Much of the debate on energy efficient technologies is related to the treatment of market and behavioural failures (cf. Hourcade et al., 2006).<sup>4</sup> Whereas there has been debate on whether TCs are, or are not, an additional source of market failure – and therefore whether governmental intervention is or is not required (c.f. Jaffe and Stavins, 1994; Howarth and Sanstad, 1995) – there is consensus that these costs do exist in energy technology markets (see e.g. Joskow, 1991; Ostertag, 1999). As a whole, it is argued that TCs are a significant but missing aspect that tends to overestimate GHG emission reduction potentials (see e.g. Fitchner et al., 2003; Michaelowa et al., 2003). The analysis of TCs can better assist comparative policy studies; improve the design implementation of policies; and support evaluation studies to boost the performance of policies (McCann et al., 2005).

Against this background, the objective of this paper is to provide a comprehensive review of empirical studies addressing TCs analysis that focus on energy efficiency (EE) technologies, renewable energy (RE) technologies, and carbon markets. All literature related to both the theoretical and empirical aspects was carefully reviewed. Gray literature (e.g., technical reports, unpublished draft papers and working papers) has also been included. The study first examined the theoretical debate on TCs, such as raised by Jaffe and Stavins (1994), Stavins (1995) and Howarth and Sanstad (1995) and attempt to clarify TCs affecting low-carbon technologies. Our review departs from industrial organisation studies that build on the theory of the firm in analysing the structure of, and boundaries between, firms and markets (see e.g. Williamson, 1981; Grossman and Hart, 1986; Hart and Moore, 1990).

TCs occur at different stages in a project/activity cycle, such as planning, implementation, monitoring and results verification and product certification and trading. At all levels, it is sometimes difficult to separate or draw a clear line of TCs along the project cycle (e.g. search for information costs might be applicable throughout the entire project cycle). The contributions of both endogenous and exogenous factors under these stages are discussed in each of the focus areas. The reasons for the wider variations in the estimations of TCs in the existing literature are also investigated.

# **2. Conceptual framework**

# **2.1. Key initial theoretical considerations**

Leon Walras built a model of market equilibrium according to which the pursuit of self-interest in a competitive market will automatically lead to the maximization of the society's total utility. In 1937, in the famous paper “ _The Nature of the Firm_ ”, Ronald Coase asserted that there is however a cost for running the economic system, that is a cost for the actual process of exchange of a good or a service performed by economic agents to occur (Coase, 1937). He characterized such an exchange in terms of a transfer of property rights. The more business activities develop, the more the number of transactions increases and the more complex the nature of transactions becomes. Several years later in his paper “ _The Problem of Social Cost_ ”, Coase (1960) attributes the function (or reason for the existence) of firms to the superiority in

> 4 Seminal contributions in this area are contained in the special issue of Energy Policy on Markets for Energy Efficiency (see Huntington et al., 1994).

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