Environmental certification programs: How does information provision compare with taxation?

This paper develops a monopolistic competition framework to assess whether environmental certification programs can serve as effective substitutes for more traditional policy instruments such as environmental taxation or a minimum quality standard (MQS). I show that if firms can organize themselves and choose the certification standard collectively, then there is a beneficial role for a regulator to intervene. Also, the degree of substitution between differentiated goods that impose environmental damage and a “clean” outside good, the degree of competition in the industry and the extent of environmental damage caused by minimal quality goods are important considerations in the choice between a certification program and a tax or a MQS. While the comparison between a certification program and a tax depends on numerous factors, I find unequivocally that certification is a poor substitute for taxation whenever the outside good is a close substitute for differentiated goods, there is a high degree of competition in the industry or if minimal quality goods impose considerable environmental damage.