Environmental Labeling and Technology Adoption in the Presence of Strategic Interactions

This manuscript analyzes the effect of binary ecolabeling on the strategic competition of Cournot duopolists in environmental technology and the output market. Under binary labeling, firms' abatement technologies are not directly observable by consumers but are certified if they satisfy preset ecological standards. Given this asymmetry, I set up the regulator's problem as one of choosing a technology standard, or "cutoff," in emissions per unit of output, below which all abatement efficiency levels are certified. The regulatory authority faces a trade-off in choosing the socially optimal cutoff: The regulator would like to raise the standard to reduce emissions but needs to lower it in order to induce technology adoption. There are three important findings: (1) ecolabeling is the second-best instrument in that choosing the optimal cutoff per se can never achieve the first-best outcome; (2) efficiency loss in terms of the difference between the first-best and the second-best total surpluses may or may not be large, depending on the extent of the certification barriers; and (3) setting too high or too low a standard is not only inefficient, but can also lead to an increase in total emissions relative to the status quo. Thus, setting the technology cutoff optimally is of crucial importance.