Standardization, Certification, and Labeling: A Background Paper for the Roundtable on Sustainability Workshop January 19-21, 2009

Kira Matus

Harvard University

INTRODUCTION

The use of standards, certification, and labeling has been growing in a number of areas, as consumers demand more information about the products that they use. From a consumer perspective, they have become increasingly common in relation to information regarding nutrition, safety, and most recently, the environmental impact of a range of products. Certification has become a popular tool in environmental policy, and is widely seen as one method to influence purchasing behavior, and through the power of markets, reputation, and branding, the environmental behavior of firms.

While there are many environmental certifications and labels that have grown in visibility and popularity (LEED for buildings and USDA Organic for foods, among others), they are not a policy panacea. There are a variety of issues that need to be addressed regarding their effectiveness, ranging from how they are developed, who ensures their veracity, and whether they actually produce a positive impact. This background paper will start by looking at general public policy theory, to help explain how standards, certification and labeling function as compared to other potential policy tools. Then it will address some key issues that have emerged both from the underlying theory and actual empirical experience. Understanding both the theory and the reality of these efforts to date are key to developing a deeper understanding of when and how standards, certification, and labeling can be used with the greatest positive impact.



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Standardization, Certification, and Labeling: A Background Paper for the Roundtable on Sustainability Workshop January 19-21, 2009 kira matus Harvard University INTRODUCTION The use of standards, certification, and labeling has been growing in a number of areas, as consumers demand more information about the products that they use. From a consumer perspective, they have become increasingly common in relation to information regarding nutrition, safety, and most recently, the environmental impact of a range of products. Certi- fication has become a popular tool in environmental policy, and is widely seen as one method to influence purchasing behavior, and through the power of markets, reputation, and branding, the environmental behavior of firms. While there are many environmental certifications and labels that have grown in visibility and popularity (LEED for buildings and USDA Organic for foods, among others), they are not a policy panacea. There are a variety of issues that need to be addressed regarding their effectiveness, ranging from how they are developed, who ensures their veracity, and whether they actually produce a positive impact. This background paper will start by looking at general public policy theory, to help explain how standards, certification and labeling function as compared to other potential policy tools. Then it will address some key issues that have emerged both from the underlying theory and actual empirical experience. Understanding both the theory and the reality of these efforts to date are key to developing a deeper understanding of when and how standards, certification, and label- ing can be used with the greatest positive impact. 

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80 certIfIaBlY sustaInaBle? TABLE 1 Definitions Term Definition Standard Specifications and/or criteria for the manufacture, use, and/or attributes of a product, process, or service. Certification The process, often performed by a third party, of verifying that a product, process or service adheres to a given set of standards and/or criteria. Labeling The method of providing information on the attributes, often unobservable, for a product, process or service. THEORy The first step in building the theory behind standards, certification, and labeling is to understand that these three terms, while often used (nearly) interchangeably, are actually different aspects of a process that is meant to increase the amount of information available to the consumer/user of a given product or service. Table 1 gives a definition of each of these three terms. These three tools are interdependent. For example, certification requires some set of criteria (standards) against which a process, product, or service is being judged. And labels refer, at the very least, to some implied (though not necessarily explicit) criteria. Therefore, efforts to understand how this kind of information provision works as a policy tool have to take each of these aspects separately, while still understanding how they interact with each other. Implicit in the entire process of standardization, certification, and label- ing is a set of underlying goals. Standards are not set arbitrarily—they are used to address a specific problem. A basic example is the electric wall socket. All electric wall sockets in the United States have the same shape, and deliver the same 120V AC current. This is a standard—but the under- lying goal is to have a system in place so that any electric device can be plugged into, and run off, any electric wall socket in the country.1 This also illustrates another important point—there is usually more than one standard that will solve the same problem. In Europe, wall sockets have a different configuration and deliver 240V of AC current. But for each region, the underlying problem was solved through the creation of a set of criteria for the delivery of electric current for common use. A highly simplified process diagram is shown in Figure 1, where the identification of a problem 1 For this example, there is also an associated certification and labeling program. Most electrically powered devices sold in the United States are inspected, certified, and labeled as being approved by the Underwriters Laboratories (UL), an independent company that works with industry to develop appropriate product safety standards. These products are certified and labeled, so that consumers know that the devices can be used safely.

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8 standardIZatIon, certIfIcatIon, and laBelIng FIGURE 1 Simplified process diagram from goal to label. leads to the setting of a goal, which in turn influences the development of a standard, which can, if needed, be certified and labeled. As will be explored, standards are not necessarily designed with a singular goal in mind. The details of the standard will influence the appropriate process for certifica- tion, as well as the most effective method of labeling. In questions of policy, broadly speaking, one common pitfall occurs during the process of goal setting, when it is easy to get confused between “means” and “ends.” Goals should always be “ends.” Some examples of ends are improved air quality, drinkable water, and an improved standard of living. The setting of a standard, or the development of an environmental regulation is not an end, or goal, in and of itself. These are means—the tools which are used to reach society’s goals. This distinction should be kept in mind throughout the discussion of standards, certification and labeling, where it is easy to fall into the trap of believing that these tools are ends in and of themselves, and not just one of many methods for accomplishing a set of goals. Before delving into the details of the entire process, it is useful to take a step back and look at the family of problems that can be addressed using these policy tools, and the potential alternatives. What Is the Problem? The Economic Perspective To understand some of the basic theory behind the need to use any kind of policy, including standardization, certification, and labeling, one starting point is economics. In classic micro-economics, economists make a series of assumptions that, while convenient for solving mathematical models, are in reality nearly always violated. These in turn lead to market failures—situations where a decentralized competitive market does not result in the most optimal allocation of goods. From an economic perspec- tive, the justification for public policy is to correct these market failures. The four traditional market failures are public goods, externalities, natural monopolies, and information asymmetries.2 2 D. L. Weimer and A. R. Vining, Policy analysis: concepts and Practice, Prentice Hall, 1999; pg. 71.

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8 certIfIaBlY sustaInaBle? One of the challenges of environmental policy is that many environ- mental problems are the result of a combination of two or more of these types of market failures. Thus it may take several approaches to effectively address any particular environmental challenge. For example, take the case of agriculture. Agricultural production can result in negative environmental impacts on those other than the individual farmer engaging in production (externalities). The consumers of the farmer’s produce are often geographically separated from the farm, and thus have no way of knowing whether their food was produced using more or less envi- ronmentally responsible methods of agriculture (information asymmetry). For the farmer, even if he wants to engage in a more responsible use of an input, say electricity, he most likely has a choice of only one supplier, due to the nature of electricity production and supply (natural monopoly). And finally, a new, environmentally friendly technique may be a public good. In economic parlance, that means that they are nonexcludable (there is no way to prevent others from benefiting from using the new method) and nonrivalrous (the use of the new method by one farmer does not impact the availability of the same method to other farmers). This deters firms from investing in developing new techniques, since there may not be enough of the benefits of their efforts to cover the cost of the innovation. Each of these market failures requires different policy approaches. Table 2 shows some of the typical, “generic” policy tools that are typically used to address market failures. Going back to the case of agriculture, for the farmer who is investing in a new innovation, the ability to patent a new seed type or technique can overcome some of the hurdles presented by the public good nature of the product. Classical government regulation on emissions and run-off can be used to deal with the externalities of farming practices. Governments also regulate certain natural monopolies, such as the provision of water or elec- TABLE 2 Generic Policy Solutions Insurance Market Nonmarket and Mechanisms Incentives Rules Supply Cushions Traditional Market Failures Public Goods X X X X Externalities X X X X Natural Monopolies X X X X Information X X X Asymmetries NOTE: Adapted from Weimer and Vining, 1999; pg. 260.

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8 standardIZatIon, certIfIcatIon, and laBelIng tricity, to make sure that optimal levels of these inputs are provided. And finally, there are a variety of techniques that can help overcome the problem of the information asymmetry between the producers and consumers, like the USDA’s “Organic” label. Standards, certification, and labeling are a set of policy tools which fall under the “Rules” category in Table 2, and are most appropriate for dealing with the problems that arrive from informa- tion asymmetries and negative externalities.3 understanding Information asymmetries and negatie externalities The problem of information asymmetries was most famously addressed by Akerlof’s “Market for Lemons.”4 In one of the classic papers in micro- economics, Akerlof laid out the case where there are two kinds of cars being sold—cherries (good cars) and lemons (bad cars). The sellers of the cars know which type they are selling, but the buyers have no way of telling before they purchase the car whether it is a lemon. In the absence of any policy intervention, Akerlof showed mathematically that the equilibrium solution is that no cars are sold—a complete breakdown of the market for cars. However, when information is available to the buyers, the result is an efficient market for cars. This analysis is obviously a simplification, but it is a great illustration of how the provision of information from the sellers to the buyers can be used to establish a market, in which all parties end up better off. This result is important for thinking about the hidden qualities of products. For example, if a consumer is looking at an apple in a store, there are certain qualities that are visible. The consumer can judge the color, the firmness of the fruit, external evidence of damage or bruising, and even the smell. There are some qualities that are temporarily hidden, but can be determined post-consumption, called unobservable quality attributes.5 For apples, these are qualities like hidden damage, and of course, taste, which are not knowable before a decision is made to purchase a particular piece of fruit. And finally, there are some qualities which cannot be observed, even after the product is consumed, such as the environmental impact of the apple’s cultivation and transport. Goods that have qualities that are unobservable even after consumption are called post-experience goods6 or credence goods.7 In addition to being used for pre-consumption and pre-experience goods (e.g., size and variety of an apple), standards, cer- tification and labeling are useful for dealing with post-consumption and 3 Ibid., pg 235 (Table 10.3). 4 G. A. Akerlof, “The Market fir “Lemons1J: Quality Uncertainity and the Market Mecha- nism,” the Quarterly Journal of economics 84 (3):488-500. 5 J. McCluskey, agricultural and resource economics reiew 29(1):1-9. 6 Weimer and Vining, “Policy Analysis: Concepts and Practice.” 7 McCluskey, 1-9.

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8 certIfIaBlY sustaInaBle? post-experience goods. They allow customers to have more information regarding impacts of their consumption that would otherwise be unobserv- able to them. Negative externalities occur when the actions of one party (the actor) negatively impact others, but this negative impact doesn’t actually cost anything to the party performing the action, and the impacted parties have no say in the economic decisions of the actor. Because the actor does not bear the cost of his actions, the result is that more than the socially opti- mal amount is produced. Pollution is a classic example. When a factory releases waste into a river, it can harm the environment and the residents downstream from the factory. In the absence of policy, releasing the waste into the river costs the factory nothing—the costs of this behavior is borne out by those downstream, and more pollution is produced than is socially optimal. Economic theory proposes several possible solutions to the problem of externalities. The most basic solution is that the affected party can pay the actor to change his/her behavior.8 In reality, this is very difficult, and not particularly practical. A second approach that is popular in economic theory is to find ways to internalize the cost of the action that creates the negative externality, often through policy mechanisms like taxes, fees, and fines. A great deal of environmental policy involves finding ways to mitigate the negative externalities of environmentally harmful behaviors through the use of regulations, economic incentives, and other tools. Some systems of standards, certification, and labeling can be used to deal with negative externalities by making it clear to consumers which products and pro- cesses are incurring fewer harmful externalities. Given this information, consumers can incorporate it into their consumption decisions—with the hope being that the market will reward those products that result in less harmful impacts. USDA Organic food works on this principle. Organic farming standards are meant to be less environmentally harmful, so foods labeled as certified organic should create fewer negative externalities than conventionally grown foods. What Is the Problem? The Policy Perspective Economic theory underscores that the availability and dissemination of information is required for markets to function properly. While this is a valuable perspective, policy makers are required to take a pragmatic view of the world. Instead of finding ways to fix models with nonoptimal solutions, policy makers are faced with the (often literally) messy world in front of them. If you ask a policy maker the question “What is the problem?” you would not expect to hear, “I believe that the market for 8 R. H. Coase, “The Problem of Social Cost,” the Journal of law and economics 3,(1):1.

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8 standardIZatIon, certIfIcatIon, and laBelIng environmentally benign cleaners is inefficient due to information asymme- tries.” You would be much more likely to hear, “We need to find a way to encourage more production of environmentally friendly cleaning products,” or even, “There’s new information that many cleaning products are bad for people and the environment.” Once policy makers identify the problem, they can formulate an asso- ciated goal. With a goal in place, then they can work to decide what the proper policy approach is to meet that goal. What are some of the policy options available? While some of the problems for which standards, cer- tification and labeling may make sense are cases of information asym- metry, there are other examples where the rationale may be technical interoperability (gasoline additive content, UL, internet protocols), or the need to improve a certain quality (labor standards, environmental impact) that may be difficult to completely address using other policy methods.9 In order to understand when standards are an appropriate step, a whole inventory of other options also needs to be considered. Often, in order to reach a goal, more than one tool has to be employed, since policy prob- lems usually involve complex systems, with many interconnected elements. Table 3 (opposite page) gives more examples of policies in each of the five generic policy types from Table 2. Obviously, there are always more options available to creative policy makers, but this list covers the most commonly used approaches to dealing with policy problems of all types. Policy makers, unlike economists, do not always have the option of spending large amounts of time developing theory. They are problem based, and constantly have to balance the viewpoints of a number of constituents. They have to deal with the competing interests of stakeholders, which can make policy making contentious and confron- tational. The challenge for effective policy makers is learning how to select the proper policy, or combination, and then get them implemented. Policy Trends: Voluntary and Self-Regulation Historically, different types of policies come in and out of vogue. In the 1970s, with the Clean Air Act and the Clean Water Act, rule-based policies on point-source emissions were popular. In the 1990s and 2000s, a variety of market-based regulations, like auctions and the allocation of property rights (in the form of cap and trade systems) were used as new methods for addressing the same problems. 9 Depending on the kind of standard, they may be mandatory (regulated and required by the government, such as certain emissions standards), or they may be voluntary (like USDA Organic). The mandatory versus voluntary nature of standards will be addressed later in this paper.

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8 certIfIaBlY sustaInaBle? TABLE 3 Policy Examplesa Market Nonmarket Insurance and Mechanisms Incentives Rules Supply Cushions Deregulate Output taxes Civil laws (ie Bureaus Mandatory liability rules) Insurance Legalize Tariffs Criminal laws Government Subsidized Corporations Insurance Privatize Matching grants Price Regulation Special Stockpiling Districts Allocate Tax expenditures Quantity Direct Transitional through (business deductions Regulation Contracting Assistance property and credits) rights Create new Commodity taxes/ Direct Indirect Cash grants marketable user fees information Contracting goods provision (nonprofits) (disclosure and labeling) Auctions In-kind subsidies Indirect information provision (registration, certification and licensing)b Vouchers Tax expenditures (personal deductions and credits) a From Weimer and Vining, “Policy Analysis: Concepts and Practice,” Chapter 10. b The standard/certification/labeling policies fall into this category. The recent increase in standards, certification, and labeling is part of a trend towards voluntary rules and self-regulation, as opposed to gov- ernment imposed mandatory rules. This method of regulation, which has also been referred to as “civil regulation,” tends to deal with social and environmental impacts.10 It is closely related to the rise in corporate social 10 D. Vogel, “Private Global Business Regulation,” annual reiew of Political science 11 (2008).

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8 standardIZatIon, certIfIcatIon, and laBelIng responsibility (CSR).11 Firms engage in self-regulation in areas in which other regulation is weak or absent, as well as in areas where strong regula- tory systems are already in place. For example, in the early 1990s, the U.S. EPA ran the 33/50 voluntary reporting program, which was aimed at reducing emissions of a list of 17 key toxic chemicals, all of which were firms were already required to report as part of the Toxics Release Inventory (TRI). Participation began in 1991, and involvement in 33/50 was voluntary on the part of firms, who were invited to participate by the EPA. They committed to publicly self- report on their progress towards reducing a variety of emissions. Firms set their own goals, and while most set specific, numerical targets, a number did not. The EPA did not require any particular reduction goal for par- ticipation, and there were no penalties for those that did not meet their pledges. In the end, participating companies exceeded their reduction goals, and showed greater reductions than companies that did not participate. The EPA’s own goals (33 percent reduction in the first two years, reaching 50 percent by 1995) were met a year early.12 Firms, in fact, voluntarily overcomplied. These seem to be impressive results given that participation was voluntary, and that there were no penalties for firms that were not able to reach their goals. This naturally leads to the question of what is driving the turn towards voluntary regulation. There are a large number of policies that would ben- efit firms. Why is this particular approach gaining in popularity? There are a number of potential explanations. An important aspect is the dynamics that result from globalization.13 Supply chains are spread out across the world. Even a firm that manufactures and sells its products in a single jurisdiction may have to deal with suppliers that are geographically distant, and about whom information may be difficult to verify. Multi- national firms have to come up with strategies that allow them to deal with variety in standards, norms, business practices, laws and regulations in the places where they do business. Table 4 lists some of the challenges addressed by voluntary regulation that occur in global supply chains. While the forces of globalization have been very successful at promoting a more efficient use of resources for production, they have also increased the complexity of the systems, and produced more difficulties with information asymmetries. 11 G. Auld, S. Bernstein, and B. W. Cashore, “The New Corporate Social Responsibility,” annual reiew of enironment and resources 33(1) (2008) defines the new CSR as the internalization of negative externalities that are the result of a firm’s core business by address- ing these issues directly through the promotion of behavioral standards. 12 United States Environmental Protection Agency, “33/50 Program The Final Record,” EPA-745-R-99-004 (1999; accessed Dec. 19, 2008). 13 Vogel, “Private Global Business Regulation.”

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88 certIfIaBlY sustaInaBle? TABLE 4 Challenges to Firms from Globalization Challenges to Firms 1. Credibility of information on the practices of geographically distant business partners 2. Differences in regulatory standards: Labor, Environment, etc. 3. Worldwide visibility of business practices 4. Diversity in customer demands 5. Diversity in acceptable norms for doing business 6. Increased number of stakeholders (i.e., NGOs, governments, consumers) Voluntary regulations, including internal and external standards, are one way for firms to cope with the complexity of a global marketplace. Changes in technology have also resulted in the ability for information to move around the globe very quickly. This means that the bad acts of firms can be publicized globally. A firm that causes environmental damage in one location may find itself facing the displeasure of consumers thousands of miles away. This has increased the power available to consumers, and society more generally, to demand certain levels of behavior from firms. Voluntary regulation has been popular as a way of reducing risk to individual firms in sectors where the negative behaviors of one or two actors could have severe impacts on a multitude of firms. This is seen to be one of the driving forces behind the American Chemistry Council’s require- ment that members participate in the Responsible Care program. After the tragedy at Bhopal, it was clear that in the case of catastrophic chemical accidents, the whole industry would be “tarred with the same brush.” In order to counter negative publicity, and the potential for onerous, restric- tive regulation, it was in the interests of chemical industry firms to develop their own standards for safety and environmental impact.14 Similar con- cerns have driven other industrial trade organizations to set up their own standards in the areas of labor and the environment. Another driver has been the increase in the power and activity of civil society groups.15 Civil society, usually in the form of nongovernmental organizations (NGOs), has been very active in pressuring firms to change their behavior. While one tactic of NGOs has been to influence govern- ments, others have chosen to focus on the private sector.16 For example, when their attempts to pressure national governments to enact forestry standards failed, NGOs turned to the private sector. This change in strategy 14 A. A. King and M. J. Lenox, “Industry Self-Regulation Without Sanctions: The Chemical Industry’s Responsible Care Program,” academy of management Journal 43(4):698-716. 15 Vogel, “Private Global Business Regulation.” 16 Ibid.

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8 standardIZatIon, certIfIcatIon, and laBelIng eventually led to the creation of the Forest Stewardship Council (FSC).17 Pressure from NGOs can create a powerful incentive to engage in vol- untary regulation. Working with NGOs can increase the legitimacy of a firm’s actions; those who ignore them risk becoming the targets of negative campaigns and boycotts. Voluntary regulation is also useful in areas where more traditional regulation would be difficult, or is absent. Setting, monitoring, and enforc- ing mandatory, rule-based regulations can be time consuming and costly, and fraught with bureaucratic challenges. Voluntary regulations move the burden of the rule making and enforcing business away from the govern- ment and onto an array of private, NGO, and academic stakeholders. This makes it attractive in nations that may not have the expertise and funding available for other, traditional methods of regulation Finally, voluntary regulation may also be useful for emerging areas of environmental interest, where government regulation may move much more slowly, or where the organizations in charge of government standard setting are diffuse. For example, standards for green buildings (like LEED) have moved in advance of government in setting building codes and stan- dards. Since in the United States, most building regulation is promulgated, monitored, and enforced on a state and local level, it was far less costly for stakeholders to develop a single, voluntary LEED standard, which was then available for local regulators to use, either as the basis for their own codes, or whole cloth as a part of their own regulatory schemes (such as Boston’s requirement that all new commercial projects over 50,000 square feet size adhere to LEED standards).18 Voluntary regulation: why firms choose to Participate From the example of 33/50 and others, such as Responsible Care and ISO 14000,19 one of the first questions to emerge is why a firm chooses to participate in voluntary regulatory programs. One explanation is that despite the short-term costs of participation, firms are able to reap real economic gains. For more than a decade, scholars have demonstrated that there is a link between superior environmental performance and financial performance.20 Growing out of the empirical evidence, there are a number 17 Ibid., Graeme Auld, Lars H. Gulbrandsen, and Cosntance L. McDermott, “Certifica- tion Schemes and the Impacts on Forests and Forestry,” annual reiew of enironment and resources 33 (2008):187. 18 Palmer, Thomas C., Jr., “Boston ready to go green Private developers face 1st-in-nation rules for buildings,” the Boston globe (2006): D1. 19 ISO 14000 is an international Environmental Management System standard promulgated by the International Standards Organization 20 G. Dowell, S. Hart, and B. Yeung, “Do Corporate Global Environmental Standards Create or Destroy Market Value?” management science 46(8):1059-1074.

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 certIfIaBlY sustaInaBle? workers are present during inspections, even if they usually make up a por- tion of the workforce. That means that methods for sampling and measur- ing have to be developed so that they are able to detect cheaters. Often, a criticism of certification systems is that it’s just too easy for bad behavior to be halted long enough to pass inspections, after which it is resumed. Since constant monitoring is expensive, the challenge is to find the optimum level of monitoring to disincentivize bad actors. Unintended Consequences The next challenge that is addressed in evaluation of certification schemes is whether there are unintended consequences. These can be both positive and negative. The process of creating standards and certification can create and strengthen networks of stakeholders. They can provide a venue for industry and government to work together constructively, instead of adversarially. On the flip side, some certification schemes, like the Forest Stewardship Council, have been controversial enough to encourage the cre- ation of competing certification schemes. Competing certification schemes can be confusing, can make it more difficult to assess impacts, and require an increased use of resources for their operation.35 There can also be other kinds of unintended consequences. In sustainable development, attention has to be paid to the development aspect, not just environmental sustainability. Some of the analyses of cer- tification schemes have rightly brought forward questions of the distribu- tion of costs and benefits, as well as justice and fairness.36 One unintended consequence of certification could be the imposition of costly requirements on entities that have no say in their creation (e.g., producer communities), and because they are nongovernmental, have little or no political recourse. It may be easier for large, multinational firms to only do business with firms or producers that comply with certain standards. The motives behind these decisions may be well-intentioned—certification provides a credible source of information to consumers throughout the supply chain. But it can devalue other methods used to encourage improved environmental impact, such as community regulation, which in some areas could be equally effec- tive at much lower cost.37 35 Auld, Gulbrandsen, and McDermott, “Certification Schemes and the Impacts on Forests and Forestry,” 187. 36 P. Vandergeest, “Certification and Communities: Alternatives for Regulating the Envi- ronmental and Social Impacts of Shrimp Farming,” world deelopment 35(7):1152-1171; J. Guthman, “Back to the land: the paradox of organic food standards,” enironment and Planning a 36, no. 3 (2004):511-528. 37 Vandergeest, “Certification and Communities: Alternatives for Regulating the Environ- mental and Social Impacts of Shrimp Farming,” 35(7):1152-1171.

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 standardIZatIon, certIfIcatIon, and laBelIng For issues on a global scale, often the countries with the ability to par- ticipate and become early adopters are the richer participants. For the FSC, this led to a disproportionate level of certification uptake in areas with tem- poral or boreal forests in the North. In the case of agriculture, certification often favors larger, more technologically advanced farms. It can take several years for a farm to transition to compliance with organic standards—a time frame which can put this valuable certification out of reach for many small farmers. In the case of marine standards, technical requirements for aquaculture may be impossible for small farmers in poorer nations, where many of the standards may not even be the most appropriate way to protect the local environment. But the inability to certify could block many small producers from selling on the world market, with negative economic and development impact.38 The question that needs to be carefully asked as certification progresses is what the consequences, both good and bad, have been. In the case of neg- ative consequences, on balance, are they more problematic than the original problem being addressed? Are there ways that they can be mitigated? And finally, are there other policy options available that could achieve the same result in a less harmful way? These kinds of evaluations are difficult, but are an important consideration in any kind of policy analysis, not just in certification. Competing Standards and Target Audiences One problem that has emerged is that the increase in popularity of vol- untary regulation has led to an increasing number of standards, often in the same or overlapping areas. The Auld et. al paper39 on the FSC gives a good example of a case where there are multiple competing standards. The same phenomenon has developed in fisheries, and also in food and consumer products. There might be very good reasons to have more than one stan- dard in a particular area. But it will impact the effectiveness of both, and can present a challenge. One question that emerges from the proliferation of certifications is whether there is a risk that consumers will get label fatigue. For example, a trip to the grocery store to get eggs can quickly become a complicated exercise. Labels commonly found on eggs in American grocery stores include “Organic,” “cage free,” “certified humane,” “vegetarian fed,” and “all natural” (and all of this in addition to size, color, and omega- 3 added or not). Certification is likely to be less effective if it is undertaken in an area that is already crowded. However, not all certification and label- 38 Ibid. 39 Auld, Gulbrandsen, and McDermott, “Certification Schemes and the Impacts on Forests and Forestry,” 187.

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 certIfIaBlY sustaInaBle? ing is aimed at end consumers. There is also a place for certification within the supply chain—ISO 14000 being one example. So another challenge for effective certification is identifying the best target audience so that the information being provided isn’t quickly crowded out. Sustainability One last challenge that has come to light in the evaluation of certifica- tion schemes is the sustainability of the programs themselves. The groups that come together to form standards and certification schemes can be temporary institutions, or may be more permanent. Responsible Care and ISO 14000 originated in existing organizations (the American Chemistry Council and the International Standards Organization). They are relatively stable institutions, and are likely to persist. They also provide a venue for the continued development of the standard and certification process, as well as for monitoring as needed. On the other hand, other certifications originate from more ad hoc processes. The Forest Stewardship Council and the LEED building standards began as voluntary partnerships between groups of stake- holders that have evolved into structured, permanent arrangements.40 In either case, for the standard and certification to be effective, it requires continual attention. Like other policy institutions, the organiza- tions that create and certify standards need to be able to learn and to adapt. Technical standards need to be adjusted to take into account advances in science and technology. There must be a way to deal with any issues of cred- ibility or legitimacy that arise, as well as negative impacts. And, of course, there has to be a way to adapt to changes in the problem itself. Sustainability of the program is fundamentally impacted by the ability of the institution to bring benefit to participants and society. As soon as the costs of participation outweigh the benefits, it becomes difficult, if not impossible, for participants to continue to certify. Defection will increase if free-riding and “cheap talk” become viable alternatives with relatively low potential penalties. If the certification program undermines sustainability broadly, such as creating severe negative economic impacts in less developed areas, it will be difficult to maintain. And if it is captured (or perceived to be) by a set of strong interests, the effectiveness and long-term sustainability could suffer. Finding the Good-Enough All of these challenges are important to keep in mind in the development and execution of any certification effort. Certification is difficult, and there 40The dynamics of these partnership institutions was examined in some depth at a recent NAS Roundtable on Sustainability Workshop.

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 standardIZatIon, certIfIcatIon, and laBelIng are many ways that any effort could fall short. There are other methods that may be faster, less expensive, or more effective. Certainly, policy makers and stakeholders need to take this into account when choosing between policy options. But as the saying goes, “the best is the enemy of the good.” In other words, certification, for all of its pitfalls, may be the best option available. And it’s also important to remember that however popular, vol- untary regulation does not have to be undertaken in the absence of more conventional regulatory approaches. The study showing that ISO 14000 participants had better environmental performance than nonparticipants was conducted in the United States, where all of the firms in the study are subject to emissions limits and other regulations stemming from, among other things, the Clean Air Act. Looking back at why firms choose to par- ticipate, the anticipation of stricter regulation can have a large influence. Regulatory “floors” provide both a base level of environmental protection, and also help create incentives for firms and government to engage in higher levels of compliance. Marine Stewardship Council certifications may be an important tool to help manage fisheries sustainably, but they are not a replacement for international fisheries agreements. Rarely is any one policy tool perfect on its own. Choosing to engage in voluntary regulation, like standardization and certification, may not be a silver bullet—but it may be an effective part of a well-thought out set of policy approaches. POLICy IN ACTION—CHOOSING AND CREATING SySTEMS OF STANDARDS, CERTIFICATION, AND LABELING Once a group of stakeholders decides to move forward with standard- ization, certification, and labeling, with an understanding of its strengths and its challenges, they confront the difficult task of actually creating and implementing an effective system. From a practical standpoint, what are the steps in the process and the considerations that need to be taken? Who should be involved? How much attention needs to be placed on the process of development, not just on the actual content and requirements? These are messy challenges, and from the empirical literature, there are examples of many ways for this to be done—and it usually involves a certain amount of trial and error. Institutions and Process The first question to be addressed is who needs to be “at the table,” and at what point in the process? Problems of sustainability involve large numbers of diverse stakeholders, who in many cases are geographically separated, and who may not even recognize their involvement in a certain issue. NGOs often take on the task representing groups in society that

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8 certIfIaBlY sustaInaBle? might otherwise be left out of decision making. But even the decision of who participates in setting initial goals can be contentious. How much of a say do NGOs get? Governments? Industry? Are underlying issues of justice and fairness taken into consideration?41 There are cases that show that process matters a great deal in the eventual acceptance and effectiveness of a standard.42 One helpful way to conceptualize the groups that come together to create standards, certification, and labeling regimes is to think of them as an example of a boundary organization that bridges the gap between envi- ronmental knowledge and the actual behaviors of firms and consumers. If standard-setting groups are boundary spanners, then, like other boundary organizations, they can be guided by work that has shown that to be effec- tive, they must ensure three factors: salience, legitimacy, and credibility.43 There is a whole literature on institutions and organizations that addresses how to work out processes and procedures for cases such as these, and while outside of the scope of this paper, it should be taken into account. The example of the Forest Stewardship Council shows that participants and structure matter—criticism of the ability of NGO and environmental interests to outvote economic ones led to the development of competing regimes.44 Goals This institutional step precedes even a formal statement of goals, although there is obviously a shared conception of a specific problem that brings participants together. Goal setting itself can be difficult. This is where the theory gives way to the messiness of the real world. At their best, a system of standardization, certification, and labeling is based on credible scientific and technical knowledge, and is designed in such a way that the results of the program effectively address the problem at hand. This is com- plicated by the fact that different stakeholders have different conceptions of the exact nature of the problem, have very different interests, and there may be significant differences in desired goals that will need to be negotiated. Still, standards need to have an underlying goal, and for the entire system to be ultimately successful, that goal should be something that is 41 Vandergeest, “Certification and Communities: Alternatives for Regulating the Environ- mental and Social Impacts of Shrimp Farming,” 35(7):1152-1171. 42 Auld, Gulbrandsen, and McDermott, “Certification Schemes and the Impacts on Forests and Forestry,” 187. 43 D. W. Cash et al., “Knowledge systems for sustainable development,” Proceedings of the national academy of sciences 100(4):8086-8091. 44 Auld, Gulbrandsen, and McDermott, “Certification Schemes and the Impacts on Forests and Forestry,” 187.

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 standardIZatIon, certIfIcatIon, and laBelIng eventually quantifiable and measurable, with appropriate metrics attached. At the same time, a properly constructed goal avoids the “ends-means” problem. The metrics have to be kept separate from the goal as such. For example, what is the goal of a global climate agreement that stabilizes atmospheric CO2 at 550 ppm? Counterintuitively, it is not to cap atmo- spheric CO2 at 550 ppm. The goal is stabilize atmospheric CO2 at a level where science tells us that the probable impacts will be within a range that we, as a society, will be able to accept—and not to push our environment to a point where we are likely to be faced with catastrophe. Standards Once a goal has been agreed upon, the next step is to work out stan- dards. This is when knowledge becomes important. Standards have to be salient, and they have to be credible. Salience means that each element of the standard must relate back to the goal. It makes no sense to require practices that have no impact on the underlying goal. The standards must be credible in that they can be believably observed, measured (if appropri- ate), and reported upon. Standards should also be flexible, so that they can incorporate new knowledge or changed goals. Sustainability is continuous, and a standard that is unchanging could quickly become out of date. For example, the LEED standard has gone through multiple versions to reflect improvements in available technology, and specialization to address the issues specific to different types of buildings (hospitals, schools, houses, commercial spaces, etc.). Flexibility and adaptability ensures long-term salience. Standards, like goals can be highly contentious. There are no direct costs associated with goals—there are costs associated with the actual per- formance standards that get attached to a goal. So, unsurprisingly, the best standards need to include not just scientific and technical knowledge, but also economic, financial, and management understanding. Standard setting is a multidisciplinary process. Certification Once standards are in place, the next step is to outline the process for certification. There are several directions that this can take. There are examples, like 33/50 and Responsible Care, where firms or industrial trade groups self-certify. While this can produce questions about credibility, there is evidence that these programs have been effective. Another option is third-party certification and auditing. This is the method used by FSC,

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00 certIfIaBlY sustaInaBle? LEED, Fair Trade,45 USDA Organic and many others. Regardless of who does the certifying, the certification process needs to be developed in a way that discourages cheating. Methods of measurement, sampling, inspection, verification, and monitoring that not only reward good behavior, but also detect the bad need to be in place. This is another place where a combi- nation of disciplines—including environmental science, industry specific technological knowledge, and statistics need to be employed. Certification is not just a one-time interaction between auditor and auditee. There is a continuous relationship. Certification is also the stage in the process where sanctions and pen- alties can take place. One obvious penalty is to deny or revoke certifica- tion and any attendant benefits (like rights to use a related label). There might also be probationary policies, if firms fall short, to give them a chance to regain compliance. One of the challenges to certification is that unlike with mandatory government regulation, there are relatively few punishments available, beyond revocation and the reputational impacts. But since reputation and market pressure are both important reasons why a firm chooses to engage in voluntary regulation, done properly, they can be effective at discouraging cheating and ensuring compliance over the long term. Labeling After certification, the last step is labeling, which has been discussed the least, but is usually the most visible part of the entire process. Labels need to be legitimate—consumers who base market decisions on the presence of a label need to be able to access information about the underlying certifi- cation and standards. They have to believe that the label is real, and that it isn’t just empty marketing. There are several kinds of labeling strategies that can be used, depending on the target audience. The most familiar labels for most people are ones that are on consumer goods. These are many examples: certified organic, free trade, marine stewardship council, Energy Star, EPA Design for the Environment, etc. They are usually straightforward—a product either has the label or it does not, or in some cases (like LEED), there may be several levels of certification. There is evidence that consumers do not pay attention to large amounts of information. Studies have shown that detailed nutritional labeling does very little to change consumer behavior.46 There is, however, 45 http://www.fairtrade.net/. 46 G. Cowburn and L. Stockley, “Consumer understanding and use of nutrition labelling: a systematic review,” Public health nutrition 8(1):21-28.

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0 standardIZatIon, certIfIcatIon, and laBelIng preliminary evidence that very simple nutritional information (on a five-star scale) can impact buying patterns.47 Not all labeling is aimed at consumers. Labeling is a useful tool within the supply chain. Firms may only consider ISO 14000 certified suppliers, large food buyers have begun to insist on certified fish. These purchasers are more likely to be capable of digesting more detailed information—they may in fact find it desirable. Within the supply chain, simple certification can be useful, but there is also a place for score cards, like the Material Data Safety (MDS) sheets required for chemicals, which help users of chemicals understand the different hazards associated with the chemi- cals that they purchase. And since every firm has its own internal set of requirements, goals, and standards, there could be value for them in certification programs whose output is more detailed than a single stamp of approval. The most appropriate form for the label needs to take into account the target audience, the product being labeled, and the most effective ways to display the information (largely a question of marketing). In all instances, the label needs to relate back to readily available information on the under- lying goals and institutions. Labels, after all, are a kind of branding. As the number of labels grows, there is competition between them, and issues of credibility, legitimacy and saliency become more important, as does trans- parency and availability of information. This entire process is iterative. Standards, certification methods, and labels all change over time, in response to the demands of stakeholders. Sometimes they exist for a limited time, like 33/50, until a specific goal is achieved. In other cases, they persist. The empirical case studies show that progress can be slow. Fifteen years in, FSC and related certifications are still working to increase the level of uptake, and their impact on markets and on forest conservation.48 questions and Areas for Future Research Certification is still a relatively new policy tool, and its impacts have not always been easy to quantify. There is a need to develop more case studies in areas of concern to sustainable development, and to improve our understanding of how and when they are effective. Some interesting ques- tions not addressed in this paper, but worthy of consideration include: 47 Andrew Martin, “Store Chain’s Test Concludes That Nutrition Sells,” the new York times C; Business/Financial Desk (2007):3. 48 Auld, Gulbrandsen, and McDermott, “Certification Schemes and the Impacts on Forests and Forestry,” 187.

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0 certIfIaBlY sustaInaBle? • Is there a role for an international environmental standards and certification body, especially to deal with their scientific and technical aspects? • What are the incentives for third-party certifiers? Should this be a private market or a public function? • What is the impact of other regulations (antitrust, WTO, intel- lectual property, and other health, safety and environmental regulation) on the effectiveness of certification? • How does certification and labeling differ when it is truly volun- tary, as opposed to when it is government mandated? • Do certification schemes help prevent the environmental “race to the bottom” by multinational firms? • Is certification effective in areas with lax environmental regulation, and could it be particularly important in these regions? • How does certification impact innovation? Are there issues of tech- nological lock-in and path dependency? • Are there certain types of supporting policies that increase the effectiveness of certification systems? There are many more, and this is an area that would benefit from both serious multidisciplinary scholarship, as well as the wisdom in the busi- ness world from the firms and managers that have been dealing with these programs for years. CONCLUSIONS Voluntary regulations have emerged in recent years as a popular way to address environmental problems. In particular, standards, certification and labeling are popular, market-based mechanisms that aim to use the provision of otherwise difficult to obtain information in order to create a market for more environmentally favorable products. The popularity of this method is well supported by the economic and policy theory literatures. Empirical experience has shown that while some programs have been suc- cessful, there are many challenges in creating effective certification systems. Like any policy tool, they need to be considered along with other policy options. In cases where certification systems are used, they need to be designed with care. First, they must address a clear goal, to which the standard, the certification process, and the labels can be clearly linked. Secondly, pro- cess, not just the end product, matters. Inclusion of stakeholders, and the institutional arrangements used in the decision making process can have long-lasting impacts on the eventual acceptance and uptake of a standard. Standards need to be based on a solid knowledge base—they must be salient

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0 standardIZatIon, certIfIcatIon, and laBelIng to the goal, and the underlying knowledge should be credible. Similarly, the certification process must also be credible—it must be able to measure compliance and catch cheating. It must also be seen as legitimate, and free from capture or corruption. And finally, labels must also be credible, relate to the underlying goal, and be effectively targeted and branded. The entire process, at the end, should be able to relate otherwise unknown informa- tion to the consumers, in order to influence their purchasing decisions and create a market for the labeled products. More research is needed on the best ways to design and implement these systems, and also about their effectiveness vis à vis other policy tools. They are not silver bullets, but neither should they be dismissed out of hand. There is a real need for ways to effectively convey otherwise invis- ible information about the environmental impact of products throughout the supply chain, so that markets, and individual consumers can make informed choices. This is one method which has already been shown to be effective in certain cases, and it deserves more examination from a variety of disciplinary perspectives. REFERENCES Akerlof, G. A. 1970. The Market for ‘Lemons’: Quality Uncertainty and the Market Mecha- nism. The Quarterly Journal of Economics 84(3):488-500. Arora, S., and S. Gangopadhyay. 1995. Toward a Theoretical Model of Voluntary Over- compliance. Journal of Economic Behavior & Organization 28(3):289-309. Auld, G., S. Bernstein, and B. W. Cashore. 2008. The New Corporate Social Responsibility. Annual Review of Environment and Resources 33(1):413-435. Auld, Graeme, Lars H. Gulbrandsen, and Cosntance L. McDermott. 2008. Certification Schemes and the Impacts on Forests and Forestry. Annual Review of Environment and Resources 33:187-211. Cash, D. W., W. C. Clark, F. Alcock, N. M. Dickson, N. Eckley, D. H. Guston, J. Jager, and R. B. Mitchell. 2003. Knowledge Systems for Sustainable Development. Proceedings of the National Academy of Sciences 100(14):8086-8091. Coase, R. H. 1960. The Problem of Social Cost. The Journal of Law and Economics 3 (1): 1. Cowburn, G., and L. Stockley. 2007. Consumer Understanding and use of Nutrition Labelling: A Systematic Review. Public Health Nutrition 8(01):21-28. Dowell, G., S. Hart, and B. Yeung. 2000. Do Corporate Global Environmental Standards Create Or Destroy Market Value? Management Science 46(8):1059-1074. Feder, Barnaby J. 2004. Environmentally Conscious Development, the new York times, August 25. Guthman, J. 2004. Back to the Land: The Paradox of Organic Food Standards. Environment and Planning a 36(3):511-528. King, A. A., and M. J. Lenox. 2000. Industry Self-Regulation without Sanctions: The Chemical Industry’s Responsible Care Program. Academy of Management Journal 43(4):698-716. King, A. A., M. J. Lenox, and A. Terlaak. 2005. The Strategic use of Decentralized Institu- tions: Exploring Certification with the ISO 14001 Management Standard. The Academy of Management Journal 48(6):1091-106.

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