19. Carbon Labelling: Moral, Economic and Legal Implications

7 September 2009

A ‘carbon footprint' refers to an estimate of the amount of greenhouse gas emissions created by a person, organisation or process. But do labels related to this criterium just intend to raise environmental awareness, or are they mainly geared to furthering the interests of domestic producers?

At present, there is no scientific consensus on how to measure or quantify the an exact value of a carbon footprint, although numerous approaches have been proposed to provide rough estimates for personal use, ranging from basic online calculators to sophisticated analysis or input-output-based methods and tools.

The Consumer Perspective

While academia can argue over the exact phrasing for determining a carbon footprint, the average consumer associates the term with everyday activities. In response, a number of high-profile companies worldwide have instituted both carbon-labelling and carbon-disclosure policies on their products, but the methods of reporting carbon values vary widely. Some, like Home Depot, use a simple estimate provided by their suppliers, while others, such as Wal-Mart, use more advanced methods that take into account ‘embodied carbon'.

The largest effect of these new labelling initiatives has been to spur ‘local food' initiatives, encouraging consumers to buy only goods produced within their communities. The purpose behind this movement is to limit the distance travelled by products, thereby reducing the carbon value generated by mass transport by air, sea and land freight. Groups promoting this approach typically include farmers' co-operatives, which have seen strong growth throughout Europe and North America.

According to the US Department of Agriculture, farmers' markets within the United States expanded from an estimated 1,755 in 1995 to 4,385 in 2006. In addition to being more environmentally friendly, supporters argue that restricting consumption to local goods is healthier since such goods require far fewer chemical preservatives to maintain freshness. The movement also encourages consumption of only in-season fruits and vegetables as products not in season must be grown in warmer climates and imported. These movements have become a major point for controversy when it comes to local versus global foods. Social, economic and environmental issues abound.

Labelling Standards and Flaws

The first of the many questions generated by carbon labelling is the significance of ‘food miles', which is the primary form of labelling currently used by supermarkets. Food-mile labels rely strictly on the distance travelled by a product to determine its carbon value; the further the item travels, the more it contributes to greenhouse gas emissions. Today, food travels an average of 1,500 to 2,000 miles (2,400 to 3,200 km) before reaching the consumer - a 25-percent increase from 1980. Some environmentalists consider this growth in overseas food trade to be a significant contributor to the surge of greenhouse gas  emissions seen since then.

Unfortunately, this view of food miles immediately raises questions related to the transportation methods used to deliver products to market. Air freight is unarguably the most carbon-intensive mode of transport, producing nearly three times the amount of emissions of ground transport by large trucks. Shipping by sea, the method used to transport many types of agricultural products, is actually believed to be more efficient than trucking. In many cases, goods produced abroad and transported by ship may give a ‘carbon advantage' over home-grown products delivered by trucks. Based on discrepancies such as these, studies of the total carbon footprint involved in food production within the US have largely found food miles to be an insignificant part of the equation. They accord far higher importance to emissions resulting from production methods, including pesticide and fertiliser use, and the amount of energy consumed by farm and processing equipment.

Such studies have resulted in a number of carbon emission assessment methods that examine the entire production process associated with a product, rather than merely how far it has travelled. These  techniques include life-cycle analysis, carbon footprint identification and hybrid life-cycle analysis. Until a method of analysing the amount of carbon emissions created through the entire life-cycle of a product is more widely accepted and applied, it will remain difficult to make meaningful comparisons between products produced locally and abroad (see box on page 18).

WTO and Product Labelling

In the context of carbon labelling, the term ‘non-product-related processes and production methods' (NPR-PPMs) refers to carbon emissions associated with a product's production or transport that are indiscernible in the final product, including how much carbon was emitted to generate the electricity used to manufacture the product, or to transport it by ship or plane to the country of sale. The applicability of the Agreement on Technical Barriers to Trade (TBT) to non-product-related PPMs is one of the principal uncertainties regarding the application of the TBT Agreement to carbon standards and labelling schemes.

For many energy-using products, the energy cost over the lifetime of the product is of a similar, or greater, magnitude to the cost of producing the product in the first place. This is a very important factor in the economic consideration of a product's carbon efficiency. In the absence of carbon performance labelling, manufacturers have little commercial incentive to minimise a product's energy consumption. Prior to the introduction of energy labelling in the EU, the least efficient refrigerators on the market used eight times more energy than the most efficient models to provide the same cooling service, and lifetime in-use energy costs exceeded the purchase price several times over.

Such labelling systems can be voluntary or mandatory, and they can provide simple, straightforward information or be of a ‘comparative' type, providing consumers with easily processed benchmarks by which to gauge a product's environmental impact. Simple labels usually report how much energy a product uses, while comparative labels also show the amount of energy used by competing products that provide an equivalent service level. Experience has revealed that ‘simple' labels have significantly less impact on consumer decisions than more detailed comparative labels, which makes the latter a much more useful way of changing consumer behaviour.

Issues related to global trade rules begin to arise with the question of whether such labels can be applied to imported goods. Efficiency standards and labels are reported to be the single largest cause of national notifications to the WTO under the TBT Agreement. Given their importance in stimulating highly cost-effective energy and emissions savings, this is likely to continue as governments worldwide continue to step up their environmental efforts. Whatever costs these regulations imply for industry and trade, it can be argued that they are generally less than the value of the energy savings they foster. A  strong argument can thus be made that trade regimes should not focus on discouraging or prohibiting such measures as non-tariff barriers to trade.

The key principle of WTO law with regard to carbon labelling is non-discrimination: goods imported from foreign producers must get no worse treatment than like goods from domestic producers. This raises the question of whether or not the application of carbon labels to products provides them with any commercial advantage or disadvantage. With respect to discrimination on the basis of embodied carbon, the million-dollar question is how to define ‘like' goods. Is a pound of bananas grown using environmentally friendly farming methods ‘like' a pound of bananas produced using more polluting means? If so, tariffs based on embodied carbon may violate the principle of non-discrimination as set forth by the WTO. This interpretation of similar products depends on the meaning that one ascribes to the word ‘related'. Does ‘related' mean product-related (detectable in the final product)? Or does ‘related' have a broader meaning, such as being associated with a product, process or production method? The scope of the TBT Agreement will ultimately depend on the WTO's interpretation of the term ‘related'.

Finally, do carbon labels have any effect on imported versus domestic sales within the current market? A WTO panel faced with a technical regulation or standard applicable to carbon emissions is likely to turn first to the TBT Agreement. The agreement differentiates between technical regulations (mandatory measures) and standards (voluntary measures) and sets forth rules applicable to both, which would apply to the subject of carbon labelling (Appleton). Mandatory application of carbon labelling would therefore have to be applied equally to imports and domestic goods, and should satisfy non-discrimination provisions by proving that the labelling of imports does not put them at an unfair disadvantage vis-à-vis domestic products.

Competitiveness Concerns

If standards for carbon emissions were formally adopted by the WTO, the cost of complying with them would likely be borne by the producers themselves, with no guarantee of the benefits they would reap in return. If the standards were required for all imports into a certain market, and if the costs were too high, developing country exporters might be excluded from the market altogether, which could jeopardise their livelihoods.

The concept of embodied carbon, as it relates to the entire life-cycle of a product intended for export to international markets, is also important in the discussion of competiveness issues. Countries implementing emissions reduction policies will have to compete with exports from countries without mandatory emissions reductions, where costs of production, and therefore cost of the finished product, may be lower. It has also been suggested that opening the door to the regulation of NPR-PPMs in internationally traded products, as related to carbon emissions, could open the door for trade discrimination based on other non-product-related criteria, including labour and human rights practices (Appleton). The impact that this additional set of variables would have on the principles of fair and balanced trade between WTO Members is yet another consideration within the possible effects of carbon labelling on the global community.

Conclusions

Reducing carbon emissions is a global conundrum, both economically and politically. Environmental issues challenge fundamental notions of state sovereignty and jurisdiction, due in part to their cross-border implications. WTO Members are facing difficulties in reaching consensus on how to manage the complex relationship between trade rules and international environmental law, in particular with respect to the extent that trade measures can be used to encourage changes in foreign production practices (Appleton). Yet, there must be some middle-ground to be discovered where environmental concerns can be addressed while maintaining the principle o`f free trade. Article 2.2 of the TBT Agreement requires that technical regulations not create ‘unnecessary' obstacles to international trade. Certain legitimate objectives are identified, including protection of human, animal or plant life or health, or the environment. These provisions are sufficiently broad to encompass carbon labelling schemes, as the underlying purpose is to preserve the environment for continued human, plant and animal use. Perhaps, then, there is room for current WTO disciplines to bend enough to encompass a globally accepted scheme for carbon labelling.

Olga Nartova is a Research Fellow NCCRTrade Regulation at the Swiss National Centres of Competence in Research in Bern.

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