Imposing versus Enacting Commitments for the Long‐Term Energy Transition: Perspectives from the Firm

Societal stakeholders in many developed economies are increasingly pushing for a long-term energy (LTE) transition from high carbon-emitting energy supply to lower emission and even emission-free energy sources. For most of these stakeholders, the societal debate on the merits of an LTE transition is over, and in their minds the remaining implementation challenges relate to the timing and scope of this transition across industries and locations: how can the LTE transition be accelerated and how can it be broadened to cover as many industries and geographic milieus as possible? It is factually correct that the global energy mix has changed significantly during the past three decades, with world renewable energy generation having more than tripled. Building upon the current state of energy technologies, the LTE transition is expected to entail further reductions in carbon emissions when using conventional energy sources, and also additional shifts from non-renewable energy sources towards renewable ones (hydro, biomass, wind, solar). However, given the growth in world population and the increase in wealth in many countries, global carbon emissions have not been reduced (Ritchie and Roser, 2020). At this point in time (2021), some proponents of the LTE transition therefore desire a more rapid and more drastic reduction in greenhouse gas (GHG) emissions from conventional sources, accompanied by an equally swift and significant increase of emission-free sources of energy supply. But as is usually the case in business, one size does not fit all when large-scale capital investments and innovation activities are involved. The timing and scope of the LTE transition appear to vary greatly across country and industry contexts. At the national level, the impact and speed of the LTE transition appear to depend at least partly on the type of legal system prevailing in the country. Within the developed world, the liberal market economies governed by common law have historically had national policy frameworks favourably inclined towards supporting the hydrocarbon industry (Boersma and Johnson, 2012; Brown and Hess, 2016; Chasek, 2007; Jacoby, O'Sullivan and Paltsev, 2011). Conversely, in other developed countries with more market coordination and governed by civil law, the policy agenda appears to have shifted more swiftly to stimulating renewables (Chasek, 2007; Reiner et al., 2006; Renn and Marshall, 2016; Szulecki et al., 2016). In this realm, US and UK business investments in renewables have historically been somewhat more modest in relative terms, and the policy environment more challenging, than in a number of more strongly coordinated markets (Reiner et al., 2006; Sawin et al., 2010). In emerging markets, policy responses have typically been less coherent, although some large nation-states such as China – with its massive state-controlled segment of the economy that is complemented by more market-driven segments – have promoted a greater usage of renewables and have fine-tuned industry incentives accordingly. However, even if some market and non-market forces try to impose commitments towards an LTE transition on existing firms, this pressure – albeit possibly a necessary condition for firm-level changes – may not be a sufficient condition for wholesale changes in capital expenditure projects and technological innovation. The sufficient condition for an LTE transition is that business firms operating in sectors with the highest GHG emissions, respond to the market and non-market forces at play by enacting these imposed commitments via investments and innovation (Verbeke, Osiyevskyy and Backman, 2017). The notion of enacting is used here to reflect the sensemaking process inside firms, whereby they try to make sense of their new business environment with commitments imposed on them by outsiders. They attempt to author their own reality, based at least in part on their unique historical trajectory in terms of identity, social context, the products they deliver and the markets they serve (see Eddleston, Banalieva and Verbeke, 2020 on the relevance of sensemaking and enacting for strategy). The goal of this Special Joint Initiative, 'The Grand Challenge of Energy Transitions' by the Journal of International Business Studies (JIBS) and the British Journal of Management (BJM), is to showcase new work that engages with this challenge at the societal and business levels. Here, we highlight the distinction between imposing commitments and enacting commitments towards the LTE transition. Researchers sometimes assume as self-evident the linkages between macro-level intention and firm-level action: that is, the affected firms are simply assumed to carry out investments and engage in innovations to reduce GHG emissions as a result of (especially) non-market forces imposing commitments towards an LTE transition on business. In our view, however, the most promising avenue for research in this area is to assess whether such linkages are actually present, and what the underlying mechanisms are to move from external forces imposing commitments on firms to large-scale capital investments and tangible innovation outcomes. We propose a simple framework linking commitments imposed on firms by market and non-market forces to affect GHG emissions with firm-level behaviour enacting these imposed commitments towards the LTE transition. In the following section, we introduce the imposing commitments versus enacting commitments framework and then discuss how the papers in this Special Section align with this framework. We conclude with suggestions for further research on the LTE transition, using a firm-level lens. The human-induced contributions to climate change can be viewed in part as consisting of negative externalities arising from the collective consumption of non-renewable energy and the related GHG emissions. Implementing the polluter-pays principle is one way of reducing the negative external effects of non-renewable energy consumption. However, many governments and non-governmental organizations (NGOs) want to go further in order to achieve climate neutrality during the 2050–2060 period. If establishing a clear path to climate neutrality represents the goal to be achieved, then the requisite LTE transition is particularly ambitious. First, the LTE transition must have a global reach. Since climate change is a consequence of collective non-renewable energy consumption, a global reach of the LTE transition is necessary to affect climate change significantly. Only if the most important GHG emitters – such as China, the United States, India and Russia – as well as a large majority of other countries in the world commit themselves to this proposed path, will it be possible to reach the climate goals that are often communicated at global conferences on the issue. Second, the LTE transition – if it is to unfold without a reduction of overall economic activity – demands the decoupling of economic activity and growth from energy consumption associated with GHG emissions. Such decoupling entails massive capital expenditures and technological innovation, especially by firms and industries that are large emitters. The LTE transition represents the most fundamental change in the world economy since the industrialization based on fossil energy sources. Third, the LTE transition is viewed as urgent by a variety of societal stakeholders; this sense of urgency places strong pressure on business firms in industries and geographic milieus where GHG emissions are high, to reduce their GHG footprint in order to retain their social licence to operate. The joint occurrence of needed global reach, requisite massive capital expenditures and technological innovation, and perceived urgency of the LTE transition translates into major challenges of complexity, uncertainty and ambiguity in public policy and corporate strategy formation. The complexity is related to the fact that the LTE transition does not simply affect isolated economic actors, but entire business systems, spanning vertical value chains and a wide variety of interconnected but spatially distributed economic activities. In addition, how the different actors involved in these systems depend on each other, and how decisions by one actor affect others, is often not transparent, thereby creating challenges of uncertainty and ambiguity as to the likely effects of particular courses of action. Actors on both the imposing and enacting sides of the LTE transition operate subject to similar micro-foundational constraints, namely bounded rationality and bounded reliability. Bounded rationality in the realm of policy and strategy formation reflects the conditions of imperfect information; imperfect information processing capacity in the face of complex, uncertain, ambiguous and distributed information; biased selection of the information facets viewed as most important to decision-making; and coloured judgement on the meaning of the information facets selected for decision-making purposes. One result of higher bounded rationality on the policy side is that those actors trying to impose a transition on industry may not fully comprehend the implications of specific policy measures on the business firms supposed to enact a transition, largely because the overall policy framing and the policy goals pursued are macro-level oriented. And one outcome of this for the enacting firms is that they are supposed to respond to new rules of the game, whether incentivizing or constraining, that were not designed with their firm-level context and associated challenges in mind. Bounded reliability reflects imperfect efforts to make good on open-ended promises, whether because of strong-form self-interest, benevolent preference reversal, or identity-based discordance. In an ordinary organizational context, and assuming manageable challenges of bounded rationality, it is often relatively easy to identify the unreliability of economic actors and to diagnose remedies for preventing or mitigating instances of unreliability via effective interventions in structural and strategic governance (Kano and Verbeke, 2015; Verbeke and Fariborzi, 2019). However, in the realm of public policy design and the broader exerting of societal pressures on business, non-market actors try to impose commitments on businesses. Imposing commitments as a type of contracting is supposedly required because businesses cannot be expected to act reliably in addressing their own climate change impacts to serve societal interests. But public policymakers and other non-market actors, when deciding not to follow the polluter-pays principle, instead need to make a large number of assumptions as to how public policy measures and societal pressures will in the short run change the behaviour of polluters and affect pollution outcomes, and in the longer run will also support shifts in capital expenditure patterns and technological innovation. From the perspective of the firms upon whom an LTE transition is imposed, the assessment may be that the boundedly rational external forces involved may have unrealistic expectations as to the speed with which the imposed commitments can actually be implemented, as well as the cost thereof. In addition, in the realm of technological innovation and shifts to renewable energy sources, the relevant innovation processes occurring inside businesses are typically a black box for non-market actors, which amplifies further the divide between those imposing transition commitments and the firms supposed to enact these commitments. In the following we introduce a simple 'imposing commitments' versus 'enacting commitments' framework and illustrate how bounded rationality and bounded reliability shape LTE transition outcomes. In order to make the LTE transition a reality at the aggregate level of a national or regional economy, or even the global economic system, strong non-market forces imposing transition commitments on business are often viewed as necessary. Commitments that are urgently needed and that must ultimately be global in reach and consist of massive capital expenditures and innovation will not be made solely through bottom-up processes with business firms taking the lead. Individual companies face substantial bounded rationality problems themselves, for example, in terms of understanding the requirements for a future social licence to operate and for profitable investments in new technologies. At least some commitments imposed on business by the non-market may be required to drive the LTE transition, despite these forces having only a black-box understanding of business, and despite the fact that sometimes, imposing commitments on energy systems may be more a form of virtue signalling than a driver of investments and genuine technological innovation (in such instances also highlighting the bounded reliability of some non-market actors). The forces at play that try to impose commitments on firms have a source dimension and a time dimension. The source dimension refers to where the imposed commitment originates and how powerful this source is. Among the non-market forces that can act as the source, a distinction can be made between regulatory authorities such as governments and supra-governmental bodies such as the European Union on the one hand, and NGOs and activist movements on the other. A number of market forces may also be active in this realm. These may include, inter alia, value chain partners such as customers and suppliers, providers of capital and other inputs, as well as – albeit more implicitly – competitors. Competitors who have enacted an LTE transition early on and are gaining competitive advantage by such enactment pose a threat to laggards and can implicitly reinforce the non-market pressures on these companies. Sources imposing a transition can be further differentiated based on their scope, that is whether they operate mainly at the local level and with a limited reach – such as industry emission regulators in a particular country, or, on the contrary, span multiple industries and nations. As regards the time dimension, the commitments imposed on firms may be in operation already (e.g. via a regulatory framework that is presently in place), or might be evolving over time, meaning that it is important to anticipate how they will unfold in the future. The already imposed commitments can result from laws and other formal regulations, as well as from pressures exerted by a large number of market and non-market forces. Here, interpretations by firms as to the goals, the content and the impact of existing, imposed commitments can vary significantly. Importantly, anticipated future impositions can be associated with considerable uncertainty. Senior management and Boards at the firm level can sometimes anticipate accurately future impositions pushing a transition, but this accuracy is limited because of bounded rationality constraints; for example, the prediction as to which government (more transition-leaning versus more transition-reticent) will be in power in the foreseeable future. What matters is imagining how future, imposed transition measures might affect the firm's operations and its survival, profitability and growth. The firm must therefore carefully monitor both non-market and market actors who could be instrumental in imposing transition commitments, with a special focus on how those actors may themselves be facing severe bounded rationality constraints in contemplating new measures and may also have little reliability in terms of making good on implicit or explicit promises not to disrupt completely normal business operations in industry. Figure 1 shows the spectrum of forces imposing transition commitments on firms. Understanding fully this spectrum may support firms in their strategizing to be to reduce the of these imposed commitments and to identify possible business related to these commitments. In Figure the vertical between the sources imposing such commitments, namely non-market forces and market forces. The the distinction between the existing of imposed commitments and future the of the of the forces imposing transition commitments, each firm to how to enact these commitments, by in a transition process Verbeke and 2017). 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