ABSTRACT
A key rationale for undertaking FFS reforms is that they would result in efficiency gains and mitigate negative externalities (e.g. environmental). However, this chapter argues that even when a “green” tax reform (such as FFS reform) is implemented, economic agents may be unable (or unwilling) to adjust their behaviour and technology in response to price signals. With a focus on energy and material efficiency investments, this chapter systematically investigates how the theoretical assumptions of perfectly competitive and efficient markets are violated in practice, and how this results in complex and interlinked investment barriers. These barriers can prevent firms in particular from undertaking investments in efficiency and low-carbon technology. The chapter classifies five categories of investment barriers: information, capacity, and financial constraints, as well as uncompetitive market structures and fiscal mismanagement – and presents evidence on each of these. It concludes by proposing a range of measures for mitigating investment barriers and addressing their structural causes. Overall, this chapter identifies market distortions that FFS reforms alone cannot address, and suggests complementary policy measures to address these barriers and increase the effectiveness of FFS reforms (and environmental tax reforms more generally).
