Incentives and Barriers for Energy Efficient Investment:
Evidence from Japanese Firms *○Naonari Yajima ** , Toshi H. Arimura † † and Emiko Inoue ‡ ‡1. Introduction
The Paris Agreement claims that at least 40% of greenhouse gases (GHG) reduction with respect
to base GHG of 2010 is necessary to reduce the risks of climate change. One of the important
options to realize this goal is to incentivize private firms to invest in energy efficiency andinitiate divestment of carbon-intensive production.
Despite the higher returns on energy efficient investment, such initiatives by the firms
are limited, due to the problem of a market failure. Some literatures report that this market failure
is due to the lack of information or mis-understandings of true benefits from the investment,
known as “Energy Efficiency Gap” (Allcott and Greenestone 2012, DeCanio et al., 1998; 2000).
Under such circumstances, economic theories predict that a cost-effective way to solve
the problem is to remove the cause of this market failure, i.e. providing information on thebenefit from energy efficiency investment (Allcott and Greenestone 2012). Therefore,understanding the firm’s incentives and barriers to investment in the climate mitigation isimportant to achieve the global goal of GHG reduction.
In this paper, we try to investigate the role of the following two elements in the firm’s
decision to adopt the climate mitigation strategy. The first element that we focus on isorganizational structures of firms followed by Martin et al. (2012). Particularly, we focus on theexistence of environmental department, and the relationships between environmental managers
and top-level executives. The second one is the Act on Rational Use of Energy, which is a uniqueregulation to promote the energy management and conservation in Japan.
2. Econometric Strategy
We performed a regression analysis using a unique data set of Japanese firms from all sectors. We
conducted the survey to collect information on environmental practices at 2010 and connectedeconomic data from Teikoku Data Bank data. Moreover, we collected the information on theorganizational structures from Toyo Keizai CSR data and environmental report published by eachfirm.
3. Results
Main estimation results are summarized in Table 1. Our findings are as follows. First, our resultssuggest that establishing an environmental department and implementing the Act promotes large
Graduate School of Economics, Waseda University, Japan
Faculty of Political Science and Economics, Waseda University, Japan‡ ‡ Faculty of Economics, Kyoto University, Japan**††firms adopting the environmental practices. However, we find that these factors only influence
relatively less costly decision such as energy efficiency investment. Second, we also investigated
the impact of these factors on divestment in addition to the investment, and we find theexecutives can proceed such relatively more costly decision. Thirdly, we investigate theindustrial heterogeneity of the impacts of both elements.
4. Conclusion
These results provide us some implications on how to proceed de-carbonization. First, anestablishment of an environmental department and the Act can be effective for bridging the“Energy Efficiency Gap”. Some requirements under the Act such as making a plan and appointing
an “energy management control officer”, and the department may solve a lack of information andmiss-understanding of benefits of environmental practices. However, the department and the Act
may not be enough to proceed divestment. Because they do not have sufficient power on
promoting divestment. A reason may be a lack of authority. Second, joining a higher-ranking
person into managerial team in charge of environmental policy is effective to solve such lack. On
the other hand, the second result also indicates that the higher-ranking person does not always
adopt less-costly decision. Hence, the environmental department and the Act, and executives havea complementary relationship.
Table 1 Main Results using the all sectors
Energy Saving Practices

Divestment
Withdrawal Cancelation

Investment Investment

DepartmentExecutives

The_ActN
LR testDesign of

fromofDevelopment environmen

carbonnew carbon

Energyonon

Efficiency

the new

the existingoftal

intensive

intensive

Improvement facilities

facilities

new products

products

businessbusiness

0.28

0.39**

0.15

0.53***

0.54***

-0.31

-0.49

(0.25)(0.20)(0.20)(0.19)(0.19)(0.32)(0.36)

-0.56

0.44

-0.31

0.40

-0.17

1.42***

1.37***(0.45)(0.35)(0.38)(0.36)(0.35)(0.49)(0.52)

0.12

0.82***

1.06***

0.09

-0.18

-0.47*-0.33(0.21)(0.18)(0.17)(0.17)(0.17)(0.27)(0.30)

536

516

531

530

524

478

433

0.00***

0.00***

0.00***

0.00***

0.00***

0.02**

0.15

Notes: Standard errors in parenthesis. Variables not shown includes natural-log of turnovers,
sub-sector dummies, stakeholder dummies. * p< 0.10, ** p<0.05, *** p<0.01