Challenges to Effective Third-Party Certification in Environmental Policy

Abstract

This dissertation expands club theory to include motivations of club owners as well as club members to better predict outcomes of interest to policy makers. A club is an organization that creates voluntary standards such as methods of production with lower negative externalities. A club owner is an individual or institution that creates rules, collects dues and enforces club member compliance. A club member is the organization or firm that chooses membership in a club and agrees to comply with club rules. Club theory has been proposed as an opportunity for “win-win-win” outcomes for consumers, producers and policy makers. In this scenario consumers have preferences for credence attributes of environmentally sensitive methods of production identified by firm membership in a club, club members receive benefits of price premiums or market share unavailable to firms who are not club members, and policy makers forgo costly command and control tools for low cost market-based tools. The expanded club theory in this dissertation identifies circumstances where incentives are not aligned to create win-win-win outcomes. The first chapter presents an extension to club theory, the second chapter presents qualitative research on the motivations of the U.S. Alaska pollock fishery to join clubs or create clubs and the third chapter presents quantitative research on the stated preference for third-party certified goods with varying numbers of goods with third-party certification in the same issue-space. Chapter one expands club theory to include the motivations of club owners to capture benefits unrelated to club member benefits to identify under what circumstances outcomes from the use of club goods will be similar to common pool resources. This chapter addresses the question: How can relaxing existing assumptions about motivation of actors in club theory improve the prediction of outcomes from third-party certification? Club theory is built upon the premise that benefits to club members are relatively excludable and non-subtractable. Existing club theory predicts the successful use of club goods to harness market forces to achieve policy objectives by aligning incentives between consumers and producers at low cost to government, resulting in a “win-win-win” outcome. In contrast, outcomes for common pool resources may be a “tragedy of the commons” where independent actors maximize personal utility by consuming a good until marginal utility equals marginal cost and reach equilibrium where social utility is sub-optimal. In this chapter I explore the motivations of club owners, those that create clubs and set rules, and club members, those who join clubs and produce products that meet club rules. Specifically, I examine the motivations of club owners to modify club rules to maximize benefits to club owners regardless of impacts on club members. The existing assumptions are that benefits to club owners are aligned with benefits to club members. If the existing assumptions of alignment of incentives between club owners and club members do not hold, then existing club theory may incorrectly predict win-win-win outcomes. An alternate alignment of incentives may produce outcomes less like win-win-win outcomes and more like a tragedy of the commons. This chapter explores a popular variant of club goods: third-party certifications. Third-party certifications are theorized to reduce information and search costs for goods and services produced with unobserved characteristics. These characteristics may include environmental externalities such as sustainable fisheries certified by the Marine Stewardship Council, best practices for emissions of toxic chemicals certified by the International Standards Organization, labor practices certified as fair by Fair Trade International for goods such as coffee, chocolate, diamonds or tea, and the risk of bond default by debt security ratings organizations such as Moody’s, Standard and Poor or Fitch. This chapter uses an example of environmental policy such as the sustainability of a fishery. The contribution of this chapter is an expansion of the club good model to include benefits to club owners unrelated to club members and how the expanded model may be used to predict incentives. The expanded model suggests that club owners may produce club rules that maximize benefits to club owners and may not achieve public policy objectives. The research question for the second chapter is: Will the addition of new certification clubs in a market reduce the incentive for firms to pursue conservation practices? In this chapter I argue existing club members understand benefits to club owners derived by changing club rules, such as processes for accepting new members, setting standards and reporting mechanisms, and that club members use this information to move to competing clubs or create competing clubs in the same issue-space. This framing suggests that club members will join alternative clubs, or create new clubs, where net benefits to club members are greater, or create new clubs to capture benefits formerly available only to club owners. From the framing of independent benefits to club owners and club members I develop hypotheses on the motivation and ability of club members to switch clubs. In this research I use a case study of the U.S. Alaska pollock fishery and use qualitative methods to explore agency, motivation, and ability of club members to switch membership between clubs and create new clubs. This research uses a case study of the U.S. Alaska pollock fishery which was certified as sustainable by the Marine Stewardship Council in 2005, then sought a rival certification of sustainability from Responsible Fisheries Management in 2011. This research traces the motivations of the U.S. Alaska pollock fishery through the decision to join one certification for sustainability and then a rival certification for sustainability. I conduct semi-structured interviews (n=15) with members of the U.S. Alaska pollock fishery to establish perceived costs and benefits of joining a club before initial certification, during initial certification, before seeking rival certification and after obtaining rival certification. This research extends club goods theory by focusing on competition among clubs within a single market and the motivations of club members as a function of club owner benefits predicted in chapter one. The findings suggest that the more certification clubs enter a market the less incentive firms may have to follow conservation practices, which may lead to environmental outcomes similar to an open-access tragedy of the commons. Chapter three addresses the research question: Does an increase in the number of certifications within a single issue-space result in outcomes similar to outcomes of a subtractable good? Goods bearing third-party certifications of environmentally responsible production are examples of using club goods to enable consumers to express preferences for environmental standards and help realize public policy objectives of sustainable environmental practices. Clubs may be fourth-party when the standards for membership are set by the government, or third-party when the standards for membership are set by an outside group. Clubs that grant third-party certifications of goods for sustainability characteristics may be a low-cost option to realize policy objectives because certification may align incentives enabling producers and customers to interact with little government expense. In this construction customers express preferences for products produced using environmentally sustainable methods, club member firms capture price premiums or market share for additional profits unavailable to non-certified competitors and third-party clubs establish standards of production that reduce negative environmental impacts. However, if any part of this causal chain fails, then the market-based tool may not produce the desired environmental outcomes. The Marine Stewardship Council (MSC) has emerged as a leading club that grants third-party certification for fisheries practices and is often cited as a successful example of a club good aligning incentives to promote sustainable fisheries. A growing body of literature using survey and market-based data has shown consumer preferences for MSC certified goods or other certified sustainable seafood products. However, since the first certification by MSC in 2000 many alternative clubs have entered the market and offer alternative third-party certification of sustainable fishing practices. No research to date has tested the perseverance of MSC price premiums or market share in the face of additional alternative certifications for responsible fisheries. This research is the first attempt to test the impact of varying the number of competing certifications of sustainable fishery practices on benefits to MSC certified firms. This research uses an online stated preference survey (n=610) to test the impact of additional certifications on market share and willingness to pay a 5% premium for MSC certified goods. This research finds that additional certified options decrease the market share for MSC certified goods. These survey results may suggest that benefits to firms in voluntary clubs for environmental practices may lose benefits when there is market entry in the same issue-space. The diluting of benefits to firms in existing clubs may diminish one motivation for firms to remain in voluntarily clubs for environmental practices. The contribution of this dissertation is the expansion of club owner agency within club theory to predict club member behavior and environmental outcomes. The findings of this dissertation suggest that additional entry to the market for clubs may weaken the alignment of incentives between consumer, producer and clubs to predict win-win-win outcomes. If policy makers neglect this fact, then policies intended to create win-win-win outcomes may instead result in lose-lose-lose outcomes where consumers cannot use producer club membership to differentiate between credence attributes, firms producing credence attributes are not rewarded with price premiums or additional market share and public policy outcomes are not achieved.