Adoption paid by non-adopters: an innovative techno-economic policy to spread clean technologies Full paper Valentino Piana



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A
doption paid by non-adopters: an innovative techno-economic policy to spread clean technologies

Full paper
Valentino Piana


Climate change mitigation and adaptation measures will require the fastest possible adoption rate of clean technologies to substitute the most polluting ones. Based on insights of diffusion theory and robust empirical evidence, an innovative tax scheme is proposed, in a wider framework of diffusion as a process involving social, technological and economic aspects.
1. Objectives of the scheme
By repetitively levying a small tax on non-adopters to finance adopters, a responsive mechanism of stimulation is put in place to “foster an efficient level of […] diffusion of greenhouse gas emissions-reducing technologies” (Duval, 2008) at no cost for the policy-maker and with an electoral majority of consensus in the population at large. Adopters enjoy a boost of profits, whereas many people are left out of the scheme (e.g. because they are poor) while receiving the environmental benefits. Administrative and monitoring costs are kept low by trivial methods. With slightly higher monitoring costs, the same mechanism can target performance thresholds (e.g. levels of CO2 emissions) instead of specific technologies.
2. Background
The scheme is a supplement to “emission reduction targets and allocation rights”, as requested by a growing number of stakeholders (Ecosecurities, 2007), to frame the political discourse on mitigation and adaptation measures as opportunities for “technological diffusion & profit” instead as a “burden on taxpayers and industry in trouble”. To quickly begin an effective reduction in emissions from the bottom up is as important as a global agreement on long-term targets: the two goals mutually reinforce each other, by breaking scepticism and fears.
By deepening the Technology-Centred Approach (Barrett, 2003), our proposal emphasises the large diffusion of existing clean technologies at their early commercialisation stage, so it can have an immediate impact on emissions and the profitability of innovators.
3. Diffusion as techno-social-economic process

The diffusion of an innovation in a population of potential users has been studied for decades. The standard theory of diffusion of technological and behaviour innovations (e.g. Rogers, 1962, revised in 2003) has been enlarged by new strands of models and insights (e.g. Nelson and Winter, 1982; van Dijk and Nomaler, 2000) but it is still confirmed that diffusion follows more or less an S-shaped curve of successive adoptions by:




  1. a very small group of pioneers (who have a special preference for the technology often beyond direct economic benefit, e.g. they have a “green” culture);

  2. a small group of “early adopters” (who scrutinise the pioneers and are rewarded by the social consideration of being “opinion maker”);

  3. a group of “early majority” (who are attracted by economic benefits – “carrot”);

  4. the “late majority” (who should be motivated by the negative effects of non-adopting – “stick”);

  5. the “laggards” (who adopt only if there is a compelling mandate by law, because they have a stubbornness out of cultural reasons, e.g. anti-environmentalist attitude).

Other patterns can be due to intensive advertising before launch of the innovation on the market (with an early peak of sales), erratic paths around a low average due to products having both strong minuses and pluses, constant low sales because of forced repurchasing by the same categories of users, diffusion failure (with fast aborted trajectories). Cyclical fashions might exhibit irregular sinusoidal dynamics. However, the large majority of successful innovation in normal conditions appeals to different user categories as described.


We think that policies targeted to fast and wide diffusion of innovation should take into account the heterogeneity of potential buyers. In particular:


  1. “pioneers” should be free, with a liberalisation of laws, regulations and social conventions;

  2. “early adopters” should be praised in moral and social terms across mass media and communication networks;

  3. the “early majority” should receive positive material incentives;

  4. the “late majority” should suffer from negative material disincentives if they do not adopt;

  5. the “laggards” should face a mandate by law to adopt before a certain temporal deadline.

In so doing, the policymaker would impact the different motivational triggering factors of the population of consumers or firms, taking advantage of asymmetries like between positive and negative incentives, as underlined by prospect theory (Kahneman and Tverski, 1979; Brekke and Johansson-Stenman, 2008).


4. Climate change mitigation requires the diffusion of innovations and behaviours
A large reduction in CO2 and other greenhouse gases is linked to the modification of technological coefficients of the installed stock of capital (buildings, cars, plants, land,…) as well as of the behaviours of consumers and firms (house temperature, km travelled, working hours, deforestation activities, …). It’s not enough that R&D labs propose breakthrough innovations: they should be timely and widely adopted. Carbon taxes and prices (e.g. generated by a cap-and-trade international system) will broadly influence the purchase and use of new technologies but on certain key markets there might be entire classes or specific technologies whose diffusion should be explicitly targeted, involving a complex strategy of communication, as widely explained in Moser and Dilling (2007).
5. The proposed scheme: the simplest case
Early majority potential buyers are particularly sensitive to positive incentives, whereas late majority should feel the cost of not adopting. Since together they account for the largest part of the population, a wide adoption requires their mobilisation. Pioneers should be taken as positive example and wide media coverage should be generated at early stage of diffusion. The perspective of a final deadline for adoption is effective also on laggards, especially it is very credible, with no past experience of deadlines missed and postponed.
In this vein, we propose PRODINT (PRO-Diffusion-of-INnovation Tax).
Let's concentrate on a situation in which innovation is embodied in a durable good, thus adoption means just to purchase it by paying a given price P. Let's further assume that the use of the good does not generate any additional flow of money neither positive nor negative (see chapter 6.3. for the removal of this hypothesis). Adoption thus has a sunk cost (P) but no fixed or variable cost.
Although in general the cost C of adopting the good comprehends not only P but also monetary and non-monetary components due to the difficulty of using the new good, any cultural resistances to adopt, and possibly the cost of overwhelming the very unawareness of its existance, in this simplest case the adoption cost might be reduced to P.
The tax on non-adopters will be a lump-sum whose value is a fraction f of C. The tax revenue be distributed in equal shares to recent adopters, defined as the agents that at a certain date can demonstrate of having adopted the innovation after a previous date.
Were the tax levied just once, it would be a mere payment from non-adopters to users. However we assume that it is levied several times, thus turning out to be:
* the first time: a payment to the entire population of adopters, but
* the further times: a payment just to whom adopted meanwhile, i.e. between two application dates.
Each adopter can get the revenue just once.
The revenue of a lump-sum tax of a fraction f of the cost C of adopting a new clean technology, levied on non-adopters, is distributed to recent adopters. The entire burden of adopting is brought by non-adopters. Not only they pay the tax but also they do not share the tax revenue and they do not have the advantages of using the innovation (e.g. alternative fuel cars and distribution stations, gas-free refrigeration platforms, eco-buildings, etc.).

If the tax is levied at the beginning of the diffusion curve, when only a very small number of pioneers has adopted, then the tax revenue will be extremely high, even if the fraction f is small, because almost everybody is a non-adopter. The adopters will receive more than C, making a large profit, which will have a strong media coverage, prompting for imitation.

In the next round, non-adopters again have to pay f. In order to avoid paying, some (not all) will adopt; their strategy clearly pays off: they receive a larger sum than C because non-adopters are still a large majority.

If the tax is levied frequently enough, the recipients will be less numerous than the payers, with a ratio of f needed to cover the adoption cost.


As far as the diffusion process proceeds and non-adopters become a minority ("late comers"), there might be a change: the tax revenue could be distributed as a loan to those who promise to adopt in this new period. If they adopt, the loan is forgiven, if not they have to pay it back. Since a minority of them will promise to adopt, they will be prized with a loan fairly near to the entire C (although possibly not covering it in whole).
In another vein, as the number of non-adaptors goes down, one might increase the percentage of tax. This will raise a larger revenue even at this stage and will encourage everyone to "get on board" early
If non-adopters are a very small minority, they can be left in peace with the tax scrapped (if it is tolerable that somebody does not adopt), or the loan structure can be in place indefinetely.
In this simplest form, the tax does not generate revenue for the state, it's a mere redistribution within an industry or a population; some receives what other pays.
6. A real-world application: distribution stations of alternative fuel
To reduce CO2 emissions and save energy, new "fuels" have been proposed for cars (e.g. GPL, electricity, hydrogen, compressed air,...) with distribution infrastructure being a major obstacle to their diffusion. The consumer does not want to buy a car that has no stations nationwide, while no distribution chain wants to set up stations if the number of consumers is too low. This vicious cycle can be broken by PRODINT, levied on existing gasoline stations.
A small tax is levied on each station that does not distribute the alternative fuel, irrespective of the ownership of the station (large chains, independent owners,...). The total tax revenue is given to the very few pioneers that add the new fuel to their existing supply lines (e.g. some environmentally-minded independent owners). They receive a huge amount of money, since non-adopters are thousands and outnumber the adopters.
The news spread, the profits lure new adopters (e.g. environmentally-sensitive owners that were afraid of the cost of adoption). Again the small tax is levied and they receive a very good amount of money, attracting a third wave of adopters (owners attracted by money only, without a particular environmental sensitivity).
This should be enough for chains to take in serious consideration stopping financing adoptions of their competitors. One or two can establish plans for adding alternative fuel to their offer in a number of stations over time. These plans are credible commitments, so car purchaser begin to have good reasons to buy cars with the new fuel (e.g. hybrid cars).
Since alternative fuel can be cheaper or be made cheaper by a legislation that internalize the costs of pollution and CO2 emission to the different fuels, early car adopters will enjoy a cost advantage with respect to the conventional car users. The wider number of alternative fuel cars increases the profits of stations offering alternative fuel. Since they remain a minority, each one covers a much wider area (consumption basin) which allows a relatively quick increase of sales.
Normal market mechanism will start working, spreading the new fuel in further stations and consumers near to those stations beginning to switch to the new fuel.
The PRODINT mechanism will stay until a satisfactory diffusion of the new distribution infrastructure is achieved. It costed nothing to the policy-maker, who can boast the reduction of CO2 emissions and the trasport costs. Producers of alternative fuel cars will make healthy profits, attracting further producers thus guaranteeing a wider choice of car models.
As the reader will have noticed, we are taking into account not only strictly monetary factors, but also the mentality, the level of information and behavioural inertia of the various actors involved.
7. Some key details: administrative and monitoring costs
Administrative costs of PRODINT are minimal. By leveraging existing technology, one can imagine a bank account where people pay the tax, while signalling by email that they adopted the good so as to receive to their bank accounts the share of tax revenue. No bureaucracy has to be added.
Monitoring costs can be brought down to very low levels through widespread power of control. For instance, any citizen could be entitled to signal non-adoption and this message is compared with official declaration of the adopter/nonadopter; in case of discrepancy (or a number of signalled discrepancies) a mission to verify is sent; if indeed there is a violation, then a high fine is issued; the citizen(s) having signalled receive(s) a part of the fine.
Many other systems of monitoring and administration can be deviced, while keeping simplicity and low costs being their features.
8. The main advantages of PRODINT
In synthesis, the main advantages of this tax system are the following:
1. totally relying on spontaneous decision, leaving people free to adopt or not;
2. no tax burden for the population as a whole;
3. during the process a large amount of people is better off with the scheme than without; of course, non-adopters would have preferred the absence of the scheme but they become a minority over time; if the wide diffusion triggers the diffusion of a complementary technology (as with the case of cars after the stations) even the "forced" adopters are happy of having done this;
4. the tax levied can be really small in absolute terms.
Additionally, the reaction of the sellers of the good is much better than in presence of a state incentive: they do not change their prices because they do not know how much the adopters might receive from the tax. On the contrary, lump-sum or percentage state-paid incentives to customers are often transferred to extra-profits of the sellers who increase price of that sum, by keeping almost at the same net price the purchaser.
In the sector producing the innovation, this scheme generates a diffusion dynamics that matches reasonable production timetable, with increasing production over time and a relatively long tail, whereas deadlines - which mandate everybody adopting - generate a skyrocketing production before deadlines and zero afterwards, with the necessity of having a large production capacity which ends up to be useless. Capital is piled up, labour is selected in a rush, has no time to learn the job and then is fired because employment goes to zero.
In turn, the smoother dynamics fostered by PRODINT allows incremental improvements of the innovation itself, as for solar panels getting more efficient over time, because the profits from early production can be channelled to R&D, as you can experiment in this interactive model.
Note that in the supplier sector, many firms compete and the consumer has the time to compare the many differentiated versions offered, whereas with deadlines the suppliers are sure to sell and do not care about additional features.
9. Some more advanced cases
9.1. Variable cost of adoption
If the cost C of adopting is not constant but has an observable distribution in the population, then the size of payments to recent adopters might be somewhat adjusted to it. This in particular is relevant when adoption relates to a vertically differentiated good and the policymaker would like to influence not only the mere fact of adoption but also its "quality", by giving more to the boldest adopters of "better" technologies.
9.2. Unknown and extremely variable cost of adoption
A more extreme case is when not only the cost of adoption is different for each agent in the population, but also it cannot be observed from outside (it is a private information of the agent).
In this case, the policymaker can request the agent to write down its estimate of adoption cost (leaving room for opportunistic behaviour) and establish the amount of tax in relation to its distribution. In particular, given a target fraction of the population that one wants to motivate to adopt, one can sum up the declared adoption cost of that fraction, beginning from the lowest estimates. In this way one obtains the lowest total amount to be given to that fraction so as it to adopt. This amount is divided by the number of non adopters and fixed as their tax. The tax revenue is distributed as a loan to those who promise to adopt in this new period. If they adopt indeed, the loan is cancelled, if not they have to pay it back.
One would expect firms to overshoot, by declaring higher costs than real ones. But those who ask the largest sums will usually end up rather paying than receiving. Those who receive will probably get high profits from the tax, confirming that it is better not to overshoot. In this uncertain scenario one thing is sure: adoption is granted in the requested quantity. Individual profits and losses represent "collateral damage" for meeting the target.
9.3. Adoption of a technology with a stream of costs and revenues over time
Many technologies involve not only a cost C for purchase but also additional costs over time in terms of maintenance, fuel, etc. In particular, a recurrent situation is where a more expensive technology in terms of C has lower variable costs over time (e.g. an efficient engine that requires less fuel but is more expensive at the time of purchase, a solar panel, etc.).
In this case, the adoption is linked to a low discount rate and a long acceptable payback period: the investor compare the present value of the technology by discounting the savings in the future with the higher cost of investment now.
More in general, the technology can involve also revenues flows, with discounting once again being the common way to take decisions of adoption.
This means that the prevailing interest rate on the market is a key determinant in choosing to adopt, with too high interest rates discouraging innovation diffusion.
PRODINT modifies only the cost of purchase, not the stream of costs and revenues afterwards, so it increases the roof for interest rate below which adoption takes place, it reduces the years for payback, so it drastically help adoption for a number of investors. In more technical terms, PRODINT increases both the Net Present Value (NPV) and the Internal Rate of Return (IRR) of the investment, so that a wider number of investors find the decision profitable.
9.4. Meeting performance threshold instead of specific technology diffusion
In certain cases, the policymaker does not know the exact technology that would be necessary to reach its goals (e.g. "lowering greenhouse gases emissions" or "increasing the competitiveness of the industry"). In other cases, technologies are known but there are several of them in competition to each other (e.g. broadband Internet connection delivered by satellite, cable, Wi-Fi, Wi-MAX, x-DSL, etc.) and the policymaker does not want to favour one against the other, possibly because of consensus constraints.
To the extent that performance is measurable, the tax can be levied on the group of agents that does not meet a minimum threshold and the tax revenue given to those exceed a sufficiency threshold.
The two thresholds can converge in one or be separated by a neutral zone, where no payment is made in either direction.
If performance, e.g. energy efficiency, is presently distributed according to a bell curve, the situation can be depicted in the following way:

People and firms using technology whose energy efficiency is below EE1 will pay the tax, whose revenue is transferred to those whose energy efficiency is higher than EE2. Because of the fact that the blue taxed are more numerous than the red receivers, the tax can be small and tolerable, while the incentive will be strong. Since the improvement in the environment resulting from higher average efficiency (the main benefit of the entire strategy) is given to all, the neutral zone can align itself with the recipients and form a political majority.


The thresholds can be established to change over time, e.g. an increase of 2% per year, so to create a clear, stable, and pro-diffusion environment for all the agents.
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