Environmental Policies and Political Feasibility: Eco-Labels versus Emission Taxes

Abstract

This paper examines the economic and political implications of two market-based policies, eco-certifications and emission taxes. We evaluate each policy s effects on the environment, investment in clean technology, and social welfare under imperfect competition. We find that eco-certification reduces total damage to the environment, increases consumer benefits, and is socially desirable. However, polluting firms will never voluntarily accept the socially optimal eco-standard, leading to suboptimal certification programs. Unless the marginal damage to the environment from emissions is sufficiently low and demand is sufficiently large, environmental damage occurring under voluntary eco-certification is higher in comparison to alternative policies. We examine the welfare impacts of each policy to identify social preferences. Using realized market benefits to construct policy preferences, we identify conditions under which the socially optimal environmental policy is unlikely to be politically feasible. Our results explain the popularity and suboptimal qualities of eco-certification programs.