Can Labelling Policies Do More Harm Than Good? An Analysis Applied to Environmental Labelling Schemes

Abstract

In certain plausible circumstances, the introduction of labelling schemes can lead to adverse effects. In the case of ecolabelling, the adverse effects are an environmental degradation rather than an environmental improvement. To take into account the environmental sensitiveness or responsiveness of consumers, we introduce the concept of environmental elasticity which enables us to classify goods. In a basic analytical model, we describe the conditions under which different outcomes—overall impacts of change in environmental quality due to environmental labelling—arise after the introduction of an ecolabelling scheme. We show that an ecolabelling scheme can lead to an increase in purchases of environmentally sustainable products. The net effect on the environment can be worse than the initial situation without ecolabelling, because the environmental unit improvement is compensated by an over-consumption. We suggest several tests to detect this potential perverse effect, some policy implications to avoid it and stress the need for further research.