As the effects of climate change intensify around the world, companies are under growing pressure from government regulations, as well as investors and consumers, to move towards more sustainable and eco-friendly practices.
A classic example is the European Union’s (EU’s) Carbon Border Adjustment Mechanism, which entered into a transitional phase in 2023 and will go into effect fully in 2026. This requires affected industries to calculate their product’s carbon emissions and to either pay a fine or change their production process to reduce emissions if their product has more emissions than a similar product made in Europe.
The impact on non-complying companies in Latin America and the Caribbean could be significant. By imposing taxes on imports based on their carbon footprint, the mechanism will make it more expensive for non-complying companies in the region to sell their products in the EU, potentially affecting jobs and economic well-being.
With the need to help the region’s firms adjust to this new regime and better protect the region’s economies, the Inter-American Development Bank (IDB) has developed a Green Tool (Eco-Herramienta in Spanish) together with FUNDES, a consultancy dedicated to promoting sustainable development in Latin America through support for small- and medium-sized businesses.
Putting the Green Tool into Practice
The Green Tool helps companies develop and monitor eco-efficiency indicators and produce more goods and services while using fewer resources and generating less waste and pollution. It is in essence a spreadsheet that helps businesses track their environmental impact by using indicators, such as resource use and number of workers, to measure both environmental costs and economic output. By helping firms record data on their use and waste of electricity and water, it allows businesses to better understand and reduce their carbon footprint.
Behavioral change, however, is not easy. Numerous behavioral biases and obstacles must be overcome to get companies to adopt the Green Tool and move forward with emissions reductions. A recent field experiment conducted by the IDB thus sought to identify and then address structural and behavioral barriers that prevent micro, small, and medium enterprises (MSMEs) from lowering their carbon footprints, following the methodology applied by the IDB’s Behavioral Economics team.
Over a period of 20 weeks, an IDB team followed 155 MSMEs in Colombia’s textile industry and Peru’s plastic industry, which were chosen for their potential integration into regional or global value chains and their need to reduce their environmental impact.
Identifying Obstacles
The first stage of the experiment employed interviews with company owners and personell to identify the principal behavioral obstacles to more sustainable practices. It found that present bias, the tendency to prioritize immediate operational concerns over long-term environmental strategies; social norms, or the failure of others in ones’ group to reduce their carbon footprint; and structural barriers, such as financial constraints and lack of access to appropriate technology, were the principal hurdles. The experiment then sought to apply behavioral interventions, including videos providing motivational, knowledge and specific Green Tool content and a one-hour online mentorship session, along with a requested pledge, to overcome those barriers among a treatment group.
The Road to Greener Businesses
The experiment showed that targeted interventions could make an immense difference. Compared to a control group that merely got informational messages about the Green Tool through WhatsApp messaging—without the videos, mentorship program, or the request for a pledge—the treatment groups in both Colombia and Peru showed a much higher uptake in their use of the Green Tool, with the mentorship program appearing to be the most important factor. Indeed, while 100% of the MSMEs in the treatment group in Peru used the Green Tool to facilitate and measure the adoption of eco-efficiency indicators, none of the firms in the control group did. And while 63% of the treatment group in Colombia adopted the Green Tool, only a bit more than 8% in the control group did. Climate change is having an ever-greater impact on Latin America and the Caribbean. From glacial retreat to rising sea levels and more extreme weather events, the region is increasingly buffetted by the shifting global climate, as the need to transition to a low-carbon economy, fluctuating market prices, and technological advancements confront it in the economic arena. Yet, as urgent as the practical challenges might be, the more intangible one of overcoming behavioral biases and getting people and firms to act is paramount. Well-designed behavioral interventions, as our experiment reveals, can make a fundamental difference.
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