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Investment vehicles, such as cars parked at the Tesla factory in Gruenheide, Germany, are at the center of the conversation about private sector involvement in addressing climate change. Some argue that businesses should prioritize profitability and economic growth over environmental concerns. However, growing evidence contradicts this viewpoint. Taking climate-friendly actions, such as reducing production emissions and setting net zero targets, can actually enhance shareholder value. Moreover, consumers are increasingly opting for environmentally conscious choices, such as sustainable packaging and clean energy.
The automotive industry serves as a prime example of this shift. While diesel car sales plummeted following the 2015 emissions scandal, there has been a surge in demand for electric vehicles, particularly Tesla. Prior to the scandal, consumers willingly paid extra for diesel cars, considering them both economical and eco-friendly. This change in consumer behavior indicates that developing clean and sustainable products can offer a competitive advantage, as long as the environmental benefits are genuine.
Creating these innovative products may involve higher costs, but the potential competitive edge could justify the expense. Additionally, if enough consumers are initially willing to pay a premium for environmentally friendly products, the direction of innovation will align, leading to reduced costs over time. In this way, clean technology can become more affordable than alternatives that harm the environment.
So, the question remains: are consumers’ environmental beliefs merely empty words that will dissipate when faced with higher prices? Or are they powerful motivators that can influence product success and generate value? Moreover, does competition promote or discourage sustainable product innovation?
A recent study conducted by experts from Princeton, the London School of Economics, Insead, and Collège de France delved into these questions. The research team developed an economic model that combines the concept of “escape competition” (where competitors innovate to gain an edge) with the recognition that consumers inherently value environmental aspects of a product. They employed data from the automotive industry to test this model.
To measure pro-environmental sentiment, the study analyzed population surveys from 25 countries, asking participants if they would be willing to pay higher prices for environmentally friendly products. The results indicated that businesses operating in markets with a stronger pro-environmental sentiment intensified their innovation efforts in electric, hydrogen, and hybrid technologies while reducing their focus on combustion engine technology. This effect was more pronounced in highly competitive markets.
Interestingly, the researchers also noted that, on average, global pro-environmental sentiment declined during a substantial portion of the sample period (1998-2012). However, this period still witnessed an overall increase in clean innovation due to heightened fuel prices and increased competition. Comparing these findings, the analysis suggests that a combination of rising pro-environmental attitudes and competitive product markets can have a similar impact on green innovation as a 17% surge in global fuel prices.
These insights have practical implications for policymakers, who often face resistance when attempting to implement significant carbon pricing mechanisms, like carbon taxes. The study indicates that efforts to shift environmental attitudes, such as educational initiatives and grassroots campaigns, can yield tangible benefits without the political challenges associated with carbon pricing.
Businesses can also learn from these findings. Instead of viewing climate mitigation as a regulatory burden, companies should see it as an opportunity. Embracing environmentally friendly approaches can not only generate profits but also provide a competitive edge. Initially, this advantage may rely on a subset of consumers willing to pay higher prices. However, as time goes on, cleaner products can reach a tipping point where they can compete on price with more polluting alternatives.
This market-led approach offers a practical pathway to universal adoption of clean technologies. However, it is crucial to note that mere greenwashing is insufficient to win over informed consumers in the long run. Tangible environmental benefits must accompany approaches and innovations to gain lasting credibility.
Philippe Aghion (London School of Economics, INSEAD, College de France), Roland Bénabou (Princeton University), Ralf Martin (Imperial College Business School), and Alexandra Roulet (INSEAD) are the co-authors of a study titled “Environmental Preferences and Technological Choices: Is Market Competition Clean or Dirty?” (American Economic Review Insights, 2023).
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