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Published in Spring 2001
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The power of markets and the promise of green goods and services
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There are many ways to foster environmental protection. One with great potential is to channel the enormous buying power of consumers toward "green goods and services", as CEC's Scott Vaughan, Chantal Line Carpentier and Zachary Patterson explain.
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Since the mid-1980s, expectations that harnessing the power of markets will deliver a better environment have risen and fallen, much like stock markets themselves. Perspectives have moved from initial optimism that market-based solutions will transform environmental approaches by delivering broad-based actions by industry and individuals in a least-cost manner, to caution that environmental quality is best secured through command and control regimes.
Between these contrasting views, green goods and services remain the most visible sign to millions of market-based solutions. The challenge of green consumer markets is simple: is there a way of combining the findings of one opinion poll after another, which confirm that citizens care deeply about their environment, with the purchasing habits of consumers in the marketplace? When consumers-so the theory goes-understand that the products they buy have an environmental footprint, and are presented with a choice between cleaner and less clean products, then many will opt for green goods and services.
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| Photo: Eric St-Pierre | A decade later, the performance of most green goods and services has remained far below these forecasts, with most market niches hovering at two to three percent. Many reasons explain the gap between expectations and performance. People rarely make the connection between environmental problems and their everyday purchasing habits: just look at the boom in gas-guzzling sports utility vehicles in urban centers. And when the link is made, consumers remain unsure if "green" products and services are able to compete on price, quality and availability compared to mainstream products. With the proliferation of green labeling and certification schemes, labeling fatigue may be growing.
Yet the most important lesson is that the concerns of citizens, and the actions of consumers, remain very far apart.
Over the past two years, CEC has been examining the performance and prospects of green goods and services, and how they work and could work in real-world markets. Work has concentrated on the agricultural sector in general, and agro-forestry, in particular, as well as two service areas, tourism and electricity.
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| Photo: Eric St-Pierre | To illustrate, work in one agro-forestry product grouping--shade-grown coffee--continues to yield lessons about how green goods can compete in international markets. The point of departure of the Commission's work on coffee is fact that rates of deforestation in Mexico are high, and accelerating. For example, preliminary results of a 2000 survey undertaken by the National Institute for Geography at Mexico's national university (Universidad Nacional Autónoma de México, UNAM) suggest that in the main coffee growing regions of Mexico, 283,000 hectares of natural cover and forested lands were lost between 1990 and 2000. CEC is working with UNAM, and Resources for the Future and others, to better understand not only rates of forest loss, but also the driving forces behind forest clearing.
The goal of our work on coffee is to help maximize the market value of non-timber products being produced under the Mexican forest canopy. By realizing this market value, the economic logic of clearing forests is drastically reduced, and incentives to conserve and sustainably use the forest increases. Among the most important products produced in the forest is shade-grown coffee. Mexico is the fifth-largest producer of coffee in the world, with approximately three million people-comprising 4,500 communities-there basing their livelihood to a large extent on coffee production. While most Mexican coffee-estimates vary from 65 to 90 percent-is shade-grown, the environmental challenge is to slow down deforestation by realizing the market value of coffee grown under forest canopies.
On the production side, CEC works with Mexican growers to understand how farm-gate revenues of agro-forestry yields compare with modern agricultural production, which generally involves the clearing of forest cover. Preliminary analysis suggests that it makes more economic sense for farmers to produce a variety of crops under standing forests-including coffee, palms, nuts, bananas and other crops sold in markets (and into account subsistence use) than it does to rely on single crop, produced through "technified" production methods. In addition to marginally higher revenues from mixed yields, diversified crops buffer farmers from international coffee price fluctuations and lower the risks of a single crop collapse due to plant diseases.
To better understand the needs of farmers and farm cooperatives, in February 2001, CEC sponsored a meeting in San Cristóbal de las Casas, Mexico. Among the issues addressed at this information forum were comparative yield and revenue figures between shade and non-shade production, challenges farmers and cooperatives face in meeting multiple coffee certification schemes, and gaps and opportunities in accessing financing through micro-credit or external financing schemes.
On the supply side, in 1999, CEC sponsored the largest consumer survey of shade-grown coffee in Canada, Mexico and the United States ever undertaken. The key finding of the survey is that roughly 20-25 percent of consumers in all three countries have a very strong interest in buying coffee grown under forest canopies in the mountains of Mexico.
Three lessons can be gained from the survey. First, a wide gap exists in most consumer surveys between an expressed willingness to pay for a green good and actual purchasing habits. Usually, for every 10 people who say they will actually do so, one person will buy the product. Based on this rule of thumb estimate, the CEC survey nevertheless suggests a potential market value of shade-grown coffee worldwide of around two percent. This translates into a market of $300 million per year. In February 2001, CEC held a meeting with key coffee industry representatives to understand how to bridge the wide gap between the potential market for shade-coffee and actual performance to date.
Second, consumers will only buy a green good if it is both price competitive and of very high quality. Taste tests and focus groups suggest that shade-grown Mexican coffee can meet superior taste levels, although farmers are recognizing that more work needs to be done on quality issues. A price premium for shade does coffee exist, although it is shallow and highly elastic. The question of a price premium is of direct relevance to estimating comparable revenues for shade versus non-shade coffee: shade-coffee plants have lower yields compared to "technified" coffee, although shade plants also have longer production lives.
Third, everyone-producers, buyers and retail operators, and consumers-has concerns about the proliferation of coffee labeling and certification schemes. To increase the comparability and transparency of schemes, CEC released an online database on shade-grown coffee. There, over 1,000 separate criteria describing different aspects of coffee production in eight key schemes are described, with the ability for stakeholders to compare individual criteria. (The coffee database, together with other green goods and services databases for electricity and tourism, can be found at http://www.cec.org/databases.)
By disentangling supply-side and demand-side issues, together with closely related financing, branding and consumer education issues, CEC is bringing forward useful lessons on how green goods and services can compete and win in global markets.
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Scott Vaughan
Chantal Line Carpentier 
Zachary Patterson