ENV 188A Business and the Natural Environment

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ENV 188ABusiness and the Natural Environment

• Eco-labels
• Magali Delmas

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Eco Labels

• Goal to provide consumers with accurate
  information regarding the environmental qualities
  of products and, by doing so, introduce a
  competitive dynamic in the market place (Salzman)

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Why the need for eco labels in the case of energy
efficient product?

• Neoclassical view of the firm
• Firms enjoy informational advantages over govt
  regulators concerning technological and economic
  aspect of energy use and pollution abatement
• Profit maximazing objective if there are
  efficiency gains, the market will help firm
  realize them
• However, consumers, manufacturers under-invest in
  efficient products.

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Organizational failure (transaction costs)

• Organizational failure generate departure from
  cost-minimizing behavior
• Firm is a network of individuals tides together
  by flow of information, material and incentives
• Even if firm is profit oriented it may be unable
  to achieve the ideal of profit maximization given
  information asymmetries and people bounded
  rationality
• Transaction costs impede the adoption of
  cost-effective technologies that would generate
  significant environmental benefits
• Energy Star
• Technological information on potential
  substitutes
• Who can supply these substitutes
• Potential financial impact

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Organizational failure (split-incentives problem)

• Accounting practices within multidivision firms
• A division may incur the costs while another one
  the benefits
• Example maybe a facilities budget would incur
  the relevant expenses while the production
  division realize the cost savings
• Facilities office no incentive to invest in
  energy efficient equipment even though it would
  benefit the firm as a whole
• Energy Star program addresses the appropriate
  decision making level within the firm

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Market-related barriers

• Inability of a company to capture all the
  benefits of their own RD because competitors can
  copy their designs
• Energy star
• Provides firms with existing designs
• Intervention directly into corporate product
  design decisions through entire industry
  negotiation. Creation of bandwagon effects

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Individual Consumer issues

• Tendency of consumers to overemphasize initial
  appliance cost at the expense of future benefits.
  Uncertainty regarding future benefits from
  efficiency investments.
• Lack of importance, for certain consumers, of the
  relatively small dollar savings achieved through
  energy-efficient investments, and
• Confusion over definition, testing of efficiency.
  Lack of objective information about energy use
• Energy Star
• Provide credible information to influence
  consumers purchasing decision simplify
  cognitive process
• Strengthening the buying power of energy
  conscious consumers (Executive order 12845)

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• ENERGY STAR

• 18,000 labeled products in 33 product categories
• 1,300 manufacturers participating in the program
• 120 million ENERGY STAR-labeled products
  purchased in 2000
• 40 of the adult US population recognizes the
  label today

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ENERGY STARFamily of Products
Label covers 33 product areas

• Office Equipment
• Consumer Electronics
• Appliances
• Insulation
• HVAC
• Residential Lighting
• Commercial Buildings
• Windows
• Exit Signs
• ENERGY STAR Home

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How EPA and DOE Select Products for ENERGY STAR

• Criteria
• Demonstrate significant energy savings potential
• Efficiency is cost-effective and non-proprietary
• Performance is maintained or enhanced
• Differentiation and testing are feasible
• Labeling would be effective in the market

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ENERGY STAR Purchasing Initiative

• Target corporate and government buyers demand
  is sufficient to influence manufacturers
• Provide assistance with finding products,
  calculating life-cycle cost savings, sample
  procurement language

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Promoting ENERGY STAR Products

• Main messages
• Smart, simple consumer choice.
• High-performing products save money and help
  protect the environment, w/ no sacrifice in
  features, convenience.
• Link between energy use and air pollution.
• Government-backed, national program
• Media outreach
• Trade press outreach,
• Public Service Announcements,
• Special product promotions,
• Partnering activities with manufacturers,
  contractors and dealers, utilities, retailers,
  consumer environmental groups
• 40 of American public recognize label

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ENERGY STAR Promotion (continued)
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ENERGY STARProgram results
In 2002, using Energy Star products Saved 100
billion kWh and 15,000 MW of peak power,
Prevented greenhouse gas emissions equivalent to
15 million automobiles , Saved consumers 4.4
billion on their energy bills
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• Why do firms join ENERGY STAR ?

• 11,000 labeled products in 33 product categories

• survey to 600 partners in 17 product categories
  160 usable surveys, overall response rate 29.3

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International Expansion Coordination
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European Eco-label

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The European Union

• Process of cooperation and integration which
  began in 1951 between six countries (Belgium,
  Germany, France, Italy, Luxembourg and the
  Netherlands).
• 1973 Denmark, Ireland and the United Kingdom
• 1981 Greece
• 1986 Spain and Portugal
• 1995 Austria, Finland and Sweden
• 2004 Cyprus, the Czech Republic, Estonia,
  Hungary, Latvia, Lithuania, Malta, Poland, the
  Slovak Republic and Slovenia
• The EU today has 25 Member States
• Euro zone 12 Denmark, Sweden, United Kingdom
  out
• Population 2004 456.4 Millions (Euro zone 308.4
  M)

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Regulation (EC) No 1980/2000 on a revised
Community Eco-label award scheme

• The Community Eco-label award scheme is designed
  to
• promote products which have a reduced
  environmental impact compared with other products
  in the same product group
• provide consumers with accurate and
  scientifically based information and guidance on
  products.
• Eco-label criteria must be established by product
  group and be based on
• the product's prospects of market penetration
• the technical and economic feasibility of the
  necessary adaptations
• the potential for environmental improvement.

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Environmental criteria

• Life cycle analysis
• Various environmental impacts included
• air, water, soil, waste, energy, natural resource
  management, global warming, ozone layer
  protection, environmental safety, noise,
  biodiversity

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Numbers

• More than 161 manufacturers
• 2005 225 products in 21 product groups

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CO2 emissions

• The ecolabel has potential to be highly
  cost-effective. Considering the Direct benefits
  and the 5 market penetration scenario, the
  amount of CO2 emissions saved is 9Mt.
• Ecolabel scheme costs 3.4M per year to operate.
  Hence the ecolabel could potentially achieve CO2
  abatement at a cost less than 1 per tonne.
• The cost of abating a tonne of CO2 has been
  estimated elsewhere by the ECCP9. ECCPs data
  suggests that, considering a basket of policy
  measures and instruments, the cost is 12 per
  tonne.

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Goals of Eco-labels

• Provide consumers with accurate information
  regarding the environmental qualities of products
  
• and, by doing so, introduce a competitive dynamic
  in the marketplace
• Theory is the same for all ecolabel schemes but
  some are thriving while other are not
• Success is in the details

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Effectiveness of eco-labels?

• They need to reduce search and information costs
  for consumers
• Information needs to be simple.
• Information needs to be easily accessible.
• Products need to be easily found (critical mass)
• Cost of purchase needs to be perceived as similar
  to competitive products or consumers need to reap
  the benefits of adoption ASAP
• If additional cost, environmental benefit needs
  to be bundled with private benefit

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Next week

• Tuesday analysis of survey on SurveyMonkey
• Each group sends comments related to survey
• Thursday
• Hayward Lumber company
• Each group 5 slides responding to questions
• Suggestion individual write-up
• How to adopt a successful environmental
  differentiation strategy based on a standard
  certification scheme or an eco-label?