Bridges Trade BioRes Review • Volume 3 • Number 1 • June 2009

Carbon labelling: Moral, economic and legal implications in a world trade environment

by Olga Nartova

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Carbon labelling is the latest in an ever-growing trend of buzz concepts within the environmentalist community. The concept came into being in the United Kingdom in 2007 as an act by the Carbon Trust, in association with the British Standards Institute. Simply stated, carbon labelling strives to emblazon a product with a visible representation of the quantity of carbon emissions generated by the creation of that product and delivering it to consumers. The primary focus of carbon labelling is frequently the issue of air miles- the process of freighting products by airplane is extremely carbon intensive, more so than any other method of transportation. However, it has frequently been challenged that other factors should be given proper weight in identifying a product’s true carbon footprint value, including manufacturing standards, storage practices, and even the tiniest details involved with the stores that sell the products, right down to their electricity consumption and the number of miles customers must drive to purchase the product. Also raising controversy is the way in which carbon labelling is used within the global economy. Is it merely to raise environmental consciousness, or are there ulterior motives involved to inhibit international trade and further the interests of the countries imposing the labels? These are all questions this study will strive to examine from different perspectives.

A green point of view: the consumer perspective

‘Carbon Footprint’ is a term used to describe an estimate of the amount of harmful environmental emissions created by a person, organisation or process. At present there is no precise method of how to measure or determine an exact value for this figure, though 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. Scientifically there is no consensus on how to measure or quantify a carbon footprint.

In the view of the average consumer, a carbon footprint is determined by everyday activities. And while academia can argue over the exact phrasing behind determining a carbon footprint, the average consumer needs a much simpler definition. Carbon labelling programs are currently in use in a number of markets. A variety of high profile companies worldwide have instituted both carbon labelling and carbon disclosure policies on their products, but none of these companies use any standardised method of reporting carbon values. 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 that were produced within their communities. This has given rise to the term ‘localvore’ for those that only consume locally produced goods. The carrying purpose behind these movements is to limit the distance travelled by products, thereby reducing the carbon value generated by mass transport by air, sea, and land freight. Such groups typically include farmers’ cooperatives which have seen strong growth throughout Europe and North America. Within the United States, farmers markets have expanded from an estimated 1,755 in 1995 to 4,385 in 2006, according to the USDA’s Agricultural Marketing Service. Supporters argue that restricting consumption to local goods is healthier in addition to being more environmentally aware, as such goods require far fewer chemical preservatives to maintain freshness. The movement also encourages consumption of only in-season fruits and vegetables, as those 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, as social, economic and environmental issues abound.

Labelling standards and flaws

The first of many questions posed to the application of carbon labelling is the significance of ‘food miles’, which is the primary form of labelling currently in place in today’s supermarkets. Food miles labels rely strictly on the distance travelled by a product to determine its carbon value - the further a food item travels, the more it contributes to climate change through negative emissions. Today, food travels an average of 1,500 to 2,000 miles (2,400 to 3,200 km) before reaching the consumer - 25 percent farther than in 1980. Some environmentalists consider this growth in overseas food trade to be a significant contributor to the increase in environmental pollution emissions seen since then.

Unfortunately, using this view of food miles immediately raises questions related to issues, such as transportation methods used to deliver these products to market. Air freight is inarguably the most carbon-intensive method of transport, producing nearly three times the amount of emissions of ground transport by large truck. Sea transport, the method used to transport many types of agricultural products, is actually believed to be more efficient than trucking; this, in many cases would give products produced abroad and transported by ship a carbon advantage over nationally produced goods transported by truck. Based largely on these discrepancies, studies of total carbon footprint involved in food production within the US have largely found food miles to be an insignificant part of the equation. Such studies give far higher importance to emissions resulting from the methods of production used, including pesticides and fertilisers, and energy sources consumed by farm and processing equipment.

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 key 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 seems difficult to make meaningful comparison between products produced locally and abroad.

WTO perspective on 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. For example, how much carbon was produced generating the electricity used to manufacture the product, or to transport it by ship or plane to the country of sale. The applicability of the Technical Barriers to Trade (TBT) Agreement to NPR-PPMs is one of the principal uncertainties regarding the application of the TBT Agreement to carbon standards and labelling schemes. The applicability of the Agreement is also the primary question for the WTO to ultimately answer as labelling programs become more prevalent in today’s markets.

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 within any market and they can provide simple, straightforward information or be of a ‘comparative’ type, providing consumers with easily processed benchmarks by which to gauge the product’s environmental impact. In the case of a simple label, they frequently report how much energy a product uses. Comparative labels also compare that to the energy used by competing products providing an equivalent service level. Experience has shown that simple information labels have significantly less impact on consumer decisions than more detailed comparative labels, and therefore comparative labelling is a much more useful system.

Issues with the WTO begin to arise, however, with the question of whether or not such labels can be applied to imported goods, or merely domestic ones. 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 environmentally conscious 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, and so there is a strong argument that trade regimes should not focus on discouraging or prohibiting such measures as non-tariff barriers to trade.

The key principle of trade law concerning the WTO on the subject of carbon labelling is non-discrimination: goods imported from foreign producers must get no worse treatment than like goods from domestic producers, and there must be no discrimination between similar goods produced in one foreign country than from any other foreign country. 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 conscious farming methods ‘like’ a pound of bananas produced using more polluting means? If so, then 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 merely associated with a product, process or production method? The scope of the TBT Agreement will ultimately depend on the Organization’s interpretation of the term ‘related’.

It remains to be asked whether or not applying such labels has any effect on import 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 TBT 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 must satisfy non-discrimination laws by proving that such labelling of imports does not put them at an unfair market disadvantage to domestic products.

Legal impact on developing economies

Evidence garnered from studies of developing economies shows that international trade promotes economic growth. However, if standards for carbon emissions were formally adopted within the WTO, the cost of complying with standards would likely be borne by the developing member country producers themselves, with no guarantee of the benefits they will reap in return. If the standards are a requirement for producers wishing to export to a certain market, and if the costs are too high, they can be excluded from the market altogether, which could jeopardise their livelihoods. This conclusion with inevitably violate the Organization’s non-discriminatory policy.

The concept of embodied carbon, as relates to the entire life-cycle of a product intended for export to international markets also is important in the discussion of competiveness issues, when applied to developed and non-struggling countries if it is not applied universally to all member nations. Those 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 as a result. 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 this additional set of variables would have on the principles of fair and balanced trade between member countries is yet another consideration within the wide-spread effects of carbon labelling on the global community.

Conclusions

The issue of 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 having difficulty reaching a consensus on how to manage the complex relationship between trade law 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 proliferation of 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 after all for current WTO policies to bend enough to encompass a globally accepted scheme for carbon labelling.

Olga Nartova is a Research Fellow in Trade Regulation at the National Centres of Competence in Research.

Box 1 - Terminology

Life-cycle analysis: A production-based assessment which includes systematic evaluation of all environmental effects involved in creation of a product or service system through all stages of its life-cycle. This includes acquisition and refining of raw materials, manufacture, transport, distribution, use, maintenance, recycling and final end-life disposal.

Ecological footprint analysis: Judges consumption of resources by estimating the area of productive land and water systems in relation to how much of these resources are available to a given population.

Hybrid life-cycle analysis: An input-output study of individual products which includes on-site study of production facilities in order to determine embodied carbon values.

Box 2

Recent studies analysing imports from African countries to European markets show that despite having greater ‘food miles’, they are ultimately lower in carbon impact than like products produced in European markets. World Flowers, an English importer of cut flowers for decorative bouquets, participated in such a study which concluded that the global warming potential over the next twenty years would be 6.4 times higher from roses grown in Dutch greenhouses than from roses grown on the equator in Kenya and flown to the United Kingdom. The study based these findings on the fact that naturally grown flowers, such as those imported from Africa, resulted in far less carbon emissions than those grown in the artificial surroundings required to produce similar flowers in the colder European climate of the Netherlands.

References

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Arthur E. Appleton (2009) Private climate change standards and labelling schemes under the WTO Agreement on Technical Barriers to Trade.(Chapter 7), In: Thomas Cottier, Olga Nartova and Sadeq Z. Bigdeli (eds). International Trade Regulation and the Mitigation of Climate Change (Cambridge: Cambridge University Press).