Competing Environmental Labels

• Author: Thomas P. Lyon,Carolyn Fischer
• Published date: 01 September 2014
• Date: 01 September 2014
• DOI: http://doi.org/10.1111/jems.12061

Competing Environmental Labels

CAROLYN FISCHER

Resources for the Future

Washington, DC 20036

fischer@rff.org

THOMAS P. LYON

Ross School of Business

University of Michigan,

Ann Arbor, MI 48109

tplyon@umich.edu

We study markets in which consumers prefer green products but cannot determine the envi-

ronmental quality of any given firm’s product on their own. A nongovernmental organization

(NGO) can establish a voluntary standard and label products that comply with it. Alternatively,

industry can create its own standard and label. We compare the stringency of these two types of

labels, and study their strategic interaction when they coexist. We find that even with error-free

labels, environmental benefits may be smaller with two labels than with the NGO label alone,

and we characterize when label competition is more likely to be environmentally beneficial.

1. Introduction

Global environmental issues such as biodiversity and climate change areincreasingly im-

portant to citizens around the world, yet extremely difficult for governments to address

with standard policy tools. The globalization of trade and the need for international

coordination on global issues make harmonized world standards for environmental

problems unlikely anytime soon. Global trade law also makes it difficult for govern-

ments to attempt to regulate attributes of production processes outside their borders, as

opposed to inherent product attributes.

In the absence of environmental standards for production behavior, many groups

have put increasing effort into international market mechanisms such as ecolabeling. In

some cases, industry takes the lead in developing labels, for example, Starkist’s move

to dolphin-safe tuna (Reinhardt, 2000, pp. 31–34) or the pulp and paper industry’s

“Totally Chlorine Free” label (US EPA 1998, p. B115). In other cases, nongovernmental

organizations (NGOs) sponsor labels, such as the “Good Environmental Choice” label

created by the Swedish Society for the Conservation of Nature (US EPA1998, p. B99), or

the Forest Stewardship Council (FSC) label, which was created by a coalition of groups.

More recently, there has been a growing proliferation of labels, as multiple groups enter

Wethank the U.S. EPA Science to Achieve Results (STAR) program (grant #RD–83285101) and Mistra Founda-

tion’s ENTWINED program for financial support, and Mark Bagnoli, the coeditor, two anonymous referees,

and seminar audiences at the Alliance for Research on Corporate Sustainability, Duke University, EPA, the

European Association for Environmental and Resource Economics, the Federal TradeCommission, the Haute

Ecole Commerciale, Indiana University,INSEAD, the University of California at Santa Barbara, the University

of Oregon, the University of Paris I, the WorldCongress of Environmental and Resource Economists, and Yale

University for helpful comments.

C2014 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume23, Number 3, Fall 2014, 692–716

Competing Environmental Labels 693

the labeling marketplace.1Of particular interest are situations in which industry has

responded to an NGO label with its own certification standards that employ alternative

criteria, which are typically less stringent than those used by the NGO. For example,

a coalition of industry groups has attacked the well-known Leadership in Energy and

Environmental Design (LEED) standard created by the nonprofit US Green Buildings

Council because it restricts the use of certain plastics and forest products; the coalition

instead promotes the weaker Green Globes standard (Makower, 2012).

A vivid example of label competition comes from the forest products sector. As

recounted by Sasser et al. (2006), the FSC was initiated in 1993 by a coalition of NGOs,

including Greenpeace and the World Wildlife Fund, which were disappointed when

nations failed to sign a global forest convention at the Rio Earth Summit. The Sustain-

able Forestry Initiative (SFI), in turn, was created a year later by the American Forest

and Paper Association (AF&PA) as an alternative that gave industry members greater

flexibility than the FSC system. Angered by the emergence of the SFI, NGOs supportive

of FSC have continually blasted the SFI alternative as a sham. In fact, on May 20, 2005,

a group of NGOs took out a full-page ad in the New York Times that said:

“How can you trust the timber industry to measure its own environmental

sustainability? Isn’t that like the fox guarding the henhouse? Simply stated,

the Sustainable Forestry Initiative program is a historic greenwashing effort

to blur the public’s trust in ecolabeling, helping loggers appear “sustainable”

when it’s really just the Same-old Forest Industry.”

The emergence of label competition is not surprising. As Bernstein and Cashore

(2007) point out, the initiators of a labeling regime face a dilemma: strict standards can

only be met by a small fraction of firms in an industry, whereas standards achievable

by most mainstream firms may be too loose to produce much overall environmental

improvement. Whether the first label takes a stringent or a lax approach, there is room

for a rival to enter and pursue the alternative strategy. Today, about 13% of the world’s

productive forests are certified, with 143 million hectares certified worldwide via FSC

and 232 million hectares certified by SFI and other labels under the umbrella of the Pro-

gramme for the Endorsement of Forest Certification (Cashore and Auld 2012). Whether

such label competition is actually good for the environment, however, is unclear.

There exists a substantial theoretical literature on ecolabels, which addresses sev-

eral sets of issues.2One strand of the literature emphasizes how firms respond to a

labeling regime, building on the industrial organization literature on duopolistic ver-

tical differentiation. For example, Amacher et al. (2004) extend this literature to allow

a first stage in which firms can invest in a green technology; they find that environ-

mental performance is enhanced when the high- and low-quality firms have similar

cost structures. In a similar setup, Ibanez and Grolleau (2008) allow for a “brown” firm

1. Steering Committee of the State-of-Knowledge Assessment of Standards and Certification (2012) offers

a thorough analysis of the global impact of ecolabels. The web site www.ecolabelindex.comprovides an up-to-

date overview of the labels currently in existence, and as of this writing tracks 410 different ecolabels around

the world.

2. There is also a literature on for-profitcertification intermediaries, which includes such papers as Lizzeri

(1999). In these models, the certifier investigates the firm and chooses what to disclose to the buying public,

and is able to retain a substantial share of the surplus. Environmental certification is quite different.Certifiers

typically set a standard ex ante that firms must meet in order to receive the label. NGO certifiers aim to

maximize environmental benefits, and are typically close to bankruptcy.Industry-sponsored certifiers aim to

maximize the benefits to the firms being certified rather than to the certifier itself. Thus, the for-profit certifier

model does not seem appropriate for our purposes.