Graded eco-labels: A demand-oriented approach to reduce pollution

Supplied oriented environmental policies are generally used in order to limit production related pollution. This fact is based on the hypothesis that consumers are not willing to sacrifice personal utility for a wider social gain. We suggest that widespread environmental concerns of consumers can be exploited to push producers along cleaner technological patterns. Our core assumption is that consumers would be ready to purchase cleaner products if the products' characteristics are not 'too dissimilar' to those of more polluting alternatives. However, due to a lack of information about non-observable product characteristics, this assumption on its own is not sufficient for 'environmental friendly' producers to become competitive. We show - by means of a simulation model - that only if consumers are provided with appropriate information on the greenness of products through adequate eco-labels (graded eco-labels), then producers will be pressed to implement innovations aimed at reducing the environmental impact of their products. Under two test settings - one without any certification and another with binary eco-labels - the model shows markets characterised by highly polluting technological patterns. Only in the presence of graded eco-labels, competition drives the market toward cleaner technological patterns. © 2008 Elsevier Inc. All rights reserved.