Voluntary endorsement labelling scheme

Voluntary labelling schemes aim to show the best available products on the market and therefore to increase the energy efficiency of products. They inform consumers about the environmental performances and especially energy efficiency of products on offer, so consumers can take account of this before making purchase decisions. Labelling schemes also incite manufacturers to produce more energy efficient appliances. Therefore, labels stimulate both the demand and the supply side of the market. An energy label will create awareness and influence the buying behaviour of costumers. Manufacturers can distinguish themselves through innovation and improvement of their image.

Many countries introduced voluntary labelling schemes to increase the energy efficiency of appliances. Labels are very widespread in industrialised but also emerging and some developing countries. A selection of different labels can be found below.
In most cases, voluntary labelling schemes were introduced at national level. In some cases, the same label was implemented in a group of several countries at the same time (e.g. the European Union includes 27 countries) or the label is accepted in several countries worldwide (inter alia the Energy Star. Regional labels were also introduced in numerous regions worldwide.

Related sectors

• residential: The sectoral focus is the residential sector. Voluntary labels were introduced to provide information about the environmental performance (including energy efficiency) of products. The main focus is on household appliances, consumer electronics and office equipment.

The range of products is unlimited in principle. As a general rule, labelling works best for products that are present in most households and with numerous different products and product characteristics. However, it must be possible to create a test structure for all environmental characteristics.

Related target groups

• User: The primary target groups are end-users and investors in energy using products. The aim is to inform these target groups and to educate them in how to find the suitable product with the lowest energy consumption.
• Manufacturer: Also, manufacturers are a target group. They can use the label as a strategic benefit in comparison to their competitors. An endorsement label can encourage manufacturers to improve the energy performance of their models and can encourage distributors and retailers to stock and display efficient products.

Direct beneficiaries

• User

  The end-users benefit from the labelling scheme. They have the chance to choose the most cost-effective solution and to make a contribution to the environment.

Indirect beneficiaries

• Manufacturer

  Besides influencing consumers to choose more efficient products, labels also lead to competition among manufacturers to produce the most energy-efficient models, which brings retailers to promote efficiency. Distributors and retailers may change the mix of products they stock and promote after the introduction of a label (Wiel et al. 2005). Eco-labels are also considered by manufacturers as a valuable tool to communicate the environmental qualities and quality image of their product and their company (OECD 1997).

Relevant barriers

• Knowledge and information barriers: Sometimes actors may not be informed about possibilities for energy-efficient improvements. Therefore the main barriers addressed by the voluntary labelling scheme are information asymmetries that result from high transaction costs for consumers to obtain relevant information on product characteristics. Without a label, consumers can often not tell whether a product is more environmentally friendly and whether a product is more energy-efficient during its use phase than another. The label is easily recognisable and, thus, provides investors directly with important information, i.e. which product is superior in terms of energy efficiency compared to other products.
• Lack of interest and motivation in energy efficiency-improvement: There is a tendency that companies, organisations and households focus on their core activities only. A voluntary label can have a significant influence on the consumer. Is he or she willing to invest in labelled products this market power could be a motivation for manufacturers to invest in energy efficiency improvements.

Relevant incentives

• Saved energy costs: After a period of time, the upfront costs, which are normally higher for energy-efficient products compared to their less-efficient counterparts, are amortised due to lower running costs.
• Unique selling proposition for suppliers: The unique selling proposition is a strategic benefit. It can lead to competitive advantages or even market leadership and ultimately contributes to increased profits, too. A well-known label can be used visibly on a product’s surface so that consumers can easily give preference to energy-efficient products over less efficient ones. If consumers started comparing individual products with each other, they would need a lot of time.
• Improved reputation: End-users and the environment benefit from energy-efficient solutions. Offering such solution underpins a company’s CSR (Corporate Social Responsibility) goals. This may lead to competitive advantages.

Endorsement labelling programmes cannot transform the market alone and, for this reason, are completed by minimum energy performance standards (MEPS) in the great majority of countries. Basically, labelling (be it endorsement or classification labelling) stimulates technological innovation and the market introduction of new more efficient products, while MEPS usually organise the gradual removal from the market of the least energy efficient appliances (WEC & Ademe 2004). A voluntary energy efficiency endorsement labelling scheme may be used as a preparatory stage before planning to introduce a mandatory comparative label and a minimum energy performance standard at a later stage. Furthermore, endorsement labels may be combined with financial incentives (for products bearing the label) (Attali et al. 2009). To implement a successful labelling scheme, consumer awareness campaigns are essential to inform the user about the label and the environmental criteria. Environmental NGOs, consumer groups and the media have contributed to increasing consumer awareness of environmentally preferable products through consumer awareness-building campaigns of various kinds (OECD 1997).

Sufficient resources are necessary to prepare, implement, monitor compliance with and enforce the label (knowledge, capacity, time, budget, priority) (European Commission 2008).
Structural pre-conditions are a standard test procedure and testing laboratories and an authority which is responsible for the implementation of the labelling scheme.

Agencies or other actors responsible for implementation
An agency or similar organisation is necessary to guarantee monitoring and to ensure compliance with the manufacturer commitment to correctly declare the energy consumption.

Funding
There is no large funding scheme necessary, except for the development and update of the scheme and for the compliance monitoring.

Test procedures
A standard test procedure and independent testing laboratories are necessary to test appliances and to decide whether they are eligible to use a label or not.

Other
Another pre-condition is advertisement and educational measures to provide information about the label and the contents of the label.

The process starts with a (preparatory) study to analyse the technical potentials and country specific circumstances (stock, sales, consumer behaviour) and to define the best available products which should be labelled. Criteria are generally set so that only a small percentage of products in a product category (5 to 30 per cent) can obtain the endorsement label (OECD 1997). Life-cycle approaches have been recognised as valuable tools to understand the complex environmental effects of products (OECD 1997). Next in the process will be the definition of the standard test procedure for energy consumption or efficiency, unless it already exists. Ideally, the integration of all relevant stakeholders and dialogue with trading partners should follow.
The best way to design an effective label is to carry out consumer research to determine which label design can be most readily understood and which is most likely to influence consumers to purchase an energy-efficient product.
Next, the rules for the award of a label to a product must be set and the process organised. Issues here are the independence of the agency or other organisation awarding the label and the cost to the manufacturers of products: will they get it for free or will they have to pay a fee?
Demonstrating market impact is crucial for a voluntary label, in order to make it attractive for manufacturers to list their products. This will only be successful with an increasing consumer awareness. Therefore, consumer awareness-building campaigns of various kinds are essential to implement a successful labelling scheme. Most of the existing programmes publish information, through newsletters, official publications or newspapers on the status of developments (OECD 1997).
A monitoring and evaluation system is essential to control the effectiveness. Once a substantial share of the market is occupied by eco-labelled products, the criteria must be revised to be more stringent and to once again create an incentive for producers to improve the energy efficiency and other environmental aspects of their products.
To illustrate the process, a simplified chart identifies the main steps which characterise the general procedure for the development of eco-labels. The chart can be found in the in the next figure.

Quantified target
Endorsement labels can and should have quantified targets. Targets relate to the share of the endorsed ‘Best in class’ in the market (development of the market), the impact of innovations (market introduction of more energy-efficient or environmentally friendly products) and, if possible, the energy savings per year.

Co-operations of countries
Several countries worldwide have already introduced voluntary labelling schemes. Therefore, co-operations are helpful for countries, which plan the introduction of a labelling scheme. Advantages and disadvantages can be exchanged to make it easier to transfer the policy in accordance with national circumstances. The Energy Star label for office equipment is a well-known example of such international co-operation between the USA and many other countries, including the EU, Australia, Canada, Japan, New Zealand and Taiwan.

Monitoring
Energy agencies or research institutions can carry out monitoring of the label. The agency responsible for monitoring should be clearly created and adequately funded. Based on identified information, the impact of the instrument can be quantified and evaluated. It is essential to attempt calculating energy but also cost savings, and to evaluate barriers and incentives for future revisions of the label. However, there may – and should – be a package of instruments targeting energy efficiency of appliances (see above). Therefore, sales figures per energy label category will not be the only factor to reflect the impact of the labelling scheme. Whether it will be useful and possible to attribute shares of the overall impact to individual instruments such as an endorsement label, will need to be assessed. Key monitoring information to explain success or failure of the endorsement label are:

• Share of products that carry a label
• Share of highly efficient products in the sales catalogue
• Share of consumers who recognize and understand a label
• Number of sales of highly efficient products

(Wuppertal Institute, based on Ecofys et al. 2006).

Relevant individual dynamics and side-effects

• Dynamic market transformation and/or innovation: In principle, a labelling scheme will stimulate innovation within the appliance industry. However, if not enough incentives are provided for a fast market transformation, manufacturers cannot recover their R&D investments timely enough to invest in still more efficient devices (European Commission 2006).
• Avoiding lost opportunities: By promoting the most energy-efficient appliance on the market, a voluntary labelling scheme tries to avoid that consumers buy energy-wasting appliances which would be a lost opportunity for saving energy.
• Minimising rebound effects: Labels need to be accompanied with educational and information campaigns to tackle the rebound effect (e.g. consumers buying larger appliances or using them more intensively, as they feel these are energy-efficient). Furthermore, the energy efficiency specifications for the label can be made degressive with appliance size and can eventually limit absolute energy consumption for bigger models (e.g. refrigerators, washing machines, televisions) instead of being defined by energy efficiency.
• Minimising snap-back effects: To minimize snap-back effects (e.g. that the market will snap back to a higher share of inefficient models), the labelling scheme should be long-lasting and regularly updated.
• Creating Spill-over effects: Positive spill-over effects can be realised with a successful labelling scheme. For example, the Energy Star label from the USA was successfully transferred to other countries and is a helpful tool for public procurement programmes. Also, consumer demand for very energy-efficient appliances will change the production portfolio of manufacturers and the stock in shops, so that even consumers who are unaware of the label may buy energy-efficient models.

Sustainability aspects
Other sustainability aspects and environmental impacts can (and should) be a part of an endorsement labelling scheme such as; health aspects or other resources (e.g. refrigerants, mercury). In this way, they develop from an energy efficiency endorsement label to a wider eco-label. That is why a preparatory study with a life cycle analysis is essential to cover all relevant aspects and to enlarge the focus (not only energy efficiency).

The following barriers are possible during the implementation of the policy:
Barriers for the implementation of voluntary labels are their general potential weaknesses, including low levels of consumer awareness, criteria differences across products, market competition between various schemes and possible technological lock-ins for business - thus limiting innovation.
Energy efficiency endorsement or eco-label criteria are generally set so that only a small percentage of products in a product category (5 to 30 per cent) can obtain the eco-label. In practice, eco-labelled products often cover more than 30 per cent of the market share in a product category. Eco-labels then no longer selectively identify a sub-set of products which are environmentally preferable to other products in the same product category, but tend to become a de facto voluntary standard (OECD 1997).

The following measures can be undertaken to overcome the barriers:
Factors which make some schemes more successful than others are media involvement, awareness building campaigns, institutional procurement etc. (OECD 1997). An effective monitoring and evaluation is necessary to observe the market and to update the labelling scheme.

The energy savings and environmental benefit of endorsement labelled products is difficult to differentiate from the energy savings and environmental benefit achieved through other energy efficiency measures. It is difficult to determine whether the label was really the source of the energy efficiency improvement of a product or the change in purchasing decision. Generally speaking, experience has shown that energy labelling programmes are effective instruments, which enable authorities to benefit from low-cost energy savings, consumers to spend less on electricity, and manufacturers to improve their products and become more competitive against imported, less efficient products (WEC & Ademe 2004). In this respect, however, mandatory comparative energy labelling should be preferred where it is feasible. In some instances, the development of eco- labels has had an impact on the behaviour of manufacturers, strongly encouraging them to modify their products in order to qualify for an eco-label so as to maintain their products in retail chains, for example. Surveys have indicated that eco-labels are better known to women than men and to younger people rather than older people. (OECD 1997). Labels can play a part in market transformation.
For example, in a country with a high level of environmental awareness, such as Sweden, the level of consumer awareness to eco-labels is significant and there is a demand for eco-labelled products. The market presence, and therefore the visibility, of eco-labelled products have contributed to the awareness of consumers. Eco-labels have also had an impact on the behaviour of manufacturers in specific product categories (OECD 1997).
Nevertheless, it is difficult to isolate and measure the environmental benefits of eco-labelling as distinct from benefits achieved via other environmental meausres. Environmental effectiveness has been evaluated indirectly on the basis of consumer awareness and consumer demand for eco-labelled products. Public awareness and attitudes to eco-labelled products vary significantly depending on the country (OECD 1997).

In many cases, there is an increase in manufacturing cost to manufacturers for appliances with enhanced energy efficiency, which can be passed on to the users or can be compensated by productivity gains.
This means that at any given time, there is likely to be a price premium of energy-efficient models over less efficient ones for consumers. However, studies found purchase prices for energy-efficient appliances have decreased over time (e.g. LBNL 2001; Lane 2011).
Other studies show that labels for promoting energy-efficient appliances have not increased consumer prices significantly (IEA 2007).
The endorsement labelling scheme itself will also entail some costs to governments (if they run the scheme and particularly if they award the label for free), for manufacturers (especially, if they have to pay a fee to register an appliance for a label) and possibly for retailers. However, they are usually small in comparison to the incremental manufacturing costs.

According to Bertoldi & Atanasiu (2007) most of the energy measures like energy labelling schemes are cost effective. This means that they will result in net money savings for the users, as the reduced electricity costs over the life time of the appliance will be bigger than any additional purchasing cost for the more efficient model. In many cases there is an increase in manufacturing cost to manufacturers, which can be passed on to users or can be compensated by productivity gains.