Eco-labels, Trade and Protectionism |
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Authors: | Mads Greaker |
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Institution: | (1) Statistics Norway, Centre for Development, P.O. Box 8131, 0033 Oslo, Norway |
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Abstract: | Eco-labels are suspected to serve protectionist purposes. We analyze the choice between an environmental standard and a voluntary
eco-label scheme in a partial trade model with one domestic firm and one foreign firm. The environmental standard will only
apply to the domestic firm, while both firms can adopt the eco-label. Pollution is production related, and domestic consumers
demand products that are produced in an “environmentally friendly” way. Our results show that it may be optimal for the domestic
government to introduce an eco-label and get both firms to adopt the label, instead of setting an environmental standard.
However, to what extent this policy serves protectionist purposes is ambiguous. In particular, if the willingness to pay for
green products is sufficient to cover the pollution abatement costs of the foreign firm, foreign firm profit will increase
while domestic firm profit will decrease compared to the outcome with a domestic environmental standard. On the other hand,
if the willingness to pay for green products is insufficient, the foreign firm would be better off with a domestic environmental
standard. |
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Keywords: | eco-labels product differentiation trade policy |
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