Eco-Label Challenge #5: Certification Costs are Misused and can be a Barrier to Entry

Unfortunately, eco-label certification can become a money-making scheme for third party eco-label agencies. A recent article concerning eco-labeling uncovers that, “Manufacturers are often required to make payments to the owner of the eco-label in order to display it on their products, risking low-bar standards for qualification” (Covington, 2011). Though payments to eco-label agencies are certainly necessary in order to fund product testing, audits, and information gathering, if it becomes excessive or misdirected, companies are essentially able to buy their way in, which jeopardizes the integrity of the entire labeling operation.

A recent study entitled “Wasteful Labeling” addresses this very problem. This study argues that labeling will not be able to solve the problem of verifying claims made by businesses if the labeling agency itself is untrustworthy (Mahenc, 2009). The study shows through economic analyses that when the labeling agency is trustworthy, the fee charged for labeling raises revenue with a minimal loss in terms of efficiency, and the money raised is analogous to a tax dedicated to funding the agency’s information gathering and other operations (Mahenc, 2009). Following this, if the agency is untrustworthy, it may charge fees that exceed the appropriate level in order to generate revenue. Similarly, an untrustworthy agency may divert the fees charged for labeling from their primary purpose of collecting information to raise additional revenue. In the first scenario where the price of certification increases, the actual price of the consumer good may also increase to compensate for this, which is a definite detriment. In addition, the high price of certification may discriminate against smaller, less profitable companies that meet the labeling criteria but cannot afford associated costs of labeling their product. In the second scenario, money that should be used to verify product claims communicated by an eco-label is diverted elsewhere, meaning that the thoroughness and quality of the actual certification process is compromised. It is clearly evident that labeling agencies need to be honest and credible to avoid the problems associated with certification costs but this is difficult to ensure in an environment where eco-labels are unregulated.

Next Up: My recommendations for overcoming the 5 challenges facing eco-labels!

References:

Covington, P. (2011). Is it greenwashing or too many eco-labels that is the problem? Triple Pundit. Retrieved from http://www.triplepundit.com/2011/03/greenwashing-many-eco-labels-problem/.

Mahenc, P. (2009). Wasteful Labeling. Jounrnal of Agricultural and Food Industrial Organization, 7(2).