The Role of Quality Infrastructure for Sustainable Development

Jan Peuckert | Innovation Economics | Workshop, May 28th 2013, Geneva

Introduction

Development and diffusion of sustainable technologies are affected by two classical market failures:

• (environmental) externalities

• information asymmetries about environmental quality

Environmental economics focus on the externality problem (getting prices right)

• Internalizing externalities through taxes and environmental regulations

• Free-riding problem in the absence of an external authority may be solved by collective action

• Both self-governance and regulation rely on sanctioning mechanisms

Information asymmetries can be reduced by Quality Infrastructure improvements

• Allow for better governance (enforcement of compliance with rules / regulation)

• Create incentives for provision of environmental quality

• Steer technological change towards sustainable development

Outline

Concept

• The National Quality Infrastructure

• The International System of Quality Infrastructure

Theory

• Economics of Quality Infrastructure Elements

• Environmental Quality and Information Asymmetry

• Quality Infrastructure as Signaling Mechanism

• Need for a Quality Infrastructure of Sustainability

Empirics

• Impact of Environmental Quality Infrastructure

• Improving the Assessment of Quality Infrastructures

CONCEPT

The National Quality Infrastructure

The International System of Quality Infrastructure

Metrology

• International Bureau of Weights and Measures (BIPM)

• International Organization of Legal Metrology (OIML)

Standardization

• International Electrotechnical Commission (IEC)

• International Communication Union (ITU)

• International Organization for Standardization (ISO)

Accreditation

• International Accreditation Forum (FIA)

• International Laboratory Accreditation Cooperation (ILAC)

Conformity Assessment

• Mainly private businesses: TÜV, SGS, Bureau Veritas

THEORY

Economics of Quality Infrastructure

Swann, P (1999): The Economics of Measurement

Lambert, R (2010): Economic Impact of the National Measurement system

Usuda, T & Henson, A (2012): Economic Impact of Measurement Standards

Blind, K (2004): The Economics of Standards

Swann, P (2010): The Economics of Standardization

Frenzen, M & Lambert, R (2013): The Economics of Accreditation

Nelson, P (1970): Information and Consumer Behavior

Akerlof, G (1970): The Market for Lemons: Qualitative Uncertainty and the Market Mechanism

Viscusi, WK (1978): A note on "lemons" markets with quality certification

Vining, AR & Weimer, DL (1988): Information asymmetry favoring sellers

Quality Infrastructure

StandardizationMetrology

Conformity Assessment

Accreditation

StandardMeasure-

ment

Producer UserProduct

characteristicsProduct

requirements

Product quality

Value Chain

Quality Infrastructure as Signaling Mechanism

Environmental Quality and Information Asymmetry

Environmental claims are often related to impacts (e.g., pollution emissions) of the production process

Search Goods•quality is observable before purchase

Experience Goods•quality is observable after purchase

Post-Experience / Credence Goods•quality is difficult or impossible to observe by the consumer

genetically unmodified

food

dolphin-safe tuna

energy-efficiency

of appliances

carbon content of products

fuel-efficiency

of carssustainable landuse for biofuels

ecological packaging

turtle friendly shrimpsuse of

natural materials

durability of goods

Need for an Environmental Quality Infrastructure

Need for eco-labels to incentivize environmental performance

• Otherwise the consumer / regulator cannot identify environmental quality

• Only what can observed can be understood, controlled, predicted and changed

Most of the literature on eco-labels wrongly assumes perfect certification

• Certification must be viewed as noisy (Mason, 2006, 2008)

• Imperfections justify the need to improve metrology, standardization and accreditation

Measurement: Third party cannot perfectly identify compliance at reasonable costs

• Example: Environmental Analytics (air, water, soil) – Metrology in Chemistry

Standardization: Standards may not be perfectly correlated with “environmental friendliness”

• Example: Indirect Land Use Change (ILUC) factors in the reporting by fuel suppliers;

currently no credible methodology for calculating the full indirect impacts of biofuels

Accreditation: Conflict of interest between consumers and certifiers

• Example: Risk of fraud / doubts about additionality of CDM projects

EMPIRICS

Impact of Environmental Quality Infrastructure

• Subjective data provided by the WEF:

“Complying with environmental standards in

your country … 1 = significantly reduces

competitiveness, 7 = helps long-term

competitiveness by encouraging

improvements in products and processes”

• We find evidence that, besides regulatory

design (regulatory pressure and openness),

also the relative intensity of ISO 14001

certification improves the long-term effects of

environmental regulation on the

competitiveness of businesses

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

,0

50,000

100,000

150,000

200,000

250,000

300,000

Number of ISO 14001 certifications

Africa / West Asia Central / South America

North America Europe

Far East Australia / New Zealand

Improving the Empirics of Quality Infrastructure

Composite indicator (Liedtke & Matteo, 2011):

(1) capabilities and

(2) international recognition / integration

• Metrology• Number of Calibration and Measurement Capabilities (CMCs) in relation to population• Number of Key or Supplementary Comparisons

• Standardization and Certification• Number of ISO 9001 certifications in relation to population• Number of Technical Committee (TC) participations

• Accreditation• Number of accredited bodies

CONCLUSIONS

Role of Quality Infrastructure for Sustainability

Reducing environmental quality information asymmetries:

• Standardization: development of performance-based environmental quality criteria

• Metrology: reliable assessment of environmental quality

• Accreditation: credibility of environmental quality information

• Conformity Assessment: precise and unbiased disclosure of environmental quality

Creation of market incentives for environmental performance

Influence on the competitiveness effect of environmental regulation (externality problem)

• Signaling / monitoring of environmental performance

• Response to sophisticated foreign demand / reduction of de facto barriers

• Incentives for the development and diffusion of environmental technologies

• Long-term effects on innovation (system functions)

THANK YOU!