Ecological transition: the danger of going it alone

Do companies that embrace the environmental transition out of genuine conviction outperform those that act in response to subsidies? A study by NEOMA researchers Lijue Lu and Fouad Ben Abdelaziz delivers a counterintuitive conclusion: even well‑intentioned firms can end up producing outcomes that are collectively inefficient. The reason? A lack of coordination.

Companies are facing growing pressure to reduce their environmental impact as the climate emergency intensifies. Some firms – Patagonia, the US‑based outdoor clothing brand, is a good example – embed environmental responsibility at the core of their business model rather than waiting for external incentives. Other companies move forward in response to government policy. In Luxembourg, for instance, the government granted €180 million in 2024 under its climate protection aid scheme, a move that successfully mobilized over €550 million in total investment from businesses. 

Although the two approaches are radically different, do they nevertheless produce the same results on a sector-wide scale? This is precisely the question the NEOMA researchers set out to answer by developing a game‑theory model to compare these two distinct pathways to environmental transition.

A structural problem rather than a question of morality

On paper at least, the conditions seem favourable. Consumers say they are willing to pay more for sustainable products, though the size of this so-called “green premium” varies greatly across industries. Companies, too, are signalling increasingly ambitious environmental goals.

Yet in competitive markets, the benefits generated by sustainable investment are not always reaped by the company that funds them. Some of these gains spill over to the entire sector through suppliers, industry standards or shifting consumer expectations. This means that firms have an incentive to take action but not to be the first to move, since they risk carrying the costs alone while others enjoy the benefits. Economists refer to this as “free-rider” behaviour. And because this dynamic entails risk, it ends up causing underinvestment across the board. 

Subsidies that rebalance the system

The researchers built a game‑theory model comparing two scenarios to formalise this mechanism: in one, two companies choose to commit voluntarily; in the other, their investment is supported by government subsidies.

The study’s findings show that  ethical intent alone is not enough. Even companies that are committed to the ecological transition make their decisions independently guided by their own cost–benefit calculations. Without a unified plan, companies hesitate to fund progress that their rivals can simply exploit for free. This “every firm for itself” mentality leads to chronic underinvestment, leaving the industry’s total green effort far below what would be optimal collectively. 

Conversely, subsidies change the equilibrium within sectors. By lowering the cost of entry for everyone at once, the government aligns a company’s private profit goals with the public’s need for a cleaner planet. This shifts the system from mutual hesitation to collective action, reducing the inefficiencies that stem from individual decision‑making.

As a result, the subsidy-based scenario outperforms voluntary action. For the same environmental performance, profits are higher; for the same profits, the environmental impact is better. While these two paths eventually converge once an industry reaches a high enough level of green maturity, coordination remains the essential spark needed to get the transition moving in the first place. Designing the right subsidies

These results have direct implications for government policy. The researchers stress a key idea: how the subsidy is designed is just as important as the amount of the funding. And not all transitions rely on the same financing mechanisms.

Some types of investment, such as waste reduction, logistics optimisation or basic energy efficiency generate quick and immediate returns. The initial steps do not cost much and are effective. However, past a given point, additional subsidies merely finance marginal gains with sharply diminishing returns.

Other types of investment, by contrast, require substantial upfront spending, but once a critical point is passed, the gains accelerate. This is what happens with CO₂‑capture technologies or when entire supply chains are overhauled. Here, the main - but not only - obstacle is getting started. The incentives must stay in place over an extended period to facilitate the ramp-up of investments.

This advantage, which is delivered by well‑targeted subsidies, is particularly strong when firms have begun the transition but still need to decide how far to take it. This is precisely where most industries find themselves today – and where coordination becomes a crucial factor.

Find out more

Lu, L. and Ben Abdelaziz, F. (2026). The role of socially responsible firms and government subsidies in the sustainability transition: A multi-objective game. Energy Economics, 155, 109198. https://doi.org/10.1016/j.eneco.2026.109198