United Nations
Commission on Sustainable Development

Background Paper


                                 ECO-LABELLING

                                   CONTENTS

                                                            Paragraphs    Page


I.    INTRODUCTION ........................................... 1 - 7     2 - 3

II.   DEFINITION OF ECO-LABEL ...............................  8 - 9       3

III.  DISCUSSION OF THE EFFICIENCY VS EQUITY ................ 10 - 15    4 - 5
      DILEMMA IN THE CONTEXT OF ECO-LABELLING

IV.   EVIDENCE FROM LABELLING PROGRAMMES .............      16 - 27      5 - 7
      
      A. Effects on consumers ..........................    17 - 24      5 - 7

      B. Effects on producers ............................. 25 - 27       7 

V.    EXPECTED EFFECTS OF ECO-LABELLING ON ..............   28 - 39     8 - 10
      CONSUMER PURCHASING DECISIONS AND 
      PRODUCER COMPETITIVENESS 

VI.   THE EFFECT OF ECO-LABELLING ON ....................   40 - 46    10 - 11
      DEVELOPING COUNTRY EXPORTERS

VII.  THE EFFICIENT DESIGN OF ECO-LABEL ................    47 - 52    12 - 13
      PROGRAMMES

VIII.       SUGGESTION FOR FUTURE RESEARCH .............    53 - 55    13 - 14


      Bibliography                                                     14 - 16



                               I. INTRODUCTION 

1.    This paper reviews the empirical and theoretical literature on
labelling. It studies the effect that labelling programs have had on consumer
and producer decisions in several industries and discusses whether the same
effects can be expected from eco-labelling. The study is primarily addressed
to those aspects of eco-labelling that may affect the level and pattern of
trade between developed and developing countries.   

2.    The paper has two objectives. The first is to report findings from the
label literature that can be useful in the design of eco-labelling programs.
It attempts to identify those factors that can improve the transfer of
information to consumers without imposing large costs on producers. For
example, the paper cites proposals from international organizations and
national governments for the coordination of national eco-labelling programs
1/. Such proposals aim to provide the information that consumers from
importing countries demand minimizing, at the same time, the costs incurred by
producers that export to more than one country (see UNCTAD 1994a and 1994b for
the current state of all these initiatives) .

3.    The second objective of this survey is to facilitate a better
understanding of the distinction between the efficiency gains and equity
implications of eco-labelling. An eco-labelling program generates efficiency
gains in the exchange of goods when it increases the information available to
consumers about alternative goods at a cost they are willing to pay. An eco-
labelling program has equity implications if it imposes higher costs on some
producers than on others. The equity implications of eco-labelling with which
this paper will be concerned are the potential market share losses of
exporters from developing countries (DGs) in industries affected by an eco-
label regulation. 

4.    The trade-off between the efficiency and equity implications of eco-
labelling is at the core of some international agency and national government
concerns. These institutions fear that developed countries (DCs) may try to
protect their markets from DG products by establishing criteria on the
environmental information on labels that DG producers (especially, small and
medium producers) might find difficult to meet. 
      
5.    The study finds that label programs have affected the pattern of
consumption and production of the industries that have adopted them.
Nevertheless, the effect of these programs has not been large and has been
unequally distributed across consumers and producers even in the most
information-sensitive industries (like the food and health industries). As a
result, the paper suggests that the effect of eco-labels on DG exports is
likely to be small as well, mainly because a large market niche will exist for
products without an eco-mark that compete primarily on the basis of price. 

6.     Thus, one conclusion of the study is that eco-labelling programs should
be designed to optimize the information gains of the groups that find value in
obtaining or disclosing voluntary information. In most cases, these groups are
neither consumers nor producers from DGs and, thus, the latter will not be
affected by these programs in a major way.

7.    Section 2 defines eco-labelling.  Section 3 discusses the efficiency and
equity implications of eco-labelling programs. Section 4 reviews the
literature on labelling, and section 5 discusses whether the conclusions from
section 4 can be extrapolated to the case of eco-labelling. Section 6
discusses the effect that eco-labelling may have on the imports from DGs.
Section 7 provides some suggestions for an efficient design of eco-labels.
Finally, section 8 suggests directions for future research.

                         II.  DEFINITION OF ECO-LABEL

8.    An eco-label is a voluntary trademark that is awarded to products deemed
to be less harmful to the environment than other products within the same
category. 

9.    There are two important implications of this definition:

      (a) an eco-label requires that a voluntary application be made by the
producer. Being a voluntary decision, a producer will apply for an eco-label
only if he/she can extract some extra surplus (or avoid a loss of surplus)
from it. If consumers' reaction to the new information is expected to be small
or if     the cost of providing that information is large, most producers will
keep their competitive advantage without participating in the program and will
not have to incur any labelling cost.

      (b) an eco-label program needs a third party certification to define the
levels of environmental harm that will differentiate products within the same
category. The third party certification defines, first, the category groups
and, second, the relevant degree of environmental harm. Because any national
government or national agency can act as a third party certifier and different
countries may select different product categories and levels of environmental
harm, there is concern that the proliferation of national programs, especially
those based on life cycle analysis (LCA), will have a negative effect on
international trade.  National governments and international institutions lack
the instruments to intervene in this matter because, being a voluntary
decision on the part of producers, eco-labels are not subject to the WTO
regulations that ban trade-restricting practices 2/. 

      III. DISCUSSION OF THE EFFICIENCY VS EQUITY DILEMMA IN THE CONTEXT
                               OF ECO-LABELLING

10.   A labelling program increases the efficiency of an exchange when the
gains to the recipients of information (consumers) outweigh the cost of
providing that information 3/.

11.   To study the efficiency of an eco-labelling program it may be useful to
clarify the type of costs and benefits that should be imputed to these
programs. 

12.   In fact, producers can react to an eco-labelling program in three
different ways, each of which is associated with different costs and benefits.
First, all producers in the industry may simply ignore the program on the
assumption that consumers do not value that information. The costs and
benefits from this program will be nil. Second, some producers, those that
already meet the standards to get the eco-label, may participate in the
program (earn the eco-mark) while the rest of the industry, those that do not
meet the standards, will not participate in the program. Only the former will
face the direct cost from complying with the new norm (studying the norm,
analyzing the product characteristics and elaborating and applying for a new
label 4/). All consumers will benefit from the differentiation of products
which seemed identical before the creation of the program. Third, some (or
all) producers who want to participate in the program may need to change their
product formulation to get an appropriate eco-label. These producers incur two
types of costs: the direct cost from elaborating and applying for a new label
and the cost from reformulating and producing the new product. The latter is a
strategic and voluntary reaction on the part of producers rather than a cost
imposed on them by the labelling standard. If one imputes this investment
expenditure as a cost of the labelling program one should also impute as a
benefit of the program the increase in consumer satisfaction (and reduction in
environmental damage) from the new products. 

13.   It should also be noted that, at the international level, one has to
impute to the program a multiple of the cost that a exporter incurs to comply
with different national programs. As a general rule, any efforts to reduce
this multiplication of costs would increase the efficiency of the programs as
long as they do not reduce substantially the information relevant for
consumers.  For this reason, the International Organization for
Standardization (ISO) is developing guidelines to reduce the trade-restricting
implications of having too many different eco-labeling programs. See UNCTAD
(1994a) for a description of other international efforts in this direction.  

14.   It will always be the case that some producers will be more affected
than others by the existence of labelling requirements. The concern about
which producer (or which country) is more affected is a problem of equity
rather than economic efficiency. It is a political decision to establish
whether a more equitable program is preferred to a, possibly, more efficient
one. 

15.   This paper will try to report findings in the labelling literature that
could help policy makers compare the potential efficiency gains of eco-
labelling programs with their potential costs in equity terms 5/.     

                    IV. EVIDENCE FROM LABELLING PROGRAMMES 

16.   This section reviews the literature on labelling with the objective of
drawing some conclusions that can be useful to the design of eco-labelling
programs. Most of the papers in this literature refer to the food industry in
the United States.

                           A.  Effects on consumers

17.   The effect of label information on consumer behavior depends on (a) the
amount of label information actually perceived by consumers and (b) the
consumer's willingness to pay the premium associated with the label, if one
exists. 

      1. Perception of information 

18.   The research reviewed indicates that consumers do demand label
information but that they actually perceive a low percentage of the
information displayed in existing labels. Muller (1985), Robertson and
Marshall (1987), Feldman and Erickson (1988), Brucks, Mitchell and Staelin
(1984) and Klein and Greyser (1989) find that information in food labels is
difficult to understand and that a large proportion of their experimental
groups did not perceive the intended information.  Levy et al. (1985) and
Burton and Biswas (1993) point out the importance of displaying complete
information but in simple statements that are easy to read. See also Brown,
Kelley and Lee (1991) for a review of the effect of labels on consumer
perception. 

19.   Caswell and Padberg (1992) report that different surveys show that
consumers do not have time to process the information on the labels they
consume at the moment of purchase in the store. Nevertheless, Moore and Lehman
(1980) argue that most of the information on labels may be acquired during
consumption rather than shopping and that this information may affect future
purchases. 

20.   Some researchers have linked the amount of labelling information
perceived by consumers to the level of information that consumers had before
purchasing the product. Ippolito and Mathios (1990) show how increasing the
level of information can affect the success of a labelling program. They study
the effect of the advertising campaign on the health effect of high fiber
cereals in the mid 1980s. They find that the promotion of these products
enhanced the amount of information transmitted from labels to groups that had
low levels of health information. Consequently, the advertising campaign
combined with the labelling information reduced the disparity between the
levels of consumption of these groups and those that were better informed
before the advertising campaign.  Beltramini (1988) finds that those that felt
more strongly about the harmful effect of smoking perceived the warning label
in cigarettes as more relevant and believable. Jensen and Kesavan (1993) find
that the advertising campaign on the calcium content of diary products
affected consumer attitudes and awareness of the products labelled as such.   
21.   It has been shown also that the level of perceived information depends
on the consumer ability to process the information in the labels. Thorelli and
Engledow (1980) identify information seekers as high-income, educated and
mostly professional or managerial people. They argue that they may represent
about 10 to 20 percent of consumers. Ippolito and Mathios (1990) find that the
groups with the highest increase in high fiber cereal consumption after an
advertising and labelling programs were those with higher capacity to process
information (better educated). Schucken et al. (1983) found that, after the
mandatory warning of saccharine usage in soft drinks, only the most educated
households or households with children reduced the consumption level of these
products. 

      2. Purchasing decisions

22.   As was indicated in the introduction to this section, the second factor
that affects the impact of a new label on consumers is the willingness of
consumers to pay a premium for the new labelled products. Although it is
difficult to measure directly, this section reviews some studies that show
that only a relatively small percentage of consumers are willing to pay higher
prices in exchange for more information or for different products. 

23.   Zarkin and Anderson (1992) report that 58% of the consumers they
surveyed consider the nutrition content of food, as perceived from food
labels, to be an important factor when shopping. Nevertheless, price and taste
were important also for a larger percentage of consumers (64% and 65%
respectively). McNeill and Wilkie (1979) found that energy labels did
communicate useful information but did not change purchase decisions, Dyer and
Maronick (1988) review the literature on appliance energy labels and conclude
that this information had only marginal purchasing effects. Levy et al. (1985)
found that when products were displayed on shelves with markers that contained
nutrition information the consumption of these products increased with respect
to those without that information, but the difference in consumption between
both types of products was not large. Brown and Schrader (1990) and Capps and
Schmitz (1990) found quantitative evidence that suggests that health and
nutrition information has affected the consumption patterns of shell eggs and
meat products. Ippolito and Mathios (1990) find that only the most health
conscious groups and those with higher education increased significantly their
consumption of high fiber cereal.   

24.   The main conclusion from this subsection is that some consumers accept
price increases in exchange for information about product quality but that
this behavior is limited to certain groups of consumers and products.


                           B. Effects on producers 

25.   Some authors argue that the most important benefit from labelling is not
the direct effect on the level of consumer information but the indirect effect
on the average quality of the supply of products (Caswell and Padberg 1992,
Padberg 1992). There is evidence that, after a compulsory label program is
implemented, some producers change the composition of their products to
prevent a negative reaction from their customers. This is not a generalized
reaction among producers, though.

26.     Ippolito and Mathios (1990) found a small but significant increment in
the average levels of "other healthy" components in high fiber ready-to-eat
cereals after health claims on food were allowed.  Nevertheless, they did not
find any significant change in the composition of cereals that were not high
fiber and, thus, were not part of the information campaign. French and
Neighbors (1991) report that many soft drink producers started using an
alternative artificial sweetener when a warning for the use of saccharin was
required. They also report similar reactions from producers that used sulfite
before a disclosure requirement was in place.    

27.   An interesting characteristic of labelling programs is that they have
been particularly effective in oligopolistic industries 6/. This is because
producers in these industries can appropriate the benefits from advertising
campaigns that make consumers aware of the information on the label (see
Ippolito and Mathios 1990 for the ready-to-eat cereal industry). Caswell
(1992) reports that, in a study developed in 1991, almost half of food
products had no label information. The reason for providing a label had more
to do with whether the competitors did it than with the type of product
offered.


          V. EXPECTED EFFECT OF ECO-LABELLING ON CONSUMER PURCHASING
                    DECISIONS AND PRODUCER COMPETITIVENESS

28.   This section discusses the differences and similarities between the
industries studied in our review and the industries which may adopt an eco-
labelling program. Based on this comparison, the section provides some
predictions on the effect that eco-labels may have on consumer and producer
decisions.   

29.   Our research indicates that five factors seem to be important for the
success of a labelling program: 

      (a) previous consumer awareness on the type of information contained in
          the label;

      (b) third party certification;

      (c) market structure; 

      (d) consumer willingness to pay a premium for labeled products;

      (e) inexpensive and clear label format 

30.   Factors (a)-(d) are product-specific while factor (e) affects every
product in a similar way. This section studies how the first four factors may
affect the industries targeted by eco-labelling programs. Section VII deals
with factor (e) and will provide practical suggestions for the design of
labels and labelling programs. 
31.   The environmental content of goods can be considered a credence and
public good that is produced in industries with very different structures. Let
us analyze these three characteristics one at a time.

32.   Credence goods are those whose characteristics can not be observed by
the consumer directly even after consumption. An example of a credence good is
"healthy" food. The literature on "healthy food" labelling indicates that
consumer awareness programs and third party certification may be necessary if
consumers are to perceive and believe the claims on the labels. An example of
third party certification combined with an advertising campaign is studied by
Ippolito and Mathios (1990). They  consider that the cooperation of the
National Cancer Institute with the Kellogg's promotion of high fiber cereal
was essential for its success 7/. 

33.   In eco-labelling programs the credibility problem can be eliminated with
the participation of governmental or private agencies as third party
certification bodies. Promotional campaigns of the environmental qualities of
a product can be carried out by governments, international organizations and
NGOs. This will require a cost-benefit analysis where the campaign cost is to
be balanced with the social benefit derived from the increase in consumer
information.  

34.   A more difficult but related issue is to know whether producers will
have incentives to invest private resources to campaign for the environmental
qualities of their products. This can depend on the structure of the industry
that produces those goods. The literature already reviewed in this survey
indicates that oligopolistic producers have high incentives to differentiate
their products while in competitive industries the efforts of a single
producer will be too small to be perceived by consumers. Thus, one would
expect that producers will be more eager to adopt an eco-label in, for
example, the chemical or paper industries than in the clothing or footwear
industries.  

35.   Public goods are those for which the consumption by one person does not
exclude the consumption by another. The cost of providing the good to an extra
consumer is negligible. Examples of such goods are, among many others, the
national defense system, public parks and public infrastructure. Markets can
not provide an efficient allocation of these goods because consumers may not
be as willing to pay for a good that other consumers can enjoy freely ("free
riding"). Governments usually coordinate the payments of large groups of
consumers through taxation so that each of them pays a portion of the cost of
the good. 

36.   Although the goods that have been previously investigated in this review
are not public goods we can still use the conclusions from that literature as
a reference to shed light on the potential implications of eco-labelling
programs. It makes sense to assume that the average consumer reaction to an
increase in the information on private goods can be an upper limit of the
expected average consumer reaction to an increase in the information on public
goods. This statement assumes the existence of "free riding" and can be
justified as follows. As a result of an increase in information about a
private product, consumers will increase their consumption of the product if
they perceive they can get a direct benefit from it (for example, consumption
of healthy food). However, after new information about the impact of a
marketed good on the quality of a public good (such as the quality of the
global environmental commons) is released, consumers may not perceive a direct
gain from the consumption (or reduction of consumption) of that good unless
other consumers will react in the same way (which will not happen if free
riding exists). For example, reducing the level of CO2 emissions by a single
consumer will not result in a tangible reduction of air pollution. Thus, it is
reasonable to assume that given an increase of environmental information on a
consumption good, consumers will react more if significant improvement in
environmental quality does not depend on the behavior of others. 

37.   There does not seem to be any comprehensive empirical research which
could help to determine the extent to which the free riding problem is
important for environmentally friendly goods. Nevertheless, there is some
anecdotal evidence which supports the hypothesis that there is a potential
demand for green products (even those that include a price premium) but that
this potential demand is still small. For example, The Economist (1993)
reports interest in the furniture industry for wood produced with sustainable
management techniques; nevertheless, East Asian Report (1994) indicates that
environmental concerns may affect the furniture industry; Marketing News
(1993) reports the potential but small market for "green clothing"; Chemical
Week (1993) reports the market gains achieved by some products using "green
chemicals" (for example, the article documents the fact that the market for
water-based paints has increased from a 5-7% in 1978 to a 40-50% in 1993); the
Swedish Standard Institution reports that the market share of detergents with
an eco-label in Sweden increased from 12% in 1992 to 80% in 1995.    
38.   This evidence shows that some products with eco-labels achieve high
market shares in a relatively short period of time. Given the small number of
products for which eco-labelling has had an important impact until now, it is
difficult to generalize about consumer behavior (especially to what extent
free riding exists in the consumption of eco-friendly products). However, even
from this limited evidence, two observations might be made which could have
relevance for other markets as well. First, eco-labels are more likely to
spread rapidly in oligopolistic markets. Second, if meeting the environmental
requirements to obtain an eco-label is not "too costly", producers will adopt
it. This will have the implication that the eco-label will discriminate
against the "worst" producers instead of creating a market niche for the
"best" producers 8/. 

39.   In summary, this section leads us to the following conclusions. First,
there may be a potential and growing demand for green products. Second, this
potential demand will not materialize in the form of actual purchases without
public information campaigns and the active role of third-party certifying
bodies. Third, there is evidence to assume that a large market for
environmentally "unfriendly" products will remain available for products
without an eco-label. This market will be larger the larger is the premium
attached to the environmental quality of the products (the more costly is to
meet the environmental requirement).  Finally, eco-labelling schemes which
discriminate against the "worst" producers may be more effective in achieving
short-term gains in environmental improvement than those which create a market
niche for the "best" producers. 

        VI. THE EFFECT OF ECO-LABELLING ON DEVELOPING COUNTRY EXPORTERS

40.   This section will focus on some of the equity consequences of eco-
labelling programs, in particular, on the effect that eco-labelling programs
can have on DG exports. Their impacts may differ depending upon whether these
programs consider the impacts of products during consumption and disposal or
whether they consider as well impacts arising from production and process
methods (PPMs), as in the case of life-cycle analysis.

41.   UNCTAD and UNDP have sponsored several surveys with the purpose of
finding which are the main concerns of DG producers facing environmentally
related regulations (see UNCTAD 1994c for a preliminary summary of the results
of these studies). 

42.   The main conclusion from these studies is that most DG exporters do not
perceive themselves to be affected by eco-labelling programs. In Colombia,
China and Poland most respondents claim not to be directly affected by
competing firms that provide eco-information, although they show interest in
applying for these labels in the future. For the respondents from Turkey,
Zimbabwe and the Philippine eco-labels were not an issue of concern. 

43.   However, UNCTAD 1994c refers to other studies that have studied the
impact of the European Union eco-labelling program, which is based on life-
cycle analysis, on small producers from Brazil, India, Colombia, Thailand and
Turkey. They report that if a small producer of footwear in India wanted to
display the EU label, the cost of test requirements alone could amount to an
increase of 50% of the factory gate price of the product. They also report
that even for large producers compliance with the EU standard would increase
their fixed capital cost by up to 50%.

44.   Most exports of manufactured products from developing countries target
market niches sensitive to the price of the product (see UNCTAD 1994a). The
main conclusion from previous sections is that eco-labelling programs may
affect market niches sensitive to product differentiation but that there will
always be price sensitive market niches for which the environmental impact of
a product is irrelevant. In consequence, one could expect that most of the
exporters of manufactures from DGs will not have to incur the costs of either
relabelling or changing the design of their products.

45.   Would DG producers who intend to upgrade their exports by
differentiating their products and targeting more profitable market niches be
adversely affected by eco-labelling? This is possible. However, the market
discipline only allows this strategic behavior to companies that can invest
enough resources to make their differentiation strategy perceivable to
consumers. These are typically large and mature companies which, in principle,
should not seek governmental or international protection. In other words,
firms that do not need to compete primarily in terms of price should not need
the protection of governmental or international agencies to compete in terms
of quality.

46.   The most important conclusion of this section is that eco-labelling
programs should be designed to provide the appropriate amount of information
to consumers at a minimum cost. However, their effects on the DGs exports are
likely to be small.  Nevertheless, some policy analysts advocate that
voluntary eco-labelling programs, especially those which are based on life-
cycle analysis, allow differentiated standards for DG exporters. Pursuing this
approach could reduce the information gains of labelling programs without
necessarily having a significant impact on DG exporters. 



               VII. THE EFFICIENT DESIGN OF ECO-LABEL PROGRAMMES

47.   The analysis in the previous sections suggests that, at least in the
short and medium-run, DG exports are unlikely to be affected greatly by
voluntary eco-labelling schemes. This section summarizes other findings from
the paper that would improve the information content of eco-labels and would
decrease the cost of providing it to those who want to participate in these
programs.

48.   From our review we can draw two types of suggestions for the design of
more efficient eco-labelling programs. The first group comprises practical
suggestions for the actual design of an eco-labelling program, the second
group of suggestions refers to the coordination of national eco-labelling
programs.       

49.   The practical findings for the design of eco-labels can be summarized in
the following points:

      - Consumers' response to the information contained in a label is larger
      when:

      (a) they are previously aware of the relevance of the information
          contained in the label;

      (b) the information is certified by a recognized third party;

      (c) the information is complete but can be summarized in simple
          statements that are easy to read.

      - Producers' reaction to a label program is less expensive when 9/:
      
      (a) the compliance period of the regulation is at least 12 months, which
          gives enough time to complete the relabelling process 10/;

      (b) the regulation is flexible (focused in discriminating against the
          most polluting producers rather than in creating a market niche for
          the cleanest producers);

      (c) firms (especially small and medium firms) can operate through
          business associations that provide services (legal information,
          laboratories to analyze product contents, printing facilities, etc.)
          that take advantage of economies of scale.


50.   At the international level, the coordination of different national eco-
labelling programs could enhance their efficiency by reducing the cost of
exporters that target several markets. This problem has been well documented
by UNCTAD (1994a and 1994b). These studies propose five general principles for
the design of such programs. These principles are the following:

      (a) transparency in the design of the programs, 
      
      (b) mutual recognition, 

      (c) internationally agreed guidelines, 

      (d) technical assistance and 

      (e) flexibility in the recognition of ways to achieve eco-objectives
(equivalencies). 

51.   Except for the principle of mutual recognition, which requires (total or
partial) recognition of the eco-label standard of the exporting country by the
importing country, these principles will decrease the cost of exporting a good
(facilitating international competition) without affecting substantially the
transmission of relevant information to domestic consumers. International
acceptance of these four principles will enhance the efficiency of current
eco-label programs. 

52.   It is not clear whether the principle of mutual recognition would
improve these programs on balance: it may improve them in aspects related to
local environmental problems (for which most of the eco-labelling programs are
designed) but it would probably have a negative effect on global environmental
problems. This principle is based on the idea that the environmental damage
from producing goods is lower in countries with high absorptive capacity than
in countries with low absorptive capacity. As a consequence, the importing
country's label should distinguish the "cleanest" producers of the exporting
country disregarding whether the absolute level of "polluting emissions" in
the exporting country does or does not meet the eco-label requirements of the
importing country. This argument misses two important points, though. First,
environmental standards depend not only on the absorptive capacities of an
economy but also on the preferences of consumers for "cleaner" products (which
may be different for different countries). Second, for some global
environmental problems local absorptive capacity is not relevant. In other
words, for environmental damage generated in countries that may have an effect
on other countries the principle of mutual recognition may not provide the
appropriate information for consumers to make the best purchasing choices.

                     VIII. SUGGESTION FOR FUTURE RESEARCH

53.   Further research is needed on the effects that currently active eco-
labelling programs might have on DG exports. The findings reported in this
paper suggest that the demand for products without an eco-mark will still be
significant. However, this result relies on studies of label programs designed
for other than environmental purposes and in the assumption that "free riding"
in the consumption of environmentally friendly goods may exist. There appear
to be as yet no available quantitative evidence to directly support or refute
this hypothesis. 

54.   The results presented here also suggest the need for further research to
measure how consumers react to recently introduced eco-label programs. 

55.   If, as the conclusions from this study suggest, a large portion of
consumers in certain markets are likely to be indifferent to the environmental
information on labels, concern about the effect of eco-labelling on DG
exporters should ease. This also implies, however, that the effectiveness of
eco-labelling schemes in achieving environmental goals in those markets will
be limited. The environmental effect of these schemes will depend, first, on
their ability to provide information that consumers can perceive and believe
and, second, on the share of total consumption of those consumers who are
willing to pay the premium associated with the increase in information. 


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                                     Notes

1/     More than twenty countries have already adopted an eco-labeling program
and the number has grown at an increasing rate during recent years (see UNCTAD
1994a).

2/     To be more precise, the GATT-Agreement on Technical Barriers to Trade
(which has a limited number of signatories) requests that, in the case of
voluntary standards, central government agencies should comply with the Code
of Good Practice. This code establishes rules to facilitate the publicity of
national governments initiatives. Nevertheless, until now no eco-labeling
scheme has been communicated to the GATT secretariat. 


3/     Depending on the market structure and demand elasticity of the product
this cost can either reduce producer surplus or be transmitted, partially or
wholly, to consumers through price increases.


4/     Some programs include an annual fee which pays for the certification
service. The European Union eco-labeling program, for example, requires that
companies pay .15 per cent of their annual European turnover. 

5/     An example of an eco-labeling policy that may have improved efficiency
while taking into account the equity problem can be found in the Austrian
legislation requiring labels on tropical wood. The Austrian parliament tried
to offset the damage that this legislation could have on tropical wood
exporters by providing a $17m "rainforest fund" to finance environmentally
sound forestry in those countries (The Economist 1993). The trade-off between
short-run efficiency and short-run equity in this example is as follows. If
Austrian consumers derived satisfaction from protecting the tropical forests
(which may not be clear to everybody) the information on the labels would
represent a benefit to them (this is an increase in the efficiency of the wood
exchange) and this benefit would make them more willing to transfer income to
tropical wood-producer countries.  
 

6/     Oligopolistic industries are those in which only a few producers
compete to sell a product. An important characteristic of these industries is
that, given the large size of the producers, consumers can easily identify the
company that provides a particular good or service.  

7/     Laric and Sarel (1982) examines consumer perception of third party
certifications.

8/     This observation is based on the experience of the Nordic Swan Eco-
labelling Scheme which was initially boycotted by environmental groups
claiming it was too light on environmental requirements. These groups rejoined
the scheme when its popularity was proven by the increase in the market share
of eco-labelled products (see DPCSD, 1995).  

9/     See French and Neighbors 1991 for a discussion of producer reactions to
label regulations. 

10/    French and Neighbors 1991 indicate that a firm facing a label program
passes through the following stages: development of a strategic response,
elaboration of product tests, printing of new labels and management of old
label inventories.

 


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Date last posted: 3 December 1999 10:27:35
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