Uncertainty, Ambiguity and Rules of Exchange: Organizing a Market for Biofuels in Europe

Thursday, 2 July 2015: 2:15 PM-3:45 PM
TW2.1.03 (Tower Two)
Ines Peixoto, Aalto University School of Business, Helsinki, Finland
Environmental policy intervenes in the economy in order to establish foundations for a more sustainable economic growth. Even though governments play a role of rule-makers (Fligstein 1996; Fligstein and Dauter, 2007), the interaction of various parties, with distinct interests and expectations of the future, such as trade associations, standardization bodies (Ahrne, Aspers and Brunsson, 2015) and social movements (King and Pearce, 2010), also shapes those rules. The policy-making process is moulded by “competing frames of meaning” and “contending interests and identities” (Hoffman and Ventresca, 1999: 1369) where problematic, inconsistent and unstable goals create conditions for ambiguity (March, 1978) regarding problems, solutions and appropriate interventions.

This paper examines the policy-driven market for biofuels in Europe as a political solution to reduce consumption of fossil fuels and emissions of greenhouse gases (GHG) in road transport by legally requiring the blending of biofuels in diesel and gasoline. When the environmental protection qualities of biofuels became ambiguous - for not fulfilling the promise of GHG emissions reduction, for causing dramatic rises in global food prices, and for causing deforestation and loss of biodiversity - legislators introduced new rules that set the kinds of biofuels favoured and sanctioned in the market.

Rules of exchange define the conditions under which transactions are carried out between buyers and sellers (Fligstein, 1996). Knowing in which terms a product can be exchanged is critical for strategic decisions pertaining to innovation and investment, as well as for assessing compliance with legislation. Rules and standards are meant to ensure stability and predictability regarding time horizons for innovation and future returns on investment (van Waarden, 2001). However, as rules are contingent on decision-making in organized markets (Ahrne, Aspers and Brunsson, 2015), decisions to change them may also destabilize markets (Fligstein, 1996) and create uncertainty.

Uncertainty can be defined as the outcome of an inability to predict or to assign probabilities to the future state of an organizational environment, the effects of changes in the organizational environment and the responses to those changes (Milliken, 1987). One source of uncertainty lies in expectations, decisions and economic outcomes pertaining to the actions of different constituents being reciprocally dependent upon each other (Beckert, 1996; DiMaggio, 2005). Uncertainty is typical of technological ferment (Murray and Tripsas, 2004), new markets (Santos and Eisenhardt, 2009), and more broadly of economy activity oriented towards an open future in capitalist economies (Beckert, 2013, 2014), but is present also in the regulation of markets and industries concerning environmental issues (Marcus, Aragón-Correa and Pinkse, 2011). Actors rely on “social devices” that reduce uncertainty (Beckert, 1996), such as market information regimes (Anand and Peterson, 2000) and credit ratings (Carruthers, 2013), which provide a means to act meaningfully (Beckert, 1996).

Ambiguity creates uncertainty about future events, but emerges in contexts of competing and incommensurable logics (Espeland, 1998) and of “multiple constituents, diffuse power and diverse interests (Jarzabkowski, Sillince and Shaw, 2010). Ambiguity is not attenuated or solved with incremental information as the underlying conflict prevails (Ventresca and Levin, 2004). It can undermine collective commitment and investment in new technology (Weber, Rao and Thomas, 2009) or amplify the uncertainty regarding the outcomes of rule-making (DiMaggio, 2005). Ambiguities concerning product definition and value are alleviated through legal qualification and standardization (Huault and Rainelli-Le Montagner, 2009) as well as commensuration (Levin and Espeland, 2002). Underlying these practices is a complex and rich social process that involves defining which dimensions of value matter the most and to whom, and how these dimensions are articulated and by whom.

Literature suggests that rules of exchange reduce uncertainty for economic action by providing an expectation regarding the future consequences of innovation and investment. However, literature also suggests that the rules that govern the market can create instability and uncertainty. Thus, in this paper we ask how rules of exchange create uncertainty for biofuels supply and investment, and whether and how do ambiguities regarding biofuels shape the making of rules of exchange. Our purpose is to build on extant research in order to elaborate on the role of ambiguity in the organization of markets and cast light on the relationship between rules of exchange and uncertainty for economic action in markets.    

This paper is based on a longitudinal qualitative study of formation and organization of a market for biofuels in the European Union in the period 1992-2009. Using archival data from relevant legislative documents, policy documents, and news articles from international media outlets, we produced detailed thematic chronologies of events built from the actions and quotes of actors involved directly and indirectly in market organizing. From the chronologies we identified rules of exchange, describe the rule-making process, and identify ambiguities related to biofuels and perceived uncertainty for biofuel suppliers and investors.

Findings show that legislators created and negotiated new sets of rules (“sustainability criteria”) to govern the supply of biofuels in response to the conflicting frames concerning the worthiness of biofuels in fulfilling the policy goals. They defined which kinds of biofuels could be traded and which kinds would be sanctioned, as well as schemes for monitoring the compliance with these rules. Ambiguous issues not covered by sustainability criteria were incorporated into scheduled reviews of the directive, which signalled that market conditions could change at future points in time with unpredictable outcomes. While sustainability criteria and reviews meant to guide future innovation efforts in biofuels and orient investment, it was perceived as jeopardizing industry investment and casting doubt on the ability of the nascent market to thrive.

We argue that rules enforced to deal with ambiguities regarding policy goals can eventually create uncertainty for innovation and investment in a nascent market. We suggest that this partly stems from sanctioning biofuel products immediately available, from enforcing product criteria only fulfilled by experimental, not commercially-available technologies and from introducing flexibility for further changes in rules at any given future time. This paper speaks to the flexibility and rigidity of rules that govern a market when rules are created to reach an imagined expectation for a nascent market which reveals complex challenges for organizing markets.