Green consumption and production,

rebound effect and leakage

phenomenon

Dr. G. Liobikienė
Content:

• Green production;
• Rebound effect;
• Green consumption;
• Globalization and leakage phenomenon.
 Green production
Considering production context, green is readily used as an umbrella term
covering a range of concepts, such as “environmentally-conscious”,
“ethical”, “organic” and “fair-trade” production. These concepts address
specific forms of production, namely:
• Environmentally-conscious: Industrial companies make themselves
committed with slowing down the degradation of the natural resources
and the planet’s ecosystems.
• Ethical: Business enterprises take responsibility for the rights of the
workers in their supply chains according to specific labour standards or
codes of practice (e.g. Ethical Trading Initiative code in the UK).
• Fair-trade: Buyers accept to pay prices above market levels for products
of disadvantaged or marginalized producers, typically from the Third
World, when these products are provided with the fair-trade label.
• Organic: Food manufacturers or producers of certain non-food items,
such as health and beauty products or textiles, obtain a certification
from an entitled organization, (e.g. in the UK, the Department for
Environment, Food and Rural Affairs, the Organic Soil Association, the
Organic Food Federation) meaning that their products are made from a
balanced living soil.
• The term, green, is often interchanged with “sustainable”.
The research literature provides a tight definition for the
concept of sustainability, which in principle is concerned
with meeting the needs of the present without
compromising the ability of future generations to meet
their own needs.
• In short, sustainability calls for production enterprises to
make a commitment to the future and assume
comprehensive responsibility for the footprint they leave
behind.
• The definitions of green given in the literature are generally
linked to the aim of making business practices compatible
with the nature’s demands.
• The use of the term green production rather than
sustainable manufacture emphasizes operational processes
economic effectiveness within industry and their inter-
relationship with the society. Green production is implicitly
linked to product design as innovations in product and
process transform the overall manufacturing system.
Framework for Green Production
Evolution of the green production view
• The traditional way of looking at green production was, indeed, to focus on pollution prevention and pollution
control technologies. Pollution control has been adopted since the 1970s and is based on the use of “end-of-
pipe” solutions to ensure a proper disposal of waste and reduce the release of pollutants after they have been
generated.
• The emphasis moved to pollution prevention approaches during the 1980s. Also known as “clean
technologies”, these are more proactive as they aim to eliminate pollution and waste and the source and, in
addition, make efficient use of energy and materials (e.g. process and equipment modification, facilities
retrofitting, material substitution, modularisation). Here, although bigger investments are required, increased
benefits can be achieved in the long term.
• The distinction between pollution prevention and pollution control then blurred during the 1990s, when
aspects of both pollution control and pollution prevention were then re-integrated. In practice, this included
efforts to evaluate the environmental impact during investment decisions (as required for environmental
certifications, e.g. ISO 14001 or EMAS), as well as operating procedures which limit or reduce the negative
impact of production processes on the natural environment (e.g. inventory management, production
scheduling, employee training).
• During the 1990s the practice of product stewardship was introduced and entailed a deeper and more
inclusive approach to green management. Here, the environmental perspective is extended beyond
manufacturing and operations, and includes minimising the environmental burden associated with every
aspect the product’s lifecycle, from design, to manufacture and use, right through recycling.
• Similarly, during the mid-1990s an increasing number of production companies have embraced the
sustainability agenda. As mentioned before, sustainability includes considering an extended set of
stakeholders, including the environment, as well as the global community and future generations. Both
pollution prevention and product stewardship practices can be used to support the sustainability vision, yet
they have to be consciously directed towards improving competitiveness of delivering environmental
performance. Various standards have evolved to reinforce this linkage; ISO 9001 emphasises quality
improvements to reduce waste, ISO 14000 deals specifically with environmental management, and
OHSAS18000 promotes healthier, safer and so more environmentally friendly working environments.
 Forms of green production
• Green production has a broad definition and so there are many
credentials that businesses offer to support their claim to be a
green producer. Business may use environmentally friendly
production technologies, procurement policies, packaging, improve
resource use etc.
Below are given few methods that can be used to achieve a complete green
production goal.
Drivers of green production within business

There are many ethical reasons for the adoption

of green production. However, taking a more
business view, the motives for adopting green
production principles can be grouped into three
categories:

• Regulation compliance ;
• Market value;
• Production costs .
More and more companies have started adopting
Green Production as an integral part of their
Operations. Factors driving such initiatives are:

• Increasing energy and input costs;

• Growing consumer awareness about Green
Products;
• Regulatory pressures;
• Need to differentiate from competitors by
enhancing competitive advantage.
Role of green production in competitive strategy
There are four strategic green alternatives, these being:
• Proactive green strategy: Anticipating competitive
pressures and implementing systematic initiatives
throughout the whole supply chain
• Responsive strategy: Largely sees the environment as a
technical issue which can still be used to gain
competitive advantage
• Reactive strategy: Company aims to comply with
environmental regulations or customers”
environmental requirements
• Unresponsive behaviour: A passive pattern of
environmental behaviour and trying to delay adoption
of green programmes.
The diagram below shows specific areas where a company can
leverage its green production processes
Challenges to implement green production

At a broader level, the challenges of implementing green production

strategies appear to fall into three clusters, namely:

• internal operations (most green initiatives require radical changes in the

operations area),
• customer relationships (the success of green policies on the market
depends considerably on being sensitive to the characteristics of potential
target segments since, by their nature, green customers are very diverse in
terms of interests, motives, priorities, degrees of concern, etc. This may
discourage companies from promoting their green production efforts,
especially if their customer base is broad and geographically scattered,
• corporate acceptance (introducing the green dimension into corporate
strategy sets-up particular challenges. Green values are specific and
different from traditional objectives of production businesses and hence
the decision to invest in green policies with respect to more traditional
sources of differentiation and cost reduction often requires complex and
conflicting trade-offs.
As society becomes increasingly concerned with
environmental issues, those companies with
more adventurous green strategies are likely to:

• Be leaders in the development of new

products and businesses opportunities;
• Have excellent growth potential;
• Seek to maintain production operations
locally;
• Positively contribute to addressing
environmental issues.
 Rebound effect:
• In conservation and energy economics, the rebound effect is the
reduction in expected gains from new technologies that increase the
efficiency of resource use, because of behavioral or other systemic
responses. These responses usually tend to offset the beneficial effects
of the new technology or other measures taken.

The full rebound effect can be distinguished into three different economic
reactions to technological changes:
• Direct rebound effect: An increase in consumption of a good is caused
by the lower cost of use. This is caused by the substitution effect.
• Indirect rebound effect: The lower cost of a service enables increased
household consumption of other goods and services. For example, the
savings from a more efficient cooling system may be put into another
luxury good. This is caused by the income effect.
• Economy wide effect: The fall in service cost reduces the price of other
goods, creates new production possibilities and increases economic
growth.
Green production → green consumption
 Green consumption
• Considering that the main aim of sustainable consumption is to
achieve that growth of consumption of goods and services does not
worsen the environmental quality. Thus environment-friendly services
and products are given a preference. Therefore the promotion of
green products purchase is one of the main aspects to achieve
sustainable consumption.
• Green products are referred to as products designed to lessen the
consumption of required natural resources and minimize the adverse
environmental impacts during the whole life-cycles of these products.

The main requirements for green products are that:

• the raw material should be environmentally-friendly, grow without
pesticides and chemical manure and toxic materials;
• the usage of genetically modified organisms are restricted;
• the package should be environmentally friendly.
The context of the purchase is important, including:

• demographic,
• social,
• political,
• economic
• psychological factors
Different kinds of choice processes in everyday purchase
situations
Relationship between green purchase and
environmentally friendly behavior:
• Practically, if people behave more environmentally friendly, they
should buy more environmentally friendly products as well.
• However, green purchase and environmentally friendly behavior can
be unrelated, whereas not all people can afford to buy green
products and not all consumers who buy green products do it for the
sake of the environment. Moreover, according to the goal framing
theory, people who are guided by normative goals are motivated to
behave in an environmentally friendly way because they think that
protecting the environment is the right thing to do. Thus, these
people tend to save water and energy resources. Meanwhile, people,
who are guided by the gain goals behave in more environmentally
friendly mode as save energy or water because they want to save
their money. People who are guided by hedonistic goals do not
attempt to save environmental resources, however they buy more of
green products because this is enhancing their status
Why determinants of green purchase cannot be
treated equally?
• Respondents were asked about purchase of green products in
general and such a generality could confuse them and the
determinants could also differ.
• In terms of organic food purchase behavior, the biggest attention
was paid to health, taste, safety and environmental protection.
Meanwhile, authors analyzing the purchase behavior of green
luxury and durable goods considered price, quality and brand
factors.
• The motives and goals which prompt to purchase green products
are different: Saving energy and money in the household could
be the main motive to purchase and consume energy efficient
bulbs and appliances. The enhancement of status could be the
main motive to buy eco-friendly clothing and fashion goods.
Health aspects could promote purchase of organic food and
personal care products.
• Products are also distinct in terms of their functional benefits,
such as superior quality, performance and health benefits. The
factors which influence green products purchase could be
different according to the functional specification of the latter.
 Globalization
• Globalization refers to the free movement of goods, capital,
services, people, technology and information. It is the action
or procedure of international integration of countries arising
from the convergence of world views, products, ideas, and
other aspects of culture. Advances in the means of transport
and in telecommunications have been major factors in
globalization, generating further interdependence of
economic and cultural activities.
• Globalization directly enhances trade and then the economic
growth. Moreover, the globalization distorts the
achievements of country’s climate change policy since
developed countries indeed reduce their own national gas
emissions by transferring their dirty industries to developing
countries through the globalization and free trade.
Leakage phenomenon:
• Carbon leakage occurs when there is an increase
in carbon dioxide emissions in one country as a
result of an emissions reduction by a second
country with a strict climate policy.

Reasons of leakage phenomenon:

• a) Tax differences;
• b) Labor cost differences;
• C) Environmental policy differences (standards and
regulation).
• Some recent contributions have demonstrated that leakage can even become
negative, either due to a fuel switch in countries carrying out climate policies which
decreases the global price of natural gas and thus incentivizes substitution away from
coal towards less carbon-intensive natural gas in third countries or due to higher
demand for capital in the countries performing abatement, which lowers capital
supply in third countries and reduces their output and emissions.
• Leakage phenomenon is related with competitiveness, international trade and
progress of technologies.
 Tools to reduce leakage phenomenon:
• Equalization of taxes;
• ‘Grandfathering’ of emission permits - reduces leakage in sectors
profiting from the free allocation, but also reduces incentive to lower
emissions (free allocation of emission permits);
• Price regulation;
• Output-based rebates - provides incentive to lower emission intensity
of production, but not its volume;
• Promote Clean Development Mechanism and foreign direct
investments (FDI) in developing countries.

FDI promotes economic growth but at the cost of the environment. This
is known as the pollution haven hypothesis (PHH). The second
hypothesis emphasizes that FDI stimulates economic growth through
technology transfer, productivity gains, and the introduction of new
processes and managerial, which is defined as pollution halo hypothesis.
 Criteria for risk mitigation measures:
These criteria, in some cases, may not be self-standing,
that is, a number of them may need to be combined to
result in a credible approach:

1. Does the provision address the carbon leakage risk?

2. Does it undermine the environmental integrity of the
climate change policy/carbon pricing mechanism?
3. Does it allow for the good functioning of the carbon
market?
4. Does the provision meet the general goals and criteria
of any sound policy?
• The provisions of the EU ETS Directive (EC, 2009) set a list
of sectors considered at high risk of carbon leakage for
which compensatory measures have been provided. The
first list of carbon leakage was agreed in 2009 for providing
free emissions allowances for 2013 and 2014 as a measure
for protecting sectors at risk of carbon leakage.
• The list is reviewed every five years, with the next list
reviewed for the 2015-2019 period. According to paragraph
of the EU ETS Directive, measures taken for sectors on the
carbon leakage list are to be “taken where necessary and to
avoid overcompensation”. The analysis of the carbon
leakage list (CLL) is done on the basis of the inability of the
respective industrial sector to “to pass on the cost of
required allowances in product prices without significant
loss of market share to installations outside the Community
which do not take comparable action to reduce their
emissions”.