Summary
When a green technology still costs more than the destructive technology it replaces, what convinces companies to adopt it anyway? Studying renewable energy across the EU before it reached cost parity, we find that incentives usually beat mandates, but the winning combination depends on context. Entrepreneurs make incentive policies work harder, and mandates succeed only when pro-environmental values run deep.
A puzzle: adoption before it pays
For years, renewable energy sources such as wind, solar, biomass, and geothermal cost more than the fossil fuels they competed against. Only in recent years have wind, followed by solar, reached grid parity in many places. Yet across the European Union, incumbent electric utilities steadily built renewable capacity well before doing so made clear economic sense. Our study of the EU from 1998 to 2009, a period when renewables had not yet reached cost parity, asks a simple question: what drives the adoption of a socially beneficial technology before it delivers economic benefits? The answer matters far beyond electricity. Accelerating the uptake of promising-but-unproven technologies sits at the heart of addressing grand challenges such as climate change through technology adoption.
The carrot or the stick?
Governments legitimize new technologies in different ways. Imposition policies — the “stick,” such as quota obligations — mandate a minimum share of renewables and penalize non-compliance. Inducement policies — the “carrot,” such as feed-in tariffs and tender systems — reward voluntary adoption with guaranteed prices or subsidies. Most of us would assume that mandates lead to greater adoption. After all, isn’t it better to force companies to adopt than simply make doing so cheaper? In our manuscript, published in the Journal of Management Studies, we found the opposite: inducement policies were generally more effective. Feed-in tariffs and tenders significantly raised adoption, while quota obligations, on their own, did not move the needle. Poland’s quota left installed capacity far below its targets, whereas Estonia’s feed-in tariff helped drive a 502% increase in renewable capacity.
Entrepreneurs make incentives more impactful
Between 1998 and 2009, renewable energy in the EU went from a fringe technology to a real industry. Generation jumped 60% as countries rolled out policies like guaranteed prices for green power and mandatory renewable quotas. Our study tracked how electric utilities of 27 EU countries responded to these different policy approaches; we draw on over a decade of capacity data plus interviews with industry insiders, entrepreneurs, and utility executives. In addition, we measured the entry of new, entrepreneurial energy companies and the strength of environmental cultural beliefs in each country. Our goal was to understand what factors pushed traditional power companies to start building wind, solar, and other renewable energy capacity.
We found that regulation did not operate in a vacuum. New renewable-energy firms demonstrate that a technology works, lowering perceived risk and showing incumbents a viable path forward. We find that entrepreneurial entry amplified the effect of feed-in tariffs. Consider Greece and Portugal: both used comparable feed-in tariffs, but Portugal’s far higher rate of new-firm entry was accompanied by a 597% rise in renewable capacity, against 315% in Greece. Entrepreneurs, in other words, help pave the way for adoption rather than simply following; they are a source of legitimacy in their own right.
Culture can make the stick more effective
Sticks were not useless; they simply needed the right cultural foundation. Where citizens held strong pro-environmental values, mandates gained normative legitimacy and became far more effective. Sweden’s stringent quota system was widely accepted, given high environmental values, and more than doubled the capacity of its main renewable sources. Crucially, the two informal forces reinforced one another: strong entrepreneurial entry combined with strong environmental values produced the largest gains of all, as seen in Germany, where wind capacity rose more than sixfold over the study period.
Fostering a future from the lessons of the past
Collectively, our findings point to a clear lesson for encouraging the adoption of future technology to address climate change. Before a green technology pays for itself, adoption is driven by legitimacy assembled from three reinforcing sources — regulation, entrepreneurial markets, and culture — and the right mix depends on context. For policymakers, that makes incentives the reliable default, since inducement policies encouraged greater adoption than stand-alone mandates. However, because mandates worked precisely where pro-environmental values ran deep, reading the cultural context should come before choosing the policy. Because entrepreneurial entry amplified incentives, fostering entrepreneurship through financing and support networks is not optional to a net-zero transition but among the most effective ways to speed it up. Our findings also suggest that location should be a strategic choice for environmental entrepreneurs; the largest gains appeared where policy, culture, and new-firm entry lined up together — as in Germany — so ventures should prioritize regions whose regulations and cultural values already fit rather than fighting for legitimacy. Although our data predate today’s cost-competitive solar and wind, our findings raise specific implications for today’s landscape. Legitimacy drawn from regulatory, market, and cultural sources can jump-start the next wave of unproven but essential technologies such as carbon capture, battery storage, and ocean energy and help drive them down the cost curve of addressing climate change.
