The Economics of Eco-Labeling: Standards, Costs and Prices

The existing eco-label landscape is fragmented because of the presence of numerous labels with different standards and is a pre-competitive environment for firms to play in with many unanswered questions. Different standards - eco-labels are built around - have different effects on credibility and legitimacy, costs and benefits, and ability to achieve sustainability goals of eco-labeling. Focusing on eco-label standards and using a Hotelling-type horizontal differentiation model, we identify standards-specific issues for and characterize primary barriers to eco-labeling. Some of the major findings are as follows: (1) More rigorous environmental standards enforced by higher-integrity labels do not necessarily translate into higher selling prices; (2) Higher prices commanded by labeled products do not guarantee that a firm will derive higher profits from eco-labeling; (3) Auditing fees paid per product unit being inspected for ensuring compliance with an eco-label standard (rather than participation fees paid up front) is the primary de facto barrier to business involvement in eco-labeling; and (4) Customers' willingness to pay price premiums for eco-labeled products is not a sufficient condition to generate a premium in the market.