FUND FOR RESEARCH INTO INDUSTRIAL DEVELOPMENT, GROWTH & EQUITY

Global Review of Eco-Labels: Implications for South Africa

PHASE ONE REPORT

6. Introducing Eco-Labels in SA: Implications and Policy Options

This chapter reviews the implications and key challenges associated with introducing an environmental labelling scheme in South Africa, and presents some initial thoughts regarding two key policy options associated with eco-labelling, namely: introducing a specific South African programme, or accessing existing labelling schemes.

6.1 Socio-Economic Impact of Eco-Labels in SA: Trade, Investment and Employment

Eco-labels are market instruments that may provide producers with the opportunity to extract additional market place preference, and thus market share, while guiding consumers to choose products that are environmentally preferable. Since eco-labels may include production methods as a criterion for differentiation and discrimination of products, there is a potential for conflict between trade partners.

In many cases, developing countries mostly export resource-intensive output (such as agricultural products and fabrics). Where industrialised countries introduce eco-labels, this can lead to exporters not being able to meet the criteria developed in the host country. Environmental awareness is generally greater in the more industrialised countries, and as such eco-labels nonetheless have the potential of having a significant impact on the "peripheral" countries, especially developing nations. As consumers shift their demand away from unlabelled goods, this has a direct impact on trade flows, leading to market share losses and trade distortions. The results are reduced production, lower investment levels and increasing unemployment.

6.1.1 Brief Overview of Trade between SA and its Trade partners

Eco-labels can have a number of implications for trade, investment, and by natural extension, on employment. Trade remains an instrument that is frequently used (and abused) by industrialised countries not only to protect their home industries, but also as a lever to exert influence over developing countries. As a result, many developing countries view environmental concerns raised by industrialised countries with a measure of distrust, being wary that environmental linkages in trade will remove many of the benefits of free trade and preferential market access.

The South African economy was for decades substantially driven by policies of inward industrialisation and import substitution, while being shielded from outside competition through restrictive trade quotas and import tariffs. As a result, South African producers in many industries were not as exposed to foreign competition, and foreign market pressure, as they would have been if the economy had been an "open" one.

In the 1990s and early 2000s however, this situation began to change markedly with the liberalisation of the South African economy. Globalisation has become a factor that very few South African producers, and consumers, are immune against. Foreign producers are increasingly contesting the domestic market, while South African producers have new opportunities in foreign markets. A number of industry sectors are finding it difficult to compete with imported substitute products, for a number of reasons. As a result, and to some extent owing to favourable exchange rate conditions, many local industries are increasingly focusing on the export market.

However, as the number and range of products bearing eco-labels increases, consumers are provided with greater opportunities to differentiate between products on environmental grounds, by choosing to purchase products that have obtained an eco-label. Not only consumers can discriminate between products bearing an eco-label and those that don't; legislative authorities may introduce policies that prevent products (typically those competing with their domestic industries) from entering a given market if such products do not comply with certain qualitative (including environmental) aspects. Market access for South African export products could be restricted by seemingly arbitrary rules governing the entry of foreign produced goods into a region. A number of well-publicised cases have involved the European Union, having gone as far as setting criteria to govern the external characteristics of certain fruit entering its area of jurisdiction.

In order to obtain a greater understanding of the potential impact that eco-labelling may have on market access opportunities, and thus on trade, it is useful to take a closer look at South Africa's trade performance.

On a regional basis, the European Union (EU) continues to be South Africa's most important export market, being the destination of approximately one third of all South Africa's exports. This is followed by exports to the North American / NAFTA countries (United States and Canada), the Southern African Development Community (14 member states) and North East Asia. With regard to overall imports, the situation is similar, except for the value of regional (SADC) imports, which are less significant from an overall perspective.

Table 8 - Trade between South Africa and its Key Trade Partners (1999-2001)

Exports to Region	2001 R '000	2000 R '000	1999 R '000	Nom. Change '99-'01
European Union	80,325,829	65,690,298	53,235,699	+ 50%
North America (NAFTA)	32,942,862	27,913,675	18,904,977	+ 75%
SADC	25,404,991	21,992,243	17,730,047	+ 43%
North East Asian Countries	23,589,802	21,060,732	15,469,881	+ 52%
Source: DTI Trade Statistics
Imports from Region	2001 R '000	2000 R '000	1999 R '000	Nom. Change '99-'01
European Union	88,721,355	74,449,719	62,926,643	+ 40%
North America (NAFTA)	27,897,028	24,328,178	21,672,630	+ 29%
North East Asian Countries	18,691,605	18,369,174	14,260,713	+ 30%
Chinas	15,683,196	13,113,254	10,393,887	+ 51%
Source: DTI Trade Statistics

The above table clearly demonstrates that international trade between South Africa and its trade partners has increased significantly in the period 1999-2001. While imports have grown strongly, exports have followed suit, especially to the EU and North American market.

A disaggregation of the above data shows that within the EU, South Africa's most important export destinations by value are the UK, Germany and The Netherlands. Within NAFTA (and overall), the US is South Africa's single largest trade partner.

6.1.2 Trade Protocols with the EU, US and Market Access Issues

South Africa's inward orientation in respect of industrial activity has in the past allowed the growth of industries that may otherwise not have been economically sustainable. Now that this orientation has changed somewhat, South African producers - faced by increased domestic competition - are seeking new export opportunities. Recent trade agreements between SA and its most important international trade partners - the European Union and the US - have important implications for South Africa.

Liberalising trade holds both opportunities and threats for South African industries. On the one hand, tariff concessions made by the EU can lead to increased exports and earnings, since lower tariffs provide South African industries with a price-advantage over their competitors (both in the export country and vis-à-vis competitors from other exporting countries). On the other hand, the reciprocal nature of a Trade Protocol result in lower import tariffs, resulting in less protection from imports. As a consequence, domestic producers (whether they are exporters or not) have to become internationally competitive in their own market. Those that don't, face decreasing market shares and inevitable job losses.

The EU Trade Protocol

Since the EU is South Africa's largest trade partner, accounting for 37% (2001) of the total value of exports and 41% (2001) of total imports, any trade-related agreements between the two regions will have an impact on South Africa's industry. A "Trade, Development and Co-operation Agreement" between the European Union and South Africa was signed on 11 October 1999 in Pretoria, South Africa. The Agreement provisionally entered into force on 1 January, 2000, and regulates the gradual downscaling of tariff-based trade barriers between South Africa and the EU. It is known as the EU/South Africa Trade Protocol.

The overall coverage of the Agreement will amount to 90 % of current EU/SA trade. The EU will, however, open its market to South African products more rapidly and more extensively than South Africa. The EU will liberalise up to 95% of its imports from South Africa within 10 years after entry into force of the Agreement, while South Africa will be able to retain its tariff barriers for slightly longer. After a transition period of 12 years South Africa will open 86% of EU imports to duty-free trade. On the South African side, tariff levels will be reduced from an average of 10% to around 5% at the end of the transition period, with the largest cuts being made with regard to agricultural imports. The EU's commitment extends to reducing overall tariff protection by 51%, with the largest cuts being made with regard to industrial imports from South Africa. It must be mentioned, however, that South Africa will be lowering its tariffs off a higher base, meaning that the marginal change is greater.

Some of the main objectives of the SA/EU Trade Protocol, especially from a South African viewpoint, are outlined in Figure 9.

Figure 9 - The Main Objectives of the SA / EU Trade Protocol from the South African Viewpoint

1.	The consolidation of strategic links with South Africa's main trading partners in Europe with a view to the provision of sustainable economic growth
2.	South Africa increasing its international competitiveness; and expansions in those sectors where it is competitive
3.	The continuing development of local and regional industrial capacity
4.	The facilitation of industrial restructuring
5.	Increasing investment flows into South African and regional economies

Some criticism has been levelled at the agreement by local manufacturers and labour organisations, which are of the opinion that the benefits are not entirely reciprocal, favouring Europe. This criticism appears to be largely based on the fact that the EU is scaling down tariffs off a much lower base percentage, while continuing to extract last-minute concessions from South Africa.

One of the concerns around the EU/South Africa Trade Protocol is, while tariff-based trade barriers are being reduced (which is also in line with WTO recommendations and other bi-lateral trade agreements), these may be replaced by non-tariff and mainly technical trade barriers. Products not complying with certain technical or environmental standards may find that their uptake in South Africa's European export markets is diminished over time, as market share is lost to "compliant" products. "Compliance" could, for example, be in the form of an eco-label or similar certification.

While, prima facie, the downscaling of tariff-based trade barriers and quotas between South Africa and the EU open up new opportunities for South African producers, the flow of benefits may be largely one-way. The EU, where environmental awareness and the market for eco-labelling has generally progressed significantly, may thus become an increasingly difficult market to penetrate, notwithstanding current trade volumes. Unless South African manufacturers can accede to the non-tariff barriers that may restrict EU market access (mainly through certified compliance with minimum environmental standards), the benefits from the Trade Protocol may be reduced.

The Africa Growth and Opportunity Act (AGOA)

The Africa Growth and Opportunity Act is a United States Trade Act that grants South Africa, among other countries, preferential access to the US market. Unlike the EU/South Africa Trade Protocol, the AGOA is not a negotiated agreement between two countries / regions. Nonetheless, it has major implications for South Africa, since the US is South Africa's single largest (country) trade partner, accounting for 14 % (2001) of South Africa's total exports, and 12 % (2001) of its imports. To the US, it's imports from South Africa are the second highest in sub-Saharan Africa, after those from Nigeria (consisting mainly of crude oil, though).

The AGOA provides qualifying Sub-Saharan countries with duty-free and access to US markets, covering the 8-year period from 01 October 2000 to 30 September 2008. It forms part of the United States' Trade and Development Act of 2000. The Act's express intention is to "authorise a new trade and investment policy for sub-Saharan Africa, renew the generalised system of preferences, and re-authorise the trade adjustment assistance programs".

The AGOA covers 35 "qualifying" countries of Sub-Saharan Africa, and provides them with duty-free access to the US. It extends the preferential market access afforded the over 4600 GSP (General System of Preferences) product lines by a further 1,800. The scope and reach of the Act are therefore broad, and are likely to have long term consequences, especially on sub-Saharan African countries.

Although much emphasis has been on clothing and textiles trade with regard to the AGOA (direct textile exports are specifically excluded, garments are not), the product coverage is wide. South African manufacturers, relative to those in most other African states, are in a dominant position to take advantage of the preferential market access. In many cases, import duties in the US in excess of 25% have been removed for AGOA-exports.

6.1.3 Possible implications for Investment and Employment

Trade, investment and employment are issues that are to a large extent interrelated. In its simplest form, ready market access and international competitiveness allow industries to penetrate export markets and gain market share, which in turn leads to increased production, necessitating increased investment and employment levels. In other words, international trade usually leads to greater investment and employment levels in an industry's home market.

However, the opposite also holds true. The previous discussion referred to globalisation, a process associated with the acceleration of international trade, the dismantling of barriers to the flow of goods, services, capital, skills and technology. The (partial) liberalisation of South Africa's economy has exposed it to the threats and opportunities of the global economy. In particular, foreign-produced output is increasingly entering the domestic market, while at the same time South Africa's exports have increased considerably.

But not all industries have been ready for new competitors, many having curtailed operations or being forced to close down, resulting in significant job losses. This is particularly true for South Africa's clothing and textile industries, which have struggled to remain competitive, especially at the lower end of the market (e.g. lower value-added products, such as T-shirts etc.). Other industries have benefited from new opportunities abroad, necessitating the local expansion of production (investment) and leading to increased employment.

It is therefore clear that investment and employment levels rise in those industries that are able to adapt to new market opportunities and manage the 'transition', as a result of their stronger outward-orientation and/or greater (price) competitiveness. Employment levels and investment decrease in the sectors that are unable to compete with imported goods. There will be both "winners" and losers". All other factors being equal, this argument certainly holds in theory.

In practice, though, there are a number of additional factors to contend with. Although tariff-based trade barriers have indeed been on a downward trend (which is also in line with WTO regulations), there are indications that industrialised countries may use other means of preventing full access to their markets, and thus competition with their home industries. Tariff-based trade barriers are in some cases effectively being replaced by non-tariff barriers, such as the need to comply with certain environmental, technical, social and documentation standards. Eco-labels also fall into these categories. Governments-sponsored national eco-labelling programs, being based on ecological criteria that are usually only relevant to the home country's environmental concerns, can shift local consumption patterns away from unlabelled goods. This can have discriminatory effects on foreign producers, especially those from developing countries, who may be burdened by not having ready access to the necessary expertise or financial resources to comply with these ecological criteria.

6.2 Eco-labelling: Costs and Benefits in a South African Context

Eco-labelling brings with it definite costs and potential benefits; for any company or organisation seeking to voluntarily comply with eco-labelling standards, it is evident that the anticipated benefits need to exceed the costs involved. This is not a straightforward decision, as the potential benefits are often more difficult to quantify than the probable direct costs. Quantifying the benefits may at best yield unreliable or vague results, whilst the quantification of indirect costs (such as the opportunity costs of not complying) are impossible to ascertain with any degree of accuracy.

This section seeks to identify some of the issues associated with the possible cost-benefit trade-off associated with an eco-labelling programme, by highlighting some of the issues that may have a bearing on the local textiles industry. (Textiles has been chosen as this is one of the key South African exports to the EU, is a sector which is particularly well covered by labelling, and is a sector in which labelling initiatives in South Africa are currently underway).

6.2.1 Likely Financial Impact of Eco-Labelling on the South African Textile Industry

It is suggested that eco-labelling and other certification initiatives are likely to have an increasingly significant impact on the textile industry, both domestically and abroad. While it is impossible to ascertain the extent of the impact that the different types of certification initiatives (environmental and quality) may have, it is evident that more and more entities along the supply and demand chain - from raw material processors through to the retail market and end-consumers - are demanding compliance with certain minimum standards. Although it is unlikely that - at least in the short term - the market demand for certified products will be significant from within developing country sectors, it is arguable that pressures from developed countries and market segments will continue to rise.

It is generally recognised that the South African textile industry is not competitive in the bottom end of the market. This is due to a number of factors, including endogenous issues - such as low labour productivity, (often) outdated capital equipment and the lack of economies of scale - as well as exogenous issues, such as globalisation and decreasing barriers to trade. As a direct consequence, not only is the lower end of the domestic textile and clothing market less accessible (or more competitive) to local manufacturers producing for that segment, but those markets that the domestic industry is competitive in, impose greater demands on the non-price issues such as quality and environmental standards.

To some extent, a shift in focus is being forced upon the local textile industry. While the factors determining un-competitiveness are in some way a result of industry-internal issues of the past, they nonetheless require a response and an adaptation by the industry in present times. Targeting foreign textile markets is an important means, if not the only one, of achieving sustainable growth in textile sales. It is no longer a question of whether or not to export; it has now become a medium term necessity for all but a few textile manufacturers operating out of South Africa.

The textile industry's size in terms of output and employment render it an important industry in South Africa, and a significant contributor to the South African economy in many ways. Its contribution to GDP and employment, as well as its direct and indirect importance to the many up-stream and down-stream industries it relies upon, increase the significance that any positive or negative impact has on the industry, and any industry that relies on it. The state of the clothing industry has a direct impact on the textile industry, both in vertically integrated enterprises as well as the rest through direct supply relationships.

Any factor having a significant financial effect on the clothing industry is likely to have an indirect, yet similarly significant effect on the textile industry. One thus needs to look at the likely financial impact of eco-labelling from two angles: the direct impact on the textile industry, and the indirect effect via the clothing industry.

The financial impact on the textile industry of eco-labelling would consequently include the costs involved with of compliance, as well as the (opportunity) costs of non-compliance:

Costs of Compliance with Eco-Label Standards

There are a number of potential costs that a local textile company may need to incur in acquiring the licence to use an eco-label:

• The direct costs of eco-labelling certification: these depend on the complexity of the products to be certified and the testing procedures to be performed.
• The cost of implementing any changes that may be necessary in order to comply with the provisions of the relevant environmental label. This may be a negative cost, but may also be a 'positive cost' associated for example with the less intensive use of chemicals and water and with energy savings.
• The information and marketing costs of first obtaining information on the correct and applicable eco-labelling scheme, and the cost of marketing compliance in existing or new output markets to prospective clients

It is anticipated that further clarity on the possible costs associated with achieving compliance with the EU textile criteria will be available during Phase II, pending the outcome of the current DANCED/DANIDA intervention (described in Section 5.3.2 above).

Costs ofNon-Compliance with Eco-Label Standards

Offsetting these various - usually more tangible - compliance costs, are the potential costs of not acquiring the eco-labelling criteria. These include:

• The potential direct loss in restricted market access in international textile markets;
• The potential opportunity cost (that is, the cost of possible opportunities foregone) associated with lost market opportunities of integrating into certain segments (e.g. EU-based clothing manufacturers) of the global textile value chain

It is difficult to estimate what these costs are. Furthermore there are some indications that at present there is insufficient demand - even from developed countries - for labelled products. A recent study undertaken by the UN Department for Policy Co-ordination and Sustainable Development found for example that: "…the effects of eco-labels on developing country exports is likely to be small, mainly because a large market niche will exist for products without an eco-mark that compete primarily on price."

During 2000 the South African textile industry exported approximately R1.5 Billion worth of textiles, with the majority of these going to developed countries, and in particular to the U.S. and Europe. Based on current exports, and assuming that South African produced textiles become less attractive due to non-compliance, this could easily cost the industry a percentage of its current exports. For every 1% that exports decrease by, this translates into R15 Million of existing sales, not counting the cost of opportunities forgone due to not expanding sales in some quarters. This opportunity cost is impossible to estimate with any measure of reliability, bearing in mind that the South African textile industry is a very small player by international standards. The growth in market demand for "environmentally-responsible" textiles, combined with the new direct and indirect market opportunities offered by various FTAs (most notably with the U.S. under the AGOA and with the EU), offers virtually unlimited opportunities to the South African textile (and clothing) industries. The possible market for environmental products is thus immense and offers huge growth prospects. It is probable that the extent of market opportunities forgone by the absence of environmental compliance is only limited by capacity ceilings of the South African industry. Currently the industry's non-utilisation of production capacity is approximately 20%, meaning that the opportunity cost of non-compliance with eco-labels is likely to be substantial (Statistics South Africa, 2001a).

A more detailed assessment of the current and anticipated level of foreign demand for certified products from key sectors will be undertaken as part of Phase II of this study.

6.3 Key Challenges in Introducing an Eco-Labelling Scheme

For an eco-labelling programme to be effective there are a number of significant challenges that need to be provided for. This sub-section outlines these challenges, and identifies various key considerations that will need to be addressed in designing a possible labelling scheme for South Africa. These challenges relate to the different impacts of the programme on consumers, producers and retailers, and government.

6.3.1 Changing Consumption Patterns : The Role of Consumers

The consumer is key to the success of an eco-labelling programme. Without any change in consumer behaviour associated directly with the label, the initiative will not achieve its anticipated outcomes. The effect of an eco-label on consumer behaviour is dependent upon:

• The nature and extent of the eco-label information actually absorbed by the consumer;
• The perceived credibility of the eco-labelling scheme;
• The willingness of the consumer to choose the labelled product over a similarly priced non-labelled product

Information perceived by the consumer

A problem encountered in many labelling initiatives is the low level of general awareness amongst consumers either of the existence of the labelling initiative, and/or of the full implications of the initiative, notwithstanding the various marketing activities that may have been carried out. These marketing activities include not only the (often substantial) expenditure undertaken by the labelling authorities, but also the product-related marketing undertaken by the producer. Researchers have found that even amongst consumers that have demanded label information, in many instances only a low percentage of that information is actually understood and appreciated by the consumers. In South Africa this is further compounded by the fact that the country suffers from high levels of illiteracy.

A lack of awareness amongst consumers regarding the existence or value of an eco-labelling scheme can result in a vicious circle that perpetuates the limited success of the scheme: without much consumer demand, producers are less likely to apply for the label; with limited suppliers, and insufficient consumer demand, retailers are less likely to stock labelled products; and without retailers offering labelled products, consumer awareness will remain limited.

These factors highlight the importance of ensuring that any eco-labelling initiative that is introduced in South Africa must be accompanied by a comprehensive programme aimed at improving consumer awareness, not only on the nature of any eco-labelling initiative, but also more generally as regards the environmental impacts of consumption patterns. In assessing the implications for South Africa, it is useful to consider the level of expenditure on marketing and promotional activities within some the various existing schemes:

• In Sweden for example approximately ECU 600 000 has been spent on marketing the Nordic Swan and EU Eco-label
• The German Blue Angel has a budget of ECU 100 000 for promotional activities (20% of total incomes of annual subscription to the Blue Angel)

Ensuring the credibility of the scheme

In addition to increasing the general level of awareness and understanding amongst consumers of the nature and benefits of the labelling programme, it is important also to ensure that the programme is seen to be sufficiently credible. This has implications in terms of the administrative process that is used, and in the nature of the eco-labelling criteria that are developed. It is important not only that the criteria are seen to address appropriate issues that are of priority concerns within the particular region, but also that there is seen to be effective and completely impartial implementation of the programme.

Consumer's Willingness to Pay

In terms of the basic economic laws of supply and demand, as the price of a good rises, so the demand for that good will fall. All things being equal, if there are two similar products then consumers will generally choose the less-expensive product. An important aim of labels (be it the form of conventional product branding or as an eco-label) is to differentiate products such that the positive attributes of a particular brand or labelled product are seen to offset a (possibly) higher price. . These attributes may include a "feel-good-factor" or an expression of some form of social identity. It should be noted, though, that consumers' "willingness to pay" should not merely be measured against their willingness to pay a price premium, but also relate to their increased willingness to chose a particular (labelled) product in the first place.

Focusing on South Africa, there is a valid concern that since a large proportion of consumers (individually) still have limited purchasing power, the more nebulous benefits typically associated with environmental labelling are unlikely to offset any higher prices associated with labelled product. To be effective, labelled products in South Africa should either not be at a cost-premium, or should be specific to those sectors of the community that can afford to pay any such premium and that are likely to perceive offsetting benefits in the labelled product. With this in mind, it may be useful to further investigate the potential in South Africa for targeting certain luxury items where there are seen to be particular opportunities both for improved environmental performance and a change in consumption patters.

To ensure that the labelling programme is effective on consumers, provision should be made for:

• Implementing a comprehensive eco-labelling marketing strategy aimed at consumers
• Facilitating effective understanding amongst consumers of the implications of label
• Ensuring that any initial products that are certified are seen by public as being credible
• Enhancing credibility through the use of a third party certification process
• Developing capacity and awareness in existing credible consumer and environmental bodies
• Focussing on products for which there is a well-informed, sufficiently prosperous consumer market who may be willing to pay more for the labelled product
• Focussing on labelled products that do not cost more than unlabelled products

6.3.2 Changing Production Patterns : The Role of Producers and Retailers

A key feature of ISO Type I labels is that their use is dependent upon there being a voluntary application made by the producer. A producer will only apply for an eco-label in those instances when there is clear potential to extract extra surplus (or avoid a loss of surplus) in doing so. If the consumer's reaction to the new information provided by the label is not significant, and/or if the cost of providing the information is large, then producers will be able to maintain their competitive advantage without participating in the programme.

Evidence of Marketing Benefits

It is essential to be able to show manufacturers and retailers that there are clear marketing benefits associated with the use of the particular eco-label. The extent to which this is the case is closely linked to the level of awareness and motivation amongst domestic consumers and/or the extent to which a label is required - or provides benefits - as a means of access to foreign markets. As has been outlined above, it is questionable whether domestic markets alone in South Africa will provide sufficient incentive. The extent to which there is sufficient demand from foreign markets to invest in a labelling initiative is to be further examined on a sectoral-specific basis during Phase II of this study.

Sufficient Awareness Amongst Producers / Retailers

A number of recent studies have shown that in many instances not only is there limited awareness amongst producers and retailers of the nature and benefits of labelling programmes, but in some instances there has also been an active scepticism of the benefits of such programmes. Industry criticisms of Type I environmental labels have been particularly evident in the United States. Criticisms - justifiable or not - have focussed on the perceived lack of scientific basis for criteria, the concern that symbols have not educated consumers, and the potential trade restrictive nature of labels that reflect regional environmental priorities. However, despite scepticism among some producers, there are others that are positive. Of prime importance is the "mobilisation" of retailers to expose and market the labelled products. Some of the Swedish experiences demonstrate that the retail sector has played a key role as an "ecological gatekeeper" for the success of the two labelling programs.

Appropriate Market Context

The market context amongst producers and retailers also has a bearing on the use of eco-labels. A recent study suggests for example that there are benefits in focussing on those product groups that include a range of products with significant price differences between brands, and that have high elasticity of sales to price (thereby enabling the sale of more expensive products by improving the image and perceived attributes of product).

In terms of the retail sector, labelling tends to be more effective where there is a large-scale retail sector with a high market share of supermarkets and with an understanding and commitment to promoting environmental and social interests. Furthermore it is important that there is not undue loyalty of retailers towards certain existing suppliers who may be reluctant to qualify for a label. The influential (in this case positive) role that the retail sector can play in an eco-labelling initiative is well demonstrated by the relative success of Sweden's Good Environmental Choice programme who provided significant seed funding to the programme. A recent study into the development of a strategy for promoting the European Eco-flower in France, Spain and the UK, further highlights that positive potential role that retailers may play as a driving force for ensuring more widespread implementation of the labelling initiative.

Branding

An important question - and one that may impact on a retailer's willingness to participate - is the extent to which the label may be seen to conflict with any existing strong brands that the retailer (or producer) may have. This problem may arise with the retailer / producer has already invested effort in marketing their brands as being indicative of various positive attributes such as superior quality and social and environmental responsibility. In those instances where a brand already enjoys strong consumer loyalty, there may be little incentive for the producer or retailer to have its products labelled. Furthermore there is the concern that those of its branded products that are not labelled may be seen to have negative social or environmental impacts. These concerns were recently voiced by management at one of the large retail chains in South Africa during discussions relating to the introduction of the EU flower for certain textiles products as part of the DANCED/DANIDA initiative (see Section 5.3.2).

Figure 11 - Addressing the Challenge: Producers & Retailers

To ensure that the labelling programme is effective on producers and retailers, provision should be made for:

• Focussing on product groups where there is already strong consumer awareness (locally and/or internationally) of the environmental impacts associated with the product
• Ensuring there is no conflict with any existing labelling, certification and branding schemes.
• Minimising the need to require the disclosure of potentially sensitive product data.
• Ensuring that the costs for producers in acquiring the label (associated for example with data collection, expertise requirements, application and licence costs, verification and marketing) do not result in uncompetitive premium being applied to the labelled product.

6.3.3 Government: Ensuring the Scheme's Effectiveness

Government has an important potential role to play in facilitating the effective implementation of a labelling programme. There are a number of activities that government can take, including:

• Providing the appropriate strategic and policy framework to stimulate the adoption of effective product-based initiatives such as eco-labelling
• Identifying the priorities that would guide the development of a possible scheme (e.g. maximising trade opportunities and/or promoting improved environmental performance)
• Facilitating the provision of sufficient seed funding to get the initiative off the ground, as well as possibly being required to provide a supporting financial role through the programme's development.
• Actively contributing to and participating in the institutional and administrative structures.
• Building capacity on LCA and related methodologies, as well as possibly focussing initial efforts on those sectors in which there is existing and/or developing experience in the use of LCA methodologies. The implementation of effective LCA studies is a complex process that requires the availability of sufficient technical, financial and human resources. This remains an area that requires capacity building in South Africa.

6.4 Institutional Implications

Based on the assessment of international experience with eco-labels - as outlined in section 2 of this report - it is possible to identify a general set of key institutional implications associated with the effective development and implementation of an eco-labelling initiative. This section briefly reviews some of the principal implications associated with: organisational structure, funding, and legislation.

6.4.1 Organisational structure

As outlined in the country-studies, most of the existing eco-labelling programmes have very similar administrative structures. There is usually some level of government involvement (typically the national environmental agency), either in administering the system and/or providing advice and funding. It is important that the administrative function is carried out by an independent body; this may be government sponsored or privately managed by an independent non-profit organisation. The political activities of the initiative are typically performed by a central decision-making board, usually comprising representatives from government, business, consumer groups, academia, and environmental groups.

The development of the award criteria typically requires the inputs of technical experts. This may be provided by standards-setting organisations, consultants, research bodies, academics, and/or ad hoc working groups for specific product categories. For a local initiative, the development of these criteria should provide for locally-relevant life cycle considerations. Recognising the complexities associated with the development of effective life cycle methodologies, it may be easier - at least initially - to make use of existing criteria developed by other programmes (as has been undertaken for example in Australia), while ensuring that as far as possible these "imported" criteria remain locally relevant.

It is important to obtain the broad support of various interest key groups in the scheme. Ideally, stakeholders should be engaged in the identification of product groups and the development of criteria for the different product groups.

6.4.2 Funding

As outlined in the country-review, there are two principal approaches for financing eco-labelling schemes:

• Self-financing: through the implementation of a fee system that covers the actual costs linked to the administration, development of criteria and the processing of applications.
• Government funding: either partially or totally.

A possible drawback in basing a system on self-financing is that the development of criteria will be totally dependent on income from fees. As a consequence, the level of the criteria and thereby the selectivity of the scheme might be lowered in order to obtain a reasonable income to run the scheme. This in turn will affect the credibility of the system. Furthermore there is the concern that a system that requires high fees (which are then passed within the price of the labelled product) may be a strong deterrent against consumer take-up of the scheme, particularly in a country like South Africa dominated by consumers with poor purchasing power. In light of these considerations it is not surprising that many of the current systems have received partial or total financial support by government.

An important budget item in the implementation of an effective scheme relates to the marketing of the scheme. As mentioned earlier, most labelling schemes have not been self-promoting. Companies are reluctant to apply for the label as long as the consumers are not aware of its existence, and consumers are not aware of the label as long as there are no labelled products on the market. This creates a chicken and egg situation. To overcome this problem, most programmes have recognised that heavy marketing and promotion activities are necessary. These activities should be targeted at the producer / retailer, as well as to the receiver of the label or declaration, whether being a consumer, a public procurer or a company in the product chain. In assessing the implications for South Africa, it is useful to consider the level of expenditure on marketing and promotional activities within some the various existing schemes, as reviewed in Appendix 1 and Chapter 3. It is important also to appreciate that in many instances this marketing is supplemented by extensive product-based marketing undertaken by the individual producers of the labelled product.

In considering the financial implications of implementing an eco-labelling initiative it is useful to bear in mind the Zimbabwean experience, where an important reason for its failure was seen to be the lack of governmental and consumer support that resulted in serious under-resourcing. In light of the international experience it is recommended that government financial support for the scheme would be essential, and that in all likelihood this would need to be provided for a significant period of time before the scheme is able to become self-sustaining.

6.4.3 Legislation

As has been highlighted by the country-specific reviews, it is apparent that Type-I eco-labelling schemes, being a voluntary environmental measure, are generally not established or regulated by any particular piece of legislation. An important exception to this - and as a specific consequence of its trans-national nature - is the EU flower.

Notwithstanding this observation, as noted in section 5.1 the legislative context within which a labelling scheme operates will have twofold relevance:

• The eco-label scheme may be a legitimate and potentially effective mechanism for giving effect to, or furthering the aims and objectives of, policy and legislation and;
• The policy and legislative direction will have a bearing on the relevance of creating the conditions that facilitate the successful introduction of an eco-labelling system.

Recent experience in a number of countries indicates that the introduction of an environmental labelling scheme often forms part of a more comprehensive product-orientated environmental policy, consisting of a range of different possible policy options a number of which may entail the introduction of legislative measures (see Section 6.5.3 below).

6.5 Policy Options for Government to consider

There are a number of policy responses that the government may choose to implement as a means of achieving the conventional goals of a labelling programme (the possible rationales for labelling initiatives are listed in Figure 1). The choice of preferred option/s will be dependent on government's underlying objective for developing an eco-label scheme. In this regard there are two key objectives that could be seen as guiding the development of such a scheme:

• As a means of facilitating access to international markets that reward or favour products meeting particular environmental criteria or standards as evidenced for example by the attainment of an eco-label. As tariff-based trade barriers between countries are scaled down or removed, largely in response to WTO regulations, so the incentive increases for countries and industries to adopt non-tariff barriers such as eco-labelling. While the exact extent of the impact that eco-labelling will have on South African industry is difficult to quantify, it is nevertheless clear that environmental issues are becoming increasingly entwined with industrial activity and production methods, as well as with international trade. Non-tariff barriers will, in effect, become a greater issue than they have ever been, and it is essential that appropriate policy responses are taken to address this issue. This is seen to be the principal motivating factor behind the commissioning of this study and as a key rationale for developing a formal position in South Africa on eco-labelling.
• As a means of promoting improved environmental performance within South Africa, by increasing the awareness of consumers of the environmental (and possibly also social) impacts of their consumption choices, and by providing produces with a stimulus to minimise the environmental impacts of their products throughout the product life cycle. In this regard there are number of product-based policy options that government may adopt. It is recommended that ideally these should form part of a more comprehensive product-based strategy that recognises the significant role of products in contributing to current environmental challenges, and that forms part of a shift away from the current emphasis on the "point-source" impacts of production and end-of-life waste.

While these are not mutually exclusive options, the nature of the underlying objective will have an important bearing in particular on the choice of product categories to be labelled, as well as on the decision as to whether to:

• Develop and implement a local labelling scheme: the preferred option for promoting improved environmental production and consumption patterns at a local level; or
• Promote compliance with existing labelling schemes: which may be seen as a preferred option for the purposes of promoting trade interests.

6.5.1 Implementation of own South African eco-labelling scheme

As has been outlined above on the basis of the country-specific reviews, there are a number of significant institutional and procedural implications associated with the establishment of a dedicated eco-labelling initiative in South Africa. If done correctly and systematically it would be a time-consuming process, requiring a process of consultation with a wide range of stakeholders.

While a locally established system would ensure greater relevance to the specific needs of domestic industry, as well as the likely information requirements of the consumer, a number of challenges would need to be addressed. An important question is whether there is sufficient need for an eco-labelling scheme in the domestic market, and - more importantly - whether local consumers are willing to pay a price premium for products bearing a eco-label in the presence of unlabelled goods with (perceived) similar quality characteristics. The sensitivity to, or strong emphasis on, price performance of local products is likely to be a significant barrier to the establishment of a domestic eco-label. This issue has not been investigated in detail as part of this study; conducting market research into local consumer behaviour patterns was beyond the scope of the investigation.

In addition, at issue is also whether the possible benefits of a domestic eco-label would extend beyond South Africa's borders. In other words whether a local eco-label would find sufficient acceptance in export markets. This not only requires that large amounts of resources are committed to marketing the eco-label nationally and internationally (both by companies and a national eco-labelling authority), but also that the environmental criteria embodied in the eco-label are either in compliance with, or similar to, those demanded in international markets. It is unlikely that end-consumers, retailers and clothing manufacturers abroad will place much value on an eco-labelling scheme that is perceived to be not on a par with others that they are familiar with. In the case for example of South Africa's traditional textile export market (Europe), it is likely that the criteria for a South African eco-label would have to at least be consistent with those of the EU eco-label, the EU Flower.

Factors having an impact on the respectability and acceptance of an eco-labelling scheme include not only the relevance of the environmental criteria used in developing such an eco-label (i.e. the requirements), but also its administration. Especially in a developing country such as South Africa, it is vital that an independent, non-industry authority performs the administration of a South African eco-label. This could include the Government, or an authority set up and funded largely by Government, yet still enjoying a certain minimum amount of autonomy.

A South African "national" eco-label would also have to be visible, and recognisable, and in some way embody environmentally preferable attributes. For example, South Africa's national bird, the Blue Crane, could be a useful emblem or 'logo'. It is widely recognisable, relevant, and embodies environmental issues. Potentially, it could become as recognisable to consumers as, for example, the panda bear of the World Wide Fund for Nature (WWF). However, such a logo may not evoke the same response with international consumers.

Some of the issues that would need to be considered in developing a South African eco-label include:

• Ensuring the relevance of the labelling criteria (for the industry and consumers).
• Assessing the current level of environmental awareness of consumers, retailers and manufacturers.
• The need to market the label in an effective and credible manner.
• Agreeing the primary focus of the label: local markets, international markets, or both.
• Ensuring that - where the focus includes international markets - the local criteria are compatible with those of relevant foreign schemes.
• Developing and implementing an effective administrative authority.
• Examining the potential to incorporate environmental considerations within government public procurement policies, including for example the requirement in appropriate instances to purchase products bearing an eco-label. (Such a requirement may however conflict with existing procurement initiatives, including in particular the current focus on the stimulation of black economic empowerment).
• Engaging with the consumer organisations and retail sector in promoting improved environmental performance through the product supply chain.
• Ensuring the timely implementation of the process.

6.5.2 Facilitating access to external labelling schemes

On the assumption that a key goal of the eco-labelling initiative is to facilitate access to foreign markets, then a potential alternative to the establishment of a South African national eco-labelling scheme, at least in the short term, would be to promote compliance with established international schemes. In this regard, the focus should start with an analysis of trade flows between the South African industry and its key international partners (with a focus on South Africa's export market). As identified above, the largest trade partner with respect to exports is Europe, with the United Kingdom, Italy, France and Germany being particularly important. As a natural consequence, the focus should then be on national or private eco-labelling schemes in these countries, a key scheme being of course the EU flower.

There are a number of issues to consider with regard to facilitating compliance with an established eco-label. These include:

• Identifying the most appropriate industry sectors and/or products that would benefit in acquiring an external label;
• Evaluating whether there is sufficient market demand for the particular label and whether the market benefits of qualifying for the label will offset any associated costs;
• Identifying the most appropriate labelling scheme within the respective export market; in this regard it is important to bear in mind for example that in some European countries national and/or private industry schemes have greater recognition and relevance than the EU eco-label;
• Identifying whether the foreign scheme may also be relevant within the domestic market as a means of promoting improved environmental performance. In this regard it is important to consider both whether there will be sufficient consumer knowledge and credibility of the foreign scheme, as well as whether the environmental criteria for that scheme are relevant to the local South African industry.

There are a number of advantages in focussing on complying with an existing scheme rather than developing an entirely new local scheme, including:

• The existing scheme is likely to be widely recognised, accepted and respected, without thus having to invest heavily in marketing a local scheme;
• Compliance with the existing eco-label is possible in the short-term, as the procedures for obtaining the label are already well established;
• Government does not have to take direct or short-term responsibility, thereby minimising financial costs and internal administrative implications.

Government has a potentially important catalytic role to play in assisting relevant companies to qualify for the label. These activities, which may be undertaken as part of the Department of Trade and Industry's existing export incentive initiatives, include for example:

• Identifying and prioritising the most appropriate industry sectors and labelling initiatives for which there is seen to be meaningful export benefits;
• Informing and advising relevant companies on the potential benefits of acquiring the label;
• Providing assistance and/or incentives to companies to acquire the relevant label.

Furthermore it is important that South Africa participates in - or as a minimum ensures the effective monitoring of - current eco-labelling harmonisation initiatives. South Africa has been one of the most active developing country participants involved in the ISO 14000 process (South Africa will be hosting the next meeting of the ISO Technical Committee 207 on Environmentally Management in June 2002 in Johannesburg). In addition to continuing to play an active role in these standards, South Africa should also consider participating in initiatives such as GEN, as well as monitoring any developments regarding eco-labelling in fora such as the WTO. Efforts should be taken to promote an effective exchange of information between the relevant government departments, parastatal organisations and consumer bodies on these issues.

6.5.3 Alternative and/or complementary policy responses

In addition to the two principal policy options outlined above, there are a number of other policy measures that may be taken as a means both of promoting improved environmental production and consumption patterns, as well as - in some cases - assisting in overcoming environmentally-related non-tariff trade barriers.

In identifying these options, it is recommended that ideally these should form part of a more comprehensive product-based strategy that recognises the significant role of products in contributing to current environmental challenges. The shift away from the prevailing emphasis on the "point-source" impacts of production towards an "integrated product policy" is currently being considered for example within the European Union and the United Kingdom.

Following are a number of policy measures that may be taken as an alternative to - or complementary with - the two key policy options identified above:

• Adopting a Green Claims code (based on ISO 14021) aimed at enhancing the credibility of self-declared environmental claims;
• Facilitating the adoption of credible and structured sectoral labelling initiatives around specific themes across a product sector (this may relate, for example, to the removal of VOCs and/or lead from paint);
• Examining the feasibility of integrating a more stringent set of environmental considerations as part of the existing Proudly South African initiative;
• Engaging with consumer organisations and/or existing brands within the retail sector on internal initiatives aimed at improving environmental performance through the product supply chain;
• Requiring compulsory labels on specific issues, based, for example, on the EU energy rating system or relating for example to the compulsory declaration on product use and disposal;
• Facilitate the appropriate adoption of existing voluntary labelling schemes, such as the textiles Eco-Tex initiative;
• Introducing appropriate product-based fiscal incentives, including for example the removal of existing perverse subsidies and the provision of tax and other incentives aimed at promoting improved products;
• Introducing specific product-based regulatory measures. These may include for example requirements relating to extended producer responsibility, product take-back, substance prohibition and quotas for recycling or recycled content;
• Adopting sectoral environmental management co-operation agreements (EMCAs) - in appropriate circumstances - to improve aspects of the overall performance of a product range beyond existing regulatory requirements (these may relate for example to reducing energy consumption and water usage, or relating to packaging content).

The above list of possible policy approaches is neither prescriptive, nor comprehensive. Rather the intention of this list is to highlight that there are a number of different options that may be used to achieve the environmental objectives typically underlying the establishment of an eco-labelling initiative, and that may be more appropriate for achieving these objectives. It is suggested that it is useful also to see these various initiatives in the context of the policy shift that is currently underway in a number of countries towards the adoption of an integrated product policy. This relevance of this policy shift to the South African environmental law reform process needs to be further considered.

6.6 Potential Product Categories for Eco-labels in South Africa

An important objective of this study is to identify priority product categories for the purposes of possible eco-labelling activities in South Africa. These categories may either form the basis for a separately established South African eco-labelling programme, or they may be targeted for the purposes of acquiring foreign licences.

The identification of these product categories will be undertaken during Phase II of this Study. Following is a description of the core considerations that form the basis for identifying and prioritising these product categories.

6.6.1 Basis for Identifying Possible Product Categories

In identifying the possible product categories for eco-labelling in South Africa, consideration will be given to the following issues:

• Trade and market advantages, with consideration of:
• The nature and extent of exports for this product category;
• The extent to which eco-labels have been developed and are being implemented in the relevant export markets;
• The nature of the manufacturing sector in terms of number of producers;
• The nature of the retail sector, with consideration for example to the market share of large-scale retailers who may be willing to participate in promoting the initiative.
• The potential for environmental improvements, with a focus being on:
• Product categories and individual product types that have a range of high and/or medium environmental impacts at any stage in its life cycle;
• Products where there is significant potential for reducing its environmental impact through changes to product design, manufacture, and/or consumer use behaviour.
• General product category issues, noting the following considerations:
• Labelling should not be introduced in those product categories where an alternative environmentally superior product or service category exits that fulfils the same function;
• Care should be taken in introducing labelling in those product categories that have significant social impacts, unless the labelling criteria makes explicit provision for these impacts or for which a link with a credible social label can be established;
• Avoid developing Type I labels if there are existing well established and credible Type II labels for that particular product;
• Avoid developing a label if there is existing or anticipated legislation that will address the most significant environmental impacts in the near future, unless there remains scope to use the criteria to improve performance beyond the legislative standards.
• Potential for take-up in South Africa, noting for example:
• The nature of the consumer market (environmental awareness and purchasing power) for that particular product;
• The ability to integrate within the product sector within government procurement programmes;
• The ability to stimulate active participation from the retail sector.