Jump to main content.

Environmental Labeling of Electricity: Label Design and Performance

Quick Links

Research Funding

Metadata


Objectives/Hypotheses: The objectives are to: 1) identify the types of environmental information that consumers will find useful when choosing among deregulated electricity products, 2) understand how different modes of disclosure affect consumers' ability to comprehend and utilize this information, 3) compare the effect of environmental certification (Type I labeling) and disclosure (Type III labeling) on consumers' perceptions of a product's environmental impact, and 4) understand how these preferences and label performance characteristics differ across consumers.

Approach: The research uses various statistical techniques to analyze survey data collected by the Department of Energy to measure the effects of providing environmental information on electricity purchase behavior. Survey respondents viewed different electricity labels and performed a series of experiments that were designed to measure the respondents' ability to use labels to judge the overall environmental quality of the product, and to verify the truthfulness of environmental claims made on the product.

Expected Results: The research will provide data regarding the type of environmental information sought by consumers and how to display the information to facilitate comparisons of products along their environmental attributes. The results would also provide some non-label-related insights. (e.g., how consumers substitute across price, fuel mix and emissions characteristics). Results will be differentiated across socioeconomic characteristics; providing important information regarding the success of environmental labeling programs across socioeconomic groups.

The research supports two of EPA's decision needs under Project Code 98-NCERQA-J5. The research: 1) advances the understanding of how perceptions of environmental problems and solutions differ across individuals, and 2) examines how the means of communicating information influence attitudes toward environmental problems and solutions. Further, the research supports current NSF initiatives to: 1) increase the understanding of information processing and decision-making by individuals, and 2) improve approaches to providing information for decision-making.

Improvements in Risk Management: From a policy perspective, one aim of eco-labeling is to educate consumers about the environmental impacts of product consumption, thereby leading to changes in purchasing behavior, and ultimately, achieving an environmentally preferred outcome. However, whether customer choice of electricity will lead to cleaner generating sources is an open question. This is of particular concern to policy makers because sulfur dioxide (SO2), nitrogen oxides (NOx) and carbon dioxide (CO2) are all key contributors to a number of air pollution problems (e.g., acid rain and global climate change). In addition, electricity generation creates about two- thirds of all SO2 emissions in the U.S., and about one-third of all NOx and CO2 emissions The success of an environmental labeling program is contingent on consumers finding the label information relevant, credible and easy to understand. The investigator believes that the research results will help develop such labels.

Metadata

EPA/NSF ID:
R826618
Principal Investigators:
Teisl, Mario F.
Technical Liaison:
Research Organization:
Maine, University of
Funding Agency/Program:
EPA/ORD/Valuation
Grant Year:
1998
Project Period:
September 1, 1998 to August 31, 2000
Cost to Funding Agency:
$72,573
Project Status Reports:
For the Year 1999

Objective: The objectives are to: (1) identify the types of environmental information that consumers will find useful when choosing among deregulated electricity products; (2) understand how different modes of disclosure affect consumers' ability to comprehend and utilize this information; (3) compare the effect of environmental certification (Type I labeling) and disclosure (Type III labeling) on consumers' perceptions of a product's environmental impact; and (4) understand how these preferences and label performance characteristics differ among consumers.

Progress Summary: During the first year of the project, we used experimental data to test the relative effectiveness of different environmental labeling programs on consumers' choices and rankings of electricity suppliers. Specifically, we compared the relative effectiveness of Type I and Type III environmental labels. The relative effectiveness of Type III environmental labels under mandatory and voluntary labeling regimes also were compared. A detailed analysis of consumer reactions to Type I labels was performed by examining the effectiveness of the label across socio-demographic groups. Finally, conjoint analysis was used to elicit consumer preferences for electricity products that vary in terms of their environmental characteristics; this analysis was also differentiated across types of consumers.

The results indicate that, in general, Type I environmental labels did not significantly alter consumer choice or ranking of electricity products. In contrast, more detailed Type III environmental labels altered both choice and rankings. Furthermore, the effect of the detailed environmental label was dependent on whether it was a mandatory or voluntary label and on the type of other information available to the individual.

The potential effect of a Type I environmental label varied significantly across individuals with different levels of education or environmental involvement. Further, the effect of the Type I label seems to depend on the type of other information available to the individual. The label did not significantly affect products that were primarily marketed as using high levels of renewable resources; whereas the seal did affect the rankings of low emissions or low price products.

Finally, the results suggest that consumers are willing to pay a premium for electricity services that feature lower ambient air emissions, and that this willingness to pay differs significantly across consumers. In general, consumers seem more concerned with the overall cleanliness of electricity, measured in terms of reduced air emissions, rather than the fuels used in electricity production. Although less important to some, fuel mix does influence the choices of some consumers. Some consumers are willing to pay more for renewable content if it replaces the fossil fuels. These differences in preferences across consumers seem to indicate that electricity choice may not necessarily lead to the demise of fossil-based electricity, especially if technologies are placed in fossil-fueled plants to make their emissions profile comparable to nonfossil fueled plants.

Future Activities: These experimental data are expected to be used to test the: (1) effect of explanation/education about the certification on respondent rating and intention to purchase; (2) effect of energy efficiency offerings on respondents' ratings and purchase intentions; (3) effect of adding/deleting different items of the label on respondent ratings/purchase intent; and (4) sensitivity of labeling's effect to the degree that product claims align with product attributes.

Journal Articles:

Teisl MF, Roe B, Levy AS, Russell M. Consumer preferences for environmentally preferred electricity. Resource and Energy Economics.

Teisl MF, Roe B, Levy AS. Eco-certification: why it may not be a "field of dreams." American Journal of Agricultural Economics.

Presentation:

Teisl MF, Roe B, Rong H, Levy AS. Comparing eco-labeling polices: experimental evidence. Submitted for presentation at the International Life Cycle Assessment Conference.

Supplemental Keywords: experimental economics, public policy, decisionmaking, nonmarket valuation.

Project Reports:
Final

Objective: The objectives of this project were to: (1) identify the types of environmental information that consumers will find useful when choosing among deregulated electricity products; (2) understand how different environmental marketing and labeling approaches affect consumers' ability to comprehend and utilize this information; (3) compare the effect of environmental certification programs (Type I labeling) and environmental attribute disclosure schemes (Type III labeling) on consumer perception of products' environmental impact; (4) compare the effects of mandatory and voluntary labeling approaches; (5) understand how marketing and labeling policies can affect individuals' level of uncertainty regarding their perceptions of product attributes and their uncertainty regarding their intention to purchase a product; and (6) understand how all these aforementioned preferences and label performance characteristics differ across different types of consumers.

Summary/Accomplishments: We found that respondents can better rank products by specific attributes when all products are required to display standardized information. When questioned directly, respondents prefer policies in which all products disclose all attributes in a standardized manner. In terms of firm-level impacts, we find that standardized disclosure in a hypothetical, three-firm market will generally benefit low-price products and harm the highest price, lowest emissions product. The two firms with sounder environmental records and higher prices generally gain market share when disclosure focuses on environmental data only and avoids price disclosure. The results suggested that policies that require compulsory display of detailed information about price and environmental attributes are more beneficial to consumers than simple eco-seal disclosure policies and other voluntary labeling regimes.

Voluntary labeling schemes that disclose standardized information can perform similarly to compulsory labeling when added to marketing schemes that are explicit regarding the attribute under question. However, we fail to consider scenarios in which the voluntary disclosure of detailed information by a firm did not perfectly correlate with marketing claims made by the firm. Hence, we do not know how consumers would fare under voluntary labeling programs in the presence of vague marketing claims. One might envision a broad set of consumer reactions to missing disclosure data in the presence of vague and contradictory marketing claims; this would be an excellent avenue of future research.

We also find that, in general, eco-seals are unlikely to affect the choice of products. Eco-seals did not significantly affect products that were primarily marketed as using high levels of renewable resources, whereas the seal did affect the rankings of low emissions or low-price products. Any potential effect of eco-seals varies significantly across individuals with different levels of education or environmental involvement. Further, the effect of eco-seals seems to be dependent upon the type of other information available to the individual.

One interpretation of this is that consumers view the use of renewable resources as synonymous with environmentally friendly; hence, the addition of an eco-seal added no new information. However, when added to products that stressed low price, the seal presented new information that was incongruous with the product's marketing. Those with less formal education and no environmental predilection increased their rankings and choice of the product, perhaps indicating that they reconsidered the product in a new light and found two favorable attributes. However, individuals with less formal education and greater environmental sensibilities may have viewed the combination of low price and environmental care with suspicion, thereby inducing a schemer's schema (Wright). That is, they may have seen the addition of the seal as an attempt to manipulate the consumer and reacted by downgrading their rating of the product.

Some consumers are willing to pay a premium for electricity services that feature lower ambient air emissions, and this willingness to pay differs significantly across segments of the sample population. In general, consumers seem more concerned with the overall cleanliness of electricity, measured in terms of reduced air emissions, rather than with the fuels used in electricity production. However, certain segments of the population view emissions reduction gained by substituting renewable and nuclear fuel sources for fossil fuels as significantly more valuable than emissions reduction alone. Particularly, respondents from the northeast and northwest are willing to pay more for renewable content, while northwestern and southeastern respondents with more formal education are willing to pay more for nuclear content.

Hence, in a deregulated market featuring environmental disclosure, emissions reduction will likely find broad, albeit mild, support. However, the degree of improvement in emissions reduction needs to be substantial to support prices even $0.01 per kilowatt-hour higher. For example, on average, individuals are willing to pay approximately $3.00 per year for a 1-percent decrease in air emissions; to justify a $0.01 per kilowatt-hour premium, air emissions associated with an electricity supplier would have to decline by approximately 40 percent. Obtaining emissions reduction by increasing renewable and nuclear generation sources generate a significant increase in willingness to pay compared to emissions reduction without fuel mix alteration. While not finding widespread appeal, renewable and nuclear may fill key niches in the emerging residential electricity marketplace.

Not surprisingly, individuals are more likely to buy products they perceive as having better financial and environmental characteristics. However, we also find that financial considerations (price, contract terms) are given more weight than environmental (level of renewable fuels, level of air emissions) considerations when consumers make their purchasing decisions.

Individuals seeing environmental marketed products state that they view the product as being environmentally better and are more likely to buy those products than those products marketed as low price.

Adding an environmental seal to products exhibiting either price or environmental marketing had no effect on the perceived price of the product. However, adding an environmental seal to a product marketed as low price did have a positive effect on the perceived environmental quality of the product?although the environmental rating was still lower than products that exhibited environmental marketing only. Adding an environmental seal to products exhibiting price marketing increased the likelihood to buy. If fact, the effect is strong enough to make products exhibiting low-price marketing and an environmental seal to be viewed similarly to products exhibiting environmental marketing alone.

There is no difference between price and environmental marketing in terms of affecting the probability that an individual is uncertain about the price of an electricity product. In addition, adding an eco-seal does not affect price perceptions; the joint effect of price marketing with an eco-seal is no different than that of environmental marketing alone. There are differences between price and environmental marketing in terms of affecting the probability that an individual is uncertain about the environmental quality of electricity. Individuals viewing environmental marketing information are much less likely to state that they "don't know" about the environmental quality of electricity. Adding an eco-seal to price marketing information does decrease the likelihood that individuals state that they "don't know" about the environmental quality of electricity. However, the joint effect of price marketing with an eco-seal is still less than that of environmental marketing alone. Finally, with respect to the intention to buy question, there is no difference between price and environmental marketing in terms of affecting the probability that individuals are uncertain about their decision. In addition, adding an eco-seal does not affect whether the individuals are uncertain about their purchase intentions.

Marketing can have a strong influence on the effect of labeling. Not surprisingly, price labels significantly reduce the likelihood that an individual is uncertain about the product's price, and the effects are equivalent across marketing treatments. Except for fuel mix labeling following price marketing, environmental labels do not affect an individual's price uncertainty. Fuel mix labeling following low-price marketing actually increases an individual's price uncertainty.

Individuals viewing fuel mix and emissions labels after low-price marketing are much less likely to state that they "don't know" about the environmental quality of electricity; interestingly, the effect of emissions and fuel mix labels are similar. Environmental labels provide no significant effect when viewed after environmental marketing materials. The joint effect of environmental information (eco-seal, fuel mix, and emissions information) and price marketing on reducing environmental uncertainty is greater than that of having environmental marketing alone.

Finally, with respect to the intention to buy, there are differences between price and environmental labeling in terms of affecting the probability that individuals are uncertain about their decision. Adding a price label to environmental marketing information significantly reduces the likelihood that individuals are uncertain about their intention to purchase decision. However, environmental labels had no effect on the individuals' uncertainty regarding their intent to purchase.

The results indicate that the mandatory display of detailed information about price and environmental attributes is more beneficial to consumers than simple eco-seal disclosure policies and other voluntary labeling regimes. In general, eco-seals did not affect individuals' perceptions or their choice of products. Voluntary labeling schemes that disclose standardized information can perform similarly to mandatory labeling when added to marketing schemes that are explicit and truthful. Although we fail to consider alternative scenarios, it is reasonable to assume that voluntary labeling schemes may not perform as well as mandatory labeling schemes when products display vague or misleading marketing claims. In fact, the use of seals-of-approval and voluntary labeling schemes may, because they do not provide an objective basis for comparisons, encourage the use of vague, unverifiable, and misleading environmental claims. The use of misleading environmental claims is not trivial; approximately 50 percent of environmental advertising is misleading or deceptive. Mandatory, detailed environmental labeling may help restrict the seller's ability to make these vague or misleading claims.

Although financial considerations are given more weight than environmental considerations when consumers make purchasing decisions, some consumers are willing to pay a premium for electricity services that feature lower ambient air emissions, and certain segments of the population view substituting renewable and nuclear fuel sources for fossil fuels as valuable. Hence, in a deregulated market featuring environmental disclosure, emissions reduction will likely find broad, albeit mild, support. While not finding widespread appeal, renewable and nuclear may fill key niches in the emerging residential electricity marketplace.

Journal Articles:

Roe B, Teisl MF, Rong H, Levy AS. Characteristics of successful labeling policies: experimental evidence from price and environmental disclosure for deregulated electricity services. Journal of Consumer Affairs. Teisl MF, Roe B, Levy AS. Eco-certification: why it may not be a "field of dreams." American Journal of Agricultural Economics.
Roe, B, Teisl MF, Levy AS, Russell M. U.S. consumers' willingness to pay for green electricity. Energy Policy.

Presentations:
Teisl MF, Roe B, Rong H, Levy AS. Characteristics of successful labeling policies: experimental evidence. Presented at the National Association of Environmental Professionals, Portland, ME, June 26, 2000.
Teisl MF, Roe B, Rong H, Levy AS. Comparing eco-labeling polices: experimental evidence. Submitted for presentation at the International Life Cycle Assessment Conference.
Teisl MF, Roe B, Levy AS. Eco-certification: why it may not be a "field of dreams." Presented at the 1999 Annual Meeting of the American Agricultural Economics Association, Nashville, TN, August 8-11, 1999.

Supplemental Keywords: air, life-cycle analysis, renewable fuels, electricity, conjoint analysis, environmentally conscious manufacturing, consumer research, survey, labeling, SO2, NOx, CO2.


Local Navigation


Jump to main content.