.1.4 Level: views on incentives and their level of implementation
The geographic and policy level at which incentives are implemented is an important factor in their
success and the recommendations that will come from this study. The incentives profiled earlier in
this report were positioned across the various levels from international, EU and national, to regional
and local. This section presents a discussion and brief analysis of the views from stakeholders and
the workshop.
Global basis important for consistency but limited practical application for incentives
Stakeholders stressed that supply chains are increasingly global and that this may provide a basis
to develop incentives internationally. The benefit of this would come through positive effects across
the whole supply chain in firms in all countries.
The international dimension was valued most highly by large firms. Their primary advice was for
work in this area to have international consistency with alignment with ISO certification being the
example put forward by multiple stakeholders, Concerns were also raised about international
comparability due to differences in the rigour of enforcement and verification between countries.
The role of the EU
Important role in setting and harmonising standards
Overall, it was agreed among stakeholders that the EU does play a vital role in setting and
enforcing standards throughout the environmental reporting chain. It was clear that there was a
strong fear that leaving this to Member States would create distortions across Europe as each
focused on different things to different extents. The varying take-up of EMAS and ISO 14001 was
quoted as an example of this, as there have been very few incentives in some Member States for
companies to achieve EMAS, while in others various projects and tax reductions were in place.
Stakeholders representing more international companies demonstrated a clear preference for
harmonisation at the EU level, as they saw leaving incentives to Member States as having the
potential to raise barriers to trade or to increase their administrative and compliance costs. Several
stakeholders also stated that leaving incentive schemes to the discretion of MSs is likely to create
distortions in the EU internal market, as MSs will unevenly address this issue.
It was also felt that the Commission, by working with larger firms first, played an important role in
helping improve environmental performance as these firms passed pressure down the supply chain
to SMEs.
EU responses not always coherent
Criticism was made by stakeholders on the lack of clarity at EU level, with some feeling that certain
issues were not coherent across all Commission policy areas or Member States. An area of specific
concern was a perceived lack of alignment between DG ENV and DG ENTR in their policy actions.
Overall this lack of coherence was felt to discourage the creation of incentives to improve company
environmental performance. As a result actions become focused on quick wins, short term policies
and strategies, often with mainly reputational impact (in contrast to real environmental impact).
The role of Member States
Vital to implementation in terms of finance and enforcement
It was clear from the discussions that Member States were also valued and required to play a
continuing role in improving firms' environmental performance. This was most closely associated
with implementation of incentives and supporting regulation and policies. While the EU and
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Commission were seen as providing a higher-level framework, the Member States themselves were
viewed as vital to actually financing most incentives and for their enforcement.
More effective than EU action as more adapted to national culture and institutions
The point was raised that the effectiveness of an incentive is closely related to the context it
operates in. With MSs all having different starting points, cultures and institutions the need for, and
impact of, incentives can be significantly different. Because of this it would be more effective for
implementation of most incentives to be carried out at Member State level as this would adapt them
to the national situation. Equally, similar arguments could be made for implementing incentives at a
regional or local level.
A ministerial official felt strongly that incentive schemes should be implemented at the Member
State level for these reasons, i.e. that conditions for implementation, politically and institutionally,
differ significantly across Member States, and this should be reflected. An example would be the
different business environment and culture in the new Member States, e.g. Czech Republic or
Slovakia, in comparison to Western Europe. The resulting divergence of requirements for
multinational companies operating across different MS was felt to be a relatively minor issue, to
which firms could relatively easily adapt. The role of the EU was seen simply as an institution to set
up the basic rules.
Differences between Member States
A variety of differences were perceived between Member States, some reflecting existing
preconceptions and expectations of an East-West, Old-New Member State divide, others not,
others overlapping across regions, these include:
Western Europe: being among the best performing and most aware of environmental
performance. With some of the most mature markets for sustainability reporting, particularly the
UK, Germany to a lesser extent and France some way behind but rapidly improving. At the
same time, firms in this region were among those most critical of the regulations that brought
this success, claiming the additional costs reduce their competitiveness;
Central and Eastern Europe: being perceived as only doing the minimum in terms of
environmental performance and sustainability reporting;
Nordic Countries: being perceived as the most mature markets for environmental performance
and sustainability reporting. Being more inclined towards voluntary agreements as they have
shown better results than regulation;
New Member States: being perceived as rapidly improving and subject to same directives as
all MS but also that implementation and enforcement lags. Some exceptions to this, in specific
forward looking companies, were put forward.
In comparison to other countries or regions a consultee working with investors and sustainability
reporting commented that the EU was the leading market in the world with North America lagging in
this area.
Summary
There should be greater clarity on roles of EU and Member States in this area
The feedback received was clear that there should be greater clarity in the role of the Commission
and the Member States in relation to environmental performance.
It may be better to focus on an EU framework with MS implementation
It was perceived that the EU should play an important role but that this may be better at a higher
level than Member States, particularly in providing a framework for action and a co-ordinating role.
The structure of the EU is better suited towards the Commission working towards uniform
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standards and concepts across Member States, while leaving the details of implementation to
Member States, and lower governance levels, so that national and local situations can be taken into
account. Part of the benefit of this would be due to the type and structure of incentives being only
loosely considered at MS level, therefore an EU-level framework would help share strategic and
policy knowledge to develop better incentives mixes. An EU framework needs to be flexible enough
to allow for differences between countries, but also standardised enough (and implemented
sufficiently well) to ensure a level playing field for businesses.
Some stakeholders felt that a further role could be foreseen for the EU to oversee self-regulatory
incentives, and indeed that it has a role to play in more effective enforcement and take-up of
existing incentives.
Rationale within single market, need for common standards and less short-term thinking
The rationale for EU involvement was centred on the need for consistent incentives and standards
across the EU, which is in line with the single-market and reduction of barriers to trade objectives.
Harmonisation of incentives and reporting across the EU was felt to be desirable, although reaching
this state was recognised as being a complex process.
The Commission, with targets working toward objectives 20-30 years in the future was felt to be an
important asset as others think in shorter terms. For example national politicians generally only
focus on the next 3-5 years, businesses on the next 3-4 years in terms of financial payback and
profitability and individual consumers typically thinking on a timescale of a matter of days. The
longer term view of the Commission can therefore form a counter-balance in terms of its policy and
spending, which can be used to incentivise behavioural change.
Avoid duplication and fragmentation of incentives, regulations and rules
Duplication and fragmentation of incentives, regulations and rules was seen as a particular danger
if MSs pursued this issue without a framework or co-ordination role for the Commission. There were
strong fears that this would add to administrative burden and create a ‘jungle’ of options and rules
for firms to navigate in each MS.
This type of danger was already pointed to in terms of labelling and carbon footprinting where a
plethora of competing schemes had emerged and this generally served only to confuse the firms
and end consumers. This has an impact upon credibility, with each new scheme reducing the
credibility, and accessibility, of all. This was seen as an area where the Commission and/or
Member States could play a vital role, in protecting credibility, introducing standard methodologies
and processes that are more trusted and reduce the potential for ‘greenwash’. The biggest practical
issue being the difficulty in getting all the existing schemes to conform to new rules, as many will be
beyond EU influence and there remain issues of debate in the methodologies.
Specific measures
A variety of general and specific measures were proposed related to the level of implementation of
incentives, these include:
Address environmental risks everywhere: government schemes and initiatives often lag
behind what is being done and achieved in the private sector. According to DEFRA, modern
supply chains are truly global in reach and structure, therefore environmental risks need to be
addressed everywhere simultaneously to be effective. Otherwise, a risk of
exporting/externalising polluting activities as opposed to taking responsibility and acting to
minimise them exists;
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Maximise benefits from existing EU programmes: the Commission funds a variety of
programmes and activities which could be adapted to more clearly incentivise desirable
environmental performance by companies. This is an opportunity that is not yet fully exploited;
Introduce EU-wide public procurement standards: public procurement is a very important
part of all major economies, introducing EU standards will avoid ‘local-level’ and other standards
that do not provide adequate incentives for firms to improve their environmental performance.
This would reduce the variations in procurement that firms face and, if carefully designed, could
help reduce bureaucratic procedures. EU guidance in this area already exists;
EU to provide footprint methodology and guidelines: this was perceived by some as a good
initiative, with the EU the appropriate body to bring it forward for common understanding. The
methodology should be clear, transparent, robust and also align, as far as possible, with
existing schemes and standards such as ISO;
An EU footprint scheme accepting existing certifications as evidence: to gain an influence
on introduction an EU scheme should look to provide recognition of achievements made under
other schemes and methodologies, to increase uptake and reduce the additional burden – in
application or verification – for firms. This could be applied across some or all of the footprint;
Setting national environmental footprints: the Commission could take a more radical
approach, setting national environmental footprints for each member state, based on something
like national GDP/environmental footprint. A high level approach of this type, aligned with
suitable incentives schemes, could drive business behaviour that generates economic growth
whilst minimising the environmental footprint of activities. There is a danger that this type of
accounting would unfairly discriminate against more resource intensive sectors.
5.2 Barriers
As with all policy measures, there are a range of barriers that can slow down or stop the effective
uptake of incentive schemes. Some of these barriers include cost of implementation, lack of
information, first mover advantage/ disadvantage, incompatible investment horizons, supply chain
issues, ingrained practices and personal attitudes to change. The key barriers or challenges for
companies to improve their environmental performance according to the stakeholders interviewed
are summarised in the following table:
Table 5.3 Key barriers for companies to improve their environmental performance
Barriers Why
Financial cost The high costs of environmental behaviour change are seen as prohibitive
particularly in the era of economic downturn, since companies, particularly
SMEs lack resources. Particularly for more capital intensive sectors higher
sunk costs can be an issue.
Perspective that benefits show
only in long-term
Companies as well as politicians make decisions on a short-term (3-4
years) perspective. This is a barrier for many investments that improve
environmental performance since the perspective among the market
participants is that benefits usually materialises only in the long-term. As
mentioned in section 3.2.2 on the barriers, many environmental measures
have a payback period of between one or three years.
Lack of targets/standards The lack of any universally accepted standards mean much of what is
reported today is perceived as greenwash. Greenwash 2010 report
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Barriers Why
suggests that only 4.5% of all environmental claims made are actually
robust, in that they do not fall into any of the 7sins of green washing110
.
Understanding environmental
risks
Understanding what a company’s environmental risks are is a challenge, as
is the cost involved in identifying and understanding these risks. Research
suggests that this initial cost barrier is outweighed by the efficiency related
savings that stem from this original investment in understanding their
environmental impact more fully.
Economic crisis Global market pressures are currently the biggest challenge; the current
economic crisis is forcing down costs throughout industry, making additional
environmental spending/investment difficult. For example, during an
economic crisis, the companies tend to invest more in the production side,
i.e. to increase their volume in the short-term, rather than to invest in
changes whose benefits will show only in the longer term, e.g. 10 years.
This holds for many investments that improve environmental performance.
Large scale of supply chain In addition, the understanding and scale of the supply chain poses
challenges. With large supply chains it is difficult to differentiate between
what they are doing and what they should be doing. There is a massive
amount of data to be collected in order to actually know how the suppliers
are performing. Only then can the buyers look to guide suppliers’ activities
that impact upon the environment.
Over-regulation/regulatory
uncertainty
There was a division in opinion among stakeholders on the need for
regulation. According to some stakeholders, too much regulation is making
the business environment unstable and creates an administrative burden.
This holds for large companies as well as SMEs across different Member
States. Over-regulation was seen as creating obstacles for international
competitiveness of companies and SMEs generally struggle to keep up with
all the legislation. Moreover, regulatory uncertainty is seen as a handicap
for decision-making. This discourages investments in industry and could
possibly lead to migration of the industry or its complete closure.
International competition One of the obstacles identified is the international competition, i.e. over
performance of European products. This has impact on the pricing of the
bids.
Lack of public interest in
environmental issues
If environmental issues are not a priority for companies and the general
public, companies do not see a real reason to improve their environmental
performance. This is another obstacle for improving environmental
performance.
It is interesting to note that ‘regulation’ has been identified as a driver of behavioural change to
improve company’s environmental performance as well as a barrier. The reason for this double role
might be the interplay between the different drivers and barriers, which on the one hand require
push from the ‘regulation’ while at the same time such ‘push’ creates regulatory burden.
The majority of barriers identified during interviews are in line with the theoretical findings discussed
in section 3.2.2. We found evidence in the literature that financial factors can be barriers to
organisational change. Similarly, the literature stated that access to information, lack of knowledge
and the complexity of assessing indirect impacts are all barriers to improving environmental
110 Terrachoice (2010). The Sins of Greenwashing.
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performance of companies. During interviews the problem of understanding environmental risks
has been identified as a key barrier. Furthermore, economic uncertainty, such as around taxes,
interest rates and exchange rates generally influence companies’ decisions negatively. Consumers
have been identified by the literature as another barrier for change since consumer’s purchase
decisions are largely based on the product price, even though this trend is changing.
Perverse incentives
Whilst the original objective of an incentive scheme may be well understood, predicting its impacts
and effects post introduction is often much more difficult. Unintended consequences of incentives
can include perverse incentives that can alter markets in unusual and unpredictable ways. The
introduction of the EU’s Biofuel Directive111 was meant to support a fledgling industry that would
help decarbonise our transport sector, however few foresaw the impact it would have upon
increased staple food costs through the increased demand it created. Similarly, incentive schemes
that reward the number of call outs fire department make can actually reduce their fire prevention
activity and lead to an increase in the number of fires112. To avoid similar unintended consequences
and perverse incentives, effective early stage policy research and in depth impact assessments
should be completed as a matter of course.
5.3 The role for a common methodology for organisations environmental footprinting
Throughout this study of incentive schemes, types and their optimal mix of application, we have
continually returned to the question of their applicability to the common methodology for OEF. We
repeatedly questioned stakeholders, interviewees and workshop participants about the role for a
common methodology for organisations' environmental footprinting and its implications for incentive
design. The general consensus was that the common methodology is a good idea, as it has the
potential to reduce a range of environmental reporting success factors previously identified (i.e.
simplicity, transparency, trust, external verification etc.). A wide range of drivers, challenges and
policy design suggestions emerged from the study. These are discussed below, while some of the
more methodology specific issues of wider interest, but not to the discussion of incentives, have
been moved to Annex C.
Challenges for the common methodology and OEF within an incentive framework:
Harmonisation with existing schemes – transparency of methodology will be a crucial issue,
as will its compatibility with existing schemes such as ISO and other global standards. The
proposed methodology must complement, and not duplicate, existing schemes and standards.
Convincing the various standards to share a common methodology may prove challenging due
to vested interests and this is likely to be outside of the control of the EU;
Complexity - methodologies can be complex and data collection time consuming. This would
be particularly challenging for SMEs, who have complained that even EMS implementation is
overly time consuming and administratively expensive, this could diminish or negate the cost
benefits of economic or administrative incentives;
Cost – related to the complexity of the methodology is the associated cost. Challenges of such
a methodology would be cost of accreditation and data collection required to complete a
company foot print, it is likely to be a resource intensive process. This expense may be an issue
for SMEs. Therefore, financial benefits need to be clearly articulated from the outset;
Non-level playing field – the environmental performance of companies within the EU and the
level of support they receive, differs significantly throughout the EU. Different MSs have
111 Directive 2003/30/EC. 112 UK DCLG (2002). Fire and Rescue in local government finance formula grant distribution.
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different starting points in their journey to sustainability; this will impact upon the effectiveness of
incentives within their country;
Utilising public procurement spending - public procurement (PP) incentives could have an
important role to play in driving uptake. If common PP standards were set, associated with the
common methodology framework, this could unlock a significant commercial driver for uptake.
Local procurement standards should be avoided, as these are likely to support protectionism
and inhibit free and fair competition;
5.4 Incentive mixes
Drivers and barriers, and the incentives that influence them, do not exist in isolation. They are part
of a wider economic, social, environmental, policy and regulatory web. The way these factors
interact, the ‘mix’ that exists is important to the outcomes that are achieved.
Mixes of incentives are particularly useful for addressing environmental issues, as pollutant
releases can vary spatially, temporally and be caused by a range of different activities and actors,
each requiring a different approach. Furthermore, well designed mixes of incentives can mutually
underpin one another by enhancing the effectiveness and efficiency of each other. This is the case
in certain labelling schemes which have been found to enhance the effectiveness of environmental
taxes, whilst that tax has also led to increased uptake of the labelling scheme113. Mixes of
incentives have also been found to be useful in limiting compliance cost uncertainty, strengthening
enforcement and reducing administrative costs114. This OECD research also highlighted the
flexibility of using a mixture of incentives and the importance of designing complementary schemes
to be mutually enhancing. Where this is not possible, incentive mixes of overlapping instruments
should be avoided; as they can dilute each others effectiveness and create unnecessary
administrative costs for business.
There has not been much evidence found in the literature providing insights into incentive mixes.
The environmental aspects covered by current environmental legislation are very broad and a
proper analysis of what additional steps should be taken within an organisational environmental
footprint initiative would require an in-depth analysis of the legislative framework, the analysis of
gaps, and the potential of incentives to fill these gaps. We tried to fill this gap in the literature using
stakeholder consultations and workshop. However, the majority of stakeholders did not provide any
concrete view. The examples below show the opinions of the few stakeholders who did have an
opinion.
Examples from stakeholder interviews
“According to DEFRA in the UK, the business world is too diverse to apply a ‘one size fits all’ approach;
hence there is no ‘optimal’ mix of incentives.”
“Incentives mixed with existing regulatory measures might work according to a stakeholder in the food and
agricultural industry. For example, some areas of the business, e.g. rapeseed for biofuel production, have
also benefited from regulatory measures such as the renewable energy directive. Their experience
suggests that voluntary measures are usually the most flexible and therefore can generate the fastest
results within industry.”
113 OECD (2006). The Political Economy of Environmentally Related Taxes. 114 OECD (2007). Instrument Mixes for Environmental Policy.
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“A company within the materials handling industry stated that softer instruments would be better accepted
by industry since hard legislation that affects whole environmental footprint would not be helpful. Lack of
coherence, double legislation, or contradictions have been identified as significant disincentives.”
“According to CDP, since companies have financial reporting requirements, it would be useful to integrate
environmental reporting with these.”
Incentives mixes for environmental footprinting
Given the lack of literature or stakeholder views on this issue we have formulated our own
approach to it. Our approach to considering how any new incentives associated with the proposed
environmental footprinting methodology could work alongside the existing policy framework has
been as follows:
1. To consider (at a high level) the existing body of legislation, measures and other policies /
schemes / charges by environmental aspect (i.e. air, water, waste, soils, energy). To summarise
the ways in which the behaviour of the relevant actors is currently intended to be controlled and
influenced. The priority sectors, in terms of the source of the majority of the pollution, for each
medium are also briefly described;
2. To consider how compliance with this existing body of legislation, measures and other
schemes, and environmental performance in a more general way, could be enhanced by the
application of the proposed environmental footprinting methodology. Also to highlight any
potential contradictions or problems. This approach is intended to provide an additional way of
considering how policy in this area could be developed. The intention is to illustrate how
environmental footprinting (and related incentives) could be used to address the objective of
improved environmental quality in each of the aspects. This is considered useful because most
environmental policy making can be classified in this way.
The following table provides a short summary of some of the major policy links by environmental
aspect and the potential links to an OEF initiative. It is far from comprehensive given the raft of EU
and national legislation in each area and the high number of possibilities to link to incentives and
OEF. In each case it attempts to give a few examples of how links could potentially be made and
the considerations needed.
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Table 5.4 Potential for incentives related to OEF to sit alongside the current regulatory framework - by environmental aspect
Summary of current situation Examples for opportunities / issues for OEF and incentives
Air
Existing regulatory framework:
Legal limits on certain emissions. Long history of
regulatory control. Detailed systems of emission
control, monitoring and reporting backed up with
site inspections. Certain processes outlawed.
Some obligatory end of pipe clean up measures.
Opportunity for risk-based incentives: opportunity for incentives to reduce administrative burden of compliance for companies proving
good environmental performance (or, in the absence of sectoral benchmarks, of relevant / relative improvements), on the assumption that
well managed sites are less likely to break rules, and therefore can be inspected less frequently; A risk-based approach.
Risk of ‘greenwash’ needs to be considered: risk of 'greenwash' if footprinting is used by companies to report meeting legal obligations as
'good' performance – footprint design and scoring needs to consider this and incentivise behaviour to go beyond compliance with better
scores..
Other policies / schemes / charges:
EU Emissions Trading Scheme (ETS);
Low emission zones (restricting vehicle access
to zones base on vehicle type and / or air
quality).
Economic incentives already in-built to EU ETS, very difficult to adjust: economic incentives are built into cap-and-trade systems such
as the EU ETS, therefore it is difficult to build a direct incentive link to footprinting as this would imply adjusting emissions caps or access to
permits, which would be complex and risk weakening the whole system.
Potentially improve reputational incentive effect: the most logical link is through reputational incentives putting more stress on how
emissions performance under ETS is satisfied, i.e. publicise companies that need to purchase additional permits as they have performed
environmentally poorly – this would need to be judged carefully using appropriate sector benchmarks.
Other ideas for links: the following potentials could be imagined:
Use OEF as a basis of a non-carbon emissions trading scheme/ extend current emissions scheme to other aspects than carbon;
Use OEF to include life cycle carbon performance into current legislation;
These types of incentives could be funded from public revenues from trading which are already earmarked for projects to improve carbon
performance.
Low emission zones already incentivise improved performance: in most cases by exempting environmentally friendly vehicles from the
restrictions. Companies that invest in these vehicles will see economic and reputation benefits from this.
Emissions to air could be linked to sustainable and responsible investment (SRI) market: Additionally, GHG emissions are already an
established element in investors that participate in the SRI market. There is potential to enlarge the evaluation of risks to life cycle impacts
and more impact categories through OEF.
Target / priority sectors:
Electricity generation – large companies;
Transport – wide mix, from large companies to
individuals;
Buildings – wide mix from large companies to
individuals.
Energy: Narrow margins, technology lock in and high cost of abatement make behaviour change beyond simple compliance difficult..
Already a wide range of reporting commitments and information available. OEF could assist the development and market attractiveness of
cleaner energies and well-performing energy providers by taking supply chain performance into account (which includes energy supply).
Transport: Wide scope for behaviour change with regards to emissions to air from transport, to achieve improvements in emissions beyond
compliance. More knowledge through the OEF (and later on, through OFSR) can help policy makers and companies in the sector to
intervene at the right life cycle stages.
Buildings: SME-specific incentives might be particularly relevant in the building sector, but would require the availability of simplified
approaches.
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Summary of current situation Examples for opportunities / issues for OEF and incentives
Water
Existing regulatory framework:
Statutory limits on the (public) water companies
on treatment of effluent and on industries who
discharge into sewers and watercourses. Well
developed regulatory compliance – monitoring,
reporting and site inspections;
Some substances banned;
International – river-basin level management is
relatively new..
Several impact categories of OEF are related to water, hence direct link;
Clear potential to link to administrative incentives: potential for environmental reporting to reduce administrative burden and cost of
compliance.
Potential to drive towards better performance in water-using sectors: incentives could underpin this by providing e.g. grants or soft
loans and other economic incentives for systemic improvements conditional to the use of OEF to track performance.
Link to investors is possible: investors taking into account water performance could also play a role given the increasingly recognised risks
related to water scarcity and quality. OEF (and even more usefully, OFSRs) could be used as a basis for assessing this risk.
Other policies / schemes / charges:
Discharge costs to companies usually reflect
level of pollution.
Improved performance already rewarded financially.
Potential links to OEF for all incentive types: OEF could be a tool to take into account life cycle performance for product portfolios with
water-intensive supply chains. Administrative, economic and reputational (given the increasing visibility of water scarcity and quality issues
around the globe) incentives can be effective means to reward companies considering and improving life cycle performance.
Target / priority sectors:
Utilities – often linked (either still or in the past)
to the regulator;
Industry – diverse range of enterprises and
sectors;
Agriculture.
All: capital intensive nature of improvement, long history of regulation, monopoly nature and pressure on margins make improvement beyond
compliance difficult – economic incentives could be used to bridge these difficulties, OEF being a potential means for identifying key areas of
intervention;
Agriculture: most agricultural enterprises are SMEs, which means that incentives need to offer rapid returns with low barriers to
participation. Any additional incentives need to take into account incentives already given through the Common Agricultural Policy (CAP).
Waste
Existing regulatory framework:
Legislation on the disposal and treatment of
waste - limits on landfilling, legal limits on certain
emissions from incineration, waste from
consumer goods (e.g. WEEE directive).
Strong life-cycle link between OEF methodology and waste: the OEF methodology focuses on impacts of activities along the life cycle,
therefore the waste phase is also taken into consideration, through its contribution to impacts such as eco-toxicity. A formula for taking
recycling into account is included.
Economic incentives can and are being successfully used, links to OEF could be made: economic incentives, such as for example
landfill tax or shifting tax burdens from labour to resource aspects could result in increased re-use and recycling. This could potentially be
linked to OEF footprint scores in a waste aspect.
Other policies / schemes / charges:
Promotion of waste prevention, recycling, re-use.
Target / priority sectors
e-waste, recycling.
OEF could be used with reputational and grant incentives to track performance: reputational and grant-type incentives could play a role
in rewarding companies that improve their waste performance throughout the life cycle and enable larger projects in this area. For this, OEF
can be a tool for differentiating between levels of performance and tracking improvements.
Consumer pressure: could be used by communicating this information on products (e.g. through a label). For this, the product
environmental footprint method should be used.
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Summary of current situation Examples for opportunities / issues for OEF and incentives
Land
Existing regulatory framework:
Most of relevant land use regulation is within the
renewable energy regulatory framework;
CAP reform.
Significant potential for improvement and links to OEF, limited knowledge at present: knowledge base on land use needs to be
developed. Land use is one of the impact categories of OEF, hence highly relevant for incentives within this policy initiative.
Regulation and spatial planning has a crucial role: in managing development and land-use in a sustainable way.
Other policies / schemes / charges:
Urbanisation, agricultural intensification,
agricultural land, sustainable management of
land
Link to point above.
Need to co-ordinate with other policy areas: in areas of spatial development, agriculture, urban redevelopment, land remediation.
Target / priority sectors
Developers, planners, remediation of
contaminated sites;
Address the indirect land use change from the
renewable energy policy.
Economic incentives such as land-based taxes are appropriate: to incentivise more efficient and environmentally friendly land use.
OEF can be effective across all sectors in accounting for these indirect impacts such as land-use: OEF is the appropriate tool for
taking indirect impacts into account for any production process.
Soils
Existing regulatory framework
Developing area in agriculture – also linked to
water and biodiversity/habitats;
Contaminated land / industrial legacy.
Soil directive planned for 2013.
OEF will incorporate soil aspects: impact categories under OEF reflect also relevant issues in this area (e.g. terrestrial eutrophication,
aquatic eutrophication).
Hard to frame incentives as very little EU regulatory context present: development of soil directive should clarify on this.
But attempts could be made to use incentives before regulation: taking a market-based approach and deploying economic incentives
could potentially achieve similar results to regulation.
Other policies / schemes / charges
Agricultural and biodiversity / habitat links;
Links to organic farming, which has independent
and national / regional licensing and reporting
systems.
Link to organic farming and reputational incentives: potential for environmental footprinting as an additional reputational enhancement
for organic farming and sectors relying on it. SME-specific incentives are particularly relevant. Complementarity with CAP needs to be
ensured for any new incentive introduced.
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Summary of current situation Examples for opportunities / issues for OEF and incentives
Resource efficiency
Existing regulatory framework:
Primarily product-based to date with some legal
requirements – e.g. energy labelling, ecodesign
– relatively short history – EU led - mixed levels
of monitoring and compliance between MSs.
Framework primarily product-based to date: the Resource Efficiency Roadmap and initiatives such as OEF can help raise the profile and
influence of company level resource efficiency as a driver.
Understanding that major, cost effective potential remains: as resource efficiency is a relatively new focus of policy and firms.
Links across all other environmental aspects: improvements in resource efficiency typically reduce pollution to the other mediums.
Current focus of policy development: as part of the Resource Efficiency Flagship, Roadmap and other initiatives, e.g. Critical raw materials.
Other policies / schemes / charges
Closely linked to energy saving targets – though
no clear legal basis to these yet;
Multiple voluntary schemes – many linked to
enhancing reputations;
Cost drivers are key and of interest to all
organisations and enterprises.
Economic benefits are already a key driver for activity in this area: further incentives could be developed and reporting / funding linked
to an OEF tool.
Existing incentives strongly linked to energy use and emissions, some risk of OEF duplication: company level reputational incentives
are already well developed, poses a risk that it will duplicate what other schemes already do;
Potential for OEF to trigger overall resource efficiency improvements by targeting interventions to where it most matters: possibility
for investors to take into account resource risks through OEF.
Relevant to all sectors and links to product environmental footprinting: could be used to influence overall consumption. Particularly
relevant to resource intensive industries.
Biodiversity / habitats
Existing regulatory framework:
Habitats directive, Natura 2000 and related
legislation – protected areas where certain
activities are controlled.
No direct link with environmental footprinting apparent: although reporting of additional information – including that related to biodiversity
– will be encouraged. This is an issue apparent across a range of monitoring tools..
Other policies / schemes / charges:
Fisheries and agricultural policy;
Numerous local, national and international
voluntary schemes.
Potential links to other NGO and industry incentives: could enhance existing schemes in areas such as agriculture, fisheries, but risk of
added complexity outweighing benefits, especially given SME nature of many companies.
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Many of the points which emerge from this analysis can be seen to echo the findings / conclusions,
from other parts of this work. For example:
Need for sector specific schemes - to avoid duplication of existing initiatives, to enable
tailored design, to better enable sectoral input into the design of schemes:
Need to add value to existing approaches - opportunity to utilise the footprinting approach
(particularly the methodologies) within existing schemes. For example existing reputational
incentives such as organic farming could arguably be enhanced by the addition of
environmental footprinting;
Risk of additional burden outweighing the benefits - for some sectors and mediums. For
example given the small size of many of the enterprises involved in organic farming adding
environmental footprinting could be a problem of additional burden;
Potential for administrative incentives in most heavily regulated sectors - for regulatory
regimes / sectors where compliance is felt by the companies involved to be administratively
‘heavy’ the potential for administrative incentives (which reduce the perceived cost / burden of
compliance) is significant. This is most likely to be the case in aspects with a long history of
regulation (e.g. companies emitting to air and water) as opposed to more recently regulated
areas, such as soil and resource efficiency. Because there is a larger body of formal regulations
already in place so incentives to reduce the administrative burden of compliance will be more
attractive;
OEF unlikely to have additional benefits to utility sectors - for public utility scale electricity
generation and water supply / treatment (key sectors for air and water quality) incentives
attached to environmental footprinting appear unlikely to bring additional benefits. This is due to
the long history of regulation, technology lock in, the unavoidable monopolistic nature of the
services (particularly for water) and the capital intensive nature of most potential improvements.
What can be also noted is that the different environmental resources are interconnected and the
potential incentives will address more than one environmental aspect. For example, when
considering reduced charges for companies registered under the Environmental Shipping Index
scheme (economic incentive), this directly influences air and water. Waste legislation is also
connected to air emissions via for example the EU Directive on the incineration of waste, which
prescribes limits on allowed air pollution from incineration of waste. Resource efficiency, as an
environmental aspect is a prior example of how the different elements are interconnected. This
complicates the design of optimal mix of incentives even more and the recommendations that can
be made in this area. ‘No one size fits all’ approach to incentives seems to be the approach the
European Commission should be taking, considering each incentive on a case-by-case basis.
5.5 Summary of Findings
The following outlines the main findings from Chapter 5.
Success Factors
The preceding chapter identified four subgroups of success factors in relation to business
environmental improvement incentive design: incentive design, company size, sector and level of
implementation. This approach is repeated below.
Incentive Design
It was a common theme among stakeholders, particularly from industry, that a one size fits all
solution will not be practicably feasible and that incentives that have a favourable impact upon
profitability should be pursued in the first instance. Other key elements for effective incentive design
include, clear targets, flexible approach, tangible short term benefits, creating peer pressure,
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utilising supply chain pressures, complementing existing regulatory measures, utilising brand image
concerns and developing and rolling out incentives in a phased manner.
Company Size
Incentive schemes tend to work more effectively on larger organisations, as they have greater
resources to respond to them. The three key drivers for large organisations are economic
performance, brand image and harmony with company goals. Some of the largest companies also
work beyond existing regulation with the best performing organisations often anticipating up-coming
policy developments. For large organisations reputational incentives also seem to be more powerful
drivers.
Incentives specifically aimed at SMEs need to contain the following four key elements: access to
clear reliable information, tailored technical advice and support, access to specialist skills and
access to finance. The role of officially recognised reputational incentives on a local scale was also
highlighted as an incentive design approach appropriate for SMEs. Supply chain pressure was also
identified as an important motivator that could be utilised to incentivise SMEs.
Sector
Whilst some drivers and incentives could apply across all sectors that have shared business
requirements, there is a strong feeling from stakeholders that the differences that do exist are
important and need to be taken into account when designing incentive schemes. Some of the main
factors identified for successful incentive design include; the environmental impact of a specific
sector, the regulatory situation within that sector, the proportion of SMEs within that sector and the
relationship between the public and that sector.
Some of the advantages of applying incentives sectorally include; accurate benchmarking and
comparison between participants, industry support for this approach, speed of implementation and
the speed at which incentives can drive change and improvement through a tight knit supply chain.
Equally, from a more neutral viewpoint there are arguments for a simpler blanket approach, which
is consistent and much less time-consuming to construct and implement. A balanced approach
between these extremes is recommended.
Level of Implementation
The level at which incentives should be implemented, geographically and in terms of policy level, is
another key feature of incentive design. Current global markets highlight the need for internationally
recognised schemes that have previously driven the adoption of some voluntary reputational
schemes. However, the EU does have an important role to play in harmonising standards and
guidance internally for MSs, but also in leading the way in developing internationally recognised
methodologies. There is also scope for improvement in the level of harmonisation of incentives
throughout MSs, although the differences between regions, old/new MSs and individual countries
should be recognised. For this reason many stakeholders in the study felt that implementation of
many incentives was best delivered at MS level, in line with EU guidance and best practice. Other
specific suggestions on EU implementation included; maximising the benefits of existing
programmes, introducing EU wide procurement standards, setting out clear guidelines and
standards, ensuring complementarity with existing certifications and schemes, and the setting of
national environmental footprints.
Barriers
The finding from this chapter highlighted a number of common barriers that currently hinder
companies from taking action to improve their environmental performance. These include many
barriers to company behavioural change including, financial cost of implementation, short financial
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horizons, lack of targets, lack of understanding of environmental risks, economic crisis induced
paralysis, supply chain complexities, international competition, lack of public interest and regulatory
uncertainty. None of these barriers are insurmountable and all can be transformed into
opportunities and mitigated through effective incentive design, as discussed below.
Common Methodology
One of the most striking features of this study was the support from stakeholders for the
development of a common methodology throughout the EU. This was identified as a means to
improve company understanding whilst increasing the credibility and comparability of organisations.
It also has the potential to harness customer behaviour to help drive rapid environmental
performance improvements within the EU, whilst also having a potential impact internationally.
However, its design and implementation are not without difficulties. Some of the main challenges
identified are the complexity of the process, the costs involved, the potential to increase
administrative burden upon organisations and the difficulties in harmonising it with the multitude of
existing schemes. Companies unwillingness to share data with competitors and the very uneven
playing field (in terms of environmental performance) that exists throughout Europe were also
identified as challenges facing the proposed common methodology. These features and
characteristics will be examined in more detail in the following chapter under policy design
considerations.
Incentive Mixes
In order to identify the type of incentive opportunities that might exist within the various
environmental impact mediums, a high level analysis of these (air, water, waste, land, soils,
resource efficiency, biodiversity and habitats) was completed to provide an overview of the current
situation and the opportunities for environmental footprinting to drive improvements in these areas.
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6 Conclusions and Recommendations
6.1 Conclusions
Based on the research as a whole, one of the most striking features has been the number and
variety of incentive schemes actually in operation. We identified over one hundred such schemes in
this study and these represent only the tip of the iceberg, in terms of what is out there. A further
aspect that was interesting was the alignment between factors in success and barriers as found in
the literature and mentioned by stakeholders, which showed that although the latter group was
often sceptical of the value of research in this area, that their findings and opinions tend to agree.
Following the structure of the research findings set out in previous chapters we can draw the
following conclusions relevant to answering the original research questions (see section 1.1).
On company environmental performance in general:
The actions of firms are crucial to EU environmental performance – companies are
increasingly interested in this and there remains significant potential to do more;
Increasing resource scarcity makes this even more relevant – as both environmental
impact and economic success are increasingly tied to firms decisions related to resource use;
Level of innovation and environmental performance tend to be linked – generally, firms
that adopt more innovative products and processes will experience greater environmental
improvement, though this is not always the case;
Organisational change is the result of a complex mix of internal and external drivers and
barriers - These differ by factors such as sector, firm size and competition.
In summary - Incentives work to enhance the power of drivers and reduce the threat of
barriers.
On incentives in general:
Incentives are increasingly being used - in addition to traditional regulatory approaches, and
the type of incentives under consideration are expanding from taxes and subsidies, increasingly
focusing on reputational incentives;
Regulation remains an important ‘incentive’ to many firms and sectors – it can be highly
effective and is an important part of the incentive mix although it is not always the most efficient
or effective way to achieve environmental improvements.
This chapter presents conclusions based on the findings in chapters 3, 4 and
5. It sets out the main findings on how and why incentives work to improve
company environmental performance and the lessons that can be learnt from
these. It finishes with a set of recommendations to the EU, MS and others on
how incentives could be better used to improve company environmental
performance and the implementation of an organisational environmental
footprint.
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Economic and reputational incentives appear to be the most effective elements in an
incentive mix – based on the incentive database and that they are most common and as
assessed below, most effective. Although administrative incentives have a role, this appears to
be limited, as a result of their implicit association with relatively complex regulatory regimes.
The process of behaviour change is complex and can start with small changes but lead
on to larger scale process changes – the behaviour of organisations changes according to a
dynamic interaction between internal and external drivers. Change can start with incremental
actions but can then lead onto larger scale, more systemic changes in behaviour.
Change is hard to recognise and classify without baseline data and measuring and
reporting such data is an important first step in changing environmental behaviour – it is
important to point out that a lack of knowledge on current performance levels amongst many
organisations makes it difficult to answer this question, since without knowledge of baseline
performance it is not possible to ascertain the scale and nature of any change induced. All
Environmental Management Systems begin with a data collection step, this is recognised as
being the vital first step in starting to improve environmental performance.
Well implemented Environmental Management Systems and incentives that judge
performance against increasing targets should help maintain and improve environmental
performance – although neither are a guarantee of good environmental performance, the
ongoing efforts that both of these require are one way of avoiding a response limited to one-off
actions.
Learning from Incentives in practice
Three types of incentives were defined in this study:
Administrative:
Administrative incentives are less widely used than economic or reputational incentives -
despite administrative burden being a major concern for companies;
Engaging firms is often the biggest barrier to success – administrative incentives often
have relatively weak take-up;
They are best applied automatically and/or linked to well known programmes – to
overcome low take-up linking to better known schemes, such as ISO certifications, is helpful;
Support for firms to meet thresholds or qualify for incentives is important – successful
implementation of schemes was often based on previous programmes providing information
and support to firms to meet the levels required for the incentive;
Links to Organisation Environmental Footprinting (OEF) through synergies in
measurement and as a screening tool – monitoring and other administrative reporting
requirements could see synergies with an OEF, with the same information being able to be
reused. Similarly, footprints could provide administrative authorities with an alternative measure
for thresholds or qualification for incentives.
Administrative incentives are unlikely to lead to systemic/ large scale one off
improvements because by their nature they are tied to existing legislation – those firms
most likely to be influenced by these types of incentives will have a long experience of operating
under a particular legislative framework, to which they will have developed a stable response.
Therefore, as a result of inertia and sunk costs, large-scale change is less likely to occur.
Economic:
Economic incentives can be a very effective element of an incentive mix – these are the
simplest and most logical incentives for firms and also the most common, simplicity and tangible
short term benefits are among the important factors in success;
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Reduced charges, taxes, subsidies, grants, soft loans, free support and access to private
funding were all successfully used – examples of successful use of these incentive types
were found, with the following useful lessons:
- Important design considerations for tax-based incentives include use of revenues
and disproportionate effects on some firms. It is important to consider and prioritise
recycling revenues from taxes back to the sector, potentially with a focus on rewarding the
better performing;
- Potential for more innovative use of tradable permit incentives, i.e. application outside
of just emissions to air, as is the case at present, and preferential funding schemes – both
could be used to incentivise improved environmental performance;
- Investment markets and firms remain quite short-termist – although improving, most
decisions are made on the basis of short term paybacks and rates of return. These criteria
make it difficult for decisions in favour of investments for improved environmental
performance, which deliver benefits over the medium-long term. Financial incentives have a
crucial role to play in overcoming this barrier.
There was less evidence for the success of sustainable procurement paths and reduced
insurance premiums – sustainable procurement appeared to be too complex for public
procurement officers to implement and ran up against pressures for reduced public expenditure.
The gap for insurance premiums is likely to be one of information rather than effect;
Larger firms tend to be more proactive – due to their investment and capital needs they tend
to take care to manage their environmental performance and reputation to ensure access to
funding and the protection of their reputation;
SMEs have a more reactive attitude to economic incentives for improved environmental
performance– because of this they are most often targeted by grants and soft loans. This is
successful and firms often go beyond simple compliance;
Tendency to target primary and secondary industries, not services – although many
economic incentives are applied evenly, most often they focus on primary and secondary
industries, primarily manufacturing. This can neglect some service industries that are also
resource intensive or have significant environmental impacts, e.g. tourism;
Economic incentives can be successfully employed at all levels - by their nature they are
most often deployed at a national level, though EU and sub-national approaches can also be
successful;
EU funding already plays an important role in economic incentives, but there is further
potential – the European Commission funds a number of programmes, such as FP7, LIFE+,
INTERREG and others, that inter-alia support companies in increasing efficiencies and
improving their environmental performance. Making this link to improved environmental
performance more explicit could be used to make further use of these funds;
Links to OEF through using economic incentives as a ‘foot-in-the door’ or as a screening
mechanism – beyond economic incentives simply helping firms to improve their footprint there
is potentially a role for incentives to be tied to the use of an OEF, i.e. that funding, grants or soft-
loans, etc; are tied to the calculation, and potentially improvement, of an OEF. Similar to
administrative incentives an OEF score could also be used as a screening mechanism to qualify
for incentives.
Reputational:
Reputational incentives have proliferated in recent years – these are present at all levels
and in many sectors. Part of the reason for this is that they are flexible, can be introduced at low
cost and provide a way for firms, most often voluntarily, to project a positive internal and
external image;
Reputation is among the most important and effective drivers for firms – feedback
received throughout the study confirmed this is something firms take very seriously and this has
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grown in importance in recent years. This allows reputational incentives to be used as both
‘carrot’ to provide rewards for improvement, and a ‘stick’ to punish poor performance:
- Power of reputational driver varies by company size – this is linked to the market that a
firm serves, larger firms are typically more responsive, particularly to national and
international rankings, SMEs can be less responsive but can also be driven by local and
regional reputation and incentives such as awards. Supply chain links can reduce the
difference between firms based on size, as firms apply pressures on each other;
- And also by sector – some sectors are much more reputation conscious, typically services
are more focused on this, but other sectors, such as food and drink are also highly
motivated by reputation. Some sectors, such as oil and gas, perceive reputation as less of
an issue than regulation or other drivers.
Cross-sector comparison of reputational incentives is the biggest worry for firms – there
is concern that comparing across sectors can be harmful as league tables or rankings often
don’t provide the context or take into account the specific resource intensity of a sector, leading
to unfair comparisons and resource intensive sectors being poorly ranked despite being
relatively good performers;
Factors in the success of reputational incentives include simplicity, comparability,
transparency, inclusiveness and their being well communicated – these are common
factors and criteria for the successful implementation of reputational incentives. Incentives
should lend themselves to simplicity, with a methodology that is transparent, this enables
understanding. Comparability is a concern for some, but also important to usefulness;
Reputational incentives are most effective when they lead onto, or link with, economic
incentives – this combination provides a first step in motivating behaviour change (via the
reputational incentive) and then backs this up with an economic justification (or reduction in cost
of change).
Challenges revolve around the same issues, particularly on trust and credibility – the
proliferation of reputational incentives has created confusion among firms and consumers. This
risks credibility, particularly as the verification and authentication of claims is often limited,
leading to significant ‘greenwash’ or industries creating schemes simply to paint a positive
picture of themselves when the reality is less positive;
Links to OEF through alignment with existing schemes, but needs to be complementary
– the existing reputational incentives point to a base of firms that are potentially interested in
OEF. There is an opportunity to harness the progress the existing schemes have made by
aligning with them, though there are also concerns that an EU OEF would seek to compete with
and displace existing schemes.
Common factors in success
Many of the factors in success raised in practice were also confirmed by literature and feedback
from stakeholders.
Incentive design and implementation:
Impacts on firms profitability and competitiveness are important – it is clear that firms do
take these factors into account when considering environmental performance improvements.
Incentives need to provide a way for companies to also move towards their objectives in these
areas:
- Being best-in-class or no.1 can be a driver, particularly for large firms – margins
between success and failure are relatively small for the largest firms, therefore they tend to
think more strategically with regard to remaining competitive, this provides more space for
incentives to work;
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- Important to focus on economic benefits to overcome short-termism – this points to a
focus on efficiency as a way to decrease costs and improve competitiveness.
One size does not fit all – stakeholders were very keen to stress that there is significant
variation between sectors, firms, member states, markets, clients and other factors, this means
each incentive should be considered on its own merits and blanket application of an approach
used successfully elsewhere is unlikely to succeed;
Regulation remains important, despite divided opinion of business – although many
businesses and associations were instinctively against further regulation, most firms
acknowledged that it plays an important role in their environmental performance and that it
serves a necessary purpose.
Modulated incentives are needed and more effective – significant variation between sectors,
firms, Member States, markets, clients and other factors means that the application of individual
incentives has to be carefully considered depending on targeted companies and targeted
behaviour change.
Incentives need to be transparent and action orientated – all incentives need to be relatively
straightforward and it is important that they require positive action by the organisations
concerned, in order to avoid the risk of 'greenwash'.
Supply chain pressure can improve environmental performance and promote life-cycle
thinking – this is particularly effective for smaller companies which are dependent on supplying
a single large customer. A focus on the individual components in the supply chain of a
completed product helps ensure that larger companies consider the full impact and life cycle of
their products.
Accounting for company size:
Large firms are important as they are responsible for 30-35% of environmental impact –
although they are less 1% of all firms and are often above average performers, their high
proportional impact and supply chain influence means it is important that incentives are
designed with these firms in mind:
- They are often more systematic in improving their environmental performance –
striving to go beyond regulation, with an eye on the strategic and economic benefits and
also a need to satisfy internal and external stakeholders, and company ethics.
SMEs remain crucial to overall long term improvement – while they have proportionally less
impact than large firms they are still responsible for the majority of environmental impact and
there is often significant ‘low-hanging fruit’ that incentives can help capture:
- Require empowering tools: access to information, technical assistance and support
(e.g. free/subsidised advice), skills and finance – these four aspects are particularly
important for SMEs to improve their environmental performance;
- Impact of reputational incentives is typically lower – unless incentives are relevant to
local supply chains or customers then SMEs tend to focus less on reputational incentives;
- SMEs are particularly conscious of administrative burden – this can be a significant
burden for SMEs in time, capacity and resources. Proportionally, administrative incentives
can be more effective for SMEs.
- SMEs have a more reactive attitude than large firms to economic incentives for
improved environmental performance – because of this they are most often targeted by
grants and soft loans.
Sectoral differences:
Sectors can have significantly different environmental risks, regulatory environment and
context, structure and client relationships – this has a significant impact on how incentives
operate:
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- These differences can also exist within sectors – sub-sectors and even different nodes
within the supply or value chain of a sector can be significantly different in their
environmental impact.
- Sectors dominated by business-to-business transactions – in these sectors supply
chain pressure is particularly important and effective as is support for SMEs to comply /
qualify for incentives. Sectoral benchmarks are also important here as they allow
organisations to make meaningful comparisons between themselves and their competitors,
and they offer high performing organisations the potential to differentiate themselves from
their competitors in markets where the customer (other businesses) are arguably more
inclined to make well researched / informed decisions than in markets where the customers
are individuals.
- Consumer facing sectors – where some organisations would be expected to react well to
credible, yet simple, reputational incentives that the public can use to differentiate their
products. However some companies will only seek to differentiate on price, so there may
well be a need for compulsory schemes and a continued major role for regulation.
- Significant existing regulatory regimes (e.g. primary industries and manufacturing) -
where administrative incentives are possible and more likely to be appropriate given that the
benefits (e.g. of reduced inspections) are widely understood and tangible. For regulatory
regimes/sectors where compliance is felt to be a heavy administrative burden, there is a
potential for administrative incentives to reduce this burden and have a positive effect on
environmental performance. There appears to be a link between the level of risk (of
environmental damage) associated with a sector and their need for more specific incentives,
with the higher risk reflecting an (understandably) more conservative approach to
participating in incentives.
- Reputation conscious sectors – some sectors are much more reputation conscious, than
others e.g. services, food and drink. By definition, reputational incentives will be more
important in these sectors than in others, e.g. iron and steel, which perceive reputation as
less of an issue than regulation or other drivers.
Stakeholders strongly support a sectoral approach – they are very keen that the real
differences that exist between sectors are adequately taken into account in designing and
implementing incentives, to avoid disproportionate benefit or harm to a particular sector:
- Though this could lead to a narrow focus – by focusing only on specific sectors others
could be neglected.
Benchmarking by sector is fairer to firms – comparing similar firms is more likely to give an
fair representation of firms good or poor relative environmental performance:
- It can also be more effective – as it can take supply chain effects into account.
Voluntary sector schemes are popular but not always effective – these are often introduced
to head-off mandatory regulation. Although voluntary schemes can be successful in some
contexts, this is often related to national culture, i.e. they are more successful in consensus
oriented cultures such as the Netherlands. Voluntary schemes can be ineffective if there is no
follow-up or checking by others.
Member State Factors
Organisations in MSs with higher level of innovation are generally more likely to improve
their environmental behaviour – although there are many exceptions to this, the importance
of innovative approaches in improving environmental performance suggests that, at a high level,
this is generally true.
Voluntary incentives work better in MSs with a traditionally consensus orientated culture
– voluntary schemes / incentives are often introduced to head-off mandatory regulation.
Although voluntary schemes can be successful in some contexts, this is often related to national
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culture, i.e. they are more successful in consensus-oriented cultures such as the Netherlands.
Voluntary schemes need follow-up / verification in order to be effective.
Environmental performance is generally a more widely accepted consumer criteria in the
old MSs – as consumer demand is an important factor in many company decisions incentives
designed to improve organisation environmental behaviour are likely to be better received in the
old MSs.
Level of incentive:
Global basis important for consistency but limited practical application for incentives –
work carried out by international organisations such as the OECD and UNEP is useful for
guidance, design and consistency in incentives but is of less practical value in actually
implementing incentives;
The EU has an important role and rationale for incentives – stakeholders were clear that the
European level is valid and justified for action on incentives. European institutions have a
particular role in:
- Setting standards and guidelines, and harmonising the implementation of incentives
– this is an area where the European Commission is seen as a credible and appropriate
institution;
- Avoiding duplication and fragmentation of incentives across Member States – this was
a concern expressed by firms and is already an issue for reputational incentives, the
Commission has a role to reduce this, which is inline with its single-market objectives;
- EC policies and actions are not always perceived as coherent – the tension between
pressure for economic growth and environmental protection is evident in some policies and
emerges as apparent contradictions between action by DG ENV and DG ENTR especially,
although this may also be a matter of presentation of policies to external stakeholders.
Member States are vital for implementation of incentives, particularly for financing and
adapting them to national circumstances – implementation at EU level would place an
additional strain on finances and risk incentives that are not appropriate or successful in all
member states;
In general, the EC should set the framework, while Member States and others take
responsibility for implementing incentives – given the various issues at stake this appears to
be the best solution for most incentives, to comply with subsidiarity and proportionality, this is
particularly relevant to tax-based incentives:
- At present there is a lack of clarity on roles in this area – it is unclear to stakeholders
what roles each party has and what overall policy is.
Barriers
Cost is a factor with returns on investment required over the short term – environmental
improvements often require upfront investments, this means a decision needs to be taken to
allocate capital. Company decision making processes are typically made based on rates of
return, and although environmental improvements often pay-off in the medium-long term, the
short-term horizons of firms and more immediate returns that may be available from other
investments make this a significant barrier;
Regulation can form a barrier, from both too much and too little – stakeholders were
divided on regulation, some seeing it as important to create markets for their products, with
others feeling that it impedes competitiveness. In terms of environmental performance it was
noted that there was a need for more regulation of green claims to promote fairness, and also
that is was important for better signalling and clarity of future regulation to reduce uncertainty;
Lack of understanding – remains a classic barrier for improving environmental performance,
with companies, particularly SMEs unsure on how to do this, or the incentives that are available;
128 Study on Incentives Driving Improvement of Environmental Performance of Companies
Access to finance is an issue and has intensified with the financial crisis – existing
difficulties in accessing finance to improve environmental performance have only increased as
firms, banks, donors and governments all have different financial priorities;
Other barriers include supply chain constraints and a perceived lack of consumer
demand – some sectors find that their supply chain, with a large number of small suppliers,
forms a barrier to change. Other firms perceive little motivation from consumer demand for them
to improve company performance, as opposed to product performance where the link is clearer;
Corporate culture and individuals can be crucial to change – this is an important factor in
improving firm's environmental performance. Without a culture, strategy or leader that supports
change and social and environmental objectives, firms are less likely to respond to incentives;
Perverse incentives can be barriers – sometimes incentives can lead to unexpected impacts
which can undermine the original intentions, or that the objectives of certain incentives are more
economic with negative environmental impacts ignored.
Trust and credibility are key challenges for reputational incentives – the proliferation of
reputational incentives has created confusion among firms and consumers. This puts the
credibility of such incentives at risk, particularly since verification and authentication of claims
is often limited, leading to significant ‘greenwash’, or to industries creating schemes simply to
paint a positive picture, when the reality is less positive.
Role and implications for OEF:
OEF is perceived as a generally good idea, subject to certain conditions – the idea of
footprint was appreciated and the logic understood by most of the stakeholders contacted in the
course of this research. The benefits and challenges of such a scheme were keenly felt,
including;
An OEF could bring improved comparability, credibility and understanding of company
environmental impact and performance, helping to reduce trade-offs – this was seen as
important to building understanding among consumers and across international markets and
would result in increasing environmental performance as a driver for companies;
Existing footprinting schemes, although narrower in focus, could provide useful lessons
for an OEF scheme – indeed many of these lessons in terms of simplicity, transparency and
credibility have been presented as factors in success and barriers above;
Harmonisation with existing schemes could be problematic – this includes the problems in
agreeing and aligning methodologies given their complexity and wish to remain independent. As
a positive, many existing GHG reporting incentives remain somewhat immature and some
consolidation is likely over time, which may enable greater alignment with environmental
footprinting;
Differences between member states would be a challenge – the differences in structure,
culture, economic progress and incentives available in each MS could all impact the success or
failure of an OEF scheme applied evenly across the EU;
Indicator selection is important – addressing, in part, the previous two points, it is important
for the indicators and measures within a footprint to be relevant, simple and transparent for
firms and users;
There are concerns that OEF may increase costs – these costs could arise in various forms,
through extra time needed to prepare and publish a footprint, through potential monitoring and
verification costs associated with a footprint or the actions required by firms to improve their
footprint;
OEF can be an important tool for incentives which can drive environmental improvement
– beyond the obvious reputational effects and competition among firms to achieve better
scores, an OEF could also be a highly useful standard by which authorities could benchmark,
screen or rate company performance. They could provide a range of incentives based on such
129Study on Incentives Driving Improvement of Environmental Performance of Companies
a scoring system, this could replace existing ad-hoc or more complex application and award
systems.
Administrative incentives can link to OEF through synergies in measurement and as a
screening tool – monitoring and other administrative reporting requirements could work hand
in hand with an OEF, since the same information could be used for both. Similarly, footprints
could provide administrative authorities with an alternative measure for thresholds or
qualification for incentives. A pre-condition of using the OEF for this purpose is the availability of
user-friendly, simple tools, which make the implementation of OEF more attractive compared
with the administrative requirement it is substituting.
Economic incentives can link to OEF if they are used as a ‘foot-in-the door’ or as a
screening mechanism – beyond simply helping firms to improve their footprint, there is
potentially a role for economic incentives to be tied to the use of an OEF, i.e. where funding,
grants or soft-loans, etc.; are tied to the calculation, and potentially improvement, of an OEF.
Similarly to administrative incentives, an OEF score could also be used as a screening
mechanism to determine qualification for incentives. A design requirement for the use of OEF in
this way is that the benefit obtained has to be higher than the costs of carrying out an OEF
analysis.
Reputational incentives can link to OEF through alignment with existing schemes, but
need to be complementary – experience of existing reputational incentives suggests there is a
significant cohort of firms that are potentially interested in OEF. This offers an opportunity to
harness the progress that existing schemes have made, by cooperating with them, while
overcoming concerns that an EU OEF would compete with and/or displace existing schemes.
There may be a need to consider a 'light' version for SMEs – the concept is of relevance to
improving the environmental performance of SMEs but there are concerns regarding the burden
of assessing performance. If a consistent method of subsidising these costs cannot be found
there is a case for developing a light touch procedure for SMEs.
Incentive mixes
This report has looked at the mix of incentives in terms of what an OEF could add to the existing
regulatory and wider policy landscape by environmental medium. This indicates that the analysis is
in line with other findings in this report, which have a justification in the literature and were
supported by stakeholders during consultation and workshop:
Incentive mixes can mutually underpin one another and enhance the effectiveness of
each other – OECD studies showed a labelling scheme enhanced the effectiveness of
environmental taxes, and vice versa, that tax increased uptake of the labelling scheme. If
mutual enhancement is not possible, incentive mixes of overlapping instruments should be
avoided;
Empirical evidence on the effectiveness of both individual incentives and incentive
mixes is lacking, further research should investigate the optimal mix of incentives per
environmental aspect – current environmental legislation is broad covering several
environmental aspects and resources. An in-depth analysis of each environmental aspect is
needed to identify the gaps that incentives could potential fill;
Stakeholders during interviews and workshop have identified only a few examples of
incentive mixes – for example it has been stressed that:
- There is no ‘one size fits all’ approach, and hence it is difficult to derive to an optimal mix of
incentives;
- Additional steps in terms of voluntary measures as opposed to regulation seem to be
promising as they do not introduce additional administrative burden on companies, are
flexible and generate fastest results;
- Any additional steps should be coherent with the existing regulatory framework and
complement it rather than duplicate, with duplication identified as a problem by stakeholders,
130 Study on Incentives Driving Improvement of Environmental Performance of Companies
e.g. in the plethora of carbon footprinting type reputational incentives, which has made it
confusing for firms;
- Need for sector specific schemes;
- Need to add value to existing schemes;
- There is a risk of additional burden outweighing the benefits for some sectors and mediums;
- For regulatory regimes/sectors where compliance is felt as a heavy administrative burden,
there is a potential for administrative incentives reducing this burden;
- For mediums dominated by public utility scale electricity generation and water
supply/treatment, incentives attached to environmental footprinting appear unlikely to bring
additional benefits.
Environmental aspects are interconnected within the existing regulatory framework
which implies that a potential incentive will be cross-sectional – this will introduce several
trade-offs, i.e. an incentives in one environmental sector (water) might have another (sometimes
opposing) impact in another environmental sector (waste). This was also mentioned by
stakeholders during interviews and the workshop.
131Study on Incentives Driving Improvement of Environmental Performance of Companies
6.2 Policy Recommendations
There are various factors to be considered in recommending actions for improving company
environmental performance in general and also to support an OEF tool.
Based on the conclusions we make the following recommendations for stakeholders in general and
at the various levels.
In general, it is recommended that:
1 New incentives need to be carefully assessed for coherence with existing incentives and
policies, as well as for simplicity and transparency. Synergies and reinforcing effects need
to be maximised, and duplication avoided.
2 If tied to voluntary schemes, measures need to be put in place to guarantee sufficient
take-up at MS or EU level.
3 The design of incentives needs to reflect the type of sector(s) at which they are aimed; and
inputs from target sectors are therefore instrumental in terms of optimisation.
4 Any targets set within incentives need to be clearly defined and relevant to the sector(s)
(e.g. taking into consideration their resource intensity, typical level of pollution, position
along the supply chain, etc)
5 Incentives should be retained for a clearly defined period. Conditions and modalities of
phasing-out need to be clear from the outset, to increase predictability.
6 Measures planned in case the incentive fails to reach the desired objective must be
defined at the outset (e.g. introducing compulsory measures)
Based on the identified barriers and obstacles and the roles of the EU and MS, it is
recommended that:
7 The current model of the EU setting standards and processes and the MSs implementing
and monitoring remains the best division of responsibilities. It is important to guarantee a
reliable, robust basis for providing incentives. In such cases, verification and monitoring
are necessary, but impose a cost on participants. Cost-efficient verification models
therefore need to be developed..
8 The EU should continue to:
Set frameworks for incentives – reflecting the policy design recommendations above,
Coordinate and share best practice,
Facilitate harmonisation and standardisation across MSs,
Identify priority areas (e.g. priority environmental impacts, priority sectors) where action
should be focussed.
Collate and disseminate knowledge on the benefits of incentives and benchmarks – this
may well require primary research to provide quantified examples.
Retain a medium–long term perspective.
132 Study on Incentives Driving Improvement of Environmental Performance of Companies
9 MSs should continue to:
Consider where their contact with companies / organisations has a link to environmental
impact and consider if the OEF could be used as a basis for reducing the amount of
contact where it is seen as a burden (e.g. inspections) or increasing it where it is beneficial
to do so (e.g. purchasing).
Consider, and aim to implement where possible, some recycling of revenues to
environmentally better performing organisations and provide assistance to help and
reward organisations which are improving their performance.
Provide possibilities for SMEs to access assistance with improving their environmental
performance and put in place meaningful rewards for them.
Identify priority areas (e.g. priority environmental impacts, priority sectors) where action
should be focussed.
Retain and possibly increase national and sub-national award schemes. These are a
relatively inexpensive, effective and inclusive way of recognising and rewarding good
environmental performance, and as such their use could be expanded – with a particular
focus on SMEs and locally concentrated supply chains.
Based on what can be concluded on incentive mixes and the desire to introduce a common
methodology for an OEF, it is recommended that:
10 The EU should shape the OEF to take account of the characteristics of effective
incentives, as follows:
Maintain communication with stakeholders and accept that the OEF is entering into an
existing footprinting market and as such opportunities to learn from, and dovetail with
existing schemes should be exploited.
Examples from other incentive schemes suggest that the OEF will need market-led buy in
(i.e. organisations will need to be convinced that participation will bring them benefits) to
achieve healthy take-up rates. This will be helped by clear alignment and complementarity
with existing schemes.
The OEF should be piloted in a limited number of priority sectors which have a prevalence
of large companies, since this is where it is most likely to succeed. The pilot should then
be extended on the basis of voluntary agreements (with MSs, investors, etc)
Alignment with existing incentives and schemes will be most productive where
organisations (especially SMEs) can clearly see benefits / rewards, for example by linking
to procurement criteria, or as part of administrative and economic incentives.
133Study on Incentives Driving Improvement of Environmental Performance of Companies
Further suggestions
In addition to these primary recommendations we also put forward the following specific
suggestions:
In general:
1. Recognise the importance of ‘getting the prices right’ – incentives experienced through the
price mechanism are among the most powerful, making companies environmental performance
more fully reflected in the prices they experience can improve performance. This can involve
policies to price CO2 emissions and resource use such as energy, materials, waste and water;
2. Incentives need to exist for all types of firms and at all levels of existing environmental
performance – both carrots and sticks are important parts of the incentive mix to keep all firms
moving towards continual improvement;
3. Greater investor dialogue is important – sustainable choices from fund managers and
investors can be very powerful. Engaging with them and encouraging them to consider the
value of environmental performance would provide powerful incentives for larger firms.
4. Encourage lenders to provide longer-term access to finance for environmental
improvements - to help market participants switch from short-term to long-term perspectives,
with products modified to this type of investment;
5. Promote the benefits of improved environmental performance to business leaders and
managers – in addition to greater dissemination of information this can also involve things such
as working with MBA course designers to better integrate sustainability and this information.
This can then translate into company values and ethics in the medium-long term;
6. Promote the benefits of improved environmental performance to consumers – this is
important for the general public as well as companies to help create demand and an incentive
for firms which will drive change;
7. Use reputational incentives for larger firms – bigger firms are more conscious of their image
and brand, this can be the most powerful driver for some. Using rankings, league tables and
publications are effective ways to stimulate further action from them;
8. Administrative incentives are best applied automatically and with support to meet the
thresholds or criteria – take-up tends to be low for incentives applied voluntarily or that need
to be applied for. It is important to also provide enabling support for firms to reach the levels to
actually benefit from the incentives, i.e. through pilot programmes and free consultancy support;
9. Expand the range of economic incentives to firms – a variety of innovative examples have
been profiled in this report, many of these could be used to adapt existing or introduce new
incentives for firms;
What the European Commission could also do:
10. Look at further opportunities to provide EU-level funding for incentives– the EU has
successfully funded programmes for companies to improve their environmental performance,
greater links to this can be made:
a. R&D funding should be applied more towards industrial environmental improvement
needs – such as funding more resource efficiency research through FP;
b. Business support programmes can be tied to environmental audit or performance – in
this way environmental performance can be mainstreamed into existing programmes. This
approach could be particularly useful in combination with OEF;
c. Formalise a risk-based approach to environmental performance in firms – as they tend
not to think in these terms funded programmes can provide a mechanism to incentivise this
type of thinking, where risks are identified, managed and monitored.
11. Provide further support for the long-term perspective - the policy framework should
continue to offer a view and support incentives that have a medium and longer-term horizon to
134 Study on Incentives Driving Improvement of Environmental Performance of Companies
complement the natural short-termism of the market. For example, including sustainability
issues in long-term contracts (on average 30 years), e.g. offer better rental price.
What Member States and others could also do:
12. Note that enforcement is important and should be a MS responsibility – while the
Commission can play a role in setting standards and rules, it is important and desirable for MS
to retain control over enforcement of incentives. This is a necessary element of their effective
function:
a. Larger firms are a good first-step – as often they are best prepared and will communicate
this down their supply chains to magnify the effects.
13. Investigate how administrative systems could be adjusted to better incentivise and
reward companies that show good environmental performance – this is important for MS
and regional and local government as these are the levels that administrative requirements are
implemented. The examples profiled in this report give a range of examples of both successful
schemes and the factors and barriers in their success;
14. Target provision of free support, i.e. consultancy or efficiency audits, to SMEs – these are
among the most successful measures to incentivise and improve SME environmental
performance;
15. Review subsidies to remove perverse incentives – subsidies should more fully take into
account their environmental performance impacts;
16. Introduce green procurement criteria that make a difference– with a greater focus on
simplicity for procurement staff and allowances for potential higher costs in budgets;
The following table summarises the conclusions across the various incentives and distinguishing
features for firms. It recommends an incentive type that is best applied to firms in this category, with
an example from those profiled in this report. This can be used as a short guide and inspiration for
policymakers.
Study on Incentives Driving Improvement of Environmental Performance of Companies
Summary table of conclusions and recommendations by incentive type and target group
Target group Incentive
type > Administrative Economic Reputational
All target groups
Incorporate into Risk appraisal of permitting / inspection
systems;
Consider how project participation and performance
can be recognised in reduced obligations;
Engagement of firms is biggest issue, therefore better
when applied automatically and / or linked to already
well known programmes, e.g. ISO;
Pilot projects or other support for firms (i.e. free
consultancy / efficiency audits) to qualify for these
incentives are important and recommended.
Logical route to incentivise;
Voluntary incentives often only low take-up proportional
to no. of firms;
Carrot, stick and enabling incentives all work, a mix of
each is best;
Potential of dynamic systems, rewarding to
performance against benchmarks;
Sustainable procurement and reduced insurance
premiums need more development;
Competitiveness issues and use of revenues raised are
important to all firms;
Need to engage more with investors – support longer
term investment horizons;
Economic incentives relevant at all levels.
Increasingly important for all companies;
Significant gains and damage possible from
environmental performance reputation, e.g. BP and
Deepwater Horizon;
Issues of fragmentation and proliferation of incentives;
Some consolidation and maturation expected;
Work in both a positive and negative sense, ‘pat-on-
back’ and ‘name-and-shame’;
Most obvious incentives for alignment with OEF, also
most potential for conflict.
Company size
SMEs
Proportionally higher burden, potential higher gains,
hard to articulate;
Blanket application better than project-based;
Recommended Incentive type (and example):
Favourable thresholds for administrative
obligations (Emilio-Romagna).
Low take-up, related to awareness and capacity;
Preference for: Free services, grants, loans;
Recommended Incentive type (and example): Soft
loans and Grants (REMAKE vouchers) or Free
consultancy business support (NISP).
Locally focussed;
Supply chain focus;
Awards can be move powerful than league tables;
Recommended Incentive type (and example):
Disclosure incentives (Envol) and awards
(European business awards for the environment).
Large
Can be a significant incentive for multi-site or firms that
trade internationally;
Project based approaches can be successful;
Recommended Incentive type (and example):
Extended permitting/reduced inspections (US EPA
Project XL).
Link between reputation and economic incentives is
crucial to decision making by larger firms;
Preference for: Funding, tradable permits preferential
loans;
Recommended Incentive type (and example):
Access to private funding / investors (CDP).
Global profile, Investor focussed;
Tend to be much more aware and focused on
reputation on environmental performance, particularly
relative to competitors;
Strategic desire to be no.1 or best in class;
Recommended Incentive type (and example):
Disclosure incentives and league tables (CDP or
Environmental Tracking Index).
Sector
Less-
resource
intensive
Less relevant;
Recommended Incentive type (and example): All
(UK Environment Agency - risk-based inspection
and permitting).
Less of a focus than primary and secondary industry –
related to perceived impact;
Recommended Incentive type (and example): All
(Tuscany EMS fee discount).
Image tends to be more important to services firms, but
environmental costs/impact is lower;
Recommended Incentive type (and example):
Disclosure incentives (Global reporting initiative).
Study on Incentives Driving Improvement of Environmental Performance of Companies
Target group Incentive
type > Administrative Economic Reputational
More
resource
intensive
Value of incentive is directly related to regulatory permit
and inspection scrutiny;
Recommended Incentive type (and example):
Extended permitting/reduced inspections (UK
Environment Agency - risk-based inspection and
permitting).
Main focus of incentives to date.
Sectoral approaches have been successful.
Recommended Incentive type (and example):
Increased taxes, levies, charges (Effluent pollution
charging) or Reduced charges (Umweltpakt Bayern)
Firms potential adverse reputational costs are high.
Regulatory and other environmental risks can be more
important in some sectors, e.g. oil.
Recommended Incentive type (and example):
Disclosure incentives (CDP and Eco-dynamiques)
Level of
environmental
performance
Poor and
in
progress
Acts as incentive for capacity building;
Firms will need support to enable improvement;
Recommended Incentive type (and example): All
(UK Environment Agency - risk-based inspection
and permitting).
Appear to respond mostly to ‘stick’ or negative
incentives;
Enablers such as free support are important to engage
with;
Recommended Incentive type (and example):
Increased taxes, levies, charges (Landfill tax) in
combination with Soft loans and Grants (IYRE).
Enabling specific customer access;
Firms incentivised by minimising this risk and being
able to market investments as socially responsible;
Naming and shaming type approaches can work as
negative incentives;
Recommended Incentive type (and example): All
(Environmental Tracking Index and Eco-
dynamiques).
High
Reduces compliance costs;
Recommended Incentive type (and example): All
(Emilio-Romagna charge reductions OR US
Environmental Performance Track).
Financial rewards can spur continued investment in
improving environmental performance;
Recommended Incentive type (and example):
Access to private funding / investors (CDP).
High profile, NGO approval;
Awards and recognition can help incentivise high
performers;
Ranking systems can be important incentives for
company environmental performance targets;
Recommended Incentive type (and example):
Disclosure incentives and league tables (Climate
Registry, CDP and Environmental Tracking Index).
Incentive best
applied at
EU level
Limited scope for this, could be influenced through EU
programme funding;
Recommended Incentive type (and example):
Favourable thresholds for administrative
obligations (Emilio-Romagna).
Continue to incentivise through EU funded
programmes;
Recommended Incentive type (and example): Soft
loans and Grants (REMAKE vouchers) and
Sustainable Procurement (EKU).
Role for EU in helping to align schemes and ensure
some level of robustness to claims;
Award schemes remain useful;
Footprinting initiative has potential, but has pros and
cons;
Recommended Incentive type (and example): All
(CDP, European business awards for the
environment and Euro topten).
MS level
Biggest scope for application, either at national or
regional/local level;
Recommended Incentive type (and example): All
(UK Environment Agency - risk-based inspection
and permitting).
Significant scope for more at national, regional and
local level;
Recommended Incentive type (and example): All
(Carbon Trust Energy Efficiency Loan).
National and sub-national programmes have had
success;
Recommended Incentive type (and example):
Disclosure incentives and awards (Eco-
dynamiques, Envol and business awards).
137Study on Incentives Driving Improvement of Environmental Performance of Companies
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Robert S. Kaplan and David P.
Norton 1992 The Balanced Scorecard—Measures that Drive Performance.
Rosa Maria Dangelico. Devashish
Pujari 2010
Mainstreaming Green Product Innovation: Why and How
Companies Integrate Environmental Sustainability.
S. Bowles, R. Edwards and F.
Roosevelt 2005
Understanding Capitalism, Competition, Command and
Change.
S. Pavelin and L. Porter 2008 The Corporate Social Performance Content of Innovation in the
U.K.
Susi Partners Sustainable
Investments and Institute for
Building Efficiency
2011 Energy Efficiency Indicator: European Regional Results.
SustainAbility 2011 Rate the raters, phase 4, The necessary future of ratings.
Sustainable Investment Research
Analyst Network, SIRAN 2010 S&P 100 Sustainability Reporting Comparison.
Swiss Agency for the Environment,
Forests and Landscape, 2002 The Environment in Switzerland: 31 Economic Instruments.
Terrachoice 2010 The Sins of Greenwashing.
The Gallup Organization 2010 Attitude of European entrepreneurs towards eco-innovation.
THINK 2011 Public Support for the Financing of RD&D Activities in New
Clean Energy Technologies.
U.S. Environmental Protection
Agency 2007
Energy Trends in Selected Manufacturing Sectors:
Opportunities and Challenges for Environmentally Preferable
Energy Outcomes.
140 Study on Incentives Driving Improvement of Environmental Performance of Companies
Author Year Title
U.S. Environmental Protection
Agency 2007
Energy Trends in Selected Manufacturing Sectors:
Opportunities and Challenges for Environmentally Preferable
Energy Outcomes.
UK DCLG 2002 Fire and Rescue in local government finance formula grant
distribution.
Urban Mines 2010 Potential for Resource Efficiency Savings for Business.
VITO 2007 Sectoral Costs of Environmental Policy.
Webb, B., Chilvers, J. and Keeble,
J., 2006
Improving Business Environmental Performance: Corporate
Incentives and Drivers in Decision Making.
Wolff, F.; Barth, R.; Hochfeld, C.;
Schmitt, K. 2009
Rhetoric and realities in CSR: main findings and implications for
public policy and Research.
141Study on Incentives Driving Improvement of Environmental Performance of Companies
Annex A: Stakeholder workshop and consultations
Organization Industry
Akzo Nobel Industrial Chemicals B.V. Chemical
Akzo Nobel Industrial Chemicals B.V. Chemical
Alcoa Europe NFM
Carbon Disclosure Project Reporting initiative
European Chemical Industry Council (Cefic) Chemical Industry
Chemical Industries Association Chemical
Colruyt Group Retail
Cyprus Permanent Representation to the European
Union (Env.)
Government
eCOMA Consumer
Eurelectric Union Electricity Industry
European Ferrous Recovery and Recycling
Federation (EFR)
NFM
European Retail Round Table (ERRT) Retail
FEM (European materials Handling Federation) Manuf/industry
FoodDrinkEurope Food
FoodDrinkEurope and CEFS Food
Henkel Laundry & Home Care, Cosmetics/Toiletries and
Adhesive Technologies
Interel European Affairs PA consultancy
SCCM NL Foundation
Pan and Pro Europe Steel/Manufacturing Association
UEAPME SME relevant
VDMA Materials handling
CLITRAVI = European Association for the Meat
Processing Industry
Food
EFPRA Food
DIGITALEUROPE IT, consumer electronics and telecommunications
Suez Environment Water and waste management
AEA Environmental consultancy
CEN-CENELEC Standardization
EEIP Platform EE
Cefic - European Chemical Industry Council Chemical Industry
US Mission to the European Union Government
European Envelope Manufacuturers´ Association
(FEPE)
Trade association
Ministry of Environment, Slovenia Government
ZVEI (German Electrical and Electronic
Manufacturers’ Association)
Industry association
142 Study on Incentives Driving Improvement of Environmental Performance of Companies
European Commission DG CLIMA
DG ENTR
DG ENV
DG TAXUD
DG DEVCO
DG INFSO
DG ENTR
DG CLIMA
JRC
DG INFSO
DG ENV
DG TRADE
DG ENV
143Study on Incentives Driving Improvement of Environmental Performance of Companies
EUROPEAN COMMISSION DIRECTORATE-GENERAL ENVIRONMENT Directorate C - Sustainable Resources Management, Industry & Air ENV.C.1 - Sustainable Production and Consumption
Brussels, DG ENV/IB
Subject: Agenda for the Workshop on 'Incentives driving improvement of
environmental performance of companies'. DG Environment, EC
Dear Sir/Madam,
Thank you for confirming your attendance at our Workshop on Incentives Linked to Environmental
Footprinting - Wednesday 14th December 2011 - DG Environment, Beaulieu 5, Brussels (see
http://ec.europa.eu/oib/pdf/38-beaulieu.pdf for a location map).
The planned arrangements for the day are as follows:
Time schedule Programme
10:15 – 10:30 Arrival
10:30 – 11:10 Presentations:
Introduction - background and purpose of study (DG ENV);
General theory of incentives and classification (Ecorys);
Findings - incentive design to maximise effectiveness (Ecorys);
Results of a survey on company attitudes to environmental issues and their
behaviour (Suez Environment);
Conclusions and introduction to questions (Ecorys).
11:10 – 12:10 Coffee break on the way to discussion
Break into 4 groups with a facilitator. We would like the following three questions
to be discussed by all of the groups:
1. Views on the way in which we have described incentives as working?
- Variance by sector, manufacturing vs. services;
- Variance by company size;
- Variance by MS;
- The different motivational mechanisms for different types of incentives.
2. What makes incentives most effective?
- Views on our summary table - any disagreements, gaps, additions?
- Data on the impact and take up of incentives;
- How do incentives work together (incentive mixes)?
3. Incentives to link to corporate environmental footprinting:
- Views on practicality?
- What level might this be best implemented (local, national, EU wide)?
- What would be the most useful additions to current offerings?
12:10 – 12:30 Round up:
five minute reporting back from each group by the facilitator.
144 Study on Incentives Driving Improvement of Environmental Performance of Companies
Organisation Industry
European Association of craft & SMEs (UEAPME) Craft and SME
FEM (European materials Handling Federation) Materials
FEM and VDMA ( German Engineering Federation) Materials / Association
Company* Metals
Carbon Disclosure Project Reporting
Suez Environment Water and waste management
Raisio Group Food
eCOMA Consumer
DEFRA Changing Business Behaviours Government - Member State
Ministry of the Environment, Czech Republic Government - Member State
Rotterdam Harbour Port & Harbour Authorities
SCCM EMS Registration
Sustainalytics Investors
* Company requested information to be anonymous.
Study on Incentives Driving Improvement of Environmental Performance of Companies
Annex B: Summary of incentive database
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
1 Acorn EMS Scheme ? x x EMS
EMS system for SMEs, designed to lead to ISO14001 /
EMAS compliance. It offers accredited recognition for
organisations evaluating and improving their
environmental performance through the phased
implementation (6 steps) of an EMS.
Voluntary National UK
2
Agreement on
Danish Energy
Policy 2008-2011
x
National Denmark
3
Amortisation of
pollution control
facilities
x Tax reduction
This US incentive allows firms to amortise investments in
pollution control in a way that reduces their tax
obligations.
Voluntary National USA
4 API/IPIECA GHG
Compendium X
GHG
emissions
reporting
Voluntary method for calculation of GHG emissions from
the operation of the oil and gas industry (from exploration
and production through refining, to the marketing and
distribution of products).
Voluntary International
5
Arizona
Environmental
Performance Track
x x x Company
Visibility
Voluntary partnership program that recognizes and
rewards private and public facilities that demonstrate
strong environmental performance beyond current
requirements. The Participating Departments will
consider inspections of Arizona Performance Track
members a low priority, reducing the frequency of routine
(i.e., non-complaint based) inspections by at least 50%
for those programs without a frequency specified in
statute or rule.
Voluntary Regional Arizona
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
6
Australian National
Greenhouse and
Energy Reporting
(NGER) Scheme
x x GHG
emissions
reporting
The scheme is a single national framework for the
reporting and dissemination of information about the
greenhouse gas emissions, greenhouse gas projects,
and energy use and production of corporations.
Mandatory for private sector.
Mandatory National Australia
7 BREEAM Product
rating
The Building Research Establishment Energy
Assessment Methodology (BREEAM) is the world’s
foremost assessment methodology and accreditation
system for buildings in the world.
International
8
California Climate
Action Registry
(CCAR)
x x x GHG
emissions
reporting
GHG emissions reporting register. 2001-2010, since
transitioned to Climate registry. Firms to gain credit in
requirements against assembly bill 32.
Voluntary Regional California
9 Carbon Disclosure
Project x
GHG
emissions
reporting
The CDP is a not-for-profit directory holding the world’s
largest depository of corporate environmental information
in the world.
Voluntary International
10
Carbon Trust
Energy Efficiency
Loan Scheme
x Loan
100% Interest free loan available for SMEs to invest in
new energy efficiency technologies from the Carbon
Trust. No longer interest free. Program now funded by
Siemens and has commercial interest rates.
Voluntary National UK
11 Carbon Trust
Standard x
Product
rating
Provides reputable independent verification for company
environmental and carbon footprinting activities. Use of
standard and logo demonstrates achievement and
openness of approach.
Voluntary National UK
12 Chicago Climate
Exchange (CCX) X X
Tradable
Permits
Voluntary emissions trading programme. Based on cap
and trade with legally binding (contractual) commitment
to emissions reduction.
Voluntary International
13 Clean Business
Programme X X x
Information
tool / Free
Advice
Supports SMEs in their efforts to improve environmental
performance by helping them reduce production costs
and environmental impacts and so increase
Voluntary National Poland
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
competitiveness. Organised on city/regional basis, with
programme co-ordinator linking firms to
training/information services.
14 Clean Tourism X X x Information
tool / Free
Advice
The goal is to improve competitiveness of tourism sector
companies by helping them improve their environmental
performance and engage in community action.
National Poland
15 ClimBus x x Project
funding
UNder ECAP. ClimBus - Business Opportunities in
Mitigating Climate Change. Within ClimBus programme,
new business opportunities were identified and
companies active in climate business developments were
supported. Program to support the developing renewable
energy production technologies.
National Finland
16 CO2 levy on
Heating Fuels x Tax Mandatory National Switzerland
17
Community
Business Loan
Fund
X Preferential
Finance
UK fund supported by RBS that has 5 million pounds to
provide in loans to firms or organisations with clear social
or environmental objectives.
Voluntary National UK
18 Cycle to work
scheme x x Green tax
Tax free bike schemes for employees, paid by employer
through payroll, thus also saving the company NI
contribution costs.
Voluntary National UK
19
DEFRA Company
GHG &
Environmental
Impact Reporting
Guidance
x GHG
emissions
reporting
Guidelines for companies that wish to report their GHG
emissions - also links to wider environmental reporting. Voluntary National UK
20
Differential taxation
applied to petrol
and diesel in
Sweden
x Green tax
Tax differential led to the phasing out of lead and the
increased uptake of cleaner fuel standards, particularly
low sulphur diesel. Germany has also more recently
introduced tax incentives to promote ultra low sulphur
diesel uptake.
Mandatory national Sweden/Germany
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
21 Dow Jones
Sustainability Index x x Reporting
An index that tracks the performance of large firms in
terms of sustainability and financial. Is not clear what it
actually does. Purpose seems to be as an information
service to investors. This will act as an incentive to firms
for access to investment capital. Voluntary
National
USA
22 Dutch Energy
Covenant x x
Industry
Covenant
Voluntary agreement with energy-intensive industry to
commit itself to the efficient use of energy in plants. Voluntary National Netherlands
23 Dutch water
pollution charge x Green tax
Small charge generated significant revenues to upgrade
the water treatment infrastructure of the country leading
to significant improvements in water quality. Charge was
levied between 86-95.
Mandatory National Netherlands
24 ECAP x x Reduced
administrative
obligations
The Commission has set up Environmental Compliance
Assistance Programme for SME's (ECAP) to reduce their
compliance burdens. Incentivises building local
environmental expertise for SMEs and including SME
priorities in existing funding schemes (mostly CIP and
LIFE+)
Voluntary EU wide
25 Ecodesign Directive x Minimum
Standards
Sets minimum eco-design standards for products.
Creating mandatory incentive for more eco-friendly
production.
Mandatory EU wide
26
Entreprises Eco-
Dinamiques (BE)
x
Entreprise écodynamique is a free environmental
labelling scheme for all companies in the Brussels-
Capital region. Based on the company’s performance in
eight environmental categories (Energy use, Water use.
Waste management, Mobility of the work force, Air
pollution, Noise, Soil, Nature and Green Spaces), it
receives one to three (best performance) stars.
Candidates for the label receive technical assistance
from environmental experts in the process of becoming
more environmentally friendly.
National
Belgium
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
27 Eco-label initiative x x
Free
consultancy /
Grant
Scheme in Ireland to provide free consultancy support or
grants to fund firms becoming eco-label certified. Voluntary National Ireland
28 EU Ecolabel x Best in class
label
.Awarding the label at request of producers if compliance
with product category requirements established at EU
level is proven. The label is placed on the product,
signifying the good environmental performance of the
product.
Voluntary EU wide
29 Effluent Charges
Act x Tax
The charge is calculated according to the amount and
harmfulness of the respective substances discharged.
Implemented.to take up the adoption of pollution
abatement measures, finance the establishment,
maintenance and upgrading of the wastewater
infrastructure.
Mandatory National Germany
30
EKU Ecologically
Sustainable
Procurement
x Minimum
Standards
Green procurement standards for firms for public
tenders. National Sweden
31 EMAS x x x EMS
firms can create cost savings in waste management and
resource input, and enhance their firm's image; improve
effort to achieve regulatory compliance; consumers put
pressure on companies to adopt EMAS to increase
sales.
Voluntary EU wide
32
Emilia-Romagna
x x Reduced
charge
In Emilia-Romagna waste fees are reduced by 30% for
EMAS-registered companies and by 10% for ISO 14001
ones; times and costs of permitting under IPPC is
reduced for them; and for EIAs the threshold is higher.
Voluntary Regional
Italy
33 Energy labelling x Product
rating
Product labelling based on energy efficiency, rated A-G
or A+++-E. Mandatory EU wide
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
34 Energy tax Austria x Tax-based
Energy intensive enterprises of the production sector
have to pay 0.5% of value added or the minimum tax
rates of the directive 2003/96/EC of the European Union,
whichever is the higher amount.
Mandatory national Austria
35 Energy Technology
List x Product
rating
List of government recognized energy efficiency
technologies. Inclusion on list opens up commercial
opportunities through linked government financial
incentive schemes.
Voluntary National UK
36 Enhanced capital
allowances x Green tax
Provides up front tax relief for companies paying
corporation tax. Technologies must be on the
government recognized Energy Technologies list.
Voluntary National UK
37
Environment
Agency Pension
Fund
X x
Pension
investment
fund
Pension fund of UK Environment Agency, invests in only
environmentally high performing firms. Voluntary National UK
38
Environment
Agency Spotlight
Reports
x Information
tool
Publishing a list of good and bad environmentally
performing companies. The Environment Agency
publishes in their Spotlight reports information on the
environmental performance of companies, mostly related
to prosecution.
National UK
39
Environment
Canada GHG
Emissions
Reporting Program
x GHG
emissions
reporting
GHG reporting for facilities, mandatory for facilities
>100kt emissions. Mandatory National Canada
40 Environmental Ship
index x x
Product
rating
A number of ports offer reduced charges to vessels
which score highly on the Environmental Ship Index
(ESI).
Voluntary International
41 Environmental
standards initiative x x x
EMS - Free
consultancy /
Grant
Scheme in Ireland to provide free consultancy support or
grants to fund firms to get EMS e.g. ISO14001. Voluntary National Ireland
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
42 Environmental
Tracking Index
series
GHG
emissions
reporting
NGO that tracks environmental performance (particularly
GHG emissions) of top 1300 firms in the world and then
ranks them. It does so regardless of whether the
company co-operates or not. In this way it can 'shame'
companies with poor disclosure, and highlight and
reward companies with high disclosure. There is an
incentive to avoid this and also through investors using
the rankings to make decisions.
International Global
43 EnVol (FR) x An environmental management scheme targeting (very)
small to medium-sized companies. EnVol is based on the
reference system AFNOR FDX30 which proposes three
different performance levels to companies. EnVol
corresponds to the first of these levels, ISO 14001 and
EMAS to the third level.
Voluntary National France
44 EPA (project XL)
permit extensions
x Permit
extension
US Environmental Protection agency allows facilitates to
extend their permitting schedule if they can comply with
certain standards or participate in the XL project.
Voluntary National USA
45
EU Emissions
trading scheme (EU
ETS)
x Tradable
Permits Cap and trade system. Mandatory EU wide
46 Euro topten x Reporting
Provides uptodate snapshop of the most efficient
products across a range of popular product categories.
This not only acts as an incentive to product
manufacturers to improve their products, but acts as a
guide to the wider business community on how to reduce
their company footprint through their procurement.
EU wide
47
European Business
Awards for the
Environment
x Award
scheme
Scheme of DG Environment, firms can apply to receive
awards for innovation for sustainability. Rewards best of
best. Detailed evaluation process. Unclear if any rewards
beyond the reputational. This is the incentive aspect. Voluntary
EU wide
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
48 Global Reporting
Initiative x
Information
tool
To measure and disclose environmental, economic and
social performance, voluntary scheme for sustainable
reporting.
Voluntary International
49
Grant for Improving
your Resource
Efficiency (IYRE)
x Grant
Upto 50% grant for SME's to invest in resource efficient
technologies. Voluntary Regional
UK
50 Green apple awards x Award
scheme
Aligned with European Business Awards for the
Environment. Firms and LAs contact the organisation
regarding their good environmental performance to enter
for an award. Awards are given each year. These are
quite prestigious, which can form an incentive. Voluntary
EU wide
51
Groundwork
Resource Efficiency
Audits
x x Information
Reduce administrative costs through effective information
provision and opportunity identification regarding energy,
water and waste saving measures on behalf of
companies.
Voluntary Regional
UK
52 Incentive tax on
VOCs x Tax Tax of 3% on products with > than set amount of VOCs. National Switzerland
53 Innovation
Vouchers x Grant
Able to direct company behaviour on specific issues. The
scheme provides SME's with a £3,000 voucher to
redeem with a local higher education facility to purchase
expert time to assist with company or process innovation.
Interesting as it can provides a financial incentive that
involves hands on innovation support.
Voluntary National
UK
54
Integrated Pollution
Prevention and
Control
x Regulatory
Mandatory regulatory permitting scheme for companies
whose operations could result in a significant
environmentally harmful release of pollutants. Includes a
requirement for continuous monitoring and improvement.
Mandatory EU wide
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
55
International Local
Government GHG
Emissions Analysis
Protocol (IEAP)
x x Information
tool / Free
Advice
Voluntary initiative for public sector. Set of guidelines to
assist local governments in quantifying the greenhouse
gas emissions from their operations.
Voluntary International
56 ISO 14001 x x EMS
Certification of companies EMS system can be a driver
for firms. This becomes an incentive as firms in company
supply chain or public procurement increasingly ask for
this.
EU wide
57 Japanese GHG
Reporting Scheme x
GHG
emissions
reporting
Business operators that emit a mass volume of GHG are
obligated to report to the government GHG emission
reduction plans and measures. The government
compiles the accounted GHG and makes the outcomes
public.
Mandatory National Japan
58 Japanese Voluntary
ETS (J-VETS) x Tradable
Permits
Voluntary trading scheme. The goal is to foster business
operations’ voluntary effort to reduce GHGs and to
accumulate knowledge and experience regarding
emissions trading.
Voluntary National Japan
59 Landfill Allowance
Trading Scheme x Tradable
Permits
UK government scheme incentivising the reduction in
local authority waste sent to landfill. Mandatory National UK
60 Landfill Tax
escalator x Tax
Tax on waste sent to landfill, charged by tonne.
Escalates (increases) each year automatically to
increasingly incentivise the production of less waste.
Mandatory National UK
61 LEED x x Product
rating US created buildings energy efficiency rating scheme.
62 LIFE Programme x Project
funding
Funding instrument for the environment. The general
objective of LIFE is to contribute to the implementation,
updating and development of EU environmental policy
and legislation by co-financing pilot or demonstration
projects with European added value.
Voluntary EU wide
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
63 Lombardia x Reduced
charge
In Lombardia, they have recently started this process by
mapping the expectations of companies and possible
areas of intervention that have little impact on the local
budget, reductions of the IRAP (regional tax on
productive activities) and some procedural fees. In
January they'll launch an online tool evaluating
compliance with environmental legislation and with
relevant legislative texts (A-lex).
Voluntary Regional
Italy
64
Lower Purchase
Tax on Very Energy
Efficient Cars
x Tax-based national Denmark
65
Marine Stewardship
Council sustainable
seafood standard
x Information
tool Standard recognising sustainable fishing practices. Voluntary International
66 Mineral oil tax x Tax-based A refund of 0.12€ litre is given to industries that use gas
oil in their production activities, after a fiscal control. national Greece
67 National Industrial
Symbiosis Network x Information
tool
Membership network which promotes the use of waste
as a natural resource and facilitates mutually beneficial
material exchanges between organisations and
industries.
Voluntary National UK
68
National Industrial
Symbiosis
Programme (UK)
x Information
tool
Bringing firms together to match waste & by-products to
other firms material/resource needs. National UK
69
New York State
Common
Retirement Fund
X x
Pension
investment
fund
Pension fund of New York State, invests in only
environmentally high performing firms. Voluntary Regional New York
70 NL environmental
covenants x
Reduced
administrative
obligations
A formal yet voluntary agreement between government
and business to target environmental improvements in
line with the covenants objectives. Each agreement lasts
for 5 years and annual reporting is required. Provides a
Voluntary National
Netherlands
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
flexible middle way of achieving policy objectings without
legislation.
71 Nordic Swan x Product
rating Nordic Ecolabeling: Miljömärkning av hotel. Voluntary Regional Scandinavia
72
PoW 2oC
Challenge
Communique
x Company
Visibility
Corporate pressure group calling governmental action on
the environment. Coordinated by Cambridge university
and prince of wales corporate leaders group.
Voluntary International Global
73
Product
Stewardship Oil
Levy
x Tax-based Tax levy on recycled Oil. national Australia
74 Publicly Available
Specification 2050 x x
Product
rating
Improves communication of env performance of
products, hence facilitates green customer purchasing
decisions, developed by the British Standards Institute in
response to broad community and industry desire for a
consistent method for assessing the life cycle GHG
emissions.
National UK
75
Pulp and Paper
Green
Transformation
Program
x Funding
Canadian pulp and paper companies that produced
black liquor — a byproduct of the pulping process —
were eligible to access $1 billion in funding to improve
their energy efficiency, their capacity to generate
renewable energy, and the overall environmental
performance of their pulp and paper facilities.
National Canada
76
Regional
Greenhouse Gas
Innitiative (RGGI)
x Tradable
Permits
Cap and trade ETS operating. Targets emissions from
fossil fuel fired power plants with a capacity of 25 MW or
more.
Mandatory Regional USA
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
77 ReMAKE Innovation
Vouchers x Funding, free
consultancy
Free consultancy connects public Knowledge Institutions
with SMEs to encourage SMEs in adopting technology to
develop their innovative ideas.
Voluntary EU wide
Now: France,
Germany, Italy,
Spain, UK
78 Renewable Heat
Incentive x
Renewables
generation
tariff
Financial incentive to stimulate the adoption and
deployment of small scale renewable energy
technologies producing low carbon heat.
Voluntary National UK
79 Retail Forum x Information
tool
A multi-stakeholder platform set up to exchange best
practices on sustainability in the European retail sector.
Includes voluntary commitments on the side of members.
Voluntary EU wide
80 Shell New Zealand
Sustainability Fund x x Funding
Aims to help SMEs develop and implement systems that
will enable them to operate in a sustainable,
environmentally responsible way. This fund is
administered by the New Zealand Business Council for
Sustainable Development.
Voluntary National New Zealand
81 SUTOUR x x x
EMS,
information,
training,
assessment
Supporting Tourism Enterprises for Eco-Labelling and
Environmental Management. EU wide
82 Swedish Sulphur
Tax x Green tax
Sweden levied a green tax on sulphur containing fuels in
the 90's. Led to a 40% drop in Sulphus emissions over 2
years. Very effective in achieving short term objective.
Mandatory National Sweden
83 Swiss Emissions
Trading Scheme x Tradable
Permits National Switzerland
84 Tax incentive -
Mexico x Tax reduction Tax reduction for companies that achieve an outstanding
environmental performance.
Voluntary National Mexico
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
85 Tax reform 2.0 x Tax-based
Tax increase on both pollution and energy consumption,
which includes raised taxes on energy used for heating
and cooling, increased green taxes on electricity in
general, and a tax on different kinds of fuels used for
production.
national Denmark
86
Technologies for
Sustainable
Development
Programme
x National Austria
87 The Buy Recycled
Code x x
Information
tool
Voluntary membership model requiring participating
companies to commit to sustainable procurement
practices and use their purchasing power to procure
products with recycled content wherever possible.
Voluntary National UK
88
The Forest
Stewardship
Council (FSC)
Certifications
x Product
rating Certification labels for forests and timber resources. International
89
The On-Pack
Recycling Label
scheme
x Product
rating National UK
90
The Regional Clean
Air Incentives
Market (RECLAIM)
x x x Tradable
Permits
Facility level emissions reduction programme for Nox and
Sox. ? Regional California
91
Tuscany
x Reduced
charge
In Tuscany action is focussed on a differentiated
reduction of IRAP based on ISO 14001 and EMAS. This
caused a significant increase in the number of EMAS
registered companies in the region. Currently they are
mapping further possibilities.
Voluntary Regional
Italy
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
92 UK Aggregates
Levy x Tax
Tax on the commercial use of aggregates in the UK.
Provides a disincentive to wasteful resource use. Mandatory National UK
93
UK Carbon
Reduction
Commitment
x x GHG
emissions
reporting
Mandatory GHG emissions assessment tools, covers
smaller emitters. Mandatory National UK
94
UK Climate Change
Levy Agreement
(CCLA)
x Tax
80% Climate Change Levy discount to "energy intensive
users", eligible companies must commit to meeting
specific targets for improving energy efficiency or
reducing carbon dioxide emissions.
Mandatory National UK
95
UK Environment
Agency extended
permitting/reduced
inspections
x Reduced
administrative
obligations
Companies that have certified environmental
management systems are inspected less frequently,
reducing company's administrative obligations. This code
of practice requires regulators to take a risk-based
approach to inspection and enforcement.
Voluntary National UK
96 UK Feed in tariff x Renewables
generation
tariff
Financial incentive to stimulate the adoption and
deployment of small scale renewable energy
technologies producing electricity.
Voluntary National UK
97
UK’s Environmental
Innovations
Advisory Group
x Information,
funding
Support to move environmental technology innovations
to market. National UK
98 Umweltpakt Bayern x x Reduced
charge
Agreement between local government and SME's
whereby companies receive preferential treatment
(reduced costs) if they can commit to environmental
performance improvements. E.g. 30% EMAS costs
covered, 30% reduction in permitting costs, 50%
reduction on water abstraction costs.
Voluntary Regional Bavaria,
Germany
99 UN Global Compact x Company
Visibility
Register of firms committed to 10 general principles on
human rights, labour rights, the environment and anti-Voluntary International Global
Study on Incentives Driving Improvement of Environmental Performance of Companies
ID Name of Incentive Adm. Econ. Rep. Broad
Incentive
Type
Description of the incentive Voluntary/
Mandatory
Geographic
spread
Country
corruption.
100
US Climate Registry
(TCR) General
Reporting Protocol
x GHG
emissions
reporting
Voluntary program for reporting of 'basket of six' GHG
emissions from their operations in Canada, the US and
Mexico at the facility level. The protocols outline best
practices and the reporting requirements.
Voluntary National USA
101 US EPA Climate
Leaders x
GHG
emissions
reporting
Voluntary reporting scheme to recognise top performers. Voluntary National USA
102 US EPA GHG Rule x GHG
emissions
reporting
Mandatory rule, requires reporting of GHG emissions
from large sources and suppliers. Mandatory National USA
103
US Securities and
Exchange
Commission (SEC)
Guidance
x GHG
emissions
reporting
Guide to address climate change considerations in the
standard SEC disclosure process. National USA
104 Viabono quality
standard x
Product
rating Green tourism initiatives “umbrella brand” – Germany. National Germany
105 Western Climate
Initiative x x
Tradable
Permits
Cap and trade greenhouse gas registry of Western Us
states and some Canadian provinces. Regional North America
106 WRI GHG Protocol
Public Sector x
GHG
emissions
reporting
Voluntary reporting scheme. Voluntary National USA
160 Study on Incentives Driving Improvement of Environmental Performance of Companies
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Annex C: Views on specific aspects of common methodology
Drivers supporting a common methodology for OEF:
Improved comparability - a common methodology has the ability to provide robust,
comparable information on the environmental performance of companies throughout Europe.
This framework and its associated guidelines would reduce duplication of company reporting
and facilitate comparison within sectors and between MSs;
Improved credibility - the fact that this reporting framework comes from the EU also improves
the credibility of reporting, as sectoral reporting schemes are more likely to be perceived as
“greenwash”;
Improved understanding – the EU has a key role to play in creating and promoting a common
understanding of data, concepts; methods, implementation logic etc. throughout Europe on this
subject;
International impact - a well designed company environmental footprinting initiative, with
suitable associated incentives, could also have an impact on overseas companies’
environmental performance, as they aim to keep up with their European competitors. The
design and guidance surrounding the common methodology will be important in ensuring its
global applicability;
Benefits to customers – customers will also benefit from the introduction of a common
methodology as it would increase their confidence in the environmental claims that companies
make, assuming that third party verification is integral to the methodology;
Accelerate the rate of company environmental improvement - corporate footprinting
standards will lead to companies having better understanding of their impacts and enable them
to take appropriate actions to mitigate these impacts. This understanding drives improvements
in environmental performance for both the best and worst performing companies. It is also the
basis for cycles of continuous improvement within the participating organisations.
Challenges in implementing a common methodology for OEF:
Data confidentiality – confidentiality issues are potential barriers as data can be commercially
sensitive. Data may reveal a lot to the well informed reader who is in the same business or
industry, for example the sensitivity of the benchmark curve data for determining ETS
benchmarks. A careful approach would be preferred here (e.g. the funnel approach mentioned
earlier);
Fairness - the Common methodology is a theoretically attractive idea, but could prove difficult
to apply fairly. Footprinting is just one tool/approach out of many in this field. There is a danger,
if it concentrates on technical (LCA type calculations), that it might be overly complex and
weaken other existing (and to date effective) tools for companies to reduce their environmental
impact. There is limited evidence to suggest it is the fastest or most effective way, to drive
environmental performance within businesses;
Standardisation issues - whilst footprinting works well for products which are easily
standardised, corporate footprinting is less well suited for comparing businesses. The structure
of a business, their business model, target market, investment approach, operating practices
etc. all contribute to a very complex (non-comparable) range of organisations. Even within one
sector.
162 Study on Incentives Driving Improvement of Environmental Performance of Companies
Design Considerations:
Benchmarking – could be problematic due to their diverse nature of business structures in
operation. Once sectoral and country specific benchmarks have been established, participating
organisations must also employ internal benchmarks to drive continuous improvements in
environmental performance;
Reporting guidelines – these are vital for meaningful MS and sectoral comparisons. Otherwise
different countries may devise multiple reporting procedures and exacerbate the problem of
multiple reporting methodologies that exists today;
Communicating complexity – the difficulties in recording and effectively communicating multi-
dimensional environmental impacts to a diverse audience should not be underestimated.
Quantifying the environmental performance of two similar companies (who have differing water
and energy impacts) is relatively straightforward, but communicating these differences to non-
technical stakeholders is much more challenging. There is an on-going conflict between level of
detail (practical utility) and public understanding;
Potential for “EU certified” status – this could be one option for including and supporting
existing schemes or compliant methodologies. This could also be extended to international
schemes and organisations;
Verification and monitoring - will be important to the credibility of the methodology and how it
is used within different schemes;
MS implementation – stakeholders felt that implementation was best done at the MS level.
However, the EU has a role to play in ensuring coherent and even implementation across MSs;
Phased implementation – for methodology should focus on the largest and most polluting first.
The law of diminishing returns applies and initial efforts should be directed at easily targeted
large organisations that can have additional influence, and exercise a multiplier effect within
their sphere of influence;
Balanced approach - a careful balance must be achieved between an overly complex (and
prohibitively expensive) approach and an overly simplistic (box ticking) exercise that will apply
to everyone, but have limited lasting impact;
Careful selection of metrics - a key challenge is the metrics used to compare businesses (i.e.
impact/employee, impact/£ turnover, impact/added value, impact/product). This will be difficult
and complex to apply across industries, as comparisons become meaningless unless they
compare like with like;
Pace of methodological change –reporting methodologies and best practice (both technical
and reporting) is changing all the time. An EU wide standard would struggle to keep up with this.
A common methodology across all sectors is an illusion since you cannot compare across all
sectors. However, the other extreme, of a constantly evolving instrument, could become
impossible to administer and enforce;
Assessing indirect impacts - Good to compare companies however, it needs to be designed
such that externalities beyond the control of the companies are eliminated from such a scheme.
This means for example for energy intensive industries that the use of an energy mix
idiosyncratic to a MS is not taken into account, i.e. it is beyond the control of the company;
Accessibility for SMEs - from an SME’s point of view any new policy must be accessible. ISO
14001 and EMAS have struggled due to their complexity. Extensive studies will be required to
establish the SME test (based on the “think small first principle”) before, during and after the
implementation of any policy which will impact upon SMEs. “LCA to go115” is an FP7 study
currently underway which will provide useful learning that can inform how corporate/company
footprinting should be applied to small and medium sized enterprises;
115 http://cordis.europa.eu/fetch?CALLER=FP7_PROJ_EN&ACTION=D&DOC=3&CAT=PROJ&QUERY=012d26e0df47:
b3ae:5d3774ea&RCN=97146.
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Supply chain issues - smaller organisations also have much less power within their supply
chains. In order for company environmental footprinting to have an impact it should focus on
large organisations, initially, plus provide incentives for them to work with their supply chains of
smaller organisations. This would be a more effective mechanism to drive change within SMEs
and is less likely to be seen as an additional burden upon them. Networks or consortia of SMEs
may also have the power to influence within their supply chain; however examples of this are
not widespread;
Continuous Improvement – as part of the reporting framework there needs to be a clear
commitment to continuous improvement of environmental performance. Otherwise, there is a
risk of companies and countries setting easily achievable targets, which once reached, could
lead to a drop off in environmental improvement activity.
BELGIUM – BULGARIA - HUNGARY - THE NETHERLANDS – POLAND - RUSSIAN FEDERATION – SOUTH AFRICA - SPAIN - TURKEY – UNITED KINGDOM
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