Eco-Labelling, Environment, and International Trade *

Transcription

1 CHAPTER 0 Eco-Labelling, Environment, an International Trae * Kenzo Abe, Keisaku Higashia, an Jota Ishikawa I. Introuction In recent years, the concern or the environment has been growing, an protection o the environment is one o the main issues being iscusse aroun the worl. In this connection, eco-labelling programs are a set o measures to protect the environment, although there are other kins o measures such as taxes, subsiies, an stanars that are also use. In the past ecae, ecolabelling programs have been isseminate since Germany irst introuce the eco-label calle Blue Angel in 977. Now more than 6 countries/regions, incluing eveloping countries such as Inia, Brazil, an Zimbabwe, have introuce similar programs. A non-proit association o eco-labelling organizations aroun the worl was also oune in 994 calle the Global Ecolabelling Network (GEN). The purpose o the association is to improve, promote, an evelop the eco-labelling o proucts an services. This suggests that eco-labelling may be expecte to be an eective measure to protect the environment. Eco-labelling programs provie consumers with inormation on the environmental burens o proucts. They may thus aect the behavior o consumers, in particular, who are aware o the importance o the environment. Those consumers ten to purchase environmentally preerable proucts, which can be ientiie through the eco-label on the proucts. Thus, eco-labelling programs will increase eman or environmentally preerable proucts, an will change resource allocation so as to protect the environment. Eco-labelling programs are basically voluntary. They establish the environmental criteria that labelle proucts shoul satisy. In this sense, they are similar to stanars. The ierence between eco-labelling programs an environmental stanars is whether the measure is compulsory or voluntary. Ecolabelling programs being voluntary measures allow irms to choose whether or not they aix eco-labels on their proucts. Environmental stanars being compulsory measures mean that irms cannot sell their proucts in a market

2 Issues an Options or U.S.-Japan Trae Policies without complying with those stanars. 3 The nature o the eco-labelling programs an the iusion o them in many countries, however, raise new questions relate to their eectiveness an trae eects. First, the eects o eco-labelling programs are not altogether apparent. They aect resource allocation inirectly through a change in consumer behavior. Some consumers are very conscious o the environment, while others are not. Consumer sensitivity to the environment is essential or eco-labelling programs to be eective. Moreover, eco-labelling may involve a limite number or percentage o irms in a voluntary scheme. Since introuction o the eco-labelling program may be o beneit to a small number o irms who have attaine the label, it may result in enhancing the power o irms in setting prices an thus alter inustry market structure. Thus, we cannot simply preict the eects o ecolabelling on resource allocation an welare, assuming a competitive market. Secon, most eco-labelling programs are establishe inepenently in each country. The criteria o awaring eco-labels are usually evelope an aopte by omestic parties. Then, the criteria may be etermine, intentionally or unintentionally, in avor o omestic irms. I omestic irms can aopt the eco-label more easily than oreign irms ue to the criteria establishe, this may cause unesirable trae eects or trae rictions. In this respect, transparency is very important to avoi unnecessary international rictions. Colombia, Pakistan, Hong Kong China, Korea an others have remarke that the key way to minimize the negative trae eects o ecolabelling is to ensure transparency in the processing an application o ecolabels, that intereste parties coul participate in their evelopment (WTO 998a). Eco-labelling proceures ten to be open to public participation, incluing environmentalists, consumers, inustry, trae unions, an oreign interest groups. For example, in a Japanese eco-labelling scheme, calle Eco- Mark, there is a 60-ay public-review process. Mutual recognition o criteria may also reconcile ierences in countrybase criteria. The concept o equivalencies in the context o eco-labelling implies that when comparable environmental objectives can be achieve in ierent ways, taking into account the speciic environmental conitions o each country, ierent criteria can be accepte as a basis or awaring ecolabels (Vossenaar 997, p.3). I both importing an exporting countries have their own eco-labelling schemes an they have accepte ierent criteria to each another, this is reerre to as mutual recognition. Analyzing environmental criteria leaing to mutual recognition is one o the purposes o GEN. This issue has also been iscusse in the Committee o Trae an Environment (CTE) o the WTO. 4 Finally, the use o Lie-Cycle Approaches (LCA) in eco-labelling programs is esigne to evaluate the overall environmental eects o proucts, incluing trae eects. The key eature o LCA is to take into consieration all lie stages o the prouct, an it is sometimes calle a crae to grave approach. Generally lie cycle assessment covers ive phases o the lie cycle o

3 Eco-Labelling, Environment, An International Trae 3 proucts: () acquisition o raw materials; () process an prouction; (3) istribution; (4) use; an (5) isposal. The International Organization or Stanarization (ISO) has evelope international guielines or LCA an almost all o the work has been complete (ISO 997, 998, 000a, 000b, 000c). LCA may in theory thereore be an ieal way to assess the overall environmental eects o proucts. In terms o practical use, however, there are a lot o iiculties. 5 First, there oes not exist any clear analytical methoology or LCA. Even experts an scientists cannot ientiy the clear bounary o the phases o the lie cycle an the impacts in each lie phase. Secon, it is iicult or LCA to take into account such non-environmental actors as resource allocation. Thereore, introuction o eco-labelling schemes base on LCA may lea to ineicient resource allocation an the egraation o the environment. Thir, the public may be irritate i a new LCA is evelope an the criteria o eco-labelling programs are change requently. Moreover, the eco-labelling programs base on LCA have to consier issues o international trae. In an open economy, a proucing country (exporting country) may be istinguishe rom a consuming country (importing country). However, the use o LCA in eco-labelling schemes theoretically consiers all lie stages, incluing acquisition o raw materials, prouction o materials, an abrication o proucts. In the absence o international methoologies an stanars, LCA systems coul eliberately an unwittingly become barriers to the entry o oreign proucts, 6 since eco-labelling schemes may reect the environmental conitions an preerences o the importing country. This aspect o eco-labelling programs is also iscusse in relation to the Agreement on Technical Barriers to Trae (TBT Agreement) at the WTO. Both evelope countries an eveloping countries have argue whether ecolabelling schemes all uner the TBT Agreement. This issue has become complicate ue to LCA. As or the prouct-relate process an prouction methos (PPMs), countries have alreay reache an agreement that they are covere by the TBT Agreement. However, they have not yet agree whether the non-prouct relate PPMs all uner the TBT Agreement. 7 In connection with the point above, the concept o like prouct is also in ispute. I the TBT Agreement allows or the concept o like prouct to be extene to cover non-prouct relate PPMs, exporting countries may not be able to set environmental stanars base on their own environmental preerences, but may have to ajust their stanars to those o importing countries. Thereore, many eveloping countries have objecte to non-prouct relate PPMs to be allowe by the TBT Agreement. At the present stage, the ull use o LCA may be unrealistic, even impossible. The most interesting use o LCA is or the ientiication o signiicant environmental impacts in the various phases o the lie cycle in orer to guie the evelopment o criteria that mirrors those impacts (Neitzel 997, p.4). We have briey reviewe some important issues regaring eco-labelling schemes, but it is iicult to in any rigorous analyses o the eects o these

4 4 Issues an Options or U.S.-Japan Trae Policies schemes. The most noteworthy stuies inclue OECD (997) which investigate some practical eects o eco-labelling schemes operating in OECD countries, an Zarrilli et al. (997), who surveye the general issues relating to eco-labelling an international trae or a number o eco-labelling programs. In what ollows in this chapter, we iscuss the eectiveness o ecolabelling schemes an their impacts on consumer behavior, the environment, international trae, an investment. We then present a simple oligopoly moel o eco-labelling schemes in an international economy. The eco-labelling scheme to be analyze is assume to be voluntary an may iscriminate against oreign proucers. We analyze the eects o an introuction o omestic or oreign eco-labelling programs on the proits o irms an on the environment. We also consier the issue o recognition o oreign eco-labelling schemes. Even with a simple moel, our results are complex an epen, in particular, on the change in competitive pressure in the market an the origin o the environmental amages. Section II ollowing consiers the pros an cons o eco-labelling schemes an mutual recognition in terms o the eect on consumer behavior. The eects o eco-labelling programs on the environment an international trae are escribe in sections III an IV, respectively. In section V, we consier the eects on investment in environmentally soun technology (EST) by irms. In section VI, we briey escribe a theoretical moel to analyze the eects o eco-labelling in an international setting, which is ully presente in appenix. Section VII provies some concluing remarks. II. Eects on Consumer Behavior The purpose o eco-labelling schemes is to inuence consumer behavior by aixing eco-labels to environmentally preerable proucts an services. In other wors, the objective is to inuce consumers to buy proucts that have less negative impacts on the environment than other proucts. Eco-labelling schemes, however, have intene eects as well as unintene sie-eects. In this section we provie a brie review o these eects an exten them to the case o mutual recognition. First, we consier the eects expecte by an introuction o eco-labelling programs. We can iner whether or not eco-labelling programs have change consumer behavior by looking at the change in market share o labelle proucts an unlabelle proucts. The share o labelle proucts has increase since the introuction o eco-labelling schemes in many countries. For example, with regar to Blue Angel in Germany: For recycle paper proucts, an increase in market share o eco-labelle proucts was observe as ollows: in 993, 64 percent or sanitary paper proucts compare to 3 percent in 986; an respectively 4 percent or aministrative paper proucts compare to 3 percent (OECD 997, p.53). Moreover, or varnishes an coatings, market shares o unlabelle proucts have allen.

5 Eco-Labelling, Environment, An International Trae 5 It shoul be note that a small share o labelle proucts oes not necessarily mean ailure o an eco-labelling scheme. The criteria or assigning ecolabels have been revise at intervals. For example, in Eco-Mark in Japan, the criteria or loa-stabilizing evices or energy conservation were abolishe an the criteria or paper or communication were revise in May 000. Some eco-labelling schemes may set the criteria so that the share o labelle proucts is small to inuce irms to compete or labels. Secon, eco-labelling schemes make consumers more environmentally conscious. I eco-labelling schemes i not exist, consumers coul not know the inormation about environmentally unrieny proucts, an thereore they coul not know how their consumption may amage the environment. As or the unexpecte or negative eects o eco-labelling programs, irst, consumers may be conuse i they ace many kins o eco-labels. That is, the oversupply o eco-labels may hiner consumption o environmentally rieny proucts. Accoring to polls conucte in Germany, the share o people who consier the Blue Angel in purchasing proucts has ecrease. A 990 survey carrie out or Tesco, a British market chain, may be another example o the conusion o consumers, in which only about 0 percent o consumers bought labelle proucts although about 50 percent o consumers sai that they were willing to pay extra or labelle-proucts. Neitzel (998a, p.7) note that the Blue Angel program has to accept the competition raise by other environmentally-relate labelling activities. This labelling market shoul be evaluate an compare by inepenent boies the only solutions how to solve conusion are well prepare inormation campaigns to achieve correct unerstaning. A secon negative eect is that consumers are skeptical o environmental claims on eco-labelling in general. This may be another explanation or the results in the survey quote above. As alreay mentione, almost all ecolabelling schemes have not been able to take into consieration non-prouct relate PPMs. Consumers know this an may thus question eco-labels. I nonprouct relate PPMs in eco-labelling are not use, it may be very iicult to convince the public about the lie cycle approach o a particular scheme (Neitzel 998b, p.4). Thir, consumers may use labelle proucts without the necessary care to avoi environmental eects in the use phase (Neitzel 998a, p.5). Consumers may not completely unerstan the meaning o eco-labels. Eco-labels are assigne, taking some lie stages into account. Thereore, i consumers use an ispose o the labelle proucts that are environmentally unrieny at the other lie stages, the eco-labelling schemes may be counterprouctive. Thereore, we cannot tell einitely whether or not the original purpose o eco-labelling schemes has been attaine since there are both positive an negative eects. There are, however, some actors that may serve to make ecolabelling schemes unction properly. The irst is a consumer-inormation campaign or consumer eucation. Neitzel (997) emphasize the importance o this scheme with an example o

6 6 Issues an Options or U.S.-Japan Trae Policies campaigns about how to use washing machines in an environmentally soun way. From this campaign, it is clear that the campaigns o aect consumer behavior. He conclue that the uture review o environmental labeling criteria programs shall inclue improve an optimize consumer inormation an tools on how to wash environmentally soun (p.48). In Japan, many institutions, such as the Hyogo Environmental Avancement Association, have campaigne or the consumption o labelle proucts. The secon actor relates to retailers or proessional purchasers (Neitzel 998a, p. ). Eco-labelling oes not aect consumer behavior irectly. However, eco-labels may aect them signiicantly when retailers want to stock proucts with eco-labels (OECD 997, p.6). The thir actor is government procurement. Accoring to OECD (997), total public-sector procurement in Canaa is more than $75 billion per year. In the Unite States an Japan, governments, institutions, an universities have been important sources or labelle proucts. Since the amount o government procurement, incluing local governments, is very large, their behavior aects the share o labelle proucts. Let us inally examine the eects o mutual recognition arrangements on consumer behavior. I mutual recognition is establishe between two countries, the share o the proucts aware eco-labelling will increase in the importing country since eco-labels become aixe to importe proucts. This gives rise to a price eect: Egypt note that mutual recognition coul, or example, result in an integration o markets an the establishment o a lower equilibrium price or the labelle prouct. This woul encourage environmentally motivate consumers to switch rom unlabelle goos an generate a positive income eect in eveloping countries, thus increasing their capability to improve the environment (WTO 995). Because o the increase in labelle proucts an the all in their price, consumers buy more labelle proucts. They may also become more environment-conscious since they are able to acquire the inormation on the environment o the exporting countries. On the other han, consumers may be conuse an become skeptical more than beore insoar as there are two or more ierent criteria to be etermine that are presently equivalent. Or they may use an ispose o the labelle proucts with less care than beore since the labelle proucts in the market increase, possibly leaing to consumers mistakenly believing that proucts in the particular category have become more environmentally rieny. The point then is that mutual recognition has both positive an negative eects. Thereore it is very important that eco-labelling schemes are enorce with other appropriate complementary schemes as mentione above. III. Eects on the Environment In this section, we concentrate on the eects o introuction o eco-labelling schemes an mutual recognition o them on the environment. Accoring to a survey conucte by the Feeral Environmental Agency o Germany, 56% o

7 Eco-Labelling, Environment, An International Trae 7 96 companies are o the opinion that the Blue Angel is very beneicial or beneicial to the environment. However, OECD (997, p.38) note that most eco-labelling programs are relatively new an their environmental eectiveness has not been evaluate. Also, the environmental beneit o ecolabelle proucts is iicult to ierentiate rom the environmental beneit achieve through other environmental measures. Only with respect to certain proucts is it possible to estimate the eect o eco-labelling schemes. For example, in the Noric Swan program, a stuy conucte in 995 showe that the eco-labelling o ine paper ha resulte in an percent reuction in sulphur emissions rom Sweish pulp an paper mills, a percent reuction in COD emissions an a 50 percent reuction in AOX emissions (OECD 997, p. 48). We can iner the environmental eects o eco-labelling programs by analogy with the eects on consumer behavior, although accurate evaluation o the eects will epen on surveys to be carrie out in the uture. I consumers can know the accurate impact on the environment by consuming the proucts an change their behavior in avor o the environment by the introuction o a ecolabelling scheme, eco-labellings will be useul schemes or conservation. However, i consumers are conuse an become skeptical because o the increase in the number o eco-labelling schemes, they may eteriorate the environment rather than conserve it. A similar analogy hols on the eect o mutual recognition. Moreover, we shoul not overlook another essential point about mutual recognition, which is relate to LCA. Generally existing eco-labelling schemes have exclue only the non-prouct relate PPMs. Hence they cannot reect the impacts both in the acquisition an the prouction phases. This incomplete consieration o LCA in conjunction with mutual recognition may expan the negative eects. On the other han, i each eco-labelling scheme takes into consieration the environmental impacts that cannot be ientiie in the prouct itsel base on its own amages an preerences, mutual recognition works in avor o the environment, since the eco-labelling schemes give proucers both in exporting an importing countries proper incentives to improve the environment. The stanarization o LCA has almost been complete in ISO, although Neitzel (998b) has pointe out that the lack o stanarization tools has mae it iicult to achieve mutual recognition. IV. Eects on International Trae WTO members have iscusse the trae eects o eco-labelling schemes at CTE meetings. They have ocuse on whether or not eco-labelling schemes give rise to technical barriers to trae (TBT). Canaa, the EC, Argentina, Inia, the ASEAN countries, the Unite States an others have note that the recent increase in the use o eco-labelling schemes raise concerns about transparency, unair burens an high competitive costs on oreign proucers o like proucts eco-labelling schemes coul lea to protectionist abuse (WTO

8 8 Issues an Options or U.S.-Japan Trae Policies 995). In March 998, Colombia presente a ocument (WTO 998b), which showe that some environmental measures aopte by particular evelope countries, such as eco-labelling or packaging regulations, have negative eects on its exports in spite o the introuction o strict environmental stanars in Colombia. Moreover, Colombia insiste that espite this eort towars environmental protection, Colombia s ower sector ha encountere iiculties with market access ue to the act that private organizations in certain importing countries ha promote a campaign to enigrate Colombian owers (WTO 998a). Colombia emonstrate this eect using ata comparing the percentage change in volume o ower exports to the whole worl with that to Germany (WTO 998b). Korea, Pakistan, an Egypt also note that in some cases eveloping country exporters must bear 5 to 0 per cent o aitional costs on exporte proucts (WTO 998a) in the existence o an eco-labelling scheme in the importing country. OECD (997, p. 38) has mentione our possible points on whether circumstances potentially leaing to trae concerns exist in the absence o evience o speciic trae eects: () the number o eco-labels evelope or prouct groups o particular export interest to eveloping countries; () the eco-label criteria base on lie-cycle analysis; (3) the proportion o eco-labelle proucts manuacture or prouce in oreign countries an in particular eveloping countries; an (4) the proportion o oreign licensees who have obtaine an eco-label or their proucts. We consier the Blue Angel as an example. The criteria o the Blue Angel o not generally inclue the non-prouct relate PPMs. Moreover, oreign proucers orm about 3 per cent o the total o proucers aware the label. This number unerestimates the actual ratio o oreign proucers since there exist cases in which omestic retail chains apply or the label on oreign proucts that they import. Thus, at the present stage, the irst point can be consiere as the best explanation or eco-labelling schemes having negative trae eects. The inustries that raise concerns about trae eects are especially textiles an paper proucts. The EU eco-label criteria or textile inustries inclue the environmental impacts rom the use o pesticies in growing cotton, the harmul process uring the prouction o polyester, an the use o harmul substances uring the processing, making up, an inishing o proucts. It is iicult or proucers in eveloping countries to comply with these criteria. The criteria or paper proucts in several eco-labelling schemes inclue the requirements on the ratio o recycle paper an that o renewable resources, which can be technical trae barriers. The key point is to what extent the criteria are base on LCA. I the criteria inclue the environmental impacts in the acquisition an prouction phases, they can easily become points in ispute. The reason is that, although the environmental impacts rom the same prouction metho are ierent between the

9 Eco-Labelling, Environment, An International Trae 9 exporting country an the importing country, which leas to the ierence o strictness o environmental stanars, the criteria usually reect the impact in the importing country. Scarlett an Morris (996) have reerre to this act an attribute it to political processes, in which stakeholers in the importing country have an avantage over those in the exporting country. Now consiering mutual recognition, there are two positive eects. First, i mutual recognition is establishe between countries, the cost o complying with the criteria alls, since the cost o meeting the ierent criteria require by ierent schemes is likely higher than that o meeting only one set o criteria. Secon, i mutual recognition is establishe with the ull LCA, it achieves eicient resource allocation. The reason is as ollows. With the ull LCA, the environmental impacts in the acquisition an prouction phases are respecte not only in the importing country but also in the exporting country. Although mutual recognition in all categories between any two eco-labelling schemes cannot be attaine in the short term, there are two alternatives to consier. First, as in the case o Noric Swan, which is an eco-labelling program common to Sween, Norway, Finlan, an Icelan, the criteria shoul be set so that a prouct is aware the label i the metho o proucing the prouct complies with all relevant provisions in the legislation/laws o the place/country o prouction, since those laws reect the preerence or the environment in the place/country. Secon, as note by Neitzel (998b), the criteria shoul inclue the requirements on non-prouct relate PPMs accoring to speciic international, or regional agree certiication systems, only i they are available. Sustainable orest certiication organize by the Forest Stewarship Council an Coex Alimentarius complete texts on oo labelling are among them. V. The Eects on Investment The introuction o eco-labelling schemes may have both positive an negative eects on investment in environmentally soun technologies (EST). The positive eect is as ollows: the proucers with labelle proucts proit more than those with unlabelle proucts since the eco-label puts a premium on the proucts. This market conition gives rise to the competition or eco-labels. Proucers have to invest more in EST to put an eco-label on their proucts. Accoring to a survey in Germany in 998, 76 % o companies believe that the eco-label has increase competition or environmental innovation in their branch (Neitzel 998a, p.). On the other han, technical options an innovations, which may be a breakthrough or uture evelopments, an which may require support rom labelling activities, may be restricte by LCA because o status-quo scenarios an present ata (Neitzel 997, p.4). Moreover, when new criteria are being evelope, proucers o eco-labelle proucts may try to ensure that cri-

10 0 Issues an Options or U.S.-Japan Trae Policies teria avor the current technology (Scarlett an Morris 997, p.3) they have, which also may istort the irection o innovation. In terms o the international aspects, there are two actors that may istort innovation: one is about transparency an the other relates to non-prouct relate PPMs. I the ecision-making process is not transparent, it costs much time an money or the proucers in the exporting country to collect the inormation, which hiners them rom investing in EST. Furthermore, i it is very iicult or the proucers to comply with the criteria or the non-prouct relate PPMs, they may also give up innovation. Mutual recognition accelerates the positive eect since potential entrants to the market o labelle proucts increase an reuce the negative eect in terms o the international aspect. This permits the proucers to collect the inormation an comply with non-prouct relate PPMs more easily. One point shoul be note on mutual recognition. As GEN (999) has note, mutual recognition is attaine more easily when the exporting country s environmental criteria are similar to the importing country s program requirements. We may say that the more similar technologies the two countries have, the similar requirements the eco-labelling schemes o those countries become. Thereore technology transer rom evelope countries to eveloping countries plays an important role in mutual recognition. At CTE meetings, several countries have pointe this out. For example, Egypt recommene that eveloping countries shoul be provie with technical assistance to improve environmental perormance (WTO 998b). VI. A Theoretical Analysis o Eco-labelling To analyze the relationship between eco-labelling an international trae, we construct a simple oligopoly moel in which there exists trae between omestic an oreign countries. Since the ull escription o the moel an analysis is given in Appenix, we briey escribe the moel an iscuss the essence o its implication in this section. The moel has the ollowing speciic eatures. First, omestic an oreign irms compete in quantities with Cournot conjecture. The oligopolistic ramework is aopte, because eco-labelling coul lea to some market power as was mentione above. With respect to supply sie, we also assume or simplicity that the numbers o irms are ixe; all irms are ientical; marginal costs are constant; an the omestic market is supplie by all irms but the oreign market is by only oreign irms. Secon, to capture a characteristic o eco-labelling that eco-labelling is voluntary an open to any proucers, we assume that the number o irms that obtain eco-label is enogenously etermine such that the proits between those irms that will obtain eco-label an those that will not obtain eco-label are equalize. However, to reect another characteristic that eco-labelling may iscriminate against oreign proucers, it is assume that the omestic ecolabel is available to only the omestic irms. The reason why we impose such

11 Eco-Labelling, Environment, An International Trae an extreme assumption is to examine whether oreign irms coul gain regaress o such an unair program. Thir, to reect the eect o eco-labelling on consumer behavior, we assume that once the eco-labelling is introuce, consumers are ecompose into two groups: those who consume only the labelle goo (an never consume the unlabele goo any longer) an those who are inierent between the labelle an unlabelle goos. 8 That is, the eco-labelling ivies a market into two markets: the unlabelle-goo market an the labelle-goo market. Fourth, the prouction (or consumption) emits pollution that is proportional to the output (or consumption) level an amages the environment. Both omestic an oreign irms can abate the emission by incurring an extra MC. This MC is relate to the emission level. The higher the MC, the lower the emission level per unit. When eco-labelling is introuce, the government sets a certain target level o emission per unit. Those irms which inten to obtain the eco-label have to incur an extra MC to attain the target level. In the moel, we consier an compare the ollowing our cases. In Case 0, there is no eco-labelling. In Case, only omestic country introuces ecolabelling. In Case, both countries inepenently establish eco-labelling schemes, while in Case 3, the omestic country recognizes the oreign label. We are particularly intereste in the eects on the omestic economy o the introuction o eco-labelling an the omestic recognition o the oreign ecolabel. The basic results obtaine in the moel are as ollows. First, the eects o eco-labelling on omestic emission crucially epen on whether the pollution is emitte uring prouction or consumption. In particular, the introuction o eco-labelling or the recognition o the oreign eco-label coul increase the local emission level. When only omestic country introuces eco-labelling, the omestic emission alls i pollution is emitte uring consumption but coul rise i it is emitte uring prouction (see Proposition ). When the omestic eco-labelling increases omestic emission in this case, the emission per unit o prouction o the irms with the eco-label becomes less, but the total omestic prouction becomes larger. That is, the irect eect o eco-labelling (i.e., the ecrease in the emission o per unit o prouction) is ominate by the inirect eect (i.e. the increase in the total omestic prouction). Moreover, the recognition o oreign eco-labelling may raise the omestic emission (see Propositions - 4). This is basically because the recognition leas the oreign irms with the oreign label to enter the omestic labelle-goo market an hence the number o omestic irms that obtain the eco-label alls. In an extreme case, no omestic irm will obtain the eco-label an the labelle goo is supplie by the oreign irms alone. Secon, even i the oreign irms cannot obtain the omestic eco-label, this oes not necessarily mean that the oreign irms lose rom it. Moreover, the omestic irms may not beneit rom such eco-labelling. When only omestic country introuces eco-labelling, there are three possible outcomes: all irms lose or gain rom the omestic eco-labelling; the omestic imrs gain

12 Issues an Options or U.S.-Japan Trae Policies while the oreign irms lose (see Proposition ). The reason why these three cases are possible is that the omestic eco-labelling basically leas to two opposing eects on proits. The introuction o the omestic eco-labelling makes the market that each irm aces smaller but the competitive pressure in each market weaker. Since the market power or the oreign irms rises, the omestic eco-labelling is not necessarily ba or oreign irms. The ollowing shoul be note with respect to the result that no irm may gain rom eco-labelling. This result suggests a reason why the government nees to initiate eco-labelling. In act, there are three types o eco-labels. 9 Type I is criteria-base, thir-party certiication programs. Type II is inormation sel-eclaration programs. Type III is quantiie prouct inormation label programs, using preset inices. One may argue that type II is suicient as ecolabels. However, our analysis shows that no irm may have an incentive to introuce type II or the emission levels set by a irm or an inustry may not be socially optimal. Furthermore, some thir party such as the government may be necessary or monitoring. VII. Concluing Remark In this chapter, we have provie a comprehensive escription o the eects o eco-labelling programs an have constructe a simple theoretical moel to analyze the eects o these programs. As there are positive an negative aspects or eco-labelling programs, our theoretical moel also reveals various consequences o them. At present, we may say that we shoul careully evaluate the introuction an mutual recognition o eco-labelling programs. They may egrae the environment instea o improving it. In terms o trae eects, however, the eco-labelling programs may not hurt oreign irms. It may be too much to say that eco-labelling programs become trae barriers. While we have ocuse on the eects o eco-labelling programs in this chapter, it woul be useul to compare eco-labelling programs with other policy instruments such as stanars. Since eco-labelling programs are voluntary, they may istort the irms optimal ecisions less than compulsory policy instruments. On the other han, the eco-labelling programs may not be as eective as compulsory measures. Further analysis is neee thereore to provie a more authoritative evaluation o eco-labelling programs. Appenix In this appenix, we present a simple international oligopoly moel that can speciically take account o the ollowing characteristics o eco-labelling: Eco-labelling is voluntary an open to any proucers. Eco-labelling may iscriminate against oreign proucers. Eco-labelling aects consumer behavior.

13 Eco-Labelling, Environment, An International Trae 3 We are particularly intereste in the eects on the omestic economy o the introuction o eco-labelling an the omestic recognition o the oreign eco-label. The Basic Moel We begin with the case where there is no eco-labelling. This case is reerre to as Case 0. To avoi unnecessary complication, we impose several assumptions. There are n omestic irms an n oreign irms. All irms are ientical an the numbers o irms are ixe. Firms prouce a homogeneous goo with constant marginal cost (MC), which is assume to be zero. The prouction (or consumption) emits pollution that is proportional to the output (or consumption) level an amages the environment. Both omestic an oreign irms can abate the emission by incurring an extra MC. This MC is relate to the emission level. The higher the MC, the lower the emission level per unit. There are two segmente markets, omestic an oreign. To mainly ocus on the omestic market, however, we assume that the omestic market is supplie by both omestic an oreign irms, while the oreign market is supplie by only oreign irms. The irms compete in quantities with Cournot conjecture in each market. The inverse eman unction o the omestic markets is given by 0 P X () where P an X are, respectively, the price an the total eman. Variable proits rom the omestic market or the omestic irm (irm ) an the oreign irm (irm ) are, respectively, given by π P x, π P x, () i where x is the supply o irm i ( i, ). We can then etermine the Cournot equilibrium in the omestic market: x 0 x 0 n + n, + P0 n + n, π + 0 π 0 ( n + n + ). (3) In the ollowing, we consier three cases to examine the eects o ecolabelling on the omestic economy. In Case, only the omestic country introuces eco-labelling. In Case, both countries inepenently establish eco-labelling systems. In Case 3, the omestic country recognizes the oreign eco-label which is not recognize in Case. Introuction o Domestic Eco-labelling In Case, eco-labelling is introuce in the omestic country alone. The omestic government sets a certain target level o emission per unit. Those irms which inten to obtain the eco-label have to incur an extra MC, c, to attain the target level. To capture the eature o iscrimination against oreign pro-

14 4 Issues an Options or U.S.-Japan Trae Policies ucers, however, we assume that the eco-labelling is available only to the omestic irms. It is also assume that any irm can prouce only one type o goo, i.e., either the labelle goo or the unlabelle goo. 3 To reect the eect o eco-labelling on consumer behavior, ollowing Mattoo an Sigh (994), we assume that once the eco-labelling is introuce, consumers are ecompose into two groups: those who consume only the labelle goo (an never consume the unlabelle goo any longer) an those who are inierent between the labelle an unlabelle goos. The share o the ormer consumers is λ, which is assume to be constant. That is, the omestic inverse eman or the labelle goo an that or the unlabelle goo are, respectively, given by 4 l u l X u X P, P. (4) λ λ In the ollowing analysis, we ocus on the parameter values uner which l u P > P always hols. To capture the voluntary eature o eco-labelling, we assume that the number o omestic irms that obtain eco-labeling, n, is enogenously etermine such that the proits are equalize among all the omestic irms. Dierent target levels o emission per unit (i.e., ierent values o c ) lea to ierent numbers o irms that obtain the label. The (varibale) proits o the omestic irm with the label are given by π ( ) P l c x (5) The omestic equilibrium in Case is as ollows: 5 x λ ( c ) l + n c λ ( c ), P, π ( ), n + n + n + u λ u x x, P, u u n + n + n + n + u λ π π u ( ). (7) n + n + Speciically, we consier two cases. One is the case where the omestic irms are ivie into two groups, those with the eco-label an those without the eco-label. The other is the case where all omestic irms obtain the ecolabel. 6 We have: ( c ) λ u ( n + ) ( n + n + ) λ u π π π (8) in the ormer case an (6)

15 Eco-Labelling, Environment, An International Trae 5 ( c ) λ > ( n + ) ( n + ) λ π π (9) in the latter. The omestic prices o both labelle an unlabelle goos are higher than the omestic price without eco-labelling. With respect to the eect on proits, the ollowing three cases coul arise: () All irms lose rom omestic eco-labelling. With n n 0, λ 0. 5, an c , n 6 i u an π > π π π, i,. () All irms gain rom omestic eco-labelling. With n n 0, λ 0. 5, an c , n 9 i u an π < π π π. (3) The omestic irms gain while the oreign irms lose. 7 With n n 0, λ 0. 8, an c 0. 5, n an π < π < π i 0 0 The reason why three cases are possible is that the omestic eco-labelling leas to two opposing eects on proits. It makes the market that each irm aces smaller but the competitive pressure weaker. It shoul be note that although the oreign irm cannot obtain the omestic eco-label, the oreign irm coul beneit rom the omestic eco-labelling system. We now consier the eect o the omestic eco-labelling system on environmental amage. Since we are primarily concerne with the omestic economy, we ocus on the local pollution. When the pollution is emitte uring prouction, the total emission in the omestic country is given by p u u E β () 0 n x + β ( c ) n x ; β () < 0, (0) where β measures the level o emission per unit o prouction. β ecreases as the MC o abatement rises. When it is emitte uring consumption, on the other han, the total emission is given by ()( ) ( ) 8 c u u u u E γ 0 n x + n x + γ c n x + γ ( c ) n x ; γ () < 0. () where γ measures the level o emission per unit o consumption. Since the omestic prices o both labelle an unlabelle goos are higher u l than the omestic price without eco-labelling (i.e., P0 < P < P c c ), E p E0 > clearly hols. However, whether E eclines or not is ambiguous. For example, suppose that n n 0, λ 0. 8, an c As we have seen above, all omestic irms obtain the label in this case (i.e., n n 0 ). p Then E β () n x β () an

16 6 Issues an Options or U.S.-Japan Trae Policies (.5) n x ( 0.5) p β 0 β p p E0 E E. I () 0 enough, thus, β an ( 0.5) β are close < hols. Although all omestic irms prouce the labelle goo, the omestic eco-labelling system makes the total omestic emission higher. 9 This is because the emission per unit o prouction becomes less, but the total omestic prouction becomes larger. This case is likely to arise when c is small an λ is large. Proposition Suppose that only the omestic country introuces eco-labelling. All omestic consumers ace higher prices. The oreign irm oes not necessarily lose. All irms coul gain or lose at the same time. The oreign irms alone are hurt only i all omestic irms obtain the label. The omestic emission is mitigate i the pollution is emitte uring consumption but may be magniie i it is emitte uring prouction. Recognition o Foreign Eco-labelling We next consier Case where the oreign country also introuces the ecolabelling system. To obtain the oreign eco-label, the oreign irm has to incur an extra MC, c. However, the oreign eco-label is not recognize in the omestic country. That is, the omestic consumers cannot istinguish the oreign labelle goo rom the oreign unlabelle goo an hence regar the oreign labelle goo as the unlabelle goo. We assume c c c or simplicity. The omestic equilibrium is given by ( ) + λ c n c l λ( c) x, P, π n + n + n +, () x ( ) u u ( λ) { ( n + n + ) c} ( λ)( + n c) u u, x x, n u + n + n u + n + + n c u P, (3) u n + n + u u ( λ) { ( n + n + ) c} u ( n + n + ) ( λ)( + n c) u ( n + n + ) u u n n an the other with n n π, π π. (4) To compare Case an Case, suppose or the moment. We have two cases: one with n < n. In the ormer u u case, we have π < π, because those oreign irms that obtain the oreign eco-label have to incur the higher MC to prouce the labelle goo. That is,

17 Eco-Labelling, Environment, An International Trae 7 the oreign eco-labelling system aects not only the competition in the oreign markets but also that in the omestic markets. As a result, n alls (i.e., n > n ). This, in turn, raises the price o the omestic labelle goo an ecreases its total supply. It shoul be note that the supply an proits rise or each omestic irm that still obtains the ecolabel. 0 u u As all omestic irms obtain the same proits, π an hence π c actually increase. The price o the unlabelle goo becomes higher. E is reuce. This reuction is ue not only to the ecreases in the emans or both goos but also the supply o the oreign goo with the oreign eco-label. Since n x alls an n u x u p rises, E is likely to increase. Thus, the recognition o the oreign eco-labelling may aect the omestic environment reversely. When n n initially hols, n may or may not all. I it alls, the eects are the same as the case with n < n. I n oes not change, there is no eect on the omestic market o the labelle goo. With respect to the u u c market o the unlabelle goo, P an π rise an π alls. E alls but p E oes not change. Proposition Suppose that the oreign country also introuces the ecolabelling system, which is not recognize by the omestic country. Then π u increases, but π ecreases. n either ecreases or remains unchange. When n alls, all omestic irms gain an the omestic emission ecreases i the pollution is emitte uring consumption but is likely to increase i it is emitte uring prouction. When n remains constant, the proits o all omestic irms remain unchange, an the omestic emission alls i the pollution is emitte uring consumption but oes not change i it is emitte uring prouction. We next consier Case 3 where the omestic country recognizes the oreign eco-label. We assume or simplicity that n remains constant (i.e., n n 3 n ). Then the equilibrium in Case 3 is given by x 3 3 x λ n + n 3 ( c) + ( n 3 + n ) c l, P, + ( c) ( n + n + ) 3 3 n 3 + n + λ π π, (5) x u 3 x u n u 3 λ, u + n + u 3 P n u 3 + n u, +

18 8 Issues an Options or U.S.-Japan Trae Policies λ u u π 3 π u u ( ). (6) n 3 + n + n n u π To compare Case 3 with Case, suppose 3 or the moment. u an π rise but π alls, because the total number o irms in the omestic market o the labelle goo increases an that o the unlabelle goo ecreases. Again, we examine the two case: n < n an n n. With n < n, n clearly alls. We irst show: Lemma 3 I n n, then the ecrease in n, n, is less than n. 3 π Proo: Suppose in contraiction that n n. Then π an u u π 3 < π hol, because the omestic irm oes not nee to incur c anymore u u when it ecies not to obtain the label. Since π π an π 3 π 3 hol in equilibrium, this is a contraiction. (Q.E.D.) The lemma implies n3 + n > n u u u. Thus, π 3 π 3 π 3 < π u l u c π π hols. π is likely to increase. Both P an P all. E becomes higher, but E may or may not become higher. p It shoul be note that i n n, the omestic labelle goo may completely be replace by the oreign one, i.e., 3 n 0 may hol. The larger n l u is, the more likely this is to occur. I this is the case, P ecreases while P u u may increase. When it oes increase, π an π also increase. The eect p c u on E is ambiguous. E increases i P oes not rise but may ecrease i u P rises. With n n, the recognition o the oreign label may not ecrease n. l u I this is the case, P alls but P rises. The recognition reuces π but u p raises π. Since the output o each omestic irm alls, E alls. The eect c on E is not clear. Proposition 3 Suppose that the omestic country now recognizes the oreign eco-label that has not been hitherto recognize. The price o the labelle goo alls. n either ecreases or oes not change. With n 3 0, the eects on the proits an emission level are ambiguous. With 0 < n 3 < n, the omestic irms lose an the omestic emission rises i it is emitte uring consumption. With n 3 n, the omestic irms lose an the omestic emission alls i it is emitte uring prouction.

19 Eco-Labelling, Environment, An International Trae 9 3 π 3 n3 We can compare Case with Case 3. This correspons to the situation in which the omestic country recognizes the oreign eco-label as soon as it is establishe. Again, n either ecreases or oes not change. The ollowing three cases are possible. First, n3 + n n hols i n n < n. That is, the number o oreign irms that obtain the eco-label is equal to that o the omestic irm that stops obtaining the eco-label. I this oes not hol, u π oes not hol, either. With + n n, the oreign ecolabelling oes not aect the prices an proits in both markets. Although p is not aecte at all, E obviously goes up. Secon, i n < n an n < n, then n 3 0. In this case, the price o the labelle goo alls while that o the unlabelle goo rises. Although no omestic irm obtains the label, the omestic irms gain. The eect on the emission is ambiguous whether the pollution is emitte uring consumption or prouction. Lastly, n may remain unchange with n n. In this case, the price o the labelle goo alls, but that o the unlabelle goo rises. The omestic p irms lose. Since the output o each omestic irm eclines, E alls. The c eect on E is not clear. Proposition 4 Suppose that the omestic country recognizes the oreign ecolabel once it is establishe. n either ecreases or oes not change. With n 3 0, the price o the labelle goo alls, the price o the unlabelle goo rises, the omestic irms gain, but the eect on the omestic emission is ambiguous. With 0 < n 3 < n, there are no eects on the prices an proits at all. The omestic emission oes not alter i it is emitte uring consumption but rises i it is emitte uring prouction. With n 3 n, the omestic irms lose an the omestic emission eclines i it is emitte uring prouction. c E Notes * We wish to thank Stephen Salant, John Whalley, T. N. Srinivasan, an seminar participants at Otaru University o Commerce, Research Institute o Economy, Trae an Inustry, an University o Western Ontario or their helpul comments. All remaining errors are, o course, our own responsibility. There are many international organizations that iscuss eco-labelling programs themselves, or their relation to international trae. These inclue the WTO, OECD, Coex Alimentarius Commission, International Trae Center (ITC), Unite Nations Conerence on Trae an Development (UNCTAD), Unite Nations Environment Programme

20 0 Issues an Options or U.S.-Japan Trae Policies (UNEP), Unite Nations Inustrial Development Organization (UNIDO), an International Organization or Stanarization (ISO). 3 For the classiication o environmental policies, see Oates an Baumol (975). Bensako (987) an Oates et al. (989) analyze stanars. 4 See WTO(996). 5 For example, it is iicult to know how long consumers may use an how they ispose o the proucts. For etails, see Scarlett an Morris (996) an Neitzel (997). 6 WTO(995). 7 Accoring to GEN (999), criteria or requirements in the manuacturing process that have no impact at the prouct use or isposal stages are reerre to as requirements arising rom non-prouct relate PPMs. In an environmental context, non-prouct relate PPMs normally reer to situations where the environmental amage cause by the PPM is not transmitte by the prouct itsel. In the WTO context, non-prouct relate PPM requirements may become a unamental challenge to the basic GATT/WTO concept o like proucts. 8 We simply assume the eman structures without speciying the preerences unerlying them. Our eman structures may be somewhat extreme because those consumers who are concerne about the environment will not consume the unlabelle goo with eco-labelling. A more realistic situation is that the consumption choice between labelle an unlabelle goos is enogenously etermine epening on the price ierence o those two goos. We eal with this case elsewhere [Abe et al. (000)]. But even with these more realistic preerences, we conjecture that the main results are still vali. Mattoo an Singh (994) also impose the same assumption in their analysis. Our iscussant, Stephen Salant, woners why consumers cannot iner that the prouct must be prouce using an environmentally unrieny technology without eco-labelling. He argues that i they can, those consumers who care about the environment will not consume the prouct even without eco-labelling. With respect to this point, some inormational aspect o eco-labels shoul be emphasize. Consumers usually know very little about processes an prouction methos (PPMs). For example, most consumers i not know much about genetically moiie organisms (GMO) until quite recently. The presence o eco-labels themselves oten provies consumers with inormation on PPMs. 9 For etails, see Markanya (997). 0 The essence o the main results will not change even i the eman is not linear. Subscript j enotes Case j in the ollowing. We will not speciy any welare unction in our moel. Thus, the welare-eects o eco-labelling are not examine. Our concern is how we shoul evaluate environmental amage (or this point, see Sen (995), or example). In particular, the pollution coul be transbounary in the ramework o an open economy. In this case, the egree o amages cause by cross-borer pollution is crucial or the result. However, it is not easy to measure that egree. Thus, we ocus on the local emission level. 3 This may be because o the presence o ixe costs. 4 Superscripts l an u, respectively, enote with an without the eco-label in the ollowing.