On taxes and subsidies with private eco-labeling

Taxes and subsidies on products embodying environmental qualities often coexist with certified private labels---like Ecocert, Scientific Certification System, or OEKO-TEX. Their interaction is yet quite unexplored. We analyze a duopoly where consumers value an environmental quality, with an externality. A certifier sets the quality standard for a label. The fee for granting the label is either set by the certifier (certifier power), or in a noncooperative bidding game (firm power). Taxes and subsidies then affect the fee, depending upon how this is set, and the standard. This channel can produce distorted or even reversed effects. If firm power exists, for instance, a subsidy to the labeled good ends up decreasing the environmental quality and welfare. Conversely, absence of firm power nullifies the effects of ad valorem taxing the unlabeled "dirty" product. Only a per unit tax has similar, but always worsening, effects.