"Increasing the Benefits of Voluntary Eco-labeling Schemes"

MACD

March 16, 2000
Jennifer Jahnke

Advisors: Bill Monning & Geza Feketekuty  

This paper was researched and written to fulfill the M.A. project requirement for completing the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. It was not commissioned by any government or other organization. The views and analysis presented are those of the student alone.

For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit www.commercialdiplomacy.org.

TABLE OF CONTENTS

Consumer Demand for Green Products
Eco-Labeling Programs
Attempts to Negotiate A Protocol on Eco-Labels in the WTO

Political Analysis
The Global Eco-Label: A New Approach
Action Plan for Establishing A Global Eco-Label

Overview
U.S. Strategy
International Strategy

Appendix 1: Stakeholder Analysis
Appendix 2: American Demand for Green Products
Appendix 3: Sample Briefing Note for Press Conference

SCENARIO

For the purposes of this project, I assume the fictitious role of Vice President of Government Relations for a fictitious American business association, the Green Producers Association (GPA). In this capacity, I have developed a proposal for establishing a global voluntary eco-labeling scheme, which will be submitted to GPA’s Board of Directors and members for approval. 

GPA’s members are American producers of environmentally sound products—producers who use environmental labeling mechanisms to market their products to environmentally conscious consumers.[1] GPA’s mission is to address public policy matters that affect eco-friendly producers, including issues surrounding eco-labels. 

I suggest in my proposal that GPA should work with the Global Eco-Labeling Network (GEN) in implementing the proposal. GEN is a real life umbrella organization for national eco-labeling programs. It already includes 25 members, and several programs are currently applying for membership. GEN represents its member programs in international fora. It has observer status with the World Trade Organization (WTO) and remains active in the United Nations Environmental Program (UNEP), the United Nations Conference on Trade and Development (UNCTAD) and the Organization for Economic Cooperation and Development (OECD). GEN provides members with international guidelines for eco-labeling criteria, which are based on the ISO 14000 series of environmental management guidelines.  In addition, GEN offers financial and technical aid to countries that wish to develop their own voluntary eco-labeling programs.  

EXECUTIVE SUMMARY

The Problem  

Eco-labels have the potential to significantly reduce environmental degradation associated with resource extraction and manufacturing processes. By enabling producers to communicate directly with environmentally conscious consumers about their production process methods (PPMs), eco-labels enhance the competitiveness of green vis-à-vis other products, and thereby provide an incentive for manufacturers to use environmentally responsible PPMs. 

A number of indicators suggest that the market for green products is large and growing. Co-op America’s “Green Pages,” for example, estimates the “green economy” could expand to an annual market of  $1 trillion.  In reality, however, producers are experiencing diminishing returns on green products. There are a number of reasons why the full benefit of eco-labels has yet to be realized: 

• Eco-labels are expensive. The high administrative and adaptive costs associated with eco-labeling programs make them unaffordable for many producers—particularly because exporters need to apply for eco-labels in all the different markets to which they hope to send their goods.

• Eco-labeling criteria of importing countries do not necessarily reflect the environmental priorities and production technologies of producing countries. These problems are particularly significant when developed countries require developing country producers to meet their own eco-label criteria. If eco-labeling criteria require PPMs that are beyond the means of developing country producers, these producers won’t even consider adopting more environmentally friendly production methods. Moreover, if eco-labling criteria aren’t tailored to address country specific environmental problems, they have less environmental benefit.

• Consumers are losing confidence in eco-labels. In recent years, the number of different eco-labels has proliferated and some producers have used the labels to make fraudulent claims. As a result, consumers have begun to lose confidence in the labels as a means of differentiating between products that are truly environmentally friendly and those that only claim to be.

To address these problems, the European Union and Canada have proposed the negotiation of a protocol concerning voluntary eco-labeling schemes that would become part of the World Trade Organization’s (WTO’s) Technical Barriers to Trade (TBT) agreement. Developing countries, however, fear that environmental measures will be used as disguised barriers to trade, and they have opposed the inclusion of any trade-related environmental issues in the WTO. 

Given this situation, negotiation of a WTO protocol to address the above listed problems is likely not a realistic near-term goal. Private sector establishment of a global eco-label scheme, however, could go a long way toward realizing the full benefits of eco-labels.

Recommendation: A Global Eco-Label Scheme  

The following proposal lays out a global eco-labeling program that could be carried out voluntarily by the private sector (thereby circumventing the need for international negotiation). The program uses mutual recognition as a means of consolidating different eco-labeling schemes’ product criteria under one umbrella label. Once the global scheme reviews and accepts an individual program’s product criteria, producers who meet the program criteria would gain the right to affix the global eco-seal to their products. 

The global label would be particularly beneficial to developing country producers because it would enable exporting countries to develop their own eco-labeling criteria that reflect their own environmental priorities and technology levels. While these criteria would have to be shown to be “equivalent” to those of other eco-labeling schemes included under the umbrella, they would undoubtedly be much more manageable for developing country producers and relevant developing country environmental problems. 

The program also would improve green market opportunities in Japan and Europe for American producers, and it would: 

• Reduce the administrative and adaptive costs of applying for multiple eco-labels by creating one universal label that would be recognized worldwide.

• Improve the environmental effectiveness of voluntary eco-labeling schemes worldwide by ensuring that eco-label criteria reflect specific producer countries’ environmental problems and technological capabilities.

• Help re-establish consumer confidence in eco-labels by creating visual recognition of one credible seal.

• Diminish the potential for eco-labels to either inadvertently become or purposefully be used as trade barriers.

• Serve as a working model for future negotiation of an eco-label protocol in the WTO.

• Build developing countries’ confidence in the benefits of eco-labels (thereby setting the stage for future negotiation of a WTO protocol).

• Improve incentives for producers to use green production methods.

To facilitate widespread use of the global label, the Global Eco-labeling Network (GEN) should be asked to offer technical assistance to developing countries that wish to develop their own eco-labeling schemes (schemes that could then be incorporated into the global program). Developing countries are less likely to adamantly oppose future negotiations regarding eco-labeling if they have a working example of a scheme that increases rather than diminishes market access for their products. Moreover, developing country manufacturers are more likely to adopt green production technologies if they will gain a competitive edge in developed country markets by doing so. 

The global program should also launch marketing and education campaigns to build recognition of the global label (which will be crucial to the label’s success) and to increase consumer awareness of environmental issues and demand for environmentally sound products.

BACKGROUND: CONSUMER DEMAND FOR GREEN PRODUCTS

During the 1990s, consumers—particularly American and European consumers—became increasingly concerned with the environmental affects of their purchasing decisions, and they began demanding significant quantities of “environmentally friendly” products. It is this demand that has spurred both manufacturers’ interest in making green products and the worldwide proliferation of eco-labels.

U.S. Demand for Green Products

In 1999, 52 percent, over half, of American consumers bought at least one product that was advertised as “environmentally safe.” While this number appears impressive, it is significantly lower than the number of consumers who have indicated a preference for eco-friendly products. (For more information on American consumer demand for green products, see Appendix 2.) Unfortunately, U.S. consumers have become somewhat skeptical about eco-labels—largely because of the sheer number of eco-labels and the fact that, because eco-labels are voluntary and unregulated, some producers have used them to make exaggerated or even fraudulent claims. 

European Demand for Green Products

The European market has tremendous potential for green producers because Europeans tend to be relatively well informed about environmental issues and their purchasing decisions reflect this knowledge. Forty-two percent of EU consumers are considered loyal green consumers, and 75 percent of consumers are willing to pay a premium for green products.[2]  Like the United States, however, the EU has problems with consumer confidence because of the overwhelming number of eco-labeled products on the market.

Japanese Demand for Green Products

Japanese consumers have recently become more aware of environmental issues, and their demand for eco-labeled products has increased accordingly. Sixty percent of consumers now recognize environmental claims,[3] and companies are using green products to improve their corporate images with consumers. If administrative and adaptive costs associated with eco-labels were reduced, both Japan and Europe would become good export markets for American green producers.

Emerging Eco-markets

Producers from lesser developed countries (LDC) generally have not been considered to be large markets for environmentally friendly products. According to a survey by Environics International, however, many consumers in these countries are willing to pay a 10 percent premium for green products.[4]  Researchers believe this results from increasing concerns about local air and water pollution in developing countries. Over 50 percent of respondents to the survey said they believe their health has been seriously harmed as a direct result of pollution and are therefore willing to buy green products at a premium.  

By contrast, only 25 percent of consumers from industrialized countries reported believing that their health has been harmed by pollution.  The following chart illustrates the findings of the study.[5]  The chart does not representative the total number of nations that participated in the study.  Rather, it displays developing countries in which consumers were found to have a notable concern for their environmental purchasing decisions, as well as a few developed countries for comparison purposes. The study findings suggest that many of these countries could become emerging eco-markets. Education campaigns will be important to further build this potential.

BACKGROUND: ECO-LABELING PROGRAMS  

Eco-labels are product labels that inform consumers about the environmental impact of a product. They encourage producers to switch to environmentally sound production process methods (PPMs) because they can give a product an advantage in the marketplace. Eco-labels allow producers to differentiate their products from products that are less environmentally friendly[6] and thus to reach environmentally conscious consumers. 

Voluntary eco-labeling programs certify products that meet set product criteria that are usually based on life cycle analysis (LCA)—an analysis of the full environmental impact of a product, including impacts associated with the initial extraction of natural resources used in the product, the production process methods (PPM’s) used in manufacturing the product, and the use and disposal of the product. 

Unfortunately, the full environmental benefit of eco-labels has yet to be realized: 

• Eco-labels are expensive. The high administrative and adaptive costs associated with eco-labeling programs make them unaffordable for many producers. Green producers that want to export their products to multiple markets incur substantial costs in gaining the right to use the eco-labels specific to each of those markets. A producer often has to pay application and scientific testing fees for each market to which he hopes to export; he may also have to adapt his production methods to meet different countries’ eco-labeling criteria. To avoid these costs, a producers might decide to apply his own environmental claims to his product packaging, however this is likely to hurt his sales and might even render his product unprofitable. A producer that can’t afford third party certification may also decide to relax some of the strict environmental guidelines that he would adhere to under the voluntary eco-labeling scheme because no one will verify his own claim. Either way, the system reduces producers’ incentives to adopt environmentally sound PPMs.

• Eco-labeling criteria of importing countries do not necessarily reflect the environmental priorities and production technologies of producing countries. The criteria for gaining the right to use European eco-labels, for example, do not reflect Zimbabwe’s local environmental problems, its access to environmentally sound technologies, or its level of economic development. Accordingly, Europe’s eco-labeling criteria might not address an important environmental issue in Zimbabwe, or more likely, they may set requirements that are near impossible for Zimbabwe’s producers to meet. Zimbabwe’s environment would benefit more if Zimbabwean producers were required to meet requirements that are feasible and that addressed specific Zimbabwean environmental problems.

• Consumers are losing confidence in eco-labels. Credibility is crucial to the success of voluntary eco-labeling schemes. In order for an eco-label to be an effective marketing tool, consumers need to know that the label makes an accurate claim. Obviously, eco-labels granted by third party organizations with established product criteria are more credible than labels ginned up by a producer for his own products. However differentiating between third-party eco-labeling programs is also problematic, and the recent proliferation of eco-labels in conjunction with some producers’ fraudulent environmental claims has diluted consumer confidence in the labels. Some consumers now believe that eco-labels are simply manufacturer schemes for exploiting consumer concern for the environment. In 1998, 8.7 percent of new products in stores nationwide carried environmental claims—an increase of 2.8 percent over the past decade.[7] As Diane MacEachern, a Washington based consultant for food eco-labeling, explains, “I could put out a product that said, ‘Good for the environment.  Nice for the bees.’  There could be absolutely no basis to make those claims other than my subjective opinion.  And consumers would have no way to validate those claims.”[8]

BACKGROUND: ATTEMPTS TO NEGOTIATE A PROTOCOL ON ECO-LABELS IN THE WTO

The European Union (EU) has suggested that member nations should negotiate an ad hoc code of conduct under the auspices of the TBT agreement in order to provide clarification of this agreement as it relates to voluntary eco-labeling schemes. As the EU sees it, negotiators need to clarify the legal questions regarding the spirit and purpose of the TBT agreement and to establish criteria for such schemes in order to limit their impact on trade flows.[9]

The United States has remained neutral on this specific issue. However it, along with the EU, Canada, and Japan have been working towards creating a political climate within the WTO that is receptive to the trade and environment agenda. To date, they have made little progress.

Developing countries remain concerned that an ad hoc agreement regarding voluntary eco-labeling will allow industrialized countries to set up disguised barriers to trade on the basis of dubious scientific evidence. Although the trade effects of voluntary eco-labeling schemes are largely unknown (because researchers do not have access to confidential corporate data regarding increases or decreases in sales),[10] there is at least some evidence that eco-labels can act as trade barriers. In Columbia, exporters have cited the high costs of obtaining foreign eco-labels as the primary reason for diverting exports from several developed countries.  Columbian textile companies reportedly ceased exporting products to certain developed countries due to these costs and the consideration that, without the eco-label, the products could not compete. Similarly, Columbian banana exporters have indicated that adaptation costs to fulfill eco-labeling requirements exceeded the benefits of getting a label.[11]

Developing countries are also concerned that a WTO eco-label agreement would establish a legal precedent for consideration of non-product related production process methods (PPM’s) as a legitimate means of discriminating between products. Developing countries argue that voluntary eco-labeling schemes are outside the text and spirit of the TBT agreement and are not WTO-compliant because labeling mechanisms allow consumers to discriminate between products based on non-product related characteristics. 

Moreover, developing countries are particularly concerned that harmonized global environmental standards will impose ineffective environmental standards and needless economic burdens on developing nations. They argue that the environmental problems of developing countries are often linked to economic development, such as wastewater treatment, deforestation, biodiversity, and population burdens, and that environmental standards for developing countries need to reflect their level of development and particular environmental challenges. 

Developing nations believe the industrialized countries have already asked the developing world to sacrifice too much for the sake of free trade. They are also frustrated by industrialized countries’ unwillingness to lower barriers to trade in textiles and commodities, which are traditional export industries for developing countries. There is a general sense among developing countries that they must stand up to developed countries on issues that threaten their economic interests.  

[1]Eco-labels are product labels that inform consumers about the environmental impacts of their purchasing decisions. They enable producers to differentiate their environmentally friendly products from other products and thereby create a market incentive for producers to switch to environmentally sound products. During the 1990s, interest in eco-labels grew in tandem with demand for environmentally friendly products.

[2] Dorothy MacKenzie, “You can still shop to save the world,” New Statesman, 10 January 2000.

[3] Mary Haffenberg, “Report from Tokyo: Net, leisure, green products hot in Japan,” Marketing News, 25 May 1998.

[6] According to the World Trade Organization (WTO), “Most environmental problems result from polluting production processes, certain kinds of consumption and the disposal of waste products.”  “Trade Liberalization Reinforces the Need for Environmental Cooperation,” World Trade Organization, http://www.wto.org/wto/environ.htm.  

[7] Portland Oregonian.  

[8] Portland Oregonian.  

[9] The WTO has considered the issue of voluntary eco-labeling within the Committee on Trade and the Environment (CTE) and the Committee on Technical Barriers to Trade (CTBT).  The CTE is responsible for identifying the relationship between trade measures and environmental measures in order to promote sustainable development. To date, it has researched the trade-related aspects of voluntary eco-labeling schemes (including transparency concerns), eco-labeling schemes’ conflicts with the TBT agreement, the limitations of life cycle analysis (LCA), and the environmental impact of production process methods (PPMs). It has given a great deal of attention to the question of how to bring voluntary eco-labeling systems into compliance with both the text and spirit of the TBT agreement.  Now, however, the Committee has exhausted its mandate for further research; the issue has reached the point at which it needs to be addressed within the text of the TBT agreement.

[10] OECD, p. 6.  

[11] “WTO Committee on Trade and Environment Discusses…Eco-labelling and Packaging.”  World Trade Organization, 13 Aug 1997, http://www.wto.org.

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