The Institutionalisation of Zero Transaction Cost Theory: A Case Study in Danish District Heating Regulation

A principle of socioeconomic viability is implemented in the legislative basis of the contemporary Danish decarbonisation energy policy. Consequently, economic theory and method is institutionalised in the energy sector as a de facto regulation of investment decisions. A disputed element of this regulation is the so-called tax distortion loss principle which is rooted in neoclassical zero transaction cost theory. Motivated by its direct effect on investments, this article examines whether the applied economic method underpins the technological transition. By applying a Coasian critique, it is shown that its application has no solid foundation in the neoclassical economic theory as the assumption of zero transaction costs is not fulfilled. Meanwhile, the implication of its use involves economic inefficiencies and barriers to the technological transition. As such, the method is in conflict with the aim of the legislation that has spurred its institutionalisation. It is thus a case study of the limits to the institution free mainstream economics and how it may fall short in a real world application.