At the end of 2011, the EU demanded its member states to introduce an eco-label for cars. This makes perfect sense, since it is useful for buyers to know the environmental impact of their cars, also because the level of taxes they pay is related to the pollution the cars create.

What is “interesting” is that the EU allows each country to basically design the label itself. A German car magazine nicely shows: France or Denmark regulate according to CO2 production, Germany takes in addition the weight of the car into account, while Belgium or Spain regulate also according to the surface area of the car. As a result, cars are placed in different ecolabel categories according to which country the are registered in:

Grafik Länder-Chaos beim Öko-Label

So why do Germans place cars into a better eco-label category if they are larger? We do get more and more the impression that lobbying from the car industry is the reason, see HERE, or HERE, or HERE. While lobbying may have had an influence on the fact that larger cars get placed in better ecolabel categories in Germany, it did not necessarly lead to an overall higher placement for cars in Germany in comparison to other countries, see the Figure above.

One would have to compare the average level of the label, weighted by the number of cars in each category, and then compare this across EU countries, in order to really know whether car manufacturers had any significant impact on the regulatory outcome. For example, if the average ranking in Germany would turn out to be B, while in all other European countries it is C, then one could claim that Germany’s design of the ecolabel places cars, on average, in a better category, and as a result favors car manufacturers.

However, even this would not be enough. It may even be necessary to weigh these results according to what cars the car manufacturers in each EU country produce, in order to know whether such a lobbying impact really exists. There is some evidence that German car manufacturers like Mercedes, Porsche, may have had some impact on the regulation, since they produce larger cars and, the bigger the car, the better the ecolabel for German cars. In contrast, French car manufacturers tend to produce smaller cars, and (consequently?) in France only the CO2 emissions are taken into account for the labelling process.

Conclusively, there may be some evidence for lobbying just like some newspapers claim, but whether the lobbying also had the impact of really providing a positive impact on the home market requires a much deeper and careful study as suggested in the paragraphs above.

Let’s look at how reasonable really the ecolabel is, and we take the example of Germany. Remember, the ecolabel is introduced in order to provide information to the buyer: mostly knowledge about the environmental impact of their cars, i.e. CO2 emissions.

Let’s look at some labelling (A+ means green and very efficient, G means red and least efficient) examples:

B category:
Porsche Cayenne S Hybrid (193 g CO2/km)

D category:
Toyoto Aygo (106 g CO2/km)

E category:
Smart mhd (103 g CO2/km)

Do you see a pattern here? The eco-label is calculated by incorporating the weight of the cars, and heavier cars are allowed to emit more for the same label category. Using this truly ingenious way of calculating the ecolabel, one may find that the Leopard 2 tank will fall into the same ecolabel category as the Smart mdh.

The difference between the two is that Leopard 2 uses roughly 530 liters for 100km, while the Smart relies on 4.3 liters for the same distance. An ecolabel that is so inversely relying on scale is not even close to being a well-meant but faulty means of information provision, but it is truly misleading.

You don’t see a house receiving a better ecolabel because it is bigger, and neither is weight incorporated into the ecolabel for fridges. Tomatos do not become organic simply because they are redder than their non-organic competitors, and, likewise, chickens do not get a bio-label if they are the size of an ostrich. Consequently, why should the environmental-friendliness of cars be judged by the weight or size of the cars?

Regulators need to take a step back and carefully think about the precise reason for which they introduce a particular regulation. By doing so, they should be able to place a frame around the regulation and decide on the absolutely necessary components of the regulation in order to achieve their objective, and those that are less important. Ultimately, their regulatory attempts will be faced by attacks from special interest groups, and they do have lobbying power. Any regulation which is weakened to such an extent that it becomes in-transparent or does not really achieve the goal it was meant to achieve may as well be dropped altogether.

As an additional point, an ecolabel regulation which is based on self-proclaimed CO2 emissions is certainly allowing plenty of room for moral hazard. I have already shown some while ago that there is plenty of moral hazard with respect to the CO2 emissions in the car sector. Now, with the additional introduction of the ecolabel, which again is based on self-proclaimed CO2 emissions, it leads to even more moral hazard.

In addition, and this may be a more troublesome implication of the regulation, this type of ecolabeling can result in what is called the `green paradox’. This is a bad name of something intuitive: Any regulation may induce counter-productive results. In the case of this ecolabel in e.g. Germany, Switzerland, Spain, etc.., car manufacturers may start to produce bigger cars since they end up, ceteris paribus, in a better ecolabel category. Consumers, vice versa, buy bigger cars, since they are led to believe that they are more environmentally-friendly. As a result, CO2 emissions may actually rise, climate change gets fostered; consumers pay more finally since they use more petrol compared to the case where the ecolabel is fully informative on the environmental impact; and car manufacturers make larger profits and consequently obtain a stronger lobbying power.

The overall picture that emerges is that a well-meant regulation at the EU level gets watered down at the national levels (at least in some countries), re-interpreted, and a regulation that was initially meant to inform consumers and reduce CO2 emissions ends up by confusing consumers and potentially increasing emissions. If regulators allow those who they are supposed to regulate that much freedom, then this receives the REGULATORY FAIL label:

UPDATE 11 Nov 2013:

One question which was raised to me was why I didn’t discuss the reason for which the EU did not try to introduce a more holistic label, for example one that is based on a craddle-to-grave approach. A craddle-to-grave label would take the whole product life cycle into account, and not only the CO2 emissions of the car one drives.

Why does it make sense? Well, clearly, imagine you buy an electric car. This will look great in terms of CO2 use and will top the list on the ecolabel for cars. However, what if the company that produced that car had to pollute its surrounding during the production to an extent that this would even be more a costly pollution than the total CO2 emitted by the electric car? This is an issue that the current ecolabel cannot address and it hides the true costs of the car that one buys.

Why did the EU not try to introduce a craddle-to-grave label? I guess (or hope), if they had seen a realistic chance for a craddle-to-grave label to make it onto the market, then they might have tried. My suppose that they, hopefully only for now, settled with the easier and more feasible option of only including CO2 emissions. Which is unfortunate, but one has to remember that there is a substantial political lobbying process going on in the background and that certainly dictates some of the possibilities. Nevertheless, it should clearly be said that a craddle-to-grave ecolabel would be the optimal solution and it can only be hoped that the EU will, sooner or later, pick up on this.