Investments in Resource Efficiency: Understanding benefits & overcoming barriers

by Jun Rentschler and Florian Flachenecker

Resource efficiency investments tend to yield both economic and environmental benefits, yet many low- and middle-income economies lag behind. The main causes of inefficiency are market failures and distortions, which create barriers preventing firms and governments from investing in efficiency. Comprehensive strategies are needed to address the complex and interlinked causes of inefficiency.

High and volatile resource prices, uncertain supply, rising demand and environmental impacts – various factors are putting increasing pressure on policy makers, researchers, firms and investors to explore pathways towards sustainable and efficient resource management. Resource efficiency is considered to be an answer to these challenges, yielding substantial benefits – both environmentally and economically.

Against this background, our recent report analyses the economic rationale for resource efficiency investments. It provides the blueprint of an analytical framework for assessing the prospects and viability of such investments in practice; and proposes interventions for overcoming investment barriers and boosting resource efficiency investments. The report was commissioned by the European Bank for Reconstruction and Development (EBRD) in the context of its Sustainable Resource Initiative, which aims to promote resource efficiency and low-carbon innovation.

The potential of resource efficiency investments: Economic theory would suggest that price signals, such as high and volatile prices, incentivise resource efficiency improvements. However, data on resource efficiency in developing and emerging economies indicates substantial gaps relative to developed economies, thus suggesting significant potential for resource efficiency improvements.

Costs & benefits of resource efficiency investments: Introducing a comprehensive cost-benefit framework, we evaluate environmental, economic and political aspects of resource efficiency investments. This analysis aims to complement purely commercial investment appraisals and facilitate the identification, monitoring and evaluation of specific resource efficiency investments.

Empirically, the core benefits from investing in resource efficiency include (i) cost reductions for firms, with potential benefits for consumers, (ii) environmental benefits at the local and global level, (iii) mitigation of price and supply risks for firms and economies, and (iv) value creation through eco-innovation and industrial symbiosis. The main costs associated with resource efficiency investments include potentially substantial upfront investment costs, opportunity costs and environmental costs due to a possible rebound effect (especially relevant in the context of energy).

While case-by-case evaluations are necessary, the overall evidence tends to suggest positive net-benefits from resource efficiency investments, both financially and environmentally.

Investment barriers and the causes of resource inefficiency: However, we find that even if resource efficiency investments are estimated to be commercially viable, firms may be unable or unwilling to take action. We identify various market failures, which create investment barriers for firms, thus causing inefficient resource use and under-investment in resource efficiency. These investment barriers can mostly be attributed to information constraints, capacity constraints, financial constraints, uncompetitive market structures, or fiscal mismanagement. Systemic risks and uncertainty may exacerbate such investment barriers, as planning horizons are reduced. For instance, volatile commodity prices make the expected benefits from resource efficiency investments highly uncertain. Payback periods will be difficult to estimate, thus aggravating existing financial and information constraints.

Policy measures and interventions: We argue that actions must be taken to address the causes of inefficient resource use and investment barriers – otherwise the accumulation of new productive capital will also be characterised by inefficiency. We propose two types of interventions, when designing effective resource efficiency strategies:
(i) Addressing ‘symptoms’, ie help firms to overcome existing barriers and address excessive waste as well as its externalities, which result from existing inefficiencies.
(ii) Addressing causes, ie tackle the structural causes of investment barriers and mitigate pre-existing inefficiencies.

According to this typology, we propose specific intervention measures for addressing investment barriers, including technical assistance, financial support and regulatory reforms. These measures must be part of a comprehensive intervention approach, recognising that barriers are interlinked and cannot be addressed in isolation.

In a nutshell: Our report provides evidence for the notion that resource efficiency investments are not only financially profitable, but can also address major externalities, most notably the environmental impacts of inefficiency. However, we show that resource efficiency investments can be difficult to implement in practice as firms and governments face multiple investment barriers due to market distortions and failures. Therefore, we propose a comprehensive intervention typology, using which policy makers can enable resource efficiency gains and unlock the economic and environmental potential of resource efficiency.

For further details please download a summary briefing or the full report.

Florian Flachenecker is a Doctoral Researcher at the UCL Institute for Sustainable Resources. He can be contacted at florian.flachenecker.13@ucl.ac.uk.

Jun Rentschler is a Doctoral Researcher at the UCL Institute for Sustainable Resources. He can be contacted at jun.rentschler.10@ucl.ac.uk.