Eco-labels, Trade and Protectionism MADS GREAKER Statistics Norway, Centre for Development, P.O. Box 8131, 0033 Oslo, Norway (e-mail: mgr@ssb.no) Accepted 8 June 2005 Abstract. Eco-labels are suspected to serve protectionist purposes. We analyze the choice between an environmental standard and a voluntary eco-label scheme in a partial trade model with one domestic firm and one foreign firm. The environmental standard will only apply to the domestic firm, while both firms can adopt the eco-label. Pollution is production related, and domestic consumers demand products that are produced in an ‘‘environmentally friendly’’ way. Our results show that it may be optimal for the domestic government to introduce an eco-label and get both firms to adopt the label, instead of setting an environmental standard. However, to what extent this policy serves protectionist purposes is ambiguous. In particular, if the willingness to pay for green products is sufficient to cover the pollution abatement costs of the foreign firm, foreign firm profit will increase while domestic firm profit will decrease compared to the outcome with a domestic environmental standard. On the other hand, if the willingness to pay for green products is insufficient, the foreign firm would be better off with a domestic environmental standard. Key words: eco-labels, product differentiation, trade policy JEL classifications: H2, H7, Q2, Q28 1. Introduction All industrialized countries except Australia have an eco-label scheme in place, while no country in Africa and only Brazil in Latin-America has one (Environmental Protection Agency 1998). Eco-labels have received consid- erable attention in the WTO (WTO 1999), and are criticized for imposing the environmental concerns of importing countries on the production methods of their trading partners. However, the trade and welfare effects of voluntary eco-label schemes, including prescriptions for production methods, have scarcely been analyzed before in formal models. Most eco-label schemes are put in place on an initiative from a govern- mental body, e.g. the EU eco-label, the US EPA Energy Star and the Nordic Swan. It is also evident that eco-label schemes frequently include prescrip- tions regarding process and production methods. One example is the EU eco- label criteria for copying paper, which only include prescriptions related to the production of the paper, i.e. demand for sustainable forest management, Environmental & Resource Economics (2006) 33: 1–37 Ó Springer 2006 DOI 10.1007/s10640-005-0070-9