Topic Area: Eco-Labeling
Geographic Area: Denmark
Focal Question: Does eco-labeling have a significant impact on consumer demand?
Sources:

(1) Bjorner, Thomas Bue, Lars Garn Hansen, and Clifford S. Russell (2002). “Environmental Labeling and Consumers’ Choice – An Empirical Analysis of the Effect of the Nordic Swan.” Working Paper No. 02-W03, Department of Economics, Vanderbilt University. http://ideas.repec.org/p/van/wpaper/0203.html

(2) Tietenberg Tom (1998), ”Disclosure Strategies for Pollution Control”Environmental and Resource Economics 11, p. 587-602.

(3) Sen, Amartya (1973). “Behavior and the Concept of Preferences.” Economica, 40, p. 241-59.

(4) Dosi, Cesare and Michele Moretto (2001).“Is Ecolabelling a Reliable Environmental Policy Measure.” Environmental and Resource Economics, 18 (1), p. 113 -27.

(5) Kirchhoff, Stefanie (2000). “Green Business and Blue Angels: A Model of Voluntary Overcompliance with Asymmetric Information.” Environmental and Resource Economics, 15(4), p. 403-20.

(6) “Nordic Ecolabeling” (2008). http://www.svanen.nu

Reviewer: Alex Russell, Colby College '08
Review:

Information disclosure can be a potentially potent technique for effecting positive environmental change, and can serve as either an effective alternative or a valuable boon to regulatory instruments such as emissions standards and taxes or market-based instruments such as tradable permits and deposit refunds. (Tietenberg 1998) One disclosure technique, environmental labels or “eco-labels,” informs consumers directly that the product they are looking at has met a certain standard of environmental friendliness. Eco-labels such as the European Union’s EU Flower, Germany’s Blue Angel, and the Nordic countries’ Nordic Swan, have the potential to empower consumers to differentiate companies with relatively environmentally friendly practices and to form a preference for products in line with those practices.

In recent years, the dramatic increase in “green” products, as well as the implementation of eco-labeling campaigns throughout the world, suggests that consumers do have a preference for environmentally friendly products. Survey results have tended to indicate that consumers are also willing to pay more for such products – for example, for those carrying the Nordic Swan eco-label in Denmark.

Nevertheless, some basic challenges to the idea of eco-labeling must be addressed. While some labels, such as hazard warnings on cigarette packages and organic labels on milk, have a direct impact on the individual user and his or her well being, eco-labels such as the Nordic Swan or those indicating dolphin-safe tuna or “fair trade” coffee rely on consumers having some greater concern for the community and world at large, beyond the degree to which that community impacts them. This altruistic reliance can lead to a market failure, as the consumers of products do not always fully internalize the impact of those products on the community as a whole. Some economists, however, such as Amartya Sen, argue that the degree of this market failure is lessened as a result of consumers’ “sympathy” and “commitment” to environmental causes. (Sen 1973)

Another cause for concern, raised by Cesare Dosi and Michele Moretto, is that eco-labels could potentially lead to image spill-over effects, which could actually result in more net pollution than would occur without the eco-label. This could happen if eco-labels projected a positive image not only on the labeled green brand, but also on the product group as a whole, including conventional and unlabeled competing brands. This could stimulate greater consumption across all products, both green and not, and result in a negative overall impact on the environment. (Dosi and Moretto 2001)

Yet another obstacle involves information asymmetry. This issue, as assessed by Stefanie Kirchhoff, revolves around the fact that environmental quality is a “credence good,” and that the environmental impact of the good cannot be immediately or accurately observed by consumers. As a result, consumers must place significant faith in eco-labels to inform them of the environmental impact of the labeled products, and thus firms have an incentive to overstate the environmental performance of their products. Kirchhoff found that in order for environmental labels to be credible in the minds of consumers, they must be established and tested by unbiased third parties. Such a process would contribute to both increased consumer faith in the labels and increased compliance with environmental standards on the part of the manufacturer. (Kirchhoff 2000)

Despite these theoretical obstacles, dramatic increases in environmentally friendly products, eco-labels, and apparent consumer preferences for labeled products suggest that the eco-labeling trend is likely to continue. One particularly strong eco-label, the Nordic Swan label, was implemented by the Nordic Council of Ministers in 1989, and was adopted by Denmark in 1997. As the eco-labeling program had matured throughout other Nordic countries for nearly a decade, Danish consumers were quick to adapt to the new labels. By 2000, three surveys investigating the recognition of the Nordic Swan label among Danish consumers had found more than half of the respondents recognized the Swan label.

In 2002 Thomas Bue Bjorner, Lars Garn Hansen, and Clifford S. Russell published a study on the empirical impact of the Nordic Swan on Danish consumers of toilet paper, paper towels, and detergents. By the end of 2000, the Nordic Swan had appeared on 13 brands of toilet paper, 9 brands of paper towels, and 3-4 brands of detergents. The analysis of the study used weekly purchase diary data for 1596 Danish households from 1997 to the beginning of 2001, and was based on a multinomial logit model used to describe households’ choices among different brands. The aim of this model is to derive households’ willingness to pay for eco-labeled products. Explanatory variables in this model include the presence or absence of the Nordic Swan label, the price of the brand, and whether the brand was purchased on sale, as well as the level of advertising of each brand on Danish television and/or in newspapers and magazines. Also included are indicators of results of consumer test reports ranking different brands of detergents and paper towels. In addition, some of the products covered in this analysis either received their Swan labels midway through the study or had their labels revoked midway through the study. These cases allowed the study to control for unobserved differences in the qualities of those brands and to isolate the effect of the label.

The results of this study indicate that the Nordic Swan eco-label has had an especially large impact on consumer demand for labeled toilet paper and detergents. Danish consumers showed a willingness to pay between 10% and 17% more for Swan-labeled toilet paper than for the unlabeled competition, while similar willingness to pay more was found for detergents. A much smaller effect was found for paper towels. One explanation provided by the study is that many Danish households still use reusable dishcloths, and that environmentally conscious consumers are likely to use these dishcloths, while consumers unconcerned with environmental impact are more likely to buy paper towels and less likely to care about the Swan label.

This study illustrates that in some cases consumers are willing to pay significantly more for products that are deemed environmentally friendly. This increased willingness could by itself provide manufacturers with sufficient incentive to produce “green” products that comply with the label standards. Furthermore, these labeling systems could be used in conjunction with either a regulation policy such as a tax on emissions or a market-based solution such as tradable permits, and could thus help contribute to a firm’s overall incentive to pursue environmentally friendly practices.

In the time since this study was conducted, the Nordic Swan label has expanded to over 1200 products in 60 different product groups, and increasing numbers of countries and organizations have adopted eco-labels as a critical piece in multi-faceted approaches to improving environmental sustainability. It seems likely that this trend will strengthen and will expand to other areas of sustainable development