Study on Incentives Driving Improvement of Environmental

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


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.

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Our staff are dedicated experts from academia and consultancy, who share best practices both

within our company and with our partners internationally.

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for environmental management systems). Our sustainability goals translate into our company policy

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purchasing carbon offsets for all our flights, incentivising staff to use public transport and printing on

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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



4.4 Reputational Incentives 81

4.4.1 Effectiveness of reputational incentives 84



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


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.


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.


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


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.


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


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


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


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.


- 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)


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


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.


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.


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.


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


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.


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.


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.


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.


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


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/.


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.


..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.


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.


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.


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


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.


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.


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.


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.


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.


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.


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.


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


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.



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.


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


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/.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


- 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.


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


Incentive Description Mandatory/

Voluntary

Geographic

Area


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.


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.


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.


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.


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.


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


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


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.


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.


Table 4.2 Overview of selected examples of economic incentives

Economic Incentive Description Mandatory/

Voluntary

Geographic

Area


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



Voluntary

Geographic

Area


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.



Voluntary

Geographic

Area


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.


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.


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.


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.


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.


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.


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.


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.





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.


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.


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.


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


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.


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


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.


Table 4.3 Overview of selected reputational incentives

Reputational Incentive Description Mandatory/

Voluntary

Geographic

Area


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.


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.


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.





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


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.


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.


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


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.


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


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.


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.


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.


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.


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.


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



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.



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).


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


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.


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.


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?


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.


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.


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.


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.


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


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


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;


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


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.


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.


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.


“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.


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.



Water


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.


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


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.


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.



Land


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.


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.



Resource efficiency


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


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..


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.


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,


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


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.


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.


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;


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


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;


- 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:


- 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


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;


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


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,


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.


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,


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.


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.


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


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.


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;


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;


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;


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;


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;


(Tuscany EMS fee discount).

Image tends to be more important to services firms, but

environmental costs/impact is lower;


Disclosure incentives (Global reporting initiative).


Target group Incentive

type > Administrative Economic Reputational

More

resource

intensive

Value of incentive is directly related to regulatory permit

and inspection scrutiny;


Extended permitting/reduced inspections (UK

Environment Agency - risk-based inspection and

permitting).

Main focus of incentives to date.

Sectoral approaches have been successful.


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.


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;



and permitting).

Appear to respond mostly to ‘stick’ or negative

incentives;

Enablers such as free support are important to engage

with;


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;


(Environmental Tracking Index and Eco-

dynamiques).

High

Reduces compliance costs;


(Emilio-Romagna charge reductions OR US

Environmental Performance Track).

Financial rewards can spur continued investment in

improving environmental performance;


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;


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;


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;


(CDP, European business awards for the

environment and Euro topten).

MS level

Biggest scope for application, either at national or

regional/local level;



and permitting).

Significant scope for more at national, regional and

local level;


(Carbon Trust Energy Efficiency Loan).

National and sub-national programmes have had

success;


Disclosure incentives and awards (Eco-

dynamiques, Envol and business awards).


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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


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


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.


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.


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).


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



Incentive

Type


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.


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.


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.


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.


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



Incentive

Type


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.


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.


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



Incentive

Type


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



Incentive

Type


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



Incentive

Type


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.


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.


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).


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



Incentive

Type


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.


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



Incentive

Type


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.


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



Incentive

Type


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.


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



Incentive

Type


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.


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



Incentive

Type


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



Incentive

Type


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.


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


Voluntary National Mexico



Incentive

Type


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.


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



Incentive

Type


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.


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.


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



Incentive

Type


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.


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



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.


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.


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

Sound analysis, inspiring ideas

P.O. Box 4175

3006 AD Rotterdam

The Netherlands

Watermanweg 44

3067 GG Rotterdam

The Netherlands

T +31 (0)10 453 88 00

F +31 (0)10 453 07 68

E [email protected]

W www.ecorys.nl

Documents

Study on Incentives Driving Improvement of Environmental