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All queries on rights and licenses effective and productive collaboration in data collection for the Technology Adoption Survey should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC and their willingness to share anonymized firm-level data, which permitted the authors to 20433, USA; e-mail: pubrights@worldbank.org. perform most of the analysis presented in this report. verview Why energy Two key Decomposing From energy efficiency necessary the drivers consumption to & reducing reform areas of energy CO2 emissions greenhouse CH. 2 consumption CH. 4 gas emissions & carbon should be a emissions policy priority in CH. 3 Georgia CH. 1 Contents 1 358 Page Page Page Page The potential effects How large are The drivers of Price incentives matter for of enhancing energy the gains from energy energy efficiency enhancing energy energy efficiency efficiency? CH. 7 CH. 8 CH. 5 CH. 6 Policy recommendations CH. 9 9 10 15 21 Page Page Page Page 1 Overview Greening Firms in Georgia Why energy efficiency and 58% reducing greenhouse gas emissions should be a policy priority in Georgia CHAPTER 1 GHG emissions growth in Georgia between 2021 and 2022 G eorgia’s greenhouse gas Although many countries are decoupling (GHG) emissions per capita their growth from emissions, Georgia are still below the European has not yet done so. Economic growth Union (EU) average but are typically demands more energy and thus growing faster than those in raises carbon emissions. However, in the the EU, and Georgian firms last decades, several countries (including are using very energy-in- developed and developing economies) have efficient methods that will decoupled their growth from emissions. For affect their competitiveness example, Germany, France, the UK, and the as energy prices increase. Greening the US have combined output expansion with private sector should be a top policy prior- emissions reductions. Aspirational peers ity for several reasons. First, faster growth such as Bulgaria, Romania, and Poland have in emissions and emissions growth inde- also cut emissions and still grown substan- pendent of economic growth threaten the tially. In fact, between 2000 and 2022 GDP in accomplishment of existing nationally deter- high-income countries grew by 49 percent, mined contributions (NDCs). Second, green- but emissions declined by 7 percent. Further- ing the private sector has a pro-competi- more, across lower-middle- and upper-mid- tiveness effect. As energy prices increase, dle-income countries, GHG emissions grew using old and obsolete energy-intensive much slower than output. Even though this technologies and processes is more costly, decoupling has remarkably intensified in the affecting firms’ competitiveness. Given the last 10 years, Georgia has been unable to fol- direct pass-through from energy intensity low this trend (Figure O.1). Between 2010 and (energy consumption per unit of output) to 2022, GHG emissions growth in Georgia out- GHG emissions, this can also affect future paced output expansion (77 percent and 58 access to EU markets. Third, as adverse cli- percent, respectively), creating the need to mate shocks and energy shocks associated urgently address the underlying challenges with geopolitical tensions increase their fre- to support the green transition. quency, greening the private sector is likely to be the most important source of private sector resilience in coming years. 2 Greening Firms in Georgia Overview Industry is one of the sectors responsi- also to the reliance on outdated technolo- itive externalities using public policy. This ble for the most emissions in Georgia, but gies, the inefficient use of energy, and weak report addresses this large evidence gap us- other sectors matter, because of the direct incentives due to the overall institutional ing a unique and granular dataset to measure link between emissions and energy con- framework and distorted low energy prices. energy efficiency, GHG emissions, and their sumption. The industry sector accounts for barriers and determinants in Georgia while 17 percent of aggregate GHG emissions. To- Yet despite these elements demanding providing a comprehensive and rigorous gether with services (transport, construction, swift action to decarbonize and make analysis of the recent evolution of energy and retail), it is a significant contributor to the private sector more energy efficient,* efficiency in the business sector as well as in- the recent growth in emissions. If no urgent policymakers have little information to formed policy recommendations. Through- actions are taken, current projections esti- design policies to accelerate the green out the report, we acknowledge the progress mate that industry emissions could increase transition. This dearth of information is made by the public and private sectors and by 90 percent between 2015 and 2030. The critical due to the urgent need to reduce address the main challenges that firms face alarming rate at which carbon emissions are carbon dioxide (CO2) emissions, align with in light of climate change and the urgent growing is not only due to GDP growth but the Paris Agreement, and address large pos- need to transition to a greener economy. *GHG emissions refer to gases released into the atmosphere that trap heat and contribute to global warming. These include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and fluorinated gases. According to the United States Environmental Protection Agency (2023), carbon dioxide accounts for the lion’s share of GHG emissions (in 2021, they represented 79% of total GHG emissions) TBILISI 3 Overview Greening Firms in Georgia FIGURE O.1 CO2 emissions in Georgia have grown faster than in peer countries since 2005 CO2 emissions (index, 1975 = 1), Moving average (5 years) 1.8 1.6 1.4 1.2 SRB 1.0 ARM EU27 BGR 0.8 HUN MKD 0.6 ROU 0.4 GEO 0.2 0.0 2003 2009 2005 2007 1983 1989 1993 2001 1999 2013 1985 2019 1995 2015 2021 1987 1979 1997 2017 1975 1977 1981 1991 2011 Source: World Bank elaboration based on Global Carbon Budget (2022) CHAPTER 2 Two key necessary reform areas 2.1 Removing energy A critical binding constraint to green- ing the private sector is that electricity We find evidence of price incentives effec- tively reducing energy consumption and, subsidies and gas prices are relatively low due to more importantly, increasing energy and government subsidies, discouraging electricity efficiency in Georgia. Specifi- the adoption of clean technologies and cally, a 1 percent price increase is associated more efficient energy use. Explicit energy with a 0.9–1.3 percent reduction in electricity subsidies in Georgia are among the highest consumption. We also find that firms with across EU and regional peer countries, re- greater electricity dependency are less re- sulting in lower electricity and gas tariffs. sponsive to price changes, which suggests Electricity price adjustments in 2021 and that price instruments could be less effective the recent gas increase in 2022 marked a for encouraging energy saving among firms significant change in the cost of energy for that use energy more intensively. Further- non-household consumers in Georgia. Low more, energy price changes are positively as- energy prices reduce the returns of green sociated with energy and electricity efficien- investments, further affected by the cur- cy. A 1 percent increase in electricity prices rent regulatory framework and lack of in- is associated with a 0.74–1.25 percent rise in formation about cutting-edge technologies energy efficiency and a 1.08–1.47 percent rise among businesses. in electricity efficiency. 4 Greening Firms in Georgia Overview 2.2 Upgrading the institutional and regulatory framework Georgia’s institutional setting and reg- However, Georgia has been improving its toring and control, certifications, efficiency ulatory framework do not encourage regulatory framework based on EU ener- codes and norms, and labeling schemes in a more responsible approach to the gy directives and regulations and is pro- addition to sector-specific actions across en- environmental impact of production. gressively rolling out a coordinated cli- ergy- and carbon-intensive activities. This Enhancing energy and carbon efficiency mate change strategy to increase energy initiative comes with a National Climate requires steering investment toward low-pol- efficiency and mitigate carbon emissions Change Plan, the Law of Georgia on Energy luting activities, adopting new technologies, through technology adoption, innova- Efficiency, and a business-oriented strate- and building capacities across and within tion, and accumulating human capital. gy to enhance energy efficiency and reduce industries. An appropriate institutional and The Ministry of Economy and Sustainable the environmental footprint of economic regulatory environment sets the incentives Development (MoESD), in coordination with activity. that are crucial for greening the economy, the Ministry of Finance (MoF), the Ministry constituting an area of opportunity that of Environment Protection and Agriculture Although the strategy seeks to harmonize requires attention in Georgia. Cross-coun- (MEPA), the Climate Change Council, inno- the legislative energy efficiency frame- try standardized metrics that measure the vation and energy agencies, and other rele- work with EU legislation and standards, adequacy of the regulatory framework and vant businesses and financial and non-profit the translation into effective implementa- scheme of incentives related to energy ef- stakeholders have been taking important tion remains a challenge. To date, no agen- ficiency and renewable energy show that steps to mitigate carbon emissions and im- cies or institutions are responsible for imple- Georgia has considerable room to improve prove energy efficiency. There are various menting the relevant laws. Furthermore, to be compared to regional peers and aspirational actions in place. The most important, the Na- successful, the strategy relies on developing countries (Figure O.2). Georgia lags especial- tional Energy Policy of Georgia, which Geor- qualification, accreditation, and certification ly in incentives and mandates to industry gia recently drafted, is a national integrated schemes for energy service providers, up- and commerce, financing mechanisms, en- energy and climate plan aiming to provide grading managers’ and workers’ capabilities, ergy utility programs, carbon pricing and energy security and solidarity, cut green- aligning incentives to climate change targets, monitoring, energy efficiency performance house gas emissions, enhance innovation, developing credit instruments, encouraging standards, labeling systems, and energy and strengthen competition. The strategy technology adoption and innovation, and cre- codes. Also, the country ranks at the bottom coordinates efforts, planning, and resource ating awareness of climate change. However, in terms of renewable expansion planning, allocation focusing on strengthening the there is still ample room for improving among incentives, regulatory support, and financ- scheme of incentives, energy-saving actions these dimensions. ing of renewable energy projects. in high energy-intensive companies, moni- FIGURE O.2 Georgia’s energy efficiency and renewable energy regulatory frameworks compared to regional peers and aspirational countries PANEL A PANEL B PANEL C Energy e ciency: Incentives Energy e ciency: Regulations Renewable Energy I&M: I&M: Financing Carbon Building Energy Minimum energy Planning Incentives Attributes of Industry Energy mecha- pricing and energy labeling e ciency performance for and financial and and utility nisms monitoring codes systems standards renewable regulatory regulatory commerce programs expansion support incentives end users United Kingdom Germany Germany ny Po ia Ge ia Ka n n a la za ma ma rm or nd kh gia Ge Ro Ro sta n Geo Kaza es Geo nia rgia om khst Stat rgia a ingd an ed Rom 10 0 ed K 100 Unit 100 80 Unit 80 80 60 60 60 40 40 40 Unite d State Bulg Turke s aria s y an tate khst ey ed S Kaza Turk Unit United Kingdom Bu Po Bu la lga lga a d y nd ti rke lan ria ria oa Croatia Croatia Po Cr Tu Notes: I&M are ‘Incentives and mandates.’ Source: World Bank elaboration based on Regulatory Indicators for Sustainable Energy (RISE). 5 Overview Greening Firms in Georgia Decomposing FIGURE O.3 Decomposing energy efficiency & carbon emissions the drivers A Energy consumption of energy (CO2 emission) change B.1 B.2 consumption Overall Scale effect efficiency and carbon C.1 C.2 Structural Sector intensity transformation emissions CHAPTER 3 D.1 Market reallocation D.2 Unweighted average firm intensity S everal elements could contrib- In Georgia, although output growth ex- ute to increasing energy con- plains a significant part of rising emis- sumption, so improving energy sions and energy consumption, there efficiency and reducing carbon are other key drivers over the period emissions requires decompos- ing energy consumption. First, 2007–2021. Over the whole period, busi- ness energy consumption grew by 155 per- ❝ an expanding economy where out- put is growing may demand more cent, mainly explained by the expansion of production (scale effect) and the structural In Georgia, although energy even when the average energy inten- sity of firms (how much energy they need to transformation of the economy, which has specialized toward more energy-intensive output growth explains produce one unit of output) does not vary or even decreases. Moreover, the emergence sectors. Improvement in firms’ efficiency due to firms’ upgrading (decreasing un- a significant part of rising emissions & energy of new, more energy-efficient sectors—or weighted average firm intensity) and real- the expansion of existing ones—can push location of market shares within the same average energy consumption downward sectors (market reallocation) have positive- despite an increase in aggregate business energy demand. Further, reallocation of ly contributed to reducing consumption. However, these improvements have not consumption, there are market shares between firms with different levels of energy efficiency, or entry and exit been enough. Since 2017, they have even been negative (firms, on average, became other key drivers over the of firms, can also influence overall energy consumption and emissions. more inefficient during 2017–21). period 2007–2021 ❞ 6 Greening Firms in Georgia Overview TBILISI 7 Overview Greening Firms in Georgia TSALENJIKHA Since 2016, high-energy-intensive indus- fuel innovative growth are likely to have more ultimately driven by deeper problems such tries have outgrown low-energy-inten- impact in more innovative sectors. However, as lack of incentives and perceived low re- sive ones. Throughout the period, structur- these sectors, which tend to be less energy-in- turns to investments, an underdeveloped al transformation contributed to increased tensive, are not yet mature, hindering the green innovation ecosystem, and barriers aggregate energy consumption as high-en- entry and growth of these innovative firms. to financing green projects. ergy-intensive sectors expanded more than low-energy-intensive ones. These patterns Since 2017, improvements in energy ef- Fortunately, since 2017, market realloca- have intensified since 2016, likely driven by ficiency at the firm level have reversed tion has helped lower overall energy con- relatively low energy prices, an institutional and worked against greening the Geor- sumption. During the period 2007–16, mar- and regulatory framework that has not pro- gian economy. In the first part (2007-16) ket reallocation drove consumption up as vided incentives for less energy-intensive of the period analyzed (2007-21), firm-level market shares of less-energy-efficient firms sectors, and barriers to access credit to invest efficiency improvements helped moderate increased relatively more. However, since in greener activities. Although bank credit energy consumption growth. However, this 2017, this has reversed (Figure O.4), pointing to the private sector in Georgia is above the pattern reversed in the last few years, sug- out that market functioning and firm churn- regional average and has improved in recent gesting challenges for firms to improve their ing are promoting the expansion of relatively years, it mostly focuses on traditional instru- levels of efficiency. The immediate causes more efficient firms. This change is partially ments, which might not support the emer- of this are likely underinvestment in green explained by the fact that start-ups and new gence and expansion of newer and greener and energy-saving technologies and poor firms are greener and replace existing firms activities. Additionally, business angels and improvements in management quality, dis- that typically have more outdated technol- seed-stage investment activities that would cussed in more detail later. Briefly, these are ogies and processes. FIGURE O.4 Energy consumption growth decomposition 3-year aggregate energy consumption change, 2018–21 by energy intensity of sectors Scale e ect Firm intensity Structural transformation Market reallocation Change in agg, energy consumption Share of energy consumption (2017) -75% -50% -25% 0% 25% 50% 75% 100% Low intensive Lower-middle intensive Upper-middle intensive High intensive Source: World Bank elaboration based on GEOSTAT. 8 1.05–1.06 Greening Firms in Georgia Overview Improving energy efficiency has a large direct effect on reducing carbon emis­ sions. Our calculation suggests that the estimated firm-level elasticity between energy quantity consumption and CO2 emission efficiency is between -> From energy consumption to CO2 emissions CHAPTER 4 C O2 emissions grew over 2015–21 FIGURE O.5 CO2 emissions and growth decomposition in Georgia mainly due to production scale and sector composition effects but also due to higher firm carbon 3-year aggregate emissions change, 2018–21 emission intensity. Alongside ris- ing energy consumption, CO2 emis- Scale e ect Firm intensity Structural transformation Market reallocation sions grew steadily from 2015 to 2021, 80% only curbed by the COVID-19 pandemic in 2020. Despite recent trends showing coun- 60% tries making remarkable progress in cutting Change in energy consumption carbon and GHG emissions alongside GDP 40% growth and that carbon intensity declines with GDP per capita (Burn-Murdoch, 2022), 20% CO2 emissions from the business sector keep growing in Georgia. However, as with energy Change in emissions 0% consumption, this rise cannot be attributed only to economic growth. The contribution -20% of output expansion to carbon emissions was significant in 2018–19 but less important af- -40% terward. In contrast, the fact that carbon-in- tensive activities are gaining market share economy-wide increased the contribution -60% of the structural transformation to carbon emissions growth. At the firm level, Figure -80% O.5 shows that businesses increased the 2018 2019 2020 2021 2015-2021 intensity of emissions (CO2 emissions per unit of output) until 2020 in line with higher Source: World Bank elaboration based on GEOSTAT. energy consumption intensity. Remarkably, market reallocation helped moderate the rate is used and between 0.92 and 0.94 if expenses price changes are removed, a 1 percent rise of growth of carbon emissions, especially are used instead. As for how firm-level fac- in energy (quantity) efficiency is associated during the first year of the pandemic. tors can change emission intensity, we assess with a 1.05–1.06 increase in carbon emission the relationship between energy and carbon efficiency, suggesting a larger than 1 pass- Improving energy efficiency has a large emission efficiency. The results indicate that through. This result is consistent with firms direct effect on reducing carbon emis- a 1 percent increase in energy (expenses) ef- investing in greener, less pollutant technolo- sions. Energy efficiency is directly linked to ficiency is associated with a 0.92–0.94 rise gy and processes, and switching energy fuels emissions, and our calculation suggests that in carbon emission efficiency on average. and a declining trend in combustion factors the estimated firm-level elasticity between This data implies an imperfect pass-through (substituting fossil fuels for electricity and energy and CO2 emission efficiency ranges from energy efficiency to carbon emission content factors changing over time, thus af- between 1.05 and 1.06 when energy quantity changes. However, once the effects of energy fecting the pollution content of energy use). 9 Overview Greening Firms in Georgia FIGURE O.9 Average energy efficiency & dispersion across sectors Within sector-by-size dispersion (p75-p25) 4.5 3 .5 2 .5 1. 5 0.5 -0.5 Unweighted sector-by-size efficiency -1.5 0 1 2 3 4 5 6 7 Notes: Bubble size quantifies the sector- Source: World Bank elaboration based by-size energy consumption. on GEOSTAT. The potential effects CHAPTER 5 of enhancing energy efficiency D ifferences in levels of energy ef- use differences than by the kinds of inher- ❝ ficiency between firms of simi- lar size within the same sectors ent technological and productive differences that typically arise between sector-by-size The considerable disparities are even larger than average differences between size-sector groups. This is a key finding from a policy perspective because it means there is signif- in energy efficien­cy between groups. It is unsurprising to find differences in energy efficiency icant scope to reduce energy consumption and improve efficiency levels without affect- firms within the same sector- across sectors and firms of different sizes be- cause specific technologies and production ing overall output and the sectoral structure of the economy. by-size groups suggests that processes characterize different industries and business scales. However, in Georgia, In addition, within-industry dispersion energy efficiency dispersion is we find even more considerable differences seems particularly large among big en- driven by firm-level energy use differences rather than inherent in energy efficiency between firms within ergy consumers. We find that sector-size the same sector-by-size groups than across groups with a higher-than-average efficien- technological and productive these groups. Firms at the 75th percentile cy dispersion accounted for 55 percent of of their sector-by-size group produce 6.5 energy value consumption in 2021 but only times as much output with the same energy inputs as firms at the 25th percentile. This for one-quarter of firms (Figure O.6). These are sectors such as transport and storage, differences that arise from disparity suggests that energy efficiency dis- persion is driven more by firm-level energy construction, agriculture, and certain man- ufacturing industries like basic metals, meat sectors and scale.❞ 10 Greening Firms in Georgia Overview FIGURE O.7 Firm-level changes in energy efficiency production, footwear, and treatment and coating of metals. This result suggests a sig- nificant opportunity for improving overall energy efficiency by facilitating the diffusion Fitted values (unweighted) Fitted values (weighted) of energy-efficient technology and sustain- Avg. firm energy e ciency in 2017-2021 able managerial practices in “laggards” to n e catch up with the efficiency frontier, espe- 10 ˚ li 45 cially among high-energy-intensive sectors. 9 Given their importance, energy efficiency "catching up" gains at a micro level in these 8 sectors could greatly impact energy savings 7 and, thus, GHG emissions at the macro level. 6 These efficiency gaps between firms are 5 persistent. We analyze convergence pat- terns and persistence of these efficiency 4 gaps and find that energy efficiency differ- 3 ences persist over time (Figure O.7). That is, high-efficiency firms in 2007–11 continued 2 to display high efficiency levels in 2017–19, on average, and we see only some limited 1 catching up. This does not rule out energy 0 efficiency convergence but suggests it could be a slow process. 0 1 2 3 4 5 6 7 8 9 10 How large Avg. firm energy e ciency 2007-2011 Note: Dots represent incumbents’ average energy Source: World Bank efficiency; bubble size depicts incumbents’ average real calculations based on GEOSTAT. sales level. Blue lines are fitted values both weighted are the gains (dashed) and unweighted (solid). from energy efficiency ? CHAPTER 6 6.1 A thought experiment to prioritize policy focus WE SIMULATE the impact of improving the energy efficiency of firms with levels of efficiency below the median in their sector-size group. A key question for pol- icymakers is how large the potential gains for energy efficiency are when supporting laggards to achieve levels of efficiency of the median firm in the sector. This bench- mark has the advantage that these are re- 11 Overview Greening Firms in Georgia alistic levels known in the sector. To this cent because energy bills only represent a Slightly more than 75 percent of carbon end, the report presents a simple thought small fraction of total costs (8.6 percent in emission reductions would be concentrat- experiment, an accounting simulation, to 2021 among inefficient firms and 4.4 percent ed in construction, non-metallic minerals, provide an order of magnitude of the poten- among all firms). The profit rate, measured as mining of metal ores, water, auxiliary trans- tial impact of improving energy efficiency the average profit-to-cost ratio, would rise by port activities, manufacturing of food and on overall energy consumption and other 7 percentage points, from 3.9 percent to 10.9 beverages, wholesale trade, and basic metals firm variables such as costs and profits. We percent. These results help to understand (Figure O.10). The magnitude of the contribu- simulate a policy intervention that targets why firms face low incentives to improve tion ultimately depends on the importance low energy-efficiency companies and reduc- energy efficiency without a nudge or other of the sector in terms of the energy sources es energy consumption, keeping the output support measures to invest in green technol- used, the sector output size and the intensity level unchanged by analyzing what would ogy or introduce more efficient productive of energy in the production process (its scale happen if firms with efficiency lower than and organizational processes. and intensity) and the size of the tail of inef- their sector-size median improved their ef- ficiency firms (dispersion). ficiency to that of the median firm in their As expected, the improvement in ener- same sector and size class. gy efficiency would also halve carbon Improving energy efficiency in non-en- emissions. Energy efficiency improvements ergy-intensive sectors can also yield re- Relatively modest energy efficiency im- have positive externalities beyond the pri- ductions in CO2 emissions. The largest provements have a large aggregate im- vate increase of profits and the reduction of impacts on carbon reductions are in high- pact on overall consumption but a much energy costs. The pass-through from energy er-energy-intensity sectors such as con- smaller impact on firms’ cost savings. efficiency improvements to carbon emission struction and transport. Nevertheless, sec- In the scenario that all firms with an ener- reduction is large and close to 1. CO2 emis- tors such as wholesale and retail or food and gy efficiency level below the median reach sions would fall by 51 percent by improving beverages also have a significant effect on the their sectoral-size class median efficiency energy efficiency to the median of the sector reduction of emissions, around 13 percent. level, aggregate energy consumption would and size (Figure O.9). This suggests that a more horizontal busi- halve (Figure O.8). However, cost reductions ness targeting that also includes large sectors (raw materials plus energy bills) would be Three-quarters of carbon emission sav- in terms of enterprise units and employment much more modest. For inefficient firms, ings from improving energy efficiency shares can also contribute significantly to the the average cost would be reduced by 7 per- would come from 8 out of 52 sectors. objective of reducing emissions. FIGURE O.8 Simulated impact of improving energy efficiency 2021, million (mln.) GEL on energy savings, costs, and profits Aggregate energy expenses Average costs of ine cient firms Average profits of ine cient firms (Mln. GEL) (Mln. GEL) (Mln. GEL) 1,270 2.97 ▼ 7% 0.22 ▼ 50% 2.75 631 0.10 ▲ 114% E ciency E ciency E ciency improvement to improvement to improvement to Baseline the median Baseline the median Baseline the median FIGURE O.9 CO2 emissions if inefficient firms optimized energy use Thousands of CO2 tonnes 805 ▼ 51% 392 Baseline E ciency improvement to the median Note: profits are revenues net of total costs and wages. Source: World Bank calculations based on GEOSTAT and simulations. 12 Greening Firms in Georgia Overview Contribution to CO2 savings 24.8 FIGURE O.10 Share of total, percentage Construction Mining of metal ores 8.3 Non - metallic minerals 12.6 6.1 Food and beverages Water transport 7.9 4.3 Utilities Basic metals 4.7 Other sectors 6.0 2.4 0.9 1.5 Air transport Agriculture 1.8 4.0 Aux. transport act. 5.8 0.88 1.1 Paper Retail trade 1.6 Other mining 5.3 business Wholesale trade Other act. Chemicals Land transport 13 Overview Greening Firms in Georgia 6.2 What would it take for firms to make this energy efficiency upgrade? 8 WE FIND THAT 8 out of 10 inefficient firms would require upgrading or aug- menting capital to converge to the me- dian efficiency. An important question for policy is what firms would require to achieve median efficiency levels. One way of inform- ing this question is by comparing firms below the median with firms in the median efficien- cy levels on, for example, the level of capital. For 80 percent of firms, improving energy efficiency would likely require more capital Out of 10 to replace outdated machinery, equipment, and infrastructure for new vintages of assets (Figure O.11). Asset values for the remaining 20 percent of firms are similar to those of the median efficiency firm, implying that upgrading energy efficiency may require another set of policies than those promoting invest- ment. For these firms, improving manage- ment quality and organizational capabilities and providing information on what solutions are available could improve their energy effi- ciency, which greatly impacts total savings. inefficient firms These 20 percent of firms that may not would require require large capital investment to reach upgrading or aug­ the median efficiency could contribute up to nearly half of the aggregate ener- menting capital to gy savings. Building on our simulation, we converge to the decompose the total savings into two parts. median efficiency. One part is accounted for by firms requiring capital upgrading, and the other by firms not requiring capital upgrading. Results show that the first group of companies would account for 54 percent of total savings. In comparison, 46 percent of savings would be explained by firms not needing more invest- ments in physical capital but higher man- agerial quality because their asset level is equivalent to or higher than that of efficient firms in their same sector-size group. The latter group could be “low-hanging fruit” in the search to reduce emissions via improved energy efficiency. 14 Greening Firms in Georgia Overview FIGURE O.11 Share of firms requiring capital and amount of capital required to improve efficiency BATUMI PANEL A A PANEL How many How firms many require firms capital require capital PANEL B Capital requirements to converge to the to converge median to the firm? median firm? for improving e ciency 3.62 3.26 Firms that require Firms capital that require capital Firms that do Firms not that dorequire capital not require capital Capital of % % ine cient 8080% firms requiring investment 797 Capital of 9% Capital of 0.90 median top-25% e ciency e ciency firms firms 220% Improvement 0% Source: World Bank calculations based Improvement Improvement Improvement on GEOSTAT and simulations. thethe to to median median thethe to to top-25% top-25% ms require capital efficiency efficiency efficiency efficiency firm? Firms that do not require capital % 79% 20% 19% ovement Improvement e median to the top-25% ciency efficiency 15 Overview Greening Firms in Georgia The drivers of energy efficiency CHAPTER 7 7.1 The dynamics of efficiency among frontier and laggard firms MORE PRODUCTIVE FIRMS are also and 4.73 percent in the average efficiency of efficient than state-owned and self-governed more energy efficient, and there are sub- the “exposed” firms. Also, market concen- firms (such as cooperatives) once sector, lo- stantial spatial spillovers. We analyze the tration appears to have some (negative) ef- cation, and size are accounted for. Therefore, drivers of firm-level energy efficiency to un- fect on energy efficiency, although small in encouraging the replacement of outdated derstand the characteristics associated with magnitude. A plausible explanation for this machinery and equipment with a horizontal higher levels of efficiency. We find that pro- effect is that market concentration may hin- policy approach based on initiatives that ad- ductivity, measured as total factor produc- der innovation and investment, ultimately dress credit, information and firm capability tivity (TFP), is the most important correlate affecting energy efficiency. Not surprisingly, problems can effectively optimize energy use of energy efficiency. We also find evidence larger firms tend to be more energy efficient across businesses. for possible spillovers because firms tend to on average once we consider various other be more efficient when there are more effi- characteristics and correlates. We also find evidence of convergence, cient businesses in their location and sector. albeit slow, in energy efficiency within These spillovers could occur because of sev- Some other results confirm findings sectors and within municipalities. Firms eral mechanisms: through the labor market from the literature and are important to further away from the local (sector-by-mu- (workers moving between firms and sharing guide policy interventions. Specifically, nicipality) frontier display the highest know-how and best practices), through sup- firms that invest in physical or intangible as- growth in their energy efficiency. However, ply chain relationships (suppliers and cus- sets, R&D, or ICT tend to be more energy ef- this convergence is very slow. Our back-of- tomers offering and demanding products ficient (Figure O.12), and these determinants the-envelope calculations suggest that, by with specific energy standards and exchang- remain significant even after controlling for 2029, one-quarter of laggard firms (those at ing information about frontier technology), productivity level, size, age, sector, region, the bottom 75 percent of the efficiency distri- or even through interactions between man- and time-fixed effects so policies promoting bution) would converge to the local frontier agers and technical staff. An alternative way the adoption of certain technologies or un- if they managed to keep their current catch- spatial spillovers might occur could be the leashing innovation could result in higher up speed. Knowledge flows between firms existence of localized business service mar- energy efficiency. Another interesting result within the same industry in several ways. kets (consultants in energy efficiency). The is that more capital-intensive firms are less Industry associations (such as round tables, magnitude of these spillovers is economi- efficient, possibly due to machinery and networking events, and sharing best prac- cally meaningful because an increase of 10 equipment demanding more energy. Anoth- tices via collaboration workshops) and sup- percent in the efficiency of the local frontier er is that domestic private businesses are less ply-chain relationships (supplier-customer is associated with a rise between 2.34 percent energy efficient than foreign firms but more linkages) may be relevant channels. More- 16 Greening Firms in Georgia Overview FIGURE O.12 The relationship between energy efficiency and investment, innovation, ICT, and exporting Invests Growth in capital stock Invests in R&D Innovates ICT adoption (z-score) Firm exports -0.10 0.0 0 0.10 0.20 0.30 0.40 0.50 Gap relative to baseline Notes: Dots depict point estimates and brackets confidence intervals (10 percent level of significance). All Source: World Bank elaboration based variables are binary (whether the firm invests in fixed assests, in R&D, innovates or exports; No = 0, Yes = on GEOSTAT and the ICT Usage in 1) except for log investment and ICT adoption z-score. Growth in capital stock is the first difference of the Enterprises and Innovative Activity of logged capital stock (conditional on being positive). Enterprises Surveys. over, labor mobility (employees reallocating 7.2 A CRITICAL DRIVER of energy efficien- between firms and sharing their know-how) cy is the adoption of green technologies; and training programs could also improve energy efficiency among low-efficiency The role of technology however, information on how much tech- nology contributes to energy efficiency firms. Also, the competition environment and the innovative performance of high-ef- adoption, prices, and is scarce. In this report, we use a unique dataset that merges information on energy innovation on energy ficiency firms within sectors could poten- consumption with very granular information tiate the knowledge of low-efficiency firms on the adoption and use of technologies. A through learning by observing or appropri- key finding is that the adoption of some some ating (at least partially) part of the knowledge generated by frontier firms. consumption and advanced general ICT technologies, not nec- essarily associated with greener outcomes, Our analysis confirms the importance of information and knowledge spillovers in efficiency correlate significantly with higher energy efficiency. improving firm-level energy efficiency. Greening the private sector starts at the A one-standard-deviation increase in the energy source and the quality of the elec- growth of the local efficiency frontier speeds tricity infrastructure. Georgian firms expe- up efficiency improvements at the firm lev- rience too frequent outages that incentivize el by one-tenth of a standard deviation. investing in fuel generators. For example, Results for the spillovers from the sectoral 96 percent of Georgian firms experience and regional frontier growth are smaller in frequent outages. An unreliable electricity magnitude but qualitatively similar. From network increases the incentives for autono- a policy perspective, spillovers point to the my from the network. However, this need for importance of fostering information shar- autonomy is associated with resorting to fuel ing, collaboration, imitation, and technol- generators instead of generating onsite en- ogy transfer because they are channels that ergy from renewables (Figure O.12). Whereas contribute to enhancing energy efficiency 30 percent of Georgian firms use generators, in Georgia. less than 1 percent produce renewables on- site. Due to the use of diesel-powered gener- 17 Overview Greening Firms in Georgia FIGURE O.13 FIGURE O.14 ators, this translates into much higher GHG emissions compared to the grid, generators Outages, use of generators, and Green technology can emit twice the GHG emissions for the production of renewable energy adoption same amount of energy.) Besides generators being cheaper, low onsite renewable energy generation is also explained by the regula- PANEL A -> Owning a generator PANEL A -> Green technologies tory framework (e.g., integration of variable and practices adopted renewable energy sources or net metering (share of firms %) regulatory system allowing microgenerators with a capacity below 500 KW). Probablity of owning a generator O 1 2 3 4 5 6 7 8 In addition, adopting standard green 47 50 technologies to make production build- ings and premises greener is still very 40 incipient in Georgia. Around 40 percent of firms use LED lighting, and 30 percent use 30 VAC/HVAC systems (Figure O.14, panel A). Still, other important technologies such as 20 smart thermostats, IoT systems, and ener- gy-efficient machinery are rarely used, even when these tend to explain a larger share 19 16 10 of the 90th to 10th percentile differences 0 in energy efficiency. Specifically, having smart thermostats and IoT systems explains 10 3 3 1 0 0 0 5 10 15 Avg. number of power outages in a month around 18 percent of this gap. K E R N E L = E PA N ECHNI KOV D EGR E E = 0 Another relevant finding is that adopting BA N DW I DT H = 3 PW I DTH = 1 . 42 Number of green technologies (out of 8) certain advanced ICT and sector-specif- ic technologies is highly correlated with the firm's overall energy efficiency. Even PANEL B -> Producing PANEL B -> Radar of green if it is not the main goal of such technolo- renewable energy technologies and practices adopted (%) gies, it is important in explaining energy ef- Probablity of producing renewable energy ficiency differences. The adoption of green and general technologies is highly correlat- ed (Figure O.15, Panel A), suggesting similar LEED certified 50 M on drivers and barriers to adoption. In addition, ito having 1 unit more technology sophistication 40 rC ar O St explains around 16–17 percent of the 90th gy Em er iss to 10th percentile differences in energy effi- En 30 ion s ciency. Looking at individual technologies, ISO 14000 using enterprise resource planning (ERP) 20 1 00 80 60 40 20 Energy e cient lighting systems explains around 7 percent of the Programmable thermostats m 90th–10th energy efficiency gap, and hav- te sys VA 10 p. ing automated quality control processes V tem HV led explains nearly 18 percent of the 90th–10th AC ab en sy 0 differences. One implication of these results st IoT em 0 5 10 15 is that technologies aimed at increasing the s Avg. number of power outages in a month overall efficiency of production planning are KER N EL = E PAN ECHN I KOV central to successfully implementing sus- DEGR E E = 0 BA N DW IDT H = 3 tainability and energy efficiency plans. PW IDT H = 1.42 Note: Panel A shows the share of firms adopting each # of technologies described in panel B, while panel B shows the percentage of firms adopting each technology Source: World Bank elaboration based on FAT surveys. 18 Greening Firms in Georgia Overview ❝ Adopting certain advanced ICT and sector-specific technologies is highly correlated with the firm's overall energy efficiency ❞ 19 Overview Greening Firms in Georgia FIGURE O.15 The correlation between green and non-green technology adoption PANEL A -> GBF tech. adoption PANEL B -> Sector tech. adoption and green tech. adoption and green tech. adoption Predicted number of green tech. & practices Predicted number of green tech. & practices 2 .5 50 2 40 1 .5 30 1 20 0.5 10 0 0 1 2 3 4 1 2 3 4 GBF technology index – Extensive Sector specific tech adoption index – Extensive LOCAL P OLYNOMIAL S MOOTH ING ESTIMATION LOCAL POLYNOMIAL SMOOTHING ESTIMATION PANEL C -> Technology adoption and energy efficiency TECH. ADOPTION INDEX GBF EXTENSIVE Note: Panel A shows the correlation between the predicted number of green technologies and prices, controlling for sector, region and size and an NUMBER OF GREEN TECH. index of sophistication of technology in general business functions (GBF), while panel B shows the same correlation with an index of sophistication of technology in sector- specific business functions (SSBF). The indices range from 1 (manual technologies) to 5 (frontier 0 0.5 1.0 1.5 2.0 technologies). Panel C Marginal e ect on energy e ciency shows the coefficients of a linear regression of energy efficiency (de-meaned by sector) controlling for sector, region, size, and characteristics of the firm (log capital, exporting status and ownership Source: World Bank elaboration based on FAT surveys. status). 20 Greening Firms in Georgia Overview 44 7.3 Although The importance of management and firms’ organization % of firms monitor consumption, GOOD QUALITY green management is Macedonia, Serbia, Slovenia), Georgia ranks rare among Georgian establishments, in the bottom three countries across the dif- and focuses only on energy consumption. ferent dimensions of green management, Only one-tenth of the establishments have such as strategy, responsibility, monitoring, green objectives or hire a manager responsi- and targeting. For example, only 10 percent ble for green issues. For those that do, there of Georgian firms have strategic objectives are different green management practices at related to the environment, the lowest the firm level, such as setting green strategic among all countries except Azerbaijan. Also, objectives, including a manager with a man- in most countries, establishments are more date to deal with environmental or climate likely to have a manager responsible for envi- change issues, monitoring and setting targets ronmental issues, monitoring, and targeting for consumption of energy or greenhouse gas energy consumption. emission, and adopting measures to enhance energy efficiency. Despite the several green We identify and group factors that seem management practices on which firms can to explain levels of green management. focus, adoption among Georgian firms is First, we find that sectoral differences ex- low. Nearly half the firms the World Bank plain part of the variation in green manageri- 12 surveyed through the WBES reported moni- al practices. Specifically, emission-intensive toring energy consumption. However, only a activities tend to have higher quality green few adopted any other green practices. This management relative to those less emis- only lack of adoption suggests a relatively passive sion-intensive. Second, and somewhat more attitude toward being more environmental- surprisingly, larger and older firms tend to ly friendly which is confirmed in the data. have higher-quality green management. For example, only 12 percent of firms adopt Third, exporters and firms with foreign own- measures to enhance their energy efficiency, ership tend to have better green managerial although 44 percent monitor consumption. and organizational practices. Finally, green management positively correlates with over- Georgian establishments are less likely to adopt green management practices all management quality, suggesting that the agenda to improve management and orga- % when compared to those in ECA coun- nization is also very important to enhance of firms adopt mea­ tries. Among comparable peers (Azerbaijan, green managerial practices. sures to enhance their Bulgaria, Czech Republic, Hungary, North energy efficiency. 21 Overview Greening Firms in Georgia Price incentives matter for enhancing energy CHAPTER 8 E nergy prices play a key role in greening the business sector in Georgia because they respond to price changes rationally. We find evidence of firms reducing energy consumption when electricity prices go up. For example, a 1 percent in- crease in electricity prices is associated with an average decrease in electricity quantity consumption of between 0.9 and 1.3. How- ever, lower electricity demand is not to the detriment of output reduction but of energy efficiency gains. According to the evidence, businesses respond rationally to higher electricity charges by using energy more efficiently, avoiding waste or overconsump- tion. A 1-percent rise in electricity prices is associated with a 1.25 percent rise in overall energy efficiency and 1.47 percent rise in electricity efficiency. Preliminary findings also suggest that Georgian firms do not reduce employ- ment after a rise in electricity charges. Besides improving efficiency, firms do not seem to respond by adjusting their labor de- mand in the short term. Rather, they seem to pass on the price increase to final consum- ers. We observe a positive increase in over- all costs and sales. For example, a 1 percent increase in energy prices raises costs by 2.48 percent and sales by 1.20 percent. Although we cannot observe firm-level product price responses, one plausible interpretation of the positive effects on both costs and sales is that firms pass higher energy costs on through prices. 22 Greening Firms in Georgia Overview Policy recommendations types of credit instruments (for example, utility on-bill financing) may take consider- able time because it requires first developing financial markets, changing the regulatory framework, and strengthening financial in- CHAPTER 9 stitutions’ capacities to perform screening and risk assessments. Developing and im- plementing such policy instruments is com- plex. In the same way, consulting services first require technical capacities and a rising awareness among firms that they need and are willing to pay for environmental-related consulting. However, information campaigns can be launched swiftly and do not involve a high degree of coordination and regulatory procedures. We summarize policy recom- mendations and classify them in terms of their priority (short, mid, or long term) and their complexity (low, medium-low, medium, medium-high, and high), with the intention to guide prioritization and implementation. Beyond the specific policy solutions, we discuss the importance of targeting T because businesses face different needs he policy agenda starts with the to the median efficiency level in their own and barriers to becoming greener. To in- need to accelerate Georgia’s re- sector-size group. form this targeting, the first step is to develop forms on energy subsidies and appropriate diagnostic and benchmark tools the convergence of its institu- To implement this greening process, this that provide more information on individual tional and regulatory framework report distinguishes two levels of policy firms’ needs and capacities. Such diagnostic with the EU. These are necessary recommendations: recommendations tools could help assess the “readiness” of the conditions for greening the private at the systemic level, focusing on insti- firms for different interventions and channel sector in Georgia. Low prices reduce the in- tutions and the legal framework, and the firms’ investments and support toward centives to invest in energy efficiency. In- recommendations that target firms and the more pressing needs and binding con- complete or inappropriate regulatory and sectors. Based on the findings discussed straints in their particular situations. Various institutional frameworks also reduce the in the report, the policy recommendations tools are discussed in the report as examples incentives to become greener, for example, can be divided into two groups. First, we of diagnostic instruments to help businesses by reducing investments in the production discuss cross-cutting recommendations identify specific areas for energy efficiency of renewables on site. that are economy-wide and focus on devel- improvements. These diagnostic tools can oping a conducive enabling business envi- also help policy and program managers as- A critical finding of this report is that ronment centered on the appropriate price sess the readiness of potential beneficiaries there is scope to improve energy effi- signals and regulations. Second, we focus and improve targeting. ciency without significant changes in on firm-level recommendations and group output or the industry composition of them around three pillars: (1) information, (2) One justification for targeting is the need the economy. Given the large differences capabilities—management, technology, and to treat sectors differently because of the in energy efficiency across firms within sec- skills—and (3) finance (see Figure O.16 below differences in the potential sources for tors, our analysis suggests that greening the for a schematic view). The different policy energy efficiency gains. The decomposi- Georgian economy can be done mainly by instruments, along with examples of existing tion analysis can help identify the priorities investing in upgrading firm-level efficiency programs, are described in more detail in the that should guide policy in improving ener- rather than changing the patterns of eco- Technical Report. gy efficiency. Table O.2 shows three key pol- nomic specialization. A cost-effective ap- icy areas for greening sectors based on the proach would focus at least initially on key Policy recommendations are grouped ac- potential sources for energy efficiency gains. priority sectors characterized by (i) a high cording to their ‘priority’ and ‘complex- (1) First, for some sectors, better function- dispersion of energy efficiency across firms ity’ to guide the design and implemen- ing of markets—having better regulation and (ii) a high level of energy consumption tation. The recommendations are listed in and less distorted energy prices can have because of the intensity and scale of the sec- Table O.1. Priority involves an assessment of a greater impact on energy efficiency. (2) In tor (in terms of output and employment). urgency, and we distinguish between short- some other sectors, the priority should be For example, construction, non-metallic term, mid-term, and long-term based on the the adoption and diffusion of green technol- products, and transport services would ac- time it would take for effective implemen- ogies that can change efficiency and tech- count for about two-thirds of total energy tation. Complexity refers to technical feasi- nique. (3) Finally, changing the patterns of savings that would result from improving bility, but it also includes political economy activity specialization within sectors is also energy efficiency among inefficient firms feasibility. For example, developing specific important for other sectors. The importance 23 Overview Greening Firms in Georgia FIGURE O.16 Structure of policy recommendations 1 2 3 Information Capabilities Finance Awareness Management and organization Guarantees Information about suppliers of Technology adoption Blended finance and credit lines solutions Skills for workers, and managers Grants and tax incentives Energy audits ESCOs Understanding about solutions Utility on-bill financing Leasing Energy savings insurance Conducive enabling business environment I N ST I T U T I O N S + R E G U L AT I O N S + P R I C E S Source: World Bank elaboration ❝ One justification for targeting is the need to treat sectors differently because of the differences in the potential sources for energy efficiency gains ❞ of these priorities sometimes also differs national good practices but also grounded fying relevant actors through which portfolio when comparing energy efficiency and GHG on a sound understanding of the idiosyn- interventions can be delivered and business- emissions efficiency. cratic needs and situations of businesses in es can be reached; and (iv) minimizing moral Georgia. Some key principles to deploy this hazard problems by including commitment TO CONCLUDE : Approach the problem of modular approach are (i) ensuring the en- premiums in support policies when possible promoting energy efficiency with a mod- abling regulatory environment and reducing (that is, interest rate reductions or cash-back ular portfolio approach and apply sup- price distortions; (ii) minimizing the infor- grants based on achieving energy efficiency port programs to clusters to potentiate mation gaps and making sure technologies targets). In addition, when possible, sup- spillovers. In this perspective, any support are available at the lowest cost possible (that port solutions may be applied to clusters program could be considered a set of mod- is, eliminating import tariffs); (iii) assessing or groups of firms to further promote the ular tools and a portfolio of interventions the readiness of potential beneficiaries with emergence of positive spillovers in terms of that should be put forward based on inter- diagnostics and benchmark tools and identi- information and knowledge sharing. 24 Greening Firms in Georgia Overview TABLE O.1 Prioritizing policy recommendations Priority Complexity and assessing their complexity Information ▶ Raise awareness ▶ Provide feedback and ▶ Ensure firms have through low-cost benchmarking about access to green solutions information campaigns energy savings and suppliers SHORT LOW SHORT MED-LOW SHORT LOW ▶ Extend market ▶ Develop interactive ▶ Develop educational energy audits tools for information resources for energy dissemination efficiency MID MED SHORT MED-LOW MID MED-LOW Capabilities Firms' and Workers' ▶ Provide consulting and outsourcing services ▶ Train managers and workers on energy ▶ Provide specialized technical assistance for efficiency production techniques MID MED MID MED-HI MID MED ▶ Support firm digitalization ▶ Boost technology adoption MID MED MID MED-HI ▶ Encourage banks to ▶ Expand blended finance ▶ Extend special ▶ Provide grants provide loan guarantees and concessional loans credit lines through and tax incentives through incentives development banks MID MED MID MED SHORT MED-LOW SHORT MED-LOW ▶ Enable energy savings ▶ Develop utility on-bill ▶ Enhance ▶ Develop energy contracting (ESCO market) financing and repayment equipment leasing savings insurance Source: World Bank elaboration. MID MED-HI LONG HI LONG MED-HI LONG MED-HI TABLE O.2 What should policy actions address? Agriculture and fishing Mining and quarrying Manufacturing Energy Consumption C02 Emissions Energy Consumption C02 Emissions Energy Consumption C02 Emissions Patterns of activity Functioning Functioning – Technology Technology specialization of markets of markets adoption adoption Utilities Construction Wholesale and retail Energy Consumption C02 Emissions Energy Consumption C02 Emissions Energy Consumption C02 Emissions Functioning Patterns of activity Technology Technology Functioning Functioning of markets specialization adoption adoption of markets of markets Accommodation Transport activities Other services and restaurants Energy Consumption C02 Emissions Energy Consumption C02 Emissions Energy Consumption C02 Emissions Functioning Functioning Technology Functioning Patterns of activity Patterns of activity of markets of markets adoption of markets specialization specialization Source: World Bank elaboration based on GEOSTAT. 25 Overview Greening Firms in Georgia ❝ Approach the problem of promoting energy efficiency with a modular portfolio approach and apply support programs to clusters to potentiate spillovers ❞ 26 Greening Firms in Georgia Overview