Eco-labels, Trade and Protectionism

Eco-labels are suspected to serve protectionist purposes. We analyze the choice between an environmental standard and a voluntary eco-label scheme in a partial trade model with one domestic firm and one foreign firm. The environmental standard will only apply to the domestic firm, while both firms c...

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Bibliographic Details
Published in:Environmental & resource economics 2006, Vol.33 (1), p.1-37
Main Author: Greaker, Mads
Format: Article
Language:English
Subjects:
Consumer preferences
Consumers
Costs
Domestic markets
Duopoly
eco-labels
Economic models
Economic theory
Economics
Environmental economics
Environmental labelling
Environmental protection
Environmental quality
Environmental regulations
Foreign ownership
Green products
International trade
Labeling
Labelling
Natural resources
Pollution
Pollution control
Product differentiation
profits
Protectionism
Q1
Q28
Quality standards
Studies
Trade policy
Willingness to pay
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Summary:Eco-labels are suspected to serve protectionist purposes. We analyze the choice between an environmental standard and a voluntary eco-label scheme in a partial trade model with one domestic firm and one foreign firm. The environmental standard will only apply to the domestic firm, while both firms can adopt the eco-label. Pollution is production related, and domestic consumers demand products that are produced in an “environmentally friendly” way. Our results show that it may be optimal for the domestic government to introduce an eco-label and get both firms to adopt the label, instead of setting an environmental standard. However, to what extent this policy serves protectionist purposes is ambiguous. In particular, if the willingness to pay for green products is sufficient to cover the pollution abatement costs of the foreign firm, foreign firm profit will increase while domestic firm profit will decrease compared to the outcome with a domestic environmental standard. On the other hand, if the willingness to pay for green products is insufficient, the foreign firm would be better off with a domestic environmental standard. Copyright Springer 2006
ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-005-0070-9