Investing in Resource Efficiency – The Economics and Politics of Financing the Resource Transition

By Florian Flachenecker, Junior Economist, OECD, and Jun Rentschler, Economist, The World Bank1


Various factors are putting increasing pressure on policy makers, researchers, firms and investors to explore pathways towards sustainable and efficient resource management. These factors include: high and volatile resource prices, uncertain supply prospects, rising demand, and environmental pressures. Moreover, rapid technological transitions that are changing lives for the better are also adding to the challenge. The significant increase in renewable energy technologies, such as solar power, electric vehicles and smart-phone use, are improving people’s lives. While these developments are in line with the Sustainable Development Goals (SDGs), they are also driving up demand for critical natural resources.

Resource efficiency investments could help solve these challenges, yielding substantial benefits both economically and environmentally. And yet, global resource efficiency has increased by a mere 1% per year over the past three decades. This is insufficient to counterbalance ever-increasing resource demand.

Moreover, numerous initiatives have proliferated on national and international policy agendas in recent years to highlight the importance of the transition towards more resource efficient and circular economies. Prominent examples include Sustainable Development Goal 12, the G7 Alliance for Resource Efficiency, the G20 Resource Efficiency Dialogue, the EU Roadmap to a Resource Efficient Europe, Raw Materials Initiative and Circular Economy Action Plan, and the OECD work streams on resource efficiency, green growth and green finance. As OECD Secretary-General Ángel Gurría confirmed, the transition to a more resource efficient and circular economic growth model – the resource transition – is an integral component of sustainable development.

That’s why several international financial institutions – including the European Investment Bank, European Bank for Reconstruction and Development, and the International Finance Corporation of the World Bank Group – have put resource efficiency high on their agendas, providing substantial funding for resource efficiency projects. The United Nations established the International Resource Panel as a dedicated commission of experts on the issue. Such initiatives are underpinned by national, regional and local activities to upscale resource efficiency investments, aiming to redirect “waste” back into value chains. Many multinational companies are also now exploring the opportunities of resource efficiency – for instance organised in the Circular Economy 100 group.

Still, even declared champions of the resource efficiency agenda have yet to deliver fully on their ambitious goals. Overall, despite high-level attempts to mainstream the resource efficiency agenda, policy measures still lack a coherent, systematic approach and large-scale implementation. So how can ambition, individual projects and high-level targets be translated into wide-ranging action on the ground?

While there may be little doubt regarding the benefits of being more resource efficient, becoming more resource efficient is a complex task. Governments have to navigate multi-faceted incentives and trade-offs to determine overall policy frameworks. Businesses and individuals are often the ones at the forefront of implementing the measures and investments for increasing resource efficiency. But firms face a range of market frictions and barriers, which can dis-incentivise or even prevent them from undertaking investments in efficiency and low-carbon technologies. Not all firms, sectors and countries are likely to benefit equally from the resource transition. This requires policy makers and researchers to identify potential adjustment costs and design mitigation strategies for people, sectors and regions that may suffer in the short-term.

Three principles are key to determining the success of the resource transition:

First, increasing resource efficiency requires action on the ground: Decentralised decisions by firms and individuals are at the forefront of determining investments in resource efficiency by developing and adopting, for example, modern, efficient technologies and production processes. High-level policy frameworks and targets must account for the complex realities that actors such as small and medium-enterprises (SMEs) are confronted with in practice to ensure their participation in the process. To this end, platforms are required that allow information on ambitions and practical feasibility to flow between international, national and local levels.

Second, significant investment barriers that impede progress need to be addressed: The incentives for investments in resource efficiency are determined in a complex context of competing investment opportunities and barriers to action, such as information, capacity and financial constraints. Addressing this web of constraints requires smart and integrated policy responses that – for instance – support firms by providing dedicated schemes to mitigate investment barriers. These policy responses also need to address the underlying and systemic causes that created these barriers in the first place.

Third, the ambitious targets for resource efficiency must be matched to carefully designed policy packages: Investing in resource efficiency requires mobilising capital from the public and private sectors. To mobilise these resources, policy frameworks must be designed to mitigate and remove barriers to investment and to balance economic, environmental and social goals. Overall, integrated policy and regulatory strategies are needed to mitigate transitional costs, manage the trade-offs, and deliver the full potential of resource efficient and circular economies.

Practical measures like these can tackle existing barriers, create innovative approaches for boosting resource efficiency investments, and ultimately facilitate a smooth transition to more resource efficient and sustainable development pathways.

Read more about this topic in a related World Bank blog

1. For designing and implementing more effective resource efficiency policies, check out Investing in Resource Efficiency: The Economics and Politics of Financing the Resource Transition. This practical guide and reference was written while Florian Flachenecker and Jun Rentschler were Doctoral Researchers at University College London. The findings, interpretations, opinions and conclusions expressed in the book and the arguments employed are entirely those of the authors. They do not necessarily reflect the official views of the OECD or its member countries. They also do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organisations, or those of the Executive Directors of the World Bank or the governments they represent.