Abstract
Private environmental standards attempt, in part, to internalize environmental externalities. Offsetting firms’ environmental externalities by buying credits is one option. Another is insetting, in which firms attempt to address externalities and provide positive benefits within their own supply chain. These two approaches to internalizing externalities can be in tension, leading toward different types of sustainable markets. Firms adopting private standards as way of avoiding reputational risks may be more likely to support insetting than offsetting strategies if their primary goal is to distinguish themselves from the rest of their industry, but these strategies can also risk separating the market into niche, high-quality producers alongside a low-quality majority. These tensions play out in the Roundtable on Sustainable Palm Oil (RSPO), where offsetting and insetting exist side-by-side. Strategic pressures promoting insetting strategies lead firms to exit the system’s offset market, but this comes with the cost of losing some of the flexibility and lowered entry barriers the offset approach offers. New technologies might allow standards to combine the benefits of both approaches, keeping the reputational benefits of insetting and the flexibility of offsetting.
Highlights
In 2010, Greenpeace launched a successful campaign against Nestlé’s use of palm oil, in its Kit Kat-brand chocolate bars
The Roundtable on Sustainable Palm Oil (RSPO), an organization that monitors and certifies palm oil production according to set of sustainability criteria, has been a common recourse for firms hedging against palm oil’s reputational risks, despite perceptions that its requirements are too weak [1,2]
Drawing on a range of sources, we demonstrate that, despite the costs of traceability required for insetting and the fact that on-the-ground requirements are generally the same for all RSPO certifications, RSPO members facing reputational risks show a preference for insetting over offsetting
Summary
In 2010, Greenpeace launched a successful campaign against Nestlé’s use of palm oil, in its Kit Kat-brand chocolate bars. A flurry of brand-based activism focused on retailers and manufacturers, in Europe, ensued [1] Given this history, it might seem surprising that Nestlé’s membership in the Roundtable on Sustainable Palm Oil (RSPO) was suspended in late June 2018. Externalities are internalized through Coasian [8] bargaining over tradeable credits, whereas in inset markets, firms internalize externalities in the costs of sourcing goods in a given value chain, the approach endorsed in Nestlé’s above statement. We select the RSPO for analysis both because of its structure and because its mandatory Annual Communication of Progress (ACOPs) reports provide an excellent repository of perspectives on the standard from across the value chain [10] This allows us to see very clearly how support for insetting or offsetting plays out in the organization.
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