45122 The World Bank PREMnotes J U L Y 2 0 0 8 N U M B E R 4 SPECIAL SERIES ON THE ECONOMICS OF CLIMATE CHANGE Carbon labelling and poor country exports Paul Brenton, Gareth Edwards-Jones, and Michael Friis Jensen Carbon labelling is being adopted by private firms as a mechanism for mitigating climate change. Such schemes are likely to have a significant impact on low-income country exports due to the need for transportation and the small size of their exporters. However, transport emissions may be offset by favorable production conditions and size bias may be reduced. The design and implementation of car- bon labelling will need to take into account a number of complex, technical challenges. As innovative solutions emerge, it is important that low income countries are involved in discussions on the design and implementation of carbon labelling. In response to growing anxiety over climate caused by their purchase of a product. But change, policy-makers, firms, and consum- the strong desire to act on carbon labelling ers are considering ways to reduce green- has been running ahead of the challenges of house gas emissions. A possible mitigation measurement and the problems of effective mechanism undergoing rapid development communication through labelling that must is carbon labelling.* be addressed for schemes to be successful. Carbon labelling involves measuring Yet a growing number of standards are be- carbon emissions from the production of ing developed with little effort to coordinate products or services and conveying that in- and generally little or no voice given to small formation to consumers and those making players, such as, low-income countries. sourcing decisions within companies. Well- Fears have been raised that low-income designed schemes will create incentives for countries will face greater difficulties export- production in different parts of the supply ing in a climate-constrained world where chain to move to lower emission locations. carbon emissions need to be measured and Thus, carbon labelling is an instrument that certification obtained to enable participation enables consumers to exercise their desire in carbon labeled trade. This discussion cen- to join the battle against climate change by ters on transportation, and the common pre- using their shopping trolley. sumption is that products produced locally Firms are eager to cater to consumers' in the country of consumption will have an demands and to reduce their own carbon advantage in terms of carbon emissions and footprints. Global retail giants, such as, UK on size. Exports from low-income countries Tesco or US Wal-Mart are developing carbon typically depend on long distance transpor- labelling schemes and major manufactures tation and are produced by relatively small are following suite. Popular outdoor gar- firms and tiny farms that will find it difficult ments manufacturers Patagonia and Tim- to participate in complex carbon labelling berland, for instance, are seeking to satisfy schemes. However, the scientific evidence their nature friendly consumers by allowing shows that carbon efficiencies elsewhere in them to see exactly how much emission is the supply chain of a product may more than *In this note we use the term `carbon' in it's popular form to indicate all greenhouse gases. FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK offset the emissions associated with transpor- Thus, transportation is just one source of tation. The disadvantages of small size can be emissions among several. The popular belief reduced by carbon labelling schemes that use is that trade by definition is problematic innovative solutions to lower costs involved since it necessitates transportation, which is in data collection and certification. a major source of emissions. This is generally The impact of carbon labelling schemes not true. There is broad agreement that air on low-income countries hinges on the issues transport causes high emissions. However, of design and implementation. Low-income the relative importance of emissions from countries generally use technologies and air freight is unusually large in the case of sources of energy that entail relatively low field grown fruit and vegetables, which have carbon emissions. For example, in agriculture been the focus of attention in the carbon ac- modern inputs, such as, fertilizers, pesticides counting studies that have been undertaken and fuel are not used intensively. A well- to date. This is because their production designed carbon scheme would value this requires relatively few other inputs and little production structure since modern inputs processing. are an important source of carbon emissions The vast majority of international trade in agriculture. Mechanisms for implement- makes use of ships for longer distances and ing carbon labelling schemes must make roads for shorter distances. Notably, ship sure that such advantages are not lost to transport has become highly energy efficient burdensome data collection and verification and, for most products, it is highly unlikely requirements. that transportation will be a disproportional source of emissions. This is particularly What science has to say relevant for processed food and industrial There is a significant knowledge gap to products for which energy consuming pro- be filled regarding scientific studies of the cessing activities weigh more heavily than structure of carbon emissions throughout for the relatively simple vegetable and fruit international supply chains that include products that have been analyzed so far. low-income countries. The small number of existing studies suggests the following main Critical issues for carbon conclusions: labelling schemes Emission patterns are highly complex. The main challenge that carbon labelling The literature illustrates a number of ways in schemes face is that, on the one hand, they which different carbon emitting activities in- must be simple for reasons of cost effective- teract to provide an overall carbon footprint. ness and ease of communication, yet, on the An important implication of these findings other hand, they must be comprehensive in is that geographic location alone is a poor order to capture the many opportunities for proxy for emissions; favorable production emission savings throughout a supply chain. conditions may more than offset a disad- While this is very demanding, there are ex- vantage in transport. For example, Kenyan amples of how some of the underlying issues produced roses sold in Europe are associated can be addressed from emerging schemes with considerably lower emissions than roses that deal with other, often specific environ- produced in the Netherlands, despite being mental and sustainability problems. air freighted to market. Airfreight is one Carbon labelling of supply chains needs carbon `hot spot' in the supply chain, but it is to include activities all the way back to dwarfed by the use of heated greenhouses in those undertaken in low-income countries, the Netherlands. The complexity of carbon if necessary, so as to offer them a chance to emissions discredits simplistic but intuitively prove carbon effectiveness where it exists. appealing concepts such as food miles and However, the devil is in the technical details buy-local campaigns. There is no scientific of the scheme. One technical issue is the use support for the notion that these concepts of primary versus secondary data. Primary can offer much in terms of climate change data (i.e., process-specific data) are precise, mitigation. but secondary data (i.e., data obtained from 2 PREMNOTE JULY 2008 Examples of carbon labelling initiatives · UK Tesco has announced they will carbon label carbon emissions while sharing their own techni- all 70,000 items on their shelves. cal expertise. · The UK government-sponsored Carbon Trust has · The household goods producer, Reckitt Benck- developed a carbon label methodology currently iser, has a program called `Carbon 20' which being tested on 75 products produced by 20 includes a scheme to measure the carbon emis- companies including many large multinationals. sions of its products including those resulting from · British Standards Institute is developing a method- consumer use. ology for the measurement of carbon footprints. · The Carbon Disclosure Project is a non-profit · US Wal-Mart is working with their suppliers to company that in October 2006 established the develop `carbon scorecards' that will throw light `Supply Chain Leadership Collaboration' which on differences in carbon efficiency. aims to collect and present supply chain informa- tion on carbon emissions. It works with companies · Outdoor equipment brand Patagonia has initiated like Hewlett Packard, L'Oreal, PepsiCo, Reckitt a scheme entitled the `Footprint Chronicles TM'. Benckiser, Wal-Mart, Cadbury Schweppes, · Shoe producer Timberland has pioneered a car- Nestlé, Procter & Gamble, Tesco, Imperial To- bon labelling scheme including a small tag on its bacco, Unilever and Dell. shoes indicating energy use and other informa- · UK organic standard setter, the Soil Association, tion. has proposed to prohibit use of its organic labels · General Motors began a pilot program in 2005 on air freighted products due to their assumed where it asked its Chinese suppliers to reduce negative influence on climate change. sources other than direct measurement) are chain. For example, the methodology being cheaper and more readily available. Methods proposed by the Carbon Trust in the UK to combine the two are being investigated, excludes emissions from the production of for example in the form of environmental capital equipment, which will tend to favor input-output analysis. However, using sec- capital-intensive production techniques over ondary data from producers in rich countries labor-intensive processes and hence will be to estimate the carbon emissions of producers to the disadvantage of low-income countries. in low-income countries will not capture the A related issue is that of the emissions that fact that the technologies being applied in occur from the changes in land use that are rich and low-income countries are substan- stimulated by the carbon-labelling scheme. tially different. Clearing natural forests to build new facto- A second technical issue relates to the ries or provide new land for agriculture will use of emission factors, the amount of car- offset some or perhaps (more than) all of the bon emitted during particular parts of the emission benefits from the changes induced manufacture and/or use of products, and by carbon labelling. Soils are major stocks of how they should be calculated. These may carbon and other greenhouse gases, which be location specific and are largely missing can be released through cultivation. These for low income countries factors need to be captured if the carbon A third issue is the choice of system labelling scheme is to lead to sustainable boundaries, which defines the extent of pro- changes in activity that have long-term posi- cesses that are included in the assessment of tive impacts on carbon emissions. greenhouse gas emissions. Estimates of the Consequently, carbon footprinting is a carbon footprint of a system will depend on complex technical issue. But, while there where the system boundary is drawn. Sys- are many challenges to the introduction of tem boundaries may be defined so that they broadly applicable carbon labelling schemes include only certain elements of the supply that do not exclude small actors, such as JULY 2008 PREMNOTE 3 low-income countries, there are emerging that sugar cane ethanol performs best in schemes that contain potential solutions. A terms of carbon savings. The development proposed EU regulation on biofuels, for in- community should contribute positively stance, contains a mechanism for certifying to discussions concerning the design and carbon emission savings whereby a producer implementation of schemes to ensure the may choose between a fast track (and cheap) inclusion of low-income countries' capacities option of using default values (that vary by in mitigating climate change. region and type of product and are specified by an independent scientific body) or may This brief draws from P. Brenton, G. Edwards- choose to produce its own emission data, Jones, and M. Friis Jensen (2008), "Carbon according to a methodology defined in the Labelling and Low Income Country Exports: regulation to show emissions lower than the An Issues Paper," PREM Economics of Climate default value. A similar mechanism for other Change Discussion Papers. products could offer low-income countries such a fast track choice if implemented as part of a carbon scheme. What is lacking About the authors is the scientific base of information that is Paul Brenton and Michael Friis Jensen are needed to develop such default values for a with the International Trade Department of broader range of products that would spare PREM at the World Bank; Gareth Edwards- small producers the burden of data collection Jones is with the School of the Environment and and certification. Natural Resources, Bangor University Looking forward About the note series Carbon labelling is still in its infancy, as is The PREM notes on the Economics of Climate our understanding in general about the Change are part of the effort conducted by the relationship between climate change and Poverty Reduction and Economic Management trade. We need to know more. The stock of Vice Presidency of the World Bank to raise aware- scientific studies remains extremely small and ness on poverty, distributional, financial, fiscal, low-income countries' carbon competitive- and trade related issues that tend to be underesti- ness needs to be explored. The agricultural mated in the more scientific and political debates capacities and technologies of low income surrounding Climate Change. The notes do not countries are likely to give rise to new op- necessarily reflect the view of the World Bank, its portunities for export to rich countries if board or its member countries. However, they do carbon emission considerations and effective reflect the content of some of the internal debates labelling schemes render the use of carbon among economists interacting traditionally on intensive inputs produced in rich countries emerging or overlooked economic consequences of a constraint upon competitiveness. For ex- environmental policies. ample, the scientific work that has supported For questions, please contact Milan Brahmbhatt the EU directive on the use of biofuels shows at mbrahmbhatt@worldbank.org. This note series is intended to summarize good practices and key policy findings on PREM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on the PREM Web site (http://www.worldbank.org/prem). If you are interested in writing a PREMnote, e-mail your idea to Madjiguene Seck at mseck@worldbank.org. For additional copies of this PREMnote please contact the PREM Advisory Service at x87736. PREMnotes are edited and laid out by Grammarians, Inc. Prepared for World Bank staff