INFORMATION SHARING DEVICES IN ENVIRONMENTAL POLICY: THE EU ECO-LABEL AND EMAS
September 26, 2000
While society has always been faced with environmental problems, the method in which public policy has tried to address these problems has evolved over time. The beginning of significant environmental legislation can be traced to the command and control policies of the late 1960s and 1970s. This method of regulating the environment relied on product bans and the setting of emissions standards. At a time when dangerous products like DDT were rampant, command and control policies were a useful first step in cleaning up the environment. The policies, however, were reactive and gave no incentive for firms to reduce their pollution beyond the mandated levels. Furthermore, the mandated restrictions on production were extremely inflexible and not cost effective.
In a move toward recognizing the power of the market to correct environmental problems, environmental policies in the late 1980s and 1990s focused on the use of economic instruments. Environmental taxes and later tradable permits attempt to address the externalities associated with environmental problems by correcting market prices. Once prices are correctly raised or lowered, proper signals are given to producers and consumers, and the market will function more efficiently. Information asymmetries, however, can often prevent an efficient market outcome. Often times, for example, firms have more information than the government in terms of their costs of abatement. On the other side of the market, the government does not know, but can only estimate, the true benefits of pollution reduction to consumers. Without having either piece of information, the government has difficulty setting the correct tax or number of permits. Hence, economic instruments, while efficient in theory, can fail to reach this outcome in practice due to a lack of information.
A new policy tool of voluntary agreements has become more popular in the past five to ten years mainly as a way to address these information asymmetries. Since the government does not have all the necessary information to create policies to ameliorate environmental problems, voluntary agreements reach out to firms and consumers to share this information. A voluntary agreement involves representatives of government and industry entering into an agreement to reduce the environmental impact of industrial activity. Since government cannot regulate every type of economic activity of a firm, even though all economic activity has some impact on the environment, voluntary agreements can extend the scope of environmental protection. Thus, voluntary agreements have found a role in supplementing the use of economic instruments. Besides their advantage in overcoming information deficiencies, voluntary agreements tend to be proactive measures that address pollution before its starts and does so at a low cost due to their flexible, voluntary nature. Of course, voluntary agreements are often criticized as being weak and nothing more than business as usual. Furthermore, there is often concern of a free-rider problem: industries can promise to reduce pollution but firms may have the incentive to free-ride off the pollution reduction of other firms in the industry.
In this paper, I will focus on two voluntary agreements in the European Union, the EU eco-label and Eco-Management and Audit Scheme (EMAS). These voluntary agreements are interesting as they both attempt to facilitate the exchange of information between producers and consumers. The premise of the programs is that the parties, once informed, will use the information to make decisions that will improve the environment. Thus, there are two key steps. First, the voluntary agreements focus on the provision of information. Second, but equally important, the programs rely on the ability of the agents to use the information. Section two introduces the important role that information plays in a market economy. While both producers and consumers are integral in determining the market outcome, the two programs are geared toward different parties. The EU eco-label focuses on consumers as the impetus that will lead to change while the EMAS program places attention on producers. Sections three and four, then, discuss the information provisions of the EU eco-label and EMAS programs. Section five concludes with lessons to be learned from the two programs.
Section 2: Information and the Market
The efficiency of competitive markets is a well-established tenet of neo-classical economic theory. A key assumption that the efficiency result rests upon is that agents have perfect information (one implication of which is that knowledge about a products characteristics is equally distributed between buyers and sellers). While economists have realized that this assumption of perfect information is never attainable, the obstacles to acquiring information have only recently been more fully developed and explored. There exist explicit costs in acquiring information (search costs) as well as implicit costs in making use of information (adverse selection, moral hazard). These costs restrict the flow of information, and the much heralded efficiency result of the neoclassical model can break down.
George Akerlof presented a classic example of how this information asymmetry can affect the functioning of a market in his 1970 article The Market for Lemons: Quality Uncertainty and the Market Mechanism. Looking at the used car market, he noted that the market is characterized by asymmetric information as sellers know the true quality of their car, but buyers can only make inferences about the quality level. When buyers know only the average car quality and are unable to obtain further information, they will only pay an amount that the average quality car is worth. High quality car owners, however, will not accept such a payment since their cars are worth more (low quality car owners, of course, are happy to be getting a premium on their cars). Buyers, however, will realize that only low quality cars will be left on the market and accordingly revise their willingness to pay. This downward spiral continues until only the low quality cars are left for sale. In a similar spirit, one can apply this analysis to the market for environmentally friendly products. While some firms may claim to produce high quality (green) goods, consumers are unable to verify if this is really the case. The information uncertainty, then, leads consumers to revise their expectations downward, and this causes the market to only provide low quality (dirty) products because consumers cannot successfully evaluate product characteristics.
The fact that used car markets for all quality cars exist, however, indicates that it is possible to overcome these information asymmetries. In the used car market, information is provided through several mechanisms. For example, buyers may consult guides like Consumer Reports to gain information about the average quality of a certain car brand. Furthermore, an expert mechanic can provide some information about the specific car in question. Sellers, too, attempt to provide information to help the market operate. For example, sellers may take their cars to a dealership that can establish a reputation for honesty. Also, the existence and type of a warranty provides a signal to consumers about the quality of the car according to the seller. The mechanism of exchanging information is successful because cars can be classified as an experience good. With such a good, the quality of the good can be ascertained but only after use of the good. All the agents above, the car mechanic, Consumer Reports, or the used car salesman, rely on their experience of the good (or similar types of good; i.e. the same make/model car) to convey information.
The exchange of information about the environmental attributes of a good, however, is different than the exchange of information about the attributes of a car. The difference arises because a green product is not an experience good but a credence good: a good whose quality cannot be ascertained even after use of the good. For example, consumers are not present at the time of production to determine the true cleanliness of the production method. Consumers also cannot ascertain the environmental quality of a good like the percentage of recycled content at reasonable costs. Thus, even after people use the good, they are in no better position to evaluate its quality. It is impossible, then, for any of the above mechanisms (ex. repeat purchases, reputation effects) to transmit information, and the existence of the market is called into doubt.
Since the market cannot provide information, this may posit a role for government to play. The EU eco-label and Eco-Management and Audit Scheme (EMAS) are voluntary programs that attempt to overcome the inefficiencies of the market by promoting the exchange of trustworthy, reliable information. First, the two programs are voluntary as they do not proscribe specific tasks for a firm to undertake to become clean; rather, both programs encourage self-regulation as firms can decide which steps to undertake to reduce the environmental impact of their activities. Second, the programs facilitate the exchange of information concerning the activities of firms to become clean. That is, information held by the firm on the level of environmental damage caused in the production and use of the good is transmitted to consumers. The underlying premises of both programs is that information given to consumers will help guide their purchasing decisions to favor products more in line with their preferences. And if agents have green preferences, the greater consumer demand for these products will then induce companies to improve their products and/or production methods. The advantage of this type of policy compared to other types of environmental policy is that it requires only the smallest intrusion by government. The government does not tell firms what to produce or how to produce a product, they do not have to estimate marginal abatement or benefit curves to determine an optimal tax, they simply aid in the exchange of information to consumers. If the government provision of information is credible, consistent, and comparable, then consumers will be more likely to use the information which will push the market work toward a more socially desirable outcome.
The ability of the information exchange to lead to an efficient market outcome, however, depends not only on the provision of credible, consistent, and comparable information, but also on the willingness of consumers to use this information. Depending on the type of benefits that consuming a good yields, information provided by the government has different effects on consumer behavior. For example, when a person consumes the services of a car, the benefits they receive (the ease and convenience of getting from point A to point B) are private. They accrue only to the person who uses the car and are not received by the population in general. The sum of the benefits, then, determines how much money the individual is willing to pay for the product. The benefits of consuming an environmentally friendly good, on the other hand, may yield private and public benefits. When one buys a green good, they personally value the reduced pollution to the environment. The reduced pollution, however, yields a stream of benefits enjoyed by others too. That is, the reduced pollution is a public good as anyone can enjoy it while not reducing the availability of the good to others. As in the case of the car, the willingness to pay for the green good will be a reflection of the (private) benefits the individual receives, and thus, there is a difference between how much they are willing to pay and the total value that the good yields due to the existence of the public benefits. The greater the degree of public benefits that the good yields, the greater is the divergence. This results in a non-optimal amount of the good being purchased and has important implications for the EU eco-label and EMAS programs.
Section 3: EU Eco-label
Section 3.1: The EU eco-label regulation
Responding to the sustainability movement started at the UN Conference on Environment and Development (Rio Conference), the EU introduced the eco-label scheme in early 1992. Since firms have the option of qualifying their products for the eco-label or not, the EU eco-label scheme can be considered a voluntary agreement. The regulation has two main parts:
(1) providing consumers with better information on the environmental impact of products;
(2) promoting the design, production, marketing and use of products which have a reduced environmental impact during their entire life cycle
(Council Regulation 880/92)
The first part of the regulation, providing consumers with information about the environmental impact of products, illustrates the reliance the program places on consumers. The reduced environmental impact of the good is transmitted though a logo of a daisy (see figure 1) that firms are allowed to use on their products, packaging, and/or advertisements if they meet the standards of the eco-label. If consumers are environmentally conscious and value a cleaner environment, they will exercise their preferences by buying eco-labeled products. The success of the program in reducing the economic impact on the environment is dependent upon the strength of this green consumer demand.
The second aspect of the regulation deals with the eco-labeled products themselves. Interestingly, the definition of products that have a reduced environmental impact is not given in the regulation; rather, the regulation calls for a regulatory committee to develop standards for individual product groups. The regulatory committee involves all relevant parties, including DG Environment, the EU Commission, industry trade groups, NGOs, and private citizens. The criteria that have developed out of these regulatory committees are unique in three respects. First, as the regulation states, the analysis is conducted on the entire life cycle of a product. Such a cradle-to-grave approach includes the extraction of raw materials, the production and distribution of the product, the actual use of the product, and finally, the disposal of the product. The second unique aspect of the criteria development is that it establishes an absolute quality level. The cleanest producers in a given product category do not de facto earn the eco-label; they must qualify by meeting an absolute standard of cleanliness. The third aspect of the criteria development that deserves mention is the type of label that is given. The effect of each activity on the environment at each stage in the life cycle is given a score, scores are then weighted and added together to get a final number that determines if the product qualifies for the label. This type of label, a Type I label by ISO standards, does not provide detailed information about specific attributes. Nutrition labeling, on the other hand, falls into the category of Type III labels as they provide detailed information about specific product attributes. The value of a Type I versus Type III label has been greatly debated. Some argue that the increased information of a Type III label allows consumers to make better decisions while other claim the increased information can lead to consumer confusion.
Section 3.2: Evaluation of the EU eco-label
The EU eco-label has had a slow and tenuous start. While it now has over 200 products registered in the program , there was only one product that qualified for the label in the first three years. The number of products has increased steadily since Hoover received the first label, but it has still not reached that critical mass where consumers are familiar with the label and consumers demand products with an eco-label. Suppliers cite a lack of consumer demand as the main reason why they have not produced goods to qualify for the eco-label. Consumers, however, say they are unable to exercise their demand for green goods because of a lack of products on the market. Thus, it appears that the EU eco-label is stuck in a vicious cycle: few green products are produced due to a lack of demand while the relative absence of green goods on the market does not allow consumers to show their demand. The disappointing results of the program to date can largely be traced to the informational requirements of the program. At the same time, consumers have not had enough information about the EU eco-label and too much information from other labels and logos. Each of these problems will be discussed below.
Section 3.2.1: Not enough information
Consumer awareness of the EU eco-label program is exceedingly small. The low level of awareness is caused by two factors: a lack of advertising of the program and a lack of consumer contact with goods that have the eco-label. There has been a lack of funding to advertise the program at both the EU and national level. The EU set up the eco-label program but set aside a small amount of money to run the program. The low level of expenditures has not allowed mass-media type advertisements (TV, newspaper ads) to explain the workings of the program. The main method of advertising at the EU level has been participation in trade shows and the diffusion of brochures to interested parties.
The EU hoped that national governments would encourage and promote the EU eco-label scheme. This was a naive hope given the fact that the EU created an eco-label that would compete with national eco-labels. Most national eco-labels receive funding from their home government and also rely on a surcharge on products sold displaying the eco-label. Greater success of the EU eco-label, then, could come at the expense of national eco-labeled products. If consumers switch from national eco-labeled products to products with the EU eco-label, the decline in sales of products in national eco-labeled programs would create a funding shortfall in the programs and greater pressure for money from the national government. In addition, the prestige of national eco-labeled schemes means that national governments are not rushing to the opportunity to fund the EU eco-label (Eiderstrom, 1998, 197).
A second reason for the low level of consumer awareness of the eco-label program is that there are not enough eco-labeled products on the market. The EU has only set up criteria for fifteen product groups, many of which are product groups that consumers rarely shop for (ex. washing machines, refrigerators, computers). In addition, the two hundred plus products is a rather small number when one considers the entire range of goods that consumers face. As a point of comparison, the German Blue Angel eco-label has around 4,000 registered products (http://www.blauer-engel.de/). The result of the having such a small number of products registered in the program is that consumers do not come into contact with EU eco-labeled products in their everyday shopping. In fact, an informal survey in at least two supermarkets in five EU countries failed to turn up a single eco-labeled product in the more commonly used products groups of detergents (laundry and dishwashing) and paper products (toilet paper and paper towels). Even if one runs into a product that has been awarded the EU eco-label, it is unlikely that they know what the logo stands for. OVIO, a Belgium think tank, carried out a study on consumer recognition of the EU eco-label in two supermarket chains.
A total of 373 customers were presented ten logos that could be found on products in their stores. They were [asked] which of them they recognized and [the] meaning they attributed to them. 16.1% thought they had seen the EU eco-label before. But when asked for the meaning of it, only 11.5% of those 16.1% (actually 1.85% of all respondents) gave a good explanation.
(Pots, Senesael, DeClercq, 1998, 97)
Thus, a lack of knowledge about the EU eco-label program, caused by a lack of advertising of the program and a lack of consumer contact with eco-labeled products, is the first obstacle to a successful program.
Section 3.2.2: Too much info
While the consumer lacks information about the EU eco-label program, they are at the same time bombarded by too much information from other logos and brands. The information overload does not help consumers make purchasing decisions which more closely reflect their preferences; rather, the information overload causes consumers to be confused and suspicious of green claims. The EU contributes to the information overload itself through the EU energy label, a mandatory labeling program of the energy consumption of household appliances. Also adding to the problem are the national or regional eco-labeling schemes. The most popular and widespread is the Blue Angel program in Germany. Started in 1977, it is estimated that 75% of German customers prefer to buy products carrying the label (Business Europe, May 15, 1995). The next largest eco-label scheme is the Nordic Swan program supported by the Scandinavian countries of Norway, Sweden, Iceland and Finland. Many other national and regional labeling schemes exist; in fact, the EU eco-label now co-exists with eight major schemes (the German Blue Angel, the Nordic Swan, the Swedish Good Environmental Choice, the Dutch Milieukeur, the French NF-Environment, the Spanish Medio Ambiente, the Catalan Medi Ambient, and the Austrian UmweltZeichen) (http://europa.eu.int/comm/environment/ecolabel/proprev.htm). In addition to the sheer number of eco-labeling schemes, the relationship between the EU eco-label and national eco-labeling schemes can also lead to confusion. This is because a product that qualifies for a national eco-label may not qualify for the EU eco-label or vice-versa due to different criteria requirements for each program.
Probably the largest source of information that contributes to consumer confusion comes from private logos and claims. Firms often label products as environmentally friendly or provide some type of logo or claim to invoke environmental responsibility. The claims tend to be unverifiable and often misleading. What does it mean to be environmentally friendly or environmentally safe and how does one verify this? Even verifiable environmental claims can be harmful as they are often misleading. For example, a common green claim is that a product is free of some harmful substance, like an aerosol can that is CFC-free. While this is indeed true, it is questionable how the consumer benefits from this information as CFCs were prohibited a number of years ago in European countries so that all aerosol cans are now free of CFCs. Another area of claims that is misleading to consumers is the use of vague words or phrases like recycled or recyclable. In a survey by Morris, Hastak, and Mazis, only five percent of respondents exhibited a thorough understanding of recycled and recyclable consistent with EPA and FTC definitions (1995, 328). Because private claims are often vague, unverifiable or misleading, they present the consumer with no real information. In fact, consumers have become skeptical of the validity of private green claims and therefore tend to buy fewer green products. The extraneous flow of information, then, debases all environmental logos and labels, including the EU eco-label. Rather than improving the efficiency of markets, this type of information can be worse than a complete lack of information.
Section 3.3: The future of the eco-label
In order to improve the workings of the EU eco-label program, one needs to simultaneously increase the level of awareness of the EU eco-label program and limit the extraneous information that acts to confuse consumers. I will first evaluate the new provisions of the EU eco-label revision document and then add some further suggestions to encourage the success of the EU eco-label.
Section 3.3.1: The EU revision
Due to recognition that the EU eco-label was not performing as well as initially hoped, the regulation has undergone a revision. The Commission presented the new regulation in March of 1997, but due to the slow pace of legislation in the EU, it has not yet been passed. It currently sits before the Parliament for a second reading. While the new regulation is rather long, the main objectives of the revision can be summarized as follows :
- to introduce a grading of the eco-label and define what information for consumers has to be included in the label
- to introduce a ceiling for the annual fee to be charged for the use of the label and a reduced rate of fee for SMEs and manufacturers of developing countries
- to ensure complementarity between the Community scheme and other major eco-label schemes in the EU
- to encourage the diffusion of information about the program
The introduction of a grading of the eco-label or a more graduated type label is an interesting proposal. The graduated label aims at providing more information to consumers by providing information about product quality in specific attribute areas. Thus, in addition to the daisy logo that certifies a product qualifies for the eco-label, major attribute areas will be scored to tell the consumer how clean the product is in each attribute area (see figure 2). In essence, the graduated label incorporates characteristics of both a Type I and Type III label. While the increased level of information can potentially be beneficial as consumers could buy products that more closely reflect their preferences, this must be weighted against the cost of processing the information and potentially creating confusion.
The appropriate type of label, I believe, revolves to a great extent on if the benefits are private or public. If the benefits are mostly private, individuals have a greater incentive to care about specific product attributes (for example, in the case of nutrition labeling, some individuals may look more closely at saturated fat while others care about the caloric content due to their individual health characteristics and the private benefit that they receive from consuming the good). If the benefits are mostly public, however, you are buying the good because it has a reduced environmental impact overall and you probably do not need all the information of a Type III label . Unfortunately, the distinction between private and public benefits does not yield a clear policy proscription in regard to the EU eco-label program as the products often offer both private and public benefits. The life cycle approach of the eco-label looks at all stages of a product, most of which (including the extraction of inputs, production, distribution, and disposal of the product) yield public benefits. However, eco-labeled products can also have reduced environmental impact during use, and therefore, the product yields private benefits too. For example, eco-labels have been given to paints with lower levels of toxic fumes during application and washing machines that use less energy and water. Since the benefits of buying an eco-labeled product are both private and public, there does not exist overwhelming evidence to support either a Type I or Type III label. For the simple fact that the EU eco-label symbol of a daisy is not yet widely recognized, I think the introduction of a graduated label has the potential to confuse consumers and is probably premature at this time.
The second proposed change of limiting the fees for the eco-label is an encouraging step. One goal of the revision should be to increase consumer contact with eco-labeled products, and reducing the fee payment has the potential to encourage participation from firms that may have been otherwise hesitant to join. The introduction of a reduced fee schedule for SMEs (small and medium size enterprises) attempts to target assistance to firms which need it most. Research has shown that SMEs are less likely to join the eco-label program for several reasons. Their small size means that they are less likely to have the personnel like a dedicated environmental manager who would lead the push for the EU eco-label. Another obstacle related to the smaller size of SMEs is the lower level of sales in which to spread out the costs of qualifying for the eco-label. A reduced fee schedule for SMEs and a general limit of the total fees for all firms are positive steps to encourage more firms to produce eco-labeled goods.
The final two other major changes of the revision are steps in the right direction but lack strength to be effective. For example, Article 10 of the revision document, which deals with the promotion of the EU eco-label, states that Member States and the EEO shall accompany the development of the scheme by promoting awareness raising actions and information campaigns for consumers, producers, retailers and the general public, specifically aimed at promoting the use of the Community eco-label. There is no specific funding requirement or punishment mechanism if the parties fail in this regard. Article 11, which deals with other eco-labeled schemes, is equally vague. It states that
existing and new public and private eco-label schemes in the Member States shall be organized in such a way as to apply to product groups for which no specific Community eco-label criteria are established, ensuring complementarity between such schemes and the Community eco-label. (Also), the Commission shall encourage collaboration between the Community Scheme and schemes in the Member States in order to ensure the necessary coordination.
In short, the revision allows national eco-labeling programs to continue to operate and only asks for collaboration between programs. Increased collaboration and increased information diffusion are steps in the right direction, but it is difficult to see how the vague statements in the revision document will be enough to ensure success.
Section 3.3.2: Recommendations
The revision document contains some potentially beneficial changes. More bold and significant steps, however, should be taken to ensure the programs success. One of the most important goals of the revision should be to increase the level of understanding and knowledge of the program. The easiest way to accomplish this is to expend some resources on advertising. Numerous studies have shown that consumers are willing to spend more money for goods with a smaller impact on the environment and that labeling can make significant changes in consumer behavior . In order to capture this demand, it is necessary to expend some initial resources educating the population about the existence and workings of the program.
Another way to increase the level of awareness of the program is to increase the number of eco-labeled products. While the decision to qualify for the eco-label is obviously in the hands of private firms, the European Union can take steps to encourage more firms to participate. This does not mean that the standards should be weakened to make it easier to qualify; rather, the cost of complying with the program can be lowered. The revision suggestion of reducing fees for SMEs is a positive step in this direction. A bolder step would be to reduce the VAT on eco-labeled products. As the EU will have to spend money on the demand side by educating consumers, it should initially expend similar resources on the supply side to encourage firms to produce eco-labeled goods.
Finally, awareness of the EU eco-label program should be encouraged through retail outlets. While again in private hands, the EU bureaucracy can work more closely with retailers to promote the eco-label. Eco-labeled products offer retailers an additional way to differentiate themselves from other retailers. While price and service differentiation have been emphasized in the past, it is possible that the increased consumer environmental movement offers retailers a marketing tool. From the EU perspective, this focus on retailers will help reach consumers for two reasons. First, retailers determine which products consumers will be able to choose from, and second, it is easier to reach hundreds of retailers than millions of consumers.
In addition to increasing awareness of the EU eco-label program, the second major task to encourage the programs success is to limit the flow of extraneous information. The excessive information confuses consumers and prevents the market from operating efficiently. Again, the revision makes a step in this direction by trying to ensure the complementarity between the EU eco-label and other national eco-labeling programs. A stronger step will be to phase out national eco-labeling programs. While countries with successful eco-labeling programs will be against this proposal, this is a necessary step if the EU eco-label will ever achieve prominence. Currently, if a producer has a national eco-label that is successful (Nordic Swan, Blue Angel), there is less of an incentive for them to get the EU eco-label. These national eco-labels, then, get in the way of the functioning of a single, common market. The EU in fact admits this,
co-existence with national schemes limits the market value of the Community eco-label and introduces further complications into its operation. Moreover, the proliferation of uncoordinated national schemes involves considerable risks of distortion of the internal market and of competition.
While multiple national schemes may have been fine in the past, the continued integration of the common market calls for a common eco-label.
The EU can also limit the flow of extraneous information by legislating more strict standards on private labels. While all European governments have laws against untruthful advertising, the application of these laws to environmental considerations has been slow. The ISO 14020 series is a recent international standard that provides guiding principles for all environmental labels and declarations and could become a useful tool in regulating these claims (Smallbone, 2000, 2552). Currently, the UK and the Nordic Council (representing the countries of Denmark, Finland, Iceland, Norway, and Sweden) are in the process of revising their national guidelines in light of ISO 14020. The EU should adopt something similar to the ISO 14020 series that calls for truthful advertising in environmental claims.
In conclusion, the EU eco-label program faces obstacles but none of which are insurmountable. The proposed changes of increasing information about the program and limiting the flow of extraneous information will help solidify the EU eco-label. The eco-label, then, will be considered a success when these steps of improving the information provision leads to real environmental improvements as more eco-labeled products are bought and sold.
Section 4: EMAS
Section 4.1: The Eco-Management and Audit Scheme Regulation
The Eco-Management and Audit Scheme (EMAS) is a voluntary program that attempts to improve the environment by reducing the pollution caused through the production of goods. Rather than cleaning up pollution after it has already been created and released into the environment, EMAS hopes to reduce the amount of waste generated by manufacturing plants. The focus on the production process means that the program relies on the efforts of producers to improve the environment. The regulation aims to
promote continuous improvements in the environmental performance of industrial activities by:
(a) the establishment and implementation of environmental policies, programmes and management systems by companies, in relation to their sites;
(b) the systematic, objective and periodic evaluation of the performance of such elements;
(c) the provision of information of environmental performance to the public
(Council Regulation 1836/93)
The above three objectives are accomplished in a number of ways. First, a company must write an environmental policy statement that outlines the overall goals of the companys production process in relation to the environment. Then, an environmental review of the site occurs from which the firm introduces an environmental program to address specific problems at the site. Furthermore, environmental audits of the site must occur to verify that progress is being made. It is important to note that EMAS simply requires that firms make progress in reducing the impacts of their activities on the environment. Unlike the eco-label that establishes an absolute standard of quality, the EMAS program relies on a standard of relative improvements over past performance. Thus, two firms with quite different levels of absolute pollution but a similar commitment to improve in the future can qualify for EMAS. In return for implementing an environmental management system, firms can hope for a number of benefits. The process of reviewing and improving their production methods may result in cost savings or lower future liabilities. More importantly, the EMAS program was sold to firms by arguing they may expect an increase in the market share of their products from participating in the program.
Section 4.2: Evaluation of EMAS
The EMAS program can be evaluated on many different levels. The fact that nearly 3,000 sites are registered in EMAS points to a more successful program than the 200 products plus eco-label program. For this paper, however, the question is if the information provision of EMAS has led to market effects. It is not immediately clear, then, that all the sites have joined EMAS in order to capture the green demand, as there exist many other potential benefits from joining. The evidence points to a failure of EMAS in using information to turn the vicious cycle into a virtuous cycle.
An obvious gauge of the success of the information provision is to ask whether the two players in the exchange, firms and consumers, know about the EMAS program. Few surveys exist on the level of knowledge of EMAS among management of firms. A research study by UNI/ASU established that over one quarter of executive managers did not know about EMAS (Freimann and Schwedes, 1999). Another study by the Institute for Research in Social Choices identified thirty three percent who had no knowledge of EMAS and another one third who claimed to know it only partly (Freimann and Schwedes, 1999). The two studies show that there exists a significant number of firms that are not aware of the EMAS program. To the best of my knowledge, there have been no surveys regarding the knowledge of EMAS among the general public. Through informal talks with people involved with EMAS, including people who work in the DG Environment in the EMAS program, most admit that there is near zero knowledge of the EMAS program among the general public. It is clear, then, that the public dialogue that EMAS attempted to create has not occurred.
The lack of information is partially the result of the limited ability that firms have in advertising their participation in the program. The EMAS proposal states that the statement of participation may not be used to advertise products, or on the products themselves, or on their packaging (Council Regulation 1836/93). Firms can only advertise their participation in the program indirectly through press releases and general (non-product specific) advertisements. This means that in order to benefit from consumer goodwill through participating in the program, individuals must recall which companies and sites belong to EMAS when they are shopping. This is probably asking too much of consumers.
Without this public dialogue, there is no mechanism to put pressure on firms to become clean. Indeed, there have been many studies that confirm that EMAS has had little to no impact on the market. A study of German participants of EMAS found that one of the most important facts is that the hopes connected with participation in the EMAS sometimes did not come up; market effects especially were rarely noticed (Freimann and Schwedes, 1999). A more comprehensive study that looked at a random sample of participating firms in all EU countries asked firms to relate the top three benefits they received from participating in EMAS. Increased market demand or greater competitive advantage was only cited by eleven percent of all firms (Hillary, 1998). Six other categories of benefits were more often cited than competitive advantage. Hence, most firms do not believe that EMAS is a successful vehicle to capture the demand of green consumers. The results confirm that without an exchange of information, the market will continue to operate in the same fashion and will be unable to provide green goods.
Section 4.3: The future of EMAS?
Section 4.3.1: The EMAS Revision (EMAS2000)
Like the EU eco-label, the Eco-Management and Audit Scheme is undergoing a significant revision, which seems to be stuck in the EU legislative process. Adopted by the Commission in October of 1998, it is currently waiting for a second reading by the European Parliament. The major elements of the revision are as follows :
- the adoption of a visible and recognizable EMAS logo to allow registered organizations to publicize their participation in EMAS more effectively
- the strengthening of the role of the environmental statement to improve the transparency of communication of environmental performance between registered organizations and their stakeholders and the public
The adoption of an EMAS logo as well as the stronger environmental statement are attempts to improve the information exchange between firms and consumers. Both are positive steps, but probably not strong enough to induce significant changes in consumer behavior. The new logo should attract the attention of consumers, but it is unclear how often they will actually see this logo. The revision document maintains the restrictive guidelines on the use of the label (not allowed on products or packaging), so firms can only use the logo on company letterhead, brochures, etc.. In the same way, the stronger environmental statement is a step in the right direction, but the actual effect will be small since the general public rarely reads the statement.
Section 4.3.2: Recommendations
The prospect of sustaining and expanding the EMAS program through market effects of increased information does not seem promising. As seen above, firms currently experience no market pressure to join EMAS. One may be tempted, then, like in the case of the eco-label to increase market pressure through increased awareness of the program. The easiest way to do this would be to loosen the restrictive advertising and allow firms to directly advertise their participation in EMAS on their products. While this is a tempting suggestion, I believe it would be counterproductive. It has the potential to confuse consumers into thinking that a product produced by an EMAS firm is in fact a green product. Again, EMAS is a signal of a firms commitment to relative improvements in their production process, not an absolute claim to the green credentials of a product over its entire life cycle. Once it is established that firms should not be able to advertise their participation directly on their product in order to maintain a distinction with the eco-label, the dim prospects of widespread consumer knowledge of EMAS must be recognized.
Even if we could somehow ignore the huge problems associated with the exchange of information and assume individuals had perfect information about EMAS, the power of the information to lead to market effects seems questionable. This is because individuals willingness to reward firms for complying with EMAS may be small for two reasons. First, individuals will be less willing to reward EMAS firms because the criteria for participation in EMAS are relative. This is not to say that a green consumer would completely ignore a firms participation in EMAS. It seems reasonable, however, that consumers would be less willing to reward firms who are compliant with EMAS than firms who have an eco-labeled product. A second reason why a perfect information exchange may still not be strong enough to garner significant market effects goes back to the public nature of the benefits that participation in EMAS yields. EMAS aims at improving the environment by reducing pollution in the production process. These benefits (cleaner water/air) are public as no one can be excluded from enjoying them, and therefore, the common free-rider problem will arise. While everyone may enjoy a cleaner environment, there is a tendency to free ride off of the contribution of others (i.e. let them buy the higher priced EMAS compliant goods). Some committed individuals may still be willing to pay a premium for goods with lower environmental impacts, but it is clear that the aggregate willingness to pay for green goods will be lower due to the free riding problem. Thus, the fact that the benefits of EMAS participation are public and since the standard is based on a relative rather than absolute quality level, consumer willingness to reward firms for such products will be smaller than they would be otherwise. Add in the major problem of disseminating information about EMAS without confusing consumers about the eco-label program, and it seems like the prospects of using the information exchange in EMAS to lead to market effects is not promising.
Rather than relying on market pressure created through the release of information, the EU bureaucracy should sell the Eco-Management and Audit Scheme on its other benefits. According to the firms currently registered in EMAS, one of the top benefits is cost savings (Hillary, 1998). Especially for small and medium size enterprises, a thorough and rigorous audit of their production processes can often lead to cost savings. Another advantage of the audit is that it identifies when firms are not in compliance with current environmental laws. This allows firms to address problems and potentially avoid or at least limit future liabilities. Regular auditing can also create additional cost savings as insurance companies acknowledge the lower risk of these companies and reward them with lower premiums. Or, as recently occurred with Deutsche Bank, EMAS registered sites can achieve cost savings by receiving favorable rates of interest because (Deutsch Bank) regards EMAS validation as a clear signal of reduced environmental risks (Taschner, 1998, 234). A final suggestion is for the EU to focus on links EMAS can provide within the supply chain. As a few retailers can affect the choices of a much larger number of consumers, a few large firms can induce change in their entire web of suppliers below them. For example, Volvo has announced that it will favor suppliers that are EMAS certified (Taschner, 1998, 221). Depending on how Volvo interprets EMAS, the requirement to look at their supply chain may require the suppliers of the suppliers to Volvo to also become EMAS compliant. If NGOs focus their pressure on large, end product producers and if government agencies give preferences to EMAS firms in procurement decisions, participation in the program has the potential to grow at a geometric rate.
Section 5: Conclusion
The ability of an information provision to overcome market failure faces numerous obstacles, especially when the information concerns the environmental attributes of a good. Unlike Akerlofs market for used cars, the credence qualities of green goods mean that experience with the good provides no knowledge of its characteristics. The EU eco-label and EMAS are government-sanctioned programs that aim to provide trustworthy information. We have seen, however, that different objectives and type of information exchanged in each program greatly affects the ultimate success of the information provision.
The eco-label program holds promise that the exchange of information can lead to market effects that will improve the environment. The exchange of information in the program works for a number of reasons. One, the mechanism (the daisy logo) in which information is transmitted is direct. Consumers can easily access such information, and with additional time and resources devoted to consumer education, more consumers will respond to the information and buy eco-labeled goods. The second advantage of the information exchange in the eco-label program deals with the type of information transmitted by the daisy. The logo indicates achievement of an absolute level of quality. A consumer knows that the producer is one of the cleanest producers in the product group, and they also know that the overall environmental impact of the product attains a certain level. Finally, while the eco-label is handicapped by the public nature of several of its benefits, most eco-labeled goods still result in significant private benefits too. The combination of private and public benefits is enough to encourage environmentally conscious consumers to buy such products. Once this demand is exercised, more producers will have an incentive to produce eco-labeled goods, and this switch to producing green goods will improve the environment.
The exchange of information in the EMAS program, on the other hand, faces too many obstacles to become successful in the near future. There are two main obstacles. First, the restrictive nature of advertising ones participation in EMAS immediately handicaps the program. This would be difficult to overcome without allowing advertising directly on products, a step which would introduce the potential for confusion between the EU eco-label and EMAS programs. The second obstacle to the EMAS program is that the type of information that EMAS provides is probably not strong enough to elicit changes in consumer behavior. EMAS, based on a relative standard of improvement over past performance, says nothing about the true quality level. When comparing two firms with EMAS certification, it is not clear that they deserve equal consumer recognition and reward since one firm could have a much higher level of pollution than the other. Another reason why consumers may not respond to the information provision of EMAS is because the benefits one receives from buying a good from an EMAS firm are nearly always public. The sole focus of EMAS on improving the production methods of firms means that the benefits from buying a good from an EMAS firm (cleaner air/water) are public, and the free-rider problem means provision of good is difficult. Nevertheless, both the eco-label and EMAS programs should be continued. The eco-label, by maintaining strict absolute standards, is by definition selective and has limited participation. EMAS, on the other hand, has the potential to reach a wider audience and can therefore have a bigger impact. Its success, then, should not depend on the information provision awakening the demand of green consumers but rather on its other benefits to firms (cost savings, limited future liability).
The EU eco-label and EMAS programs show us that the ability of the market to self-regulate itself after the provision of new information is a complicated process. It is not always enough for a government to just provide information. We have seen that the exchange mechanism, whether a direct mechanism like the eco-label or an indirect mechanism like in EMAS, can be important in determining how successful it is in reaching individuals. Another key factor illustrated in these two programs is that the kind of information is crucial to its ability to lead to changes in consumer behavior. Stronger pieces of information (absolute versus relative improvements) and information that has a direct impact on consumers (private versus public benefits) will more likely yield market effects. These issues must be addressed when designing voluntary agreements in the future that attempt to use information to regulate the market.
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