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Journal of Cleaner Production 109 (2015) 260e270

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Journal of Cleaner Production

journal homepage: www.elsevier .com/locate/ jc lepro

A critical review of the interplay between policy instruments andbusiness models: greening the built environment a case in point

Yasser Al-Saleh*, Sami Mahroum 1

INSEAD Innovation and Policy Initiative, P.O. Box 48049, Abu Dhabi, United Arab Emirates

a r t i c l e i n f o

Article history:Received 25 April 2014Received in revised form28 June 2014Accepted 14 August 2014Available online 3 September 2014

Keywords:Green business modelsEnvironmental policySustainable built environmentGreen entrepreneurship

* Corresponding author. Tel.: þ971 2651 5290.E-mail addresses: Yasser.ALSALEH@insead.edu (Y.

insead.edu (S. Mahroum).1 Tel.: þ971 2651 5260.

http://dx.doi.org/10.1016/j.jclepro.2014.08.0420959-6526/© 2014 Elsevier Ltd. All rights reserved.

a b s t r a c t

Policy instruments introduced with the aim of promoting environmental sustainability are oftendesigned and evaluated in terms of their impact with regard to facilitating technological change. Most‘green’ policy instruments that have emerged in recent decades have targeted facilitation of the devel-opment and adoption of greener processes, goods and services. Concurrent business models have soughtto create and capture value arising from this policy-induced transition to more environmentally sus-tainable practices. Both such policy instruments and the business models are, however, often evaluatedmore in terms of their impact on the development and adoption of innovations and less in terms of theirimpact on behavioural change. This paper provides a critical review of the interplay between green policyinstruments and green business models from a behavioural perspective. Instead of looking at policyinstruments from a technology-push and demand-pull perspective, this paper samples them in terms of‘sticks’, ‘carrots’ and ‘sermons’ and then provides a critical review of business models that have emergedin response to these types of policy regimes. The paper finds that most green business models that haveemerged in the built environment - in response to sticks - may be characterised as buck-passing, i.e.passing costs to others and skirting around the stick of regulation. Those that emerge in response tocarrots as opportunistic carpet-bagging aimed at capturing a temporary gain. Finally, those that emergedin response to sermon-orientated awareness campaigns, show a tendency to diffuse even in the absenceof supportive fiscal conditions.

© 2014 Elsevier Ltd. All rights reserved.

1. Introduction

There is widespread agreement that the cost of mitigatingclimate change is a significant fiscal issue across the globe (IEA,2013; UN, 2013). Governments have limited financial capacity, soa large proportion of the green investment required to address thisissue is expected to come from the private sector. Given the highlevel of upfront investment usually associated with green energytechnologies, a range of innovative policy instruments and businessmodels have emerged to create potentially lucrative green markets(WEF, 2013). A review of the literature pertaining to sustainabilitytransitions reveals that e with a few exceptions e the interplaybetween business models and policy has not been well addressedin previous research (Doranova, 2012; Kivimaa and Virkamaki,2014; Provance et al., 2011; Truffer et al., 2012). This is despiteintense pressure on politicians and managers alike to create and

Al-Saleh), Sami.MAHROUM@

capture value from eco-investments (Desyllas and Sako, 2013;Kiron et al., 2013; Nidumolu et al., 2009; OECD, 2013; Orsato,2009). Contrary to the conventional wisdom of most businessleaders and mainstream economists, Porter (1991) floated the ideathat environmental regulations could actually enhance the pro-ductivity and competitiveness of firms. Many economists remainsceptical of such ‘winewin theorising’, yet Porter and van der Linde(1995) offer several case studies of companies that appear to havebenefited (i.e. through value capture) from developing or adoptinggreen technologies in response to market-based environmentalregulations. There is a growing awareness that new business op-portunities may be created through green business model inno-vation, but empirical data regarding their sustainability is limited(Huijben and Verbong, 2013).

The built environment is a case in point.2 A review of the liter-ature indicates that the topic of green business models in the built

2 The built environment refers to surroundings that provide the setting for humanactivity. It can range in scale from individual buildings through to public spaces,communities and cities. It typically includes their supporting infrastructure, e.g.transport, energy and water networks.

Fig. 1. Possible avenues for split incentives in the landlord-tenant relationship.Adapted from Gillingham et al., 2012

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environment sector has been subject to little academic scrutiny(IEA-RETD, 2013). The built environment is not only affected greatlyby climate change, it is also a major consumer of energy and acontributor to climate change. There has been recent massivegrowth in new construction within developing economies, com-pounding the issue of inefficient building stock that exists world-wide. The current business-as-usual scenario envisaged by theUnited Nations Environment Programme (2009) is that green-house contributions from the built environment sector will morethan double over the next twenty years. This forecast takes intoconsideration the entry of new technologies into the market thathave the potential to significantly reduce greenhouse gas emissions(IPCC, 2007; Mahroum and Al-Saleh, 2012).

The ‘greening’ of the built environment is often associated withthe implementation of energy efficiency measures and/or renew-able energy technologies. Their uptake, despite the availability ofcost-effective technologies, has been slow (Gillingham et al., 2009;Zhang et al., 2011) with the dominant policy paradigm beingfocused on designing and introducing policy instruments withtwofold aims. These are: (i) generating new energy-efficient andcleaner technologies and (ii) accelerating the adoption of thesetechnologies by consumers (e.g. see OECD, 2012). In other words,the innovation literature is dominated by the so-called ‘technology-push’ and ‘demand-pull’ perspective; where success and failure aremeasured in terms of technology development and diffusion(Horbach et al., 2012; Vollenbroek, 2002). There are, however,concerns about the sustainability of temporary gains made in thisregard, particularly given that many of these ‘push’ and ‘pull’ dy-namics are the result of heavy subsidies (Taylor, 2008). This appliesboth to the cost of technology development and of technologyadoption, which has the probable effect of slowing down theemergence of sustainable business models that are not under-pinned by the presence of government subsidies (Gan et al., 2007).While the behavioural implications of policy interventions mayhave significant potential in addressing such concerns, they areoften seen as precursors for technological development rather thanultimate policy objectives.

So, what happens if or when the subsidies go away? How sus-tainable are the gains made through utilising these green policyinstruments? How does the business community behave inresponse to various types of green policy interventions? This paperdoes not claim to provide a definitive answer to these questions,but rather proposes an approach for examining the sustainability ofsuch gains. It will also examine the behavioural changes thatemanate from the interplay between green policy instruments andbusiness models taking the built environment as a case in point.

Our review is based on over a dozen semi-structured interviewsand in-depth discussions with green business professionals andpolicy-makers from around the world. This field research wasaugmented with a review of green business models that haverecently emerged in relation to the built environment. The reviewalso draws upon a range of international examples of successful andunsuccessful experiences in greening the built environment. Datawas analysed manually in a qualitative manner by identifyingemerging themes from the interviews and literature review. Theremainder of the paper is structured as follows. The next sectionestablishes a basic understanding of the rationale behind greenpolicy intervention, followed by an overview of types of greenpolicy instruments (Section 3). The paper then provides a synthesisof a range of green business models in terms of policy instrumentsthat have emerged in the built environment (Section 4). Section 5examines the voluntary emergence of green business models inthe form of entrepreneurship with the aim of distilling further theinterplay between the fields of environmental policy and entre-preneurship studies. In Section 6, we propose a behavioural

framework for examining the sustainability of gains that resultfrom the interplay between policy and business models. The paperconcludes with Section 7; a discussion that summarises the find-ings of the paper and reinforces the importance of further consid-eration of behavioural aspects in mainstream environmental policydebates.

2. Rationale for green policy intervention

In spite of the apparent abundance of clean and profitableenergy-saving opportunities, green technologies often fail to bediffused widely within markets (Gillingham et al., 2009; Jaffe,1994). Neoclassical economists provide reasons to explain thelimited adoption of such cost-effective technologies. They generallyboil down to so-called ‘market failures’, which in turn provide ajustification for policy intervention as suggested by Arrow (1962).Market failures can be a result of several factors including mis-placed incentives; negative externalities (i.e. unpriced costs such asair pollution); imperfect competition; path dependency; freeriding; distortionary fiscal, economic and regulatory policies; andasymmetric information (Cornes and Sandler, 1996; Foxon andPearson, 2008; Jaffe and Stavins, 1994; Marques et al., 2013;Weber and Rohracher, 2012). Misplaced incentives are of partic-ular relevance to the built environment sector. These are the resultof the so-called ‘principal-agent problem’ in economics literature e

where an agent has the authority to act on behalf of a customer, yetdoes not fully reflect their best interests (Brown, 2001). Forexample, consider the moral hazard that may arise in the landlord-tenant relationship; the former is not usually incentivised to investin energy-efficient equipment as the latter is the party that willusually pay the energy bills and benefit from any savings. Thelandlord is not able to recover the cost of energy efficiency in-vestment through the purchase price or rent charged for theproperty, and the tenant is being encouraged to under-invest inenergy efficiency relative to the social optimum, thereby creating amarket failure (Gillingham et al., 2009).

Fig. 1 shows a matrix of three possible avenues for split in-centives in the landlord-tenant relationship (the agent making thehidden action in the landlord-tenant problem is indicated inparentheses).

Another example of market failures is a power plant with noeconomic incentive to minimise the external costs of pollution. Inthis case, governments might attempt to serve the public good ofclean air through creating new mechanisms such as a carbontrading scheme (Jaffe et al., 2005). Additionally, government mayintervene to preserve commonly-shared resources such as waterand non-renewable energy sources. Without government involve-ment, such resources could become overused or depleted (Agrawal,2002). According to neoclassical welfare economics, the existenceof such market failures impedes the attainment of socially-optimallevels of investment in energy efficiency and provides justification

Table 1Examples of technology-push and demand-pull green policy instruments.

Technology-push green instruments Demand-pull green instruments

R&D Tax CreditsR&D GrantsTop Runner ProgrammeCapital Cost Subsidies

Feed-in TariffsNet MeteringTradable CertificatesRenewable Portfolio StandardsPublic ProcurementGreen Awareness CampaignsProvision of InformationEco-Labelling

3 Thaler and Sunstein (2008) popularised the term ‘nudges’ to refer to theshaping of behaviour. This paper adopts instead the term ‘sermon’ as opposed to‘nudges’ because we believe that both sticks and carrots have a nudging effect. Inother words, all types of policy actions send signals to investors that motivate themto behave in certain ways.

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for public policy intervention. However, whilst economic analysisof environmental policy is mainly based on the idea of correctingmarket failures with the aim of achieving economic efficiency,economists have long disputed the extent to which policy in-terventions are needed to foster the development and diffusion oflow-carbon technologies and practices (e.g. see Kneese andSchultze, 1975). An examination of the environmental policy liter-ature reveals increasing calls to replace the neoclassical rationale ofmarket failure with one of systemic failure. The basic concept,which is not universally supported by all economists, is that policyintervention should aim to address the problems that hinder theoperation and development of the innovation system as a whole(Edquist, 1997). In an attempt to further advance this debate, Jaffeet al. (2005) articulated the idea of ‘double market failure’, i.e.market failures associated with environmental pollution whichinteract with those associated with the innovation and diffusion ofnew technologies. The interplay between these two analyticallydistinct e yet linked e sets of market imperfections decreases thelikelihood that the rate of investment in development and diffusioncould occur at a socially-optimal level.

Along similar lines, Gillingham and Sweeney (2012) argue thatalthough the high cost of renewable energy technologies consti-tutes a major barrier to their market penetration, it does notnecessarily present a rationale for policy intervention on economicefficiency grounds (i.e. the possibility to improvewelfare for at leastsome people, whilst concurrently making no one worse off).Raising questions about the fundamental theorem of welfare eco-nomics, they suggest that economists should be hesitant aboutjustifying a subsidy to stimulate the diffusion of such low-carbontechnologies unless there is clear evidence suggesting a sizableR&D (research and development) spill-over. A valid analytical basisfor considering such policies might be that the social benefitsassociated with a speedy diffusion of green technologies are un-likely to be fully captured by private innovators (Jaffe et al., 2005).Some scholars nevertheless caution that subsidising green tech-nologies e on the grounds of positive spill-over effects e cansometimes be welfare-worsening as it may delay the introductionof new technologies (Kverndokk et al., 2004). Subsidies for ethanolproduction may, for example, hamper the creation of new firmsthat are looking for alternative green fuels (York andVenkataraman, 2010). This means that although the existence ofmultiple market failures and policy targets may justify employingseveral policy instruments, the disproportionate use of pricing in-terventions can prejudice the introduction of potentially betterproducts and services. This has been seen to be the case in theBrazilian ‘Pro Alcohol/Ethanol Programme’ (Mahroum et al., 2011).

3. A closer look at green policy instruments

Contemporary discussion in environmental policy circles hasmoved on from justifying whether government intervention isneeded to support green innovation, to how this ought to bedesigned for optimal effect (Veugelers, 2012). An extensive toolkitof policy instruments has emerged to facilitate protection of theenvironment and support the generation and diffusion of greeninnovation. These instruments can be mapped into two broadcategories; (i) technology vs. market dynamics; (ii) deterrents vs.rewards. The first analytical category deals with policy instrumentsthat aim to foster technological change using either technology-push instruments, or market-pull mechanisms (Mowery andRosenberg, 1979). Table 1 shows some recent examples of bothtypes.

Despite its inclusion in some contemporary debate, thetechnology-push/demand-pull typology reflects an arguablyoutdated thread in the economics of innovation literature, i.e. a

linear progression from basic science to applied research to productdevelopment to commercialisation (e.g. see Horbach et al., 2012;Miles, 2010). In classical innovation literature, there exists a ten-dency to view innovation as a ‘black box’ into which R&D inputsflow and out of which commercial technologies diffuse into themarketplace (Jaffe et al., 2002). Just as the economics of innovationliterature moved beyond the narrow technology versus marketdichotomy, we suggest that it is time for environmental policy re-searchers and analysts to also transcend this.

An alternative and underexplored analytical category of policyinstrument is the ‘deterrent vs. reward’ formulation, morecommonly known by its ‘stick’ versus ‘carrot’ idiom in reference tothe use of rewards and punishments to induce certain behaviours.Some environmental economists have further suggested publicinfluence (i.e. sermon) as a third type of policy instruments(Vedung and van der Doelen, 2010).3 Table 2 illustrates examples ofhow various policy instruments may be mapped along the deter-rentereward axis.

We propose a mapping framework that links policy instrumentsto both business model design and economic agent behaviour.Adopting a stick, carrot and sermon perspective as opposed totechnology-push vs. demand-pull approach allows the linking ofvarious policy instruments to their expected behavioural responses.This helps not only in terms of designing, but also in evaluatingpolicy interventions. According to Taylor (2008), a lack of systemicpolicy evaluation has often been identified as a reason behind aweak empirical basis for green policy design recommendations.

Regarding carrots and sticks, there seems to be an over-whelming consensus e in the literature at least e that carrotsshould be used for correcting positive externalities and sticks foraddressing negative externalities (Wittman, 1984). Whenaddressing environmental pollution, internalising the environ-mental costs or imposing a limit on the level of pollution makesmore sense than subsidising pollution-reduction measures. Thelatter action could inject money into the industry and thus attractmore polluters in the long run. Both carrots and sticks come withtheir own cost burdens; carrots generate transaction costs relatingto compliance, whilst sticks do likewise but in relation to violation.Following this logic, one could argue that theft should be penalisedrather than non-theft subsidised because the former occurs lessfrequently (Geest and Dari-Mattiacci, 2013). After examining thetheoretical and empirical evidence pertaining to environmentalpolicy, however, several scholars e including Fisher and Rothkopf(1989) and Jaffe et al. (2003) e accept that economists and policyanalysts are far from having a well-established theoretical orempirical basis for when andwhat kind of green policy instruments

Table 2Examples of stick, carrot and sermon-type green policy instruments.

‘Sticks’ as green policyInstruments

‘Carrots’ as greenpolicy instruments

‘Sermons’ as greenpolicy instruments

Energy Saving ObligationsMandatory Green

Building CodesRenewable Portfolio

StandardsFuel/Carbon/Green TaxesClimate Change LevyPolluter Pays Principle-based

InstrumentsTop Runner ProgrammeRoad/Congestion Charges

Feed-in TariffsNet MeteringTradable CertificatesCapital Cost SubsidiesGrantsTax CreditsLoan GuaranteesCompetitive ContractBidding/Tendering

Provision ofInformationEco-LabellingGreen AwarenessCampaigns

Fig. 2. Stick-induced policy-business behaviour cycle.

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(e.g. sticks, carrots or sermons) are preferable in any given marketconditions. There seems, however, to be unanimity of opinion thatvoluntary and incentive-orientated policy approaches are morelikely to foster diffusion and compliance paths than rigid regulatoryapproaches (Sioshansi, 1994). There still remain the questions ofhow much penalty/reward is necessary and how it should beadministered to induce certain behavioural change?

Having briefly discussed the potential connection betweentypes of policy instrument and expected behaviour in terms ofresponses to sticks, carrots and sermons, we now turn our attentionto the behaviour of the business community. This is particularly interms of generation and adoption of green business models andagain; we take the built environment as a case in point.

4. How have green business models emerged in response topolicy actions? The built environment as a case in point

What do we mean by ‘business model’? The field of businessmodel research has gathered momentum since the mid-1990s, yetits literature seems to be developing largely in silos with variousscholars unable to agree onwhat constitutes a basic business model(Bocken et al., 2014; Klang et al., 2010; Zott et al., 2011). In broadterms, a business model defines business logic or a value proposi-tion for the way that a company creates value and how it capturessome of this value as profit (Teece, 2010). Green business modelsmay be broadly defined as business plans which support thediffusion of products and services that offer an economically-viableenvironmental benefit (FORA, 2010). In the context of the builtenvironment, building owners emerge as an important stakeholderbecause they often have the final say on whether or not to installrenewable energy technology or energy-efficient measures. Severalbusiness models exist that present building owners with attractiveopportunities to help address high up-front costs and other non-financial barriers, such as the hassle associated with buying,installing or maintaining green energy equipment (Huijben andVerbong, 2013; IEA-RETD, 2013). The following sub-sections eval-uate the experience of some green business models, which haveemerged within a stick, carrot or sermon-orientated policy envi-ronment. It should be borne in mind, however, that the threegroupings are not always analytically conclusive as some policye-business interactions might not neatly fit into these classificationsor can perhaps span more than one setting.

4.1. Stick-induced green business models

Our research suggests that businesses respond to stick-typepolicy instruments by ‘passing the buck’ e a metaphor that refersto evading responsibility by passing it on to someone else. Stick-induced green business models thus tend toward buck-passing

behaviour that offloads any additional costs to other parties (seeFig. 2).

The fragmented, transient and competitive nature of the builtenvironment may deter parties from working together to achievehigh levels of long-term environmental sustainability (TheVoluntary Environmental Governance Project, 2013). As a result,Davis (2012) finds that energy-efficient appliances are less likely tobe installed in rented dwellings; whilst Gillingham et al. (2012)show that owner-occupied houses are more likely to be well-insulated. Nevertheless, there is a growing understanding thatbuilding owners who do not occupy their buildings can profit fromadditional revenue opportunities if they are allowed to chargehigher rents after undertaking energy-saving upgrade renovation.This business model aims to address the aforementioned problemof ‘split incentives’, which is commonly referred to in the energyefficiency debate as the ‘landlord/tenant dilemma’. However, it onlyseems applicable for rented buildings in countries where rents areregulated; for example, the social housing sector in the EuropeanUnion (EU).

Quite often, there is a need for a change in legislation in order toallow landlords to pass on all or part of the cost of the investment tothe tenant, mainly through a rent increase. A number of such reg-ulatory changes have been introduced across the EU over the pastfew years. France, for example, adopted a tenants' law in 2009 inorder to enable owners to realise energy improvements and shareenergy-saving benefits with their tenants. In France and theNetherlands, the landlord is required to obtain the consent of thetenant to undertake renovation and the economic gain to thelandlord cannot exceed half of the energy cost savings. Additionally,rents are allowed to rise only when the effect of the energy con-servation measure has been proven. The results are usually moni-tored, allowing for rents to be adjusted if the expected results arenot achieved. A potential risk of adopting this business model isthat changes in regulations can be a time-consuming process. Forinstance, the change to rental price evaluation in the Netherlandswas only realised after a tense political process that took threeyears (CEPI and UIPI, 2010; IEA-RETD, 2013). In the United States(US), it was noted that the need for change in existing legislationshas slowed down the emergence of third-party business models ei.e. where commercial companies own and operate customer-sitedsolar systems and lease the equipment or sell electricity to thebuilding occupant (Drury et al., 2012). Since companies assume therisks associated with owning and operating green technologies, the

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occupant is likely to adopt positive and collaborative attitudes to-wards installing such equipment in the property.

Energy Saving Obligation (ESO) schemes, sometimes referred toas ‘White Certificates’, are an example of a stick-type policy in-strument that forces energy companies to realise energy savings atthe level of the end-user. They represent documented and oftentradable obligations that a certain reduction in energy consumptionhas to be attained. Such policy schemes have motivated energycompanies to develop business models that realise mandated en-ergy savings (IEA-RETD, 2013). In France, this was carried outthrough partnerships with electricians and installers to offer newenergy-saving services to customers. In Italy, a large part of theobligationwas outsourced to Energy Service Companies (ESCOs). Inother words, ESO schemes played a role in stimulating the demandfor e and growth of e the ESCO market (Boot, 2009).4 Indeed, ifenergy companies are allowed to pass on the costs of efficiencymeasures to customers through charging higher energy tariffs, suchobligations could be considered as a potential financingmechanismfor greening the built environment without having to use directgovernment funds. One successful ESO scheme has been enforcedin the United Kingdom (UK) through a policy programme namedthe ‘Carbon Emission Reduction Target (CERT)’. Targeting low-income households, it has reduced the incidence of ‘free riding’as this target group was less likely to adopt efficiency measures.

Mandatory green building codes are another example of a stick-type green policy instrument. A number of green building codesand certifications have been introduced around the world in orderto assess and rate the environmental credentials of buildings (e.g.see Wang et al., 2014). Many property developers have voluntarilyengaged in constructing buildings according to green certificationschemes with the expectation of realising a price premium whengreen codes become mandatory. This business model is based onthe assumption that such a premium will compensate for theadditional costs associated with greening a building and obtainingcertification. This is in addition to a greater level of profit. It shouldbe noted here that it is difficult to assess the sustainability of thisbusiness model. The relatively short history of green certificationsand codes means there is little evidence regarding the impact ofgreen building certificates on decisions related to purchasing,renting or renovating a property. It has been noted, however, thatspeculation of a possible price premium accompanied the launch ofthe ‘Estidama’ scheme by the Government of Abu Dhabi as theMiddle East region's first e voluntary e green rating system(Nelson, 2011). This should not underplay the role of Estidama inraising awareness (i.e. sermons) with regard to sustainability in aplace that has the unenviable tag of being the world's largest percapita emitter of carbon dioxide (Ghazal-Aswad et al., 2012). Inother words, depending on the context in which a policy instru-ment is applied, it may result in dissimilar behavioural change.

Governments also engage in buck-passing to manage risks andthis is likely to be one of the motivations behind government ini-tiatives involving Public-Private Partnerships (PPPs) developedwhen governments are incapable of either adequately funding orrunning a construction project. Design, Build, Finance and Operate

4 Energy Service Companies (ESCOs) emerged in the US and the EU following theenergy crises of the 1970s. Quite often, ESCOs target existing buildings in order toachieve significant energy and cost reductions with no cost to the building owner(Peretz, 2009; Wargert, 2011). This business model has been endorsed for itsbusiness and environmental credentials, yet it has attracted relatively little aca-demic scrutiny, with most of the existing literature originating from industry andgovernment sources. Many economists and policy scholars maintain that becausethe nature and long-term potential of the ESCO markets are poorly understood, it isdifficult to adequately appreciate their potential contribution to sustaining a greeneconomy (Hannon, 2012; Sorrel, 2005; Vine, 2005).

(DBFO) is a form of PPPs that has been used for building a numberof climate-resilient infrastructural projects across the EU such asroads and hospitals. Innovative features of this model include theuse of private finance in addition to merging the design/construc-tion phase with the operation/maintenance phase. A private sectordeveloper takes charge of the design, construction, finance andoperation/maintenance of an infrastructural asset. Since the risksare passed on to the developers, they have an incentive to adopt along-term view and to design and build the project so that it can beoperated and maintained in an efficient manner for a typical periodof 30e35 years. Given the increasing interest in green PPPs aroundthe world, a stronger backing from public authorities e eitherthrough lending, guarantees or supportive regulatory frameworkse could encourage the private sector to invest more in green pro-jects (IEA, 2012; IRENA, 2013; Limaye and Zhu, 2012). Examples ofgreen business models that have emerged due to such carrot-typepolicy schemes are discussed next.

4.2. Carrot-induced green business models

A critical evaluation of international experiences confirms thatwhilst stick-induced business models tend to create buck-passingbehaviour, uncontrolled offering of carrots often leads to opportu-nistic behaviour aimed at capturing temporary gains (see Fig. 3). Inessence, this finding is in line with the utility maximisation hy-pothesis assumed in most economic analyses of firm behaviour ei.e. a firm acts so as to maximise its profits.5

The Netherlands is an instructive example of a built environ-ment shaped by a carrot-orientated policy regime. It has the largestshare of social housing in the EU, accounting for around 32% of totalhouses and approximately 75% of the rental stock in the country.The success of the aforementioned model of increasing rents afterimplementing energy saving measures in the Netherlands is partlyattributed to the existence of a favourable environment. This ischaracterised by loan guarantees in addition to rent-price regula-tion. Registered social housing organisations are eligible to benefitfrom an innovative three-level security structure. The first securityinstrument is the Central Fund of Social Housing, an independentpublic entity that acts as a supervisor empowered to financiallysupport such organisations when in difficulty. The second instru-ment is the Guarantee Fund for Social Housing; a private organi-sation created by housing organisations themselves to act as asolidarity-based mutual fund. In cases where these two in-struments are unable to provide favourable conditions and interestrates, financially troubled social housing organisations may resortto a third option, the state and local authorities (CECODHASHousing Europe, 2013). Although a favourable policy context existin the Netherlands that has stimulated the rise of energy efficiency-based business models, the policy conditions have not been as rosyfor its local solar energy market. Whilst Verhees et al. (2013)applauded the advent of a few innovative business models for so-lar technologies in the Netherlands, other scholars (e.g. Huijben andVerbong, 2013) argue that the financial viability of these greenbusiness models was found to be highly dependent on the

5 Some economists have raised criticisms about the neoclassical hypothesis ofutility maximisation. For example, Van den Bergh et al. (2000) suggested that suchdeterministic models are based on a flawed assumption that choices are easilypredictable because individuals behave consistently across different situations andperiods (c.f. bounded rationality). Other economists further argue that experimentaleconomics has provided evidence to show that individuals are less prone to free-riding than predicted by neoclassical theory. Broader explanations include ‘other-regarding’ and ‘reciprocal fairness’ where people reward and penalise the behav-iour of others instead of acting strategically in their own self-interest alone (Gintis,1998).

Fig. 3. Carrot-induced policy-business behaviour cycle.

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existence of net metering regulations (i.e. carrots). Quite often,providing carrots for efficiency (through end-user subsidies) tendsto create distorted price signals and may also encourage increasedenergy use and reduced incentives to use energy efficiently (i.e. therebound effect). Evidence of such behavioural patterns among oc-cupants of energy-efficient buildings is documented in theNetherlands (Santin, 2013) and other European countries (e.g. Haaset al., 1998; Hens et al., 2010).

One of the most popular incentivising policy structures for re-newables in general, and rooftop solar panels in particular, is theFeed-in Tariff (FiT). Designed to address the barrier of high capitalcosts associated with most renewable energy technologies, the FiTscheme obliges utilities to purchase electricity from renewableenergy producers/users at a rate per kWh that is higher thanmarket electricity rates. Since a FiT scheme guarantees access to apredictable and long-term revenue stream from a usually reputablecounterpart (i.e. government or network operator), it can serve asan incentivising basis for a green business model (Gifford et al.,2011; IEA-RETD, 2013; Mande, 2011). In addition, the FiT schemehas potential to drive the deployment of renewable energy tech-nologies in ESCO models; as the building owner can outsource theinstallation and operation to the ESCO, as well as claiming FiTsupport. The introduction of the FiT by the UK Government in April2010, with the aim of helping the UK meet legally-binding targetsunder the EU Renewable Energy Directive, has stimulated thegrowth of roof-mounted solar panels in the country. A large num-ber of installation and consultancy firms have been set up to enablecustomers to gain from this scheme. The FiT has enabled landlordsto either provide electricity for free e as a rental incentive e orimpose higher rents based on the kind of benefit the tenant willreceive (Ownergy, 2013; UK Energy Partners, 2013). Nevertheless,some building owners favour direct investment subsides asopposed to FiT schemes, which sometimes have a payback period ofaround twenty years. Additionally, investment risks arise frominconsistent policy regimes that result in unpredictable changes inthe tariffs. Some EU countries have implemented ‘stepped FiT’schemes, where tariffs are decreased over time in accordance withexpected technological learning and economies of scale. Forinstance, according to the German Renewable Energy Act, the FiTfor new renewable energy installations is decreased annually inorder to both avoid overcompensation and provide a continuousincentive for cost reduction in new plants (Klein et al., 2010).

Quite often, the business community overlooks the fact thatengaging in self-centred carrot-induced activities that allow valueappropriation (i.e. capture), without value creation, is destined tofail. For example, consider US President Obama's stimulus packageof $80 billion that was allocated to subsidise politically-preferredenergy projects. As a result of the government approach of ‘pick-ing winners’, a substantial share of the financial incentives wasawarded to green energy companies that have since gone bankrupt(Schow, 2012).When considering the case of Chinaewhich is oftenportrayed as a great rival to the US in the green energy arena e itcan be argued that the Chinese ESCO market has developed onlymodestly. This is despite its huge market potential and favourablepolitical conditions which have, for example, encompassed a spe-cial subsidy for energy conservation projects run by ESCOs. It ap-pears that this underperformance is largely attributable to marketand institutional barriers in addition to a lack of trustworthy re-lationships between ESCOs and potential clients (Kostka and Shin,2013; Lo, 2014). For that reason, one could argue that intensifyingawareness campaigns is likely to alter attitudes and behaviour ofconsumers and investors alike in such nascent markets. The effectof awareness-building on the business community is discussednext.

4.3. Sermon-induced green business models

Sermon-induced business models emerge in response to de-mand sparked by a change in value systems. This is akin to theemergence of business models that foster fair trade, organic foodand/or ethical businesses. Certain segments of society are willing topay a premium for consuming goods and services that are producedin line with their value systems. Halal and Kosher businesses forMuslims and Jews are two examples of such values-based marketsthat have recently attracted scholarly interest (e.g. see Campbellet al., 2011; Verbeke et al., 2013). For example, Ibrahim (2011) re-ported that willingness to pay a premium for halal goat meat inAtlanta equates to 50 US-cents per pound. Hill and Lynchehaun(2002) argued that due to the high prices associated with organicfood, consumers in the UK tend to perceive organic food to be ofhigher quality and tastier than conventionally-grown food. Like-wise, over the last two decades, there has been a growing aware-ness about environmental degradation among the populationresulting in the emergence of a green value-based market segment.

Consequently, there is considerable evidence to show that anincreasing number of customers are willing to pay more for greenproducts and services (Manget et al., 2009; Margolis et al., 2007;Orsato, 2009). A survey of more than 1000 companies by Kironet al. (2013) revealed a growing number of green companieswhose emergence had been driven by internal motivations asopposed to government regulations or market competition. Agrowing number of studies further recognise the importance ofsocial acceptance and behavioural patterns in shaping environ-mental technologies and markets (e.g. see Keirstead, 2007;Rohracher, 2003; Wolsink, 2012). A review of the business man-agement literature indicates a long-standing debate on howcorporate environmentalism may improve financial performancefor businesses. A company portraying itself as a ‘green firm’ sends asignal that supports a perception that it is awell-managed business,which can help in terms of both attracting good employees andlow-cost capital from potential investors (e.g. see GIIRS, 2012;Odell, 2007).

At a theoretical level, a number of scholars (includingGillingham and Sweeney, 2012; Shu and Bazerman, 2010; Van denBergh et al., 2000; Venkatachalam, 2008) have challenged welfareeconomics principles. They cite behavioural and ideologicalanomalies which infer that insights from behavioural economics

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are arguably more instructive in designing effective green policyinstruments. For instance, decisions by consumers are swayed bytheir ethical values or a lack of information. Uncertainties regardingthe detailed usage of electricity, or even the cost-effectiveness ofenergy efficiency measures, could lead to building owners under-evaluating potential future economic savings (Girotra andNetessine, 2013). Not only does the provision of information withregard to electricity consumption influence the conservationbehaviour of occupants, but also heuristic-based social norms havea nudging effect as well. Schultz et al. (2007) demonstrated thatproviding households with information on how their electricityconsumption compared to their neighbourhood average hassignificantly encouraged them to rationalise their consumption.The use of a smiley face or a frowning one (conveying socialapproval for under-average or disapproval for above-average) hasalso eliminated an undesirable boomerang effect.

Persuading the public to ‘go green’may be achieved through theprovision of information, education, eco-labelling or a sustainabil-ity awareness campaigns. Public campaigns have been carried outextensively using different means around the world to discouragehabitual behaviours such as smoking, alcohol and other drug con-sumption. Empirical evidence shows that the outcomes of thesecampaigns yield mixed results in different domains and jurisdic-tions (Espinoza et al., 2012; Momin et al., 2014; Wakefield et al.,2010). In the context of the built environment, one could arguethat raising the awareness of the value of sustainability among thepublic may be used to create a social value-based market for greenbuildings e i.e. a lower-cost policy option when compared to theuse of sticks or carrots. Increasing awareness of sustainability doesnot necessarily guarantee that ‘greener’ actions will follow. Unlikethe case with sticks and carrots, it might prove difficult to establisha clear and direct correlation between the use of sermons and theemergence of green business models. It would, however, bereasonable to assume that the magnitude of green business un-dertakings might be partly rather than wholly influenced bysermon-orientated policy regimes (see Fig. 4).

5. Voluntary emergence of green entrepreneurs beyondcarrots and sticks: an example from Dubai

Approaching green business models from the angle of policyinstruments does not mean that green business models can betriggered only by policy intervention. In this respect, the

Fig. 4. Sermon-induced policy-business behaviour cycle.

hydrocarbon-rich Middle East provides an instructive examplegiven the near absence of green policy carrots and sticks in theregion as a whole. Estimates provided by Frost and Sullivan (2011)show that the energy performance contracting market in theMiddle East earned revenues of around US$79 million, and is ex-pected to grow at an annual rate of 4.1%. To shed some light on theemergence of such a market in the absence of carrots and sticks, welook at an example from Dubai, in the United Arab Emirates (UAE),namely Taka Solutions, which is considered to be one of the fewpioneering ESCOs to have adopted an energy performance con-tracting business model in the region. The near absence of green-oriented carrots and sticks in this region makes the niche emer-gence of such a green company noteworthy because it providesproof that given market opportunity, green business models canemerge without direct government support. Further scrutiny re-veals that the UAE leads the broader region in terms of the extent ofgreen building certification (i.e. Estidama), government-led sus-tainability awareness building campaigns and levels of environ-mental consciousness (Ghazal-Aswad et al., 2012).6 Taka Solutionsis an example of the voluntary emergence of green entrepreneur-ship without the aid of sticks or carrots.

The company was established in 2012 with the aim of providingbuilding owners with risk-free energy-efficiency upgrades thathave the potential to enhance the durability and value of theirbuildings without the need for capital investment from the owners.When interviewed, Charles Blaschke IV e Founder and GeneralManager of Taka Solutions e indicated that “The establishment ofthis company was motivated by a desire to address a host ofneglected problems currently facing the adoption of energy up-grades to existing buildings in the UAE”. Many organisations existwith old and inefficient building assets that would like to imple-ment energy conservation measures, but have neither the technicalexpertise nor the capital to do so. This situation is a historicalfunction of low utility rates, harsh weather conditions, occasionallyinefficient planning, inferior quality of construction and amenitiesand conflicts of interest between owners, tenants and real estateinvestors and a lack of transparency with regard to energy usage.

Taka Solutions expect contract lengths of seven years or fewer tosatisfy the project costs required to reduce energy by up to 30% andsometimes more. The company was formed in anticipation ofthings yet to come. For example, the Regulatory and SupervisoryBureau of the Dubai Government has started work on a frameworkto nurture the ESCO market in Dubai. Elements of this frameworkinclude launching an accreditation scheme for ESCOs and stand-ardising energy performance contracts; this is in addition to settingup mechanisms for measurement, verification and dispute resolu-tion (Sims, 2014). Such carrot-based legal frameworks that use‘reputation-enhancing’ tools could help in terms of maintainingcompetitive market conditions given that the private sector e in itspursuit of value appropriation e may try to maximise profitsbeyond what many would agree is socially acceptable. Taka Solu-tions could be seen as a green entrepreneurial initiative that hasdecided to address a neglected societal problem (i.e. inefficientbuilding stock) by challenging conventional wisdom through the

6 Interestingly, our research indicates that a high level of sustainability awarenesshas not been the case in the UAE a few years ago. Interviewing an official from theDubai Municipality revealed that due to intense opposition from the public, theyhad to abolish a law that mandated the installation of green roofs for every house inDubai (i.e. a stick-type regulation). Green roofing is an energy conservation measurethat was identified as a cost-effective means to reduce the carbon footprint of theUAE's residential sector. Subsequently, in October 2009, the government decided tomake green roofing optional, whilst at the same time launching intensive aware-ness campaigns that educate the public about the benefits of green roofs (i.e.sermons).

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innovative green business model of energy performance contract-ing. Through targeting the low-hanging fruit of UAE buildings, ithas demonstrated the viability of a green business avenue that hassubsequently enticed government-owned utilities to fund a superESCO, named ‘Etihad Energy Service Company’, which started op-erations in June 2013. This is a counter-intuitive development in acountry that is characterised by artificially cheap energy and energyconservation is not a high priority through necessity.

Recent years have witnessed a growing awareness of the con-ditions in which entrepreneurs may surpass, or at least supple-ment, the efforts of governments, established firms and non-governmental organisations (York and Venkataraman, 2010). Inthis respect, Santos (2012) suggests that social entrepreneurship e

which voluntarily green entrepreneurship could be seen as a subsetof e is the pursuit of sustainable solutions to problems of neglectedpositive externalities. When substantial positive externalities exist,goods and/or services may be under-consumed or under-providedbecause self-interested actors do not perceive there to be a po-tential for value appropriation (Rangan et al., 2006). Governmentshave multiple roles and often scarce resources, not to mention thatself-interested behaviour is not usually effective in the presence ofpositive externalities. These sustainability-orientated entrepre-neurs are therefore usually the economic agents that end up tryingto address these neglected externalities.

Accordingly, one could argue that Taka Solutions represents anexample of a green entrepreneurial company which has emergedunder an extant policy regime and market conditions that favourthe incumbent energy system. The fact that its emergence did notrequire direct policy support suggests that market-tested businessmodels have a chance of diffusing voluntarily, even without thepresence of supportive regulatory conditions. In essence, such en-trepreneurs could be viewed as being continuingly enticed by thepromise of competitive advantage and the possible enhancementin market power that ‘going green’ can offer. To remain sustainable,however, the importance of continuous innovation at the businessmodel level cannot be overemphasised. The next section provides abroad synthesis of the various interactions between green policyand business model innovation, with a particular focus on theprospects for such sustainability.

6. On the sustainability of green business model innovation

For a green business model innovation to be sustainable, in anygiven sector, it needs to allow for both value creation and valueappropriation. The importance of connecting value creation andvalue appropriation in the pursuit of a sustainable business modelis well-established in the field of strategic management (see forexample Girotra and Netessine, 2013; Lavie, 2007; Mizik andJacobson, 2003). Whilst the value creation/value capture di-chotomy is centuries old, the main purpose of firms is usuallyassumed by the business community to be value capture; hence thebuck-passing and carpet-bagging behaviour that result from stickand carrot-type policy regimes. Fig. 5 illustrates a framework forexamining the sustainability of gains and behavioural changeemanating from the interplay between green policy instrumentsand business models.

Extending the arguments of Santos (2012) in his search for aplausible theory of social entrepreneurship, one could suggest thatwhilst it falls upon traditional commercially-orientated entrepre-neurs to pursue new opportunities for value appropriation(through stick or carrot-induced green business models), greenentrepreneurs focus on value creation opportunities (throughideology-driven green business models). The stick method forcesthe market to behave in certain ways using the ‘visible stick ofregulation’. The carrot approach offers financial rewards to energy

users to modify their energy consumption behaviour e and to in-vestors to take their investment decisions e using the ‘invisiblehand’ of economic theory (Sioshansi, 1994). Green entrepreneur-ship, on the other hand, could be seen as what Santos (2012) callsthe “2nd invisible hand of Adam Smith”, which is driven by others-regard as opposed to self-interested and profit-maximising entre-preneurial behaviour. This activity is driven by a view of environ-mental degradation not only as an opportunity, but also an ethicalissue (York, 2009). Adopting such ethical considerations in thework of green entrepreneurs has implications for the businessworld.

What sometimes tends to be overlooked in the business com-munity is that without value being created, there is nothing tocapture. It would be possible for a business to make more moneythrough either maximising value capture or increasing the value itcreates. An over-emphasis onmonetising valuemay undermine thelong-term sustainability of a business, while too much focus onvalue creation may deteriorate the ability of the organisation tocompete and keep creating value (Pitelis, 2009). Moving away fromsuch a narrow trade-off mentality, we argue that sustainablebusiness model innovation should be based on creating ‘sharedvalue’ e an approach that links business success with social prog-ress (Porter and Kramer, 2011). The central thesis of the ‘sharedvalue’ notion is that since the competitiveness of a company andthe health of its community are mutually dependent, the companyshould focus on creating economic value in a way that also createssocietal benefits by addressing its needs and challenges. In effect,creating shared value should go beyond traditional CSR (CorporateSocial Responsibility) programmes which tend to focus on boostingreputation with a limited connection to business (Porter andKramer, 2011). This represents another contemporary endeavourto broaden both the concept of Adam Smith's invisible hand and theconstruct of value, which has been overly simplified to focusnarrowly on purely economic returns (Harrison and Wicks, 2013;Satz, 2010). Adopting such an approach is important becausesolving social problems can no longer be the sole responsibility ofgovernments. Fig. 6 reflects these ideas on the so-called ‘Value/Business Behaviour Quadrant’.

� Low Value CreationeLow Value Capture: A state of affairs inwhich a business strives neither to create value nor to capture it.This is a stagnant business model with a limited valueproposition.

� Low Value CreationeHigh Value Capture: Where a companybehaves in an opportunistic fashion to maximise short-termprofits, often in response to policies which it seeks to exploit.This attitude resonates with the utility maximisation hypothe-sis, a basic assumption of most economic analysis of firmbehaviour.

� High Value CreationeLow Value Capture: Business model ofgreen entrepreneurs who adopt an others-regard as opposed toa self-interested mind-set.

� High Value CreationeHigh Value Capture: For a green businessmodel innovation to be sustainable, it needs to allow for a bal-ance of value creation and value capture (i.e. a shared valueperspective).

On the policy-making front, we argue that environmentaleconomists would benefit from further consideration of behav-ioural and ethical aspects as part of their rationale for environ-mentalism. As far as governments are concerned, behavioural-related issues e rather than the economic efficiency criterion e

have the potential to justify a range of paternalistic (i.e. stick)policies that force consumers to purchase more green technologiesthan they would otherwise. Different reactions to negative and

Fig. 5. Interplay between green business models, behaviour and various types of green policy instruments.

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positive sanctions have been widely studied in psychology andbehavioural economics (e.g. see Feld and Frey, 2007; Gowdy, 2008).For instance, one of the key findings in behavioural economicsresearch is that decisionmakers pay greater attention to losses thangains (Kahneman and Tversky, 1979). Consequently, carrot-basedgreen policy instruments can be considered as a tool to overcometwo cognitive barriers to environmental action; over-discountingthe future and positive illusions. The first is a cognitive bias thatmeans when making investment decisions, people tend to focus onshort-term considerations as opposed to long-term concerns. Sec-ond, positive illusions lead us to conclude that either energyproblems do not exist or that a ‘silver-bullet’ technology will beinvented to solve energy problems in time (Shu and Bazerman,2010). The fact is that the world is not short of green technolo-gies. What is needed is green business model innovation thatsuccessfully brings such technologies to the market. Policy-makers,on the other hand, need to move away from a traditionaltechnology-push versus demand-pull mentality and think more interms of behavioural changes that result from different types ofgreen policy actions. Clearly, policy interventions can influencefirms to engage in environmental-conscious behaviour; whereasthe question of whether to choose sticks, carrots or sermons alsohas effects on the sustainability of business behaviour as has beendemonstrated by this paper.

7. Conclusions

In this paper, we have provided a critical review of the interplaybetween various policy instruments and emergent business models

Fig. 6. The value/business behaviour quadrant.

in the green built environment. This has allowed for a number ofobservations to bemade, fromwhich some normative prescriptionscan be proposed. To start with, government rationale for policyintervention to support the transition into a more environmentallysustainable economy cannot be based on the premise of a market-failure in the eco-technology market alone. A technology policyapproach to sustainable energy solutions assumes that once a greentechnology is found, market pull becomes the next immediate areafor government intervention since on its own the new technologywill not be able to survive. This has led to a situation where greenbusiness models have developed to a point where they are un-sustainable without government support. The observations madein this paper suggest that while there is truth in the premise thatmany green technologies would not have survived without gov-ernment support, the interventions used (i.e. the policy in-struments) have generated significant negative externalities thathave rendered them ineffective. The bulk of policy instrumentsdeployed by environmentally-conscious governments have soughtto stimulate demand for greener technological solutions by eitherbribing users to adopt a greener solution, or using a subsidisedsubstitute to fuel a binging behaviour. The adopted policy in-struments do not target behavioural change, but rather support asense of entitlement to established wasteful behaviour. As a result,many government-supported programmes and initiatives have ledonly to temporary gains. These often quickly disappear as a result ofnegative externalities in the form of tactful behaviour (e.g. buck-passing and carpet-bagging behaviour). Stick-induced businessmodels tend to engender a buck-passing attitude in the businesscommunity, whereas uncontrolled offering of carrots often leads toopportunistic carpet-bagging aimed at capturing short-term gains(i.e. value appropriation). Consequently, the emergent green busi-ness models are primarily aimed at capturing and distributingvalue rather than creating new sustainable value.

When externalities are overlooked by governments and estab-lished businesses, green entrepreneurs may hope to exploit whatthey see as potential opportunities for value creation from theseidentified positive externalities. They tend to be business oppor-tunities characterised by high-value creation and capture. This wasobserved in the emergence of companies with green-based busi-ness models in theMiddle East, where neither carrots nor sticks areavailable on any substantial scale. The emergence of such modelslends support to the proposition that governments can achievepositive results by targeting behavioural change that leads to the

Y. Al-Saleh, S. Mahroum / Journal of Cleaner Production 109 (2015) 260e270 269

creation of new markets, rather than targeting the formation of anartificial demand for an alternative technology. While sticks andcarrots can indeed be used effectively to cause such a change e forexample as evident in the experience of some countries in reducingsmoking habits e sermon-type interventions in the form ofawareness and information campaigns have the ability to expandthe opportunities for positive externalities to arise.

On the academic front, this paper challenges policy innovationand entrepreneurship researchers to design and innovate greenbusiness models that make the most sustainable use of existingpolicy regimes. It also highlights the importance of assessingwhether these business models have achieved the ultimate objec-tive of green policies with regard to causing a behavioural changeamong various economic agents. In addition, it argues that whilstthe economics literature lacks a solid conceptual foundation thatcan clarify the rationale behind the voluntary emergence of greenentrepreneurs, insights from behavioural economics and manage-ment studies may enhance our understanding with regard to therationale for environmentalism. In that respect, one wonders towhat extent ethical and commercial rationales or reputationalconcerns affect the entrepreneurial move towards achieving asustained green economy? Addressing this question to understandthe emergence patterns of green entrepreneurs would requiretheory testing and conducting international case studies. The an-swers that will eventually emerge from extensive research into thisarea will have profound implications for both the theory andpractice of sustainability transitions.

Acknowledgements

The authors would like to thank the anonymous reviewers fortheir constructive comments and informed suggestions inimproving an earlier version of this manuscript. The authors alsowish to acknowledge the financial support of the Abu Dhabi Edu-cation Council.

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