Green Premiums and the Price of Ethical Consumption

Most consumers do not like the idea that the goods they purchase are only made so affordable through producers’ exploitation of labor and lack of concern for the environment.  As a result, many consumers are drawn to goods that are produced ethically, with ethically sourced being a popular term.  In highly developed economies like those in North America and western Europe, consumers may also prefer goods that are advertised as domestically produced for similar reasons.  It is often assumed that goods produced domestically in highly developed nations are made by companies that have to conform to labor, health, and environmental regulations.

Green Premiums Explained

Good produced ethically, and especially ethically and domestically in highly developed nations, are more expensive due to higher costs of production.  These higher costs, of course, translate into higher prices.  These higher-than-average prices create the green premiums that consumers can choose to pay.  Specifically, “green” premiums refer to the cost of environmentally-conscious production, up to and including carbon neutral production.  To produce carbon neutral goods, a company must usually engage in carbon offsets to make up for their production-related pollution.

Economic Benefits of Environmental Sustainability

Environmental sustainability is often seen as a noble goal.  However, there are also economic benefits to supporting environmentally sustainable production.  Pollution and environmental degradation are negative externalities that cause economic harm to third parties through higher costs.  Thus, paying more to support environmentally sustainable production can be seen as an investment in reducing negative externalities.  On a macro scale, the costs of supporting environmental sustainability could be justified by proportionally reducing the costs of repairing environmental harms.

Consumers may consciously contribute toward this effort by supporting companies that produce ethically, or they may support these companies out of a more basic dislike of pollution.  The government also contributes toward this effort by offering tax credits for firms and consumers that engage in both ethical production and ethical consumption.  If producers and consumers make financial decisions that are better for the environment, the government does not have to expend as much of its resources to heal the environment later on.

Are Consumers Willing to Pay for Green Production?

A strong majority of consumers indicate that they are willing to pay more for environmentally sustainable goods, which are produced with less trash- or pollution-creating methods than substitutes.  How much more they are willing to pay is the key question, with one survey indicating about 12 percent.  This trend has persisted since at least the late 1980s, when polled consumers said they would pay about 5 percent more for environmentally sustainable packaging.

However, researchers noted that consumers stating they would be willing to pay green premiums came independently of information about economic struggles like inflation.  There is also the strong possibility of social desirability bias in surveys about environmentalism, meaning consumers often overstate their valuation of clean energy, environmentally sustainable production, carbon neutrality, and other pro-environmental concepts.  This implies a lag between predicted consumer adoption of green production and green energy and actual adoption, with more consumers than expected continuing to purchase less expensive substitutes.

Negative Externalities of Green Premiums

Greenwashing

More consumers willing to pay green premiums and supporting environmentally sustainable production and clean energy is undoubtedly good for the environment.  As “green” companies grow and expand, they cause less ecological damage than their “dirty” counterparts.  However, just like some companies try to attract consumers by falsely claiming that their products are domestically made, some companies also try to attract consumers by falsely claiming that their products are ethically made.  Greenwashing is the term for producers using misleading terminology, or outright fraud, to advertise their goods and services as ecologically friendly.

Unfortunately, greenwashing is not uncommon.  Some greenwashing is easily detected by regulators, such as automakers advertising that their vehicles meet new emissions standards but failing to do so in reality.  Other greenwashing is more subjective, such as advertising that a company is “making strides toward” or “has plans to” help the environment.  It is difficult for regulators or pro-environment interest groups to penalize companies for subjective assertions, although most consumers would agree that such corporate advertising without action is unethical.

Regulatory Gaps

Some companies may delay or avoid environmental regulations by engaging in greenwashing.  Busy regulators may focus first on companies that are known polluters, allowing less-known polluters to “fly under the radar” by using pro-environmental and pro-green language.  Sometimes, outright fraud may be used when companies create fake environmental groups that certify the company’s products as “green” or “eco-friendly.”  Many companies may engage in various types of greenwashing to delay having to make actual reforms, slowing the macro process of reducing pollution and environmental degradation.

Political Challenge of Green Premiums: Inflation and Elitism

Greenflation has become a popular term for describing the extra costs of green premiums on consumers.  In our current era of growing income inequality, both in North America and in western Europe, some political leaders have criticized the environmentalist and clean energy movements as raising costs on lower- and middle-income families due to greenflation.  Supporters of these movements counter, and argue that clean energy and environmentally sustainable production actually benefit these families in the long run through less volatility in energy markets as compared to petroleum.

Critics of “ethical consumption” also frequently argue that such a focus is elitist and driven primarily by wealthy liberals.  In recent years, critics have pointed out the alleged hypocrisy of pro-environmentalist celebrities traveling via private jet, which causes considerable pollution.  Especially in the United States, this has created the political charge of wealthy environmentalists hypocritically causing pollution while wanting to “force” lower-income Americans to replace their traditional vehicles and appliances with energy-efficient versions.

Future of Ethical Production and Consumption

Most experts agree that global warming, caused by carbon emissions and other pollution, will cause inflation as it increases demand for air conditioning and makes it more difficult to grow certain crops.  Politically, however, it is difficult to combat global warming due to strong resistance by polluters and tepid support by the public.  The collective costs of continued global warming are divided among billions of people, meaning it will take decades to generate widespread public support.  Major corporations employ well-connected lobbyists who can network with legislators around the globe, helping delay or disrupt proposed environmental regulations.

Aside from scientific breakthroughs in clean energy production, such as cold fusion, the environmental and clean energy movements can continue to increase public support for ethical consumption through skilled marketing and public relations.  Successful advertising in recent years has focused on promoting the reliability of clean energy, which rebuts critics claims that clean energy is less reliable than fossil fuels.  Other successful ads focus on the economic impact of clean energy, which is often government-subsidized and creates full-time jobs.  For example, the Inflation Reduction Act of 2022 is estimated to create between 1.7 and 5 million jobs in the United States over the long run thanks to tax credits for clean energy.

Government-subsidized clean energy jobs, however, may be vulnerable to withdrawals of government grants, tax credits, and other funding when administrations change, thus reducing the true economic benefit of government spending on clean energy.  This can create a net loss in production output, as pulling funding for these jobs may result in unfinished projects where sunk costs cannot be recouped; the resources cannot reasonably be transitioned elsewhere.  Therefore, governments should be careful not to pull funding to infrastructure projects and grant programs that are unfinished - forcing projects to stop abruptly can mean billions in wasted investment.