Environmental certification programs: How does information provision compare with taxation?

Abstract

This paper develops a monopolistic competition framework to assess whether environmental certification programs can serve as effective substitutes for more traditional policy instruments such as environmental taxation or a minimum quality standard (MQS). I show that if firms can organize themselves and choose the certification standard collectively, then there is a beneficial role for a regulator to intervene. Also, the degree of substitution between differentiated goods that impose environmental damage and a "clean" outside good, the degree of competition in the industry and the extent of environmental damage caused by minimal quality goods are important considerations in the choice between a certification program and a tax or a MQS. While the comparison between a certification program and a tax depends on numerous factors, I find unequivocally that certification is a poor substitute for taxation whenever the outside good is a close substitute for differentiated goods, there is a high degree of competition in the industry or if minimal quality goods impose considerable environmental damage.

Green consumers and environmental policy

“…The increasing importance of green consumerism has raised the question of the appropriate adjustments to the traditional environmental tax and subsidy policies and furthermore initiated a discussion regarding the effectiveness of information campaigns and advertising, aiming at increase environmental awareness, as an additional policy instrument (see, e.g., Brouhle & Khanna, 2007; Nyborg, Howarth, & Brekke, 2006; Petrakis, Sartzetakis, & Xepapadeas, 2005; Sartzetakis, Xepapadeas, & Petrakis, 2012; more recently Podhorsky, 2020 also considers environmental awareness but in the form of certification standard). The literature has approached the emergence of green consumers using different frameworks.…”

Specific taxation, asymmetric costs, and endogenous quality

“…The present paper also relates to other fields of economics. There exists a substantial literature on endogenous quality choice of firms, see for example, Podhorsky (2020), for a model where quality choices of firms relate to environmental damage or Fan et al (2015) and Ludema and Yu (2016) for international trade applications. Moreover, international economics that studies effects of specific costs arising from shipping costs, specific tariffs, and shadow values of quotas (Durceylan, 2012; Hummels & Skiba, 2004; Irarrazabal et al, 2015; Sørensen, 2014) and industrial organization that studies the effects of changes in prices of common input factors (Gaigné & Mener, 2014).…”

Special Issue: Supermodularity and Monotonicity in Economics

“…For related work, see e.g. Podhorsky (2020). Gama et al (2020) considers a general class of symmetric Cournot oligopolies with firm-specific network effects and investigates the effects of exogenous entry on market performance, and the profitability and welfare effects of horizontal mergers.…”