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DRAFT

Impact of Environmental Measures for Increasing Southern Exports to the North:

A Case Study of Leather Products of India

Executive Summary

Introduction

Recent years have witnessed an increased use of Ecolabels as a market instrument to influence the consumer choice in favour of environmentally friendly goods.  Since the first Ecolabel Blue Angel of Germany in 1978, number of countries, both developed and developing have introduced these labels to influence consumer and industry to behave in an environmentally responsible manner.

India also introduced an ecolablelling scheme- called Ecomark, which has met with little success. Its failure has been a serious cause of concern for both environmentalists and governmental environmental agencies.

Ecolabelling also has trade implications, which is a concern for developing countries. Criteria for ecolabels can be set to favour the local producers through demands on specific technology or material. Developing country producers may find it difficult and costly to adopt these technologies and processes and fear that this may discriminate against imports from developing countries.

This study is focused on the impact of ecolabels on India’s leather industry; for two main reasons: a) The production of leather is a highly polluting process, with major impact on the environment; b) Leather and its products accounts for a large proportion of India’s export. The use of ecolabels by importing countries might affect these exports significantly.

The study is primarily concerned with the following issues:

Ecolabels

Ecolabels are used to inform consumers that a labelled product is environmentally friendlier compared to other products in the same category. They are voluntary market based instruments used to compliment environmental laws and regulations. Ecolabels increase consumer awareness of environmental issues and influence their choice in favour of less polluting products. They also encourage industry to produce and market environmentally friendly products.

Ecolabelling can be based on two types of criteria: product related or production-related. Product-related criteria relate to the environmental impact of the product only. Production-related criteria, on the other hand, relate to the process and production methods (PPMs) and covers environmental impact of the entire production process.

The most comprehensive Ecolabelling schemes are based on Life-Cycle Assessment (LCA) that assess the environmental damage caused by products during their entire life cycle.  There are serious difficulties in the implementation of the programmes under LCA. Ecolabels, mostly, cover only a limited number of important environmental aspects i.e. covering only parts of the product’s life cycle.

Ecomark in India

India’s Ecomark Scheme was introduced in 1991 as a market-based non-regulatory instrument to reduce pollution. The avowed objectives of the scheme are to assist consumers to become environmentally responsible in their purchasing decisions and to provide an incentive to manufacturers to reduce adverse environmental impact of their products. The award is available for consumer goods only. Whereas ecolabel in most countries is awarded solely on the basis of environmental considerations, in India the products must meet both environmental and quality criteria. Meeting the Indian ISI quality standard is a precondition for the eligibility for the label.

The Ministry of Environment of Forests (MoEF), with the technical advice of the Central Pollution Control Board (CPCB), runs the programme. The programme is implemented in three stages:

The criteria for Ecomark are based on the life cycle analysis of products: a concept  which is often termed as "cradle to grave'' approach. Products are assessed in terms of the environmental and health impacts of the production processes, and methods of use and disposal.  The major considerations are: comparative pollution threat, biodegradability, recyclability and saving of non-renewable resources and energy during production and use. The company must obtain consent from the Sate Pollution Control Board and comply with India’s Water, Air, and Environmental Protection Acts. Presently there are 17 product groups for which Ecomark is available.

The Ecomark scheme has met with little success in India. So far only four companies have been granted Ecomark and none of these companies are using the label on their products. It can, therefore be safely concluded that Ecomark has not made any contribution to the improvement of environment in India. 

Reasons for the Lack of Popularity of Ecomark

There are a number of reasons for Ecomark’s lack of success in India. These include:

Measures Required To Promote Ecomark.

Closer cooperation between all the stakeholders is necessary before Ecomark can make a significant contribution to the improvement of environment. The programme needs to be modified substantially to make it more attractive to the industry. Some of the specific suggestions, based on our discussions with industry representatives and policy makers, to increase the effectiveness of Ecomark scheme are:

Indian Leather Industry

India’s large leather industry plays an important role both as an earner of foreign exchange and provider of employment. The industry employs more than 2.5 million people and was responsible for about US$ 1814.18 million worth of exports in 2002-03, much of it to the developed countries. India has about 3,000 tanneries with a total processing capacity of 700,000 tons of hides and skins per year. More than 90% of the tanneries are small or medium sized. Most of the small tanneries cater to the local market, while the large tanneries are primarily export oriented.

For a number of years production of leather and leather goods was reserved for small-scale sector in India and given various incentives, primarily to promote employment.  The implication of this policy has been a slow pace of modernization. As a result, the leather industry, by and large, uses obsolete and inefficient technologies, and its environmental performance is poor.

In recent years the government has introduced a number of policy changes to promote technological up-gradation of the industry. Large firms are now permitted to enter the sector, provided they export a minimum of 95% of their production of finished leather. The government also permits the import of modern technology, machines and chemicals. It has also initiated schemes to provide financial support to promote modernization of tanneries.

As a result of these developments, the structure of the industry has undergone a major change. Now a high proportion of good quality leather is produced by large firms who account for a major share of export of leather and finished products. Furthermore, an increasing proportion of India’s leather export consists of finished goods.

The conventional leather tanning technology is highly polluting as it produces large amounts of organic and chemical pollutants. These pollutants, which are mostly contained in the untreated effluent discharged by tanneries, are a serious threat to the environment by increasing soil salinity; reduce fertility and damage farming in large areas and affect water bodies. Tanneries also produce harmful gases, dust and a large amount of solid waste.

Ecomark for Leather

Ecomark criteria for “finished leather” as a product category were finalized in 2001. Leather and its products were included in the scheme for two main reasons: a) due to the environmental implications. b) There was a concern that India’s exports may be adversely affected with the tightening of the environmental standards in the developed countries. The introduction of Ecomark was expected to improve the environmental performance of leather industry and help in export.

In order to be eligible for the Ecomark leather products must meet criteria on general environmental aspects like water and air pollution; and specific requirements on maximum limits of formaldehyde, PCP, aryl amines released from azo-dyes and hexavalent chromium. Further, the product packaging shall be recyclable or reusable or biodegradable.

Unlike other products covered by the Ecomark scheme, leather products are not required to get an ISI mark from the Bureau of Indian Standards. This is largely because of lobbying by the leather industry (especially leather exporters), which argued that most of their products were manufactured at a level higher than the BIS standards.

This study shows that Ecomark has not had any impact on the leather industry. None of the companies included in the study has taken Ecomark. In fact, it is found that a large majority of the firms were unaware of the Ecomark or did not see any advantage in participating in the Ecomark scheme.

Why has Ecomark not made An Impact? 

A number of reasons responsible for the poor performance of Ecomark scheme have been discussed in the previous chapter, and most of these apply to leather industry. A large number of tanneries are unable to meet the effluent norms set by the Central Pollution Control Board and fail to get consent from the Board.

Broadly speaking, tanneries can reduce the load of pollutants in two ways: a) install end-of-the-pipe equipment like effluent treatment plants (ETPs) and chrome recovery plants (CRPs) that treat effluents and check emissions. and b) introduce cleaner production methods and technologies so that the production of pollutants is reduced at the process stage itself.

But these measures have been found to be too costly to introduce and operate, especially for the small-scale operators. At times the technology was inadequate and demanded introduction of costlier techniques. The poor R&D facilities even in large tanneries hampers the firms’ ability to introduce incremental technical changes for environmental improvement with out much cost.

The high cost of imported capital equipment limits the ability of a large section of the industry to upgrade production facilities.  Majority of the firms can only afford to purchase Indian machines with older technologies, and are inefficient and less eco- friendly. 

To deal with this, the government subsidised the investment in modernisation that will lead to better environmental quality. But, most of the investment has gone into the modernization of finishing process where as beam house operations and tanning, are the main cause of pollution in the tanning industry. This will limit schemes effectiveness on improving the environmental performance of the industry.

The leather industry is very reluctant to introduce technological or managerial changes as most of the owners and managers of tanneries have little technical education. This lack of positive attitude towards new technology and management methods also acts as a serious barrier to the environment friendliness of the industry.

The low cost of natural resources in India is also responsible for industry’s lack of willingness to introduce more efficient and environmentally friendly process technologies. Consequently, the tanneries have little incentive to save natural resources like water.

Ecolabels in the European Union

The European Community (EC) adopted a programme to award ecolabels in 1992. The objective of the programme is to help consumers to make informed choices about the products they buy and promote production of environment friendly commodities. The scheme is open to any product or service, except food, drink, pharmaceuticals and medical devices. The label is only awarded to products that can be guaranteed to be at least as efficient as conventional products. A number of factors, including environmental and market considerations are taken into account while choosing new products to be included in the Ecolabel scheme.

The criteria used by the scheme to award ecolabel are based on cradle-to-grave approach and take into account all aspects of a product's life, from its production and use to its eventual disposal. The criteria are same across all member states.  The label, once awarded, is valid across all member states without any further tests or controls.

The scheme is administered by the European Ecolabelling Board (EUEB). The Board includes representatives from industry, environment protection groups and consumer organizations. At the national level the scheme is administered by Competent Bodies in the member states.

 

The EU Ecolabel scheme has not been very effective. Its impact on consumer choices and producer behaviour has been low inspite of the revision of the scheme in 2000 to provide greater participation of the stakeholders, increased transparency and coverage.  The label’s popularity is limited to a handful of countries and product categories while the national labels like Blue Angel of Germany remained more preferred and recognised by the consumers and producers alike in the member countries.

The low acceptance of EU’s Ecolabel is attributed to many reasons similar to that of the Indian Ecomark programme’s failure. There is low environmental consciousness amongst the consumers. They are more conscious about prices in their purchase decisions and ecolabelled products indeed cost higher.  Majority of the consumers are still unaware of Ecolabel. There is poor response from the industry as costs of taking ecolabel out weigh the benefits. It is also held that labelling limit the scope for new designs and innovations in product s that undergo seasonal changes.

The EU Ecolabel will have a significant impact on environment only when a large number of products with ecolabel are available in the market. Presently, the number of labelled products is too small to make a substantial contribution to environment.

EU’s Ecolabel and Its Impact on Exports from India

The developing countries are particularly concerned as many of the products included in the EU’s Ecolabel schemes are of particular export interest to the them. There is a widespread concern that EU’s Ecolabel scheme is likely to discriminate against imports from developing countries like India for the following reasons:

The Impact of EU’s Ecolabel on India’s Export of Leather Footwear

Imports accounts for more than 50% of the consumption of leather goods in EU countries. As imports have increased, the production in EU market has declined in recent years affecting the North European countries in particular. The leather industry in these countries has lost ¼ of its industrial capacity and 1/3 of its work force during the last decade. Faced with increasing imports, many EU countries feel the need to protect their leather industry.

The ecolabel in leather sector applies to all categories of shoes, including sports and casual shoes. The criteria for the award of ecolabel take into account environmental as well as performance considerations. The main objective of the Ecolabel is: a) reduction of water and air pollution during tanning process; b) minimizing the risk of allergic reactions from chemicals used during the fabrication and finishing stages; and c) use of recycled material for packaging.

The Ecolabel scheme has been particularly unsuccessful in case of footwear; only a handful of firms have received the label. This is because environmental considerations are reported to be unimportant in consumers’ choice of footwear. Consumers’ concern is largely limited to the use of hazardous substances (such as carcinogenic azo dyes and PCP) in the manufacture of footwear. Most consumers are not aware of the environmental impact of the leather production process. Due to lack of demand, the industry is not interested in using Ecolabel on its products.

As it does not play an important role in EU’s footwear markets, the impact of Ecolabel on the import of footwear from developing countries, including India is negligible. Discussions with stakeholders in Europe and India suggest that ecolabels do not play a role in importers’ choice of suppliers. Large European companies such as Clark and Mark and Spencer, which import large volume of footwear from India, have their own norms and do not use the EU Ecolabel. Most of the Indian exporters, including some of the large companies, have not even heard of Ecolabel and none had lost business for not having the label.

Discussions with Indian and EU companies indicate that the importers are primarily interested in ensuring that the banned substances are not use in the production of leather. 

While it is true that at present environmental considerations do not play an important role in Europe’s footwear market, this situation may change. The industry in EU countries is already working on the development and adoption of technologies that can provide both improved environmental performance and competitive advantage. Efforts are also being made to popularise the European Ecolabel amongst the footwear manufacturers in the EU, mainly SMEs and traders.

If the situation does change and the EU’s market of leather footwear become more sensitive to environmental issues, Ecolabel may have an important impact on India’s export.  As an increasing number of Indian firms move to the higher end of the market, they are likely to become more vulnerable to the impact of ecolabel in the EU market.

 

Indian Firms’ Ability to Meet the Criteria and Obtain EU’s Ecolabel

Indian firms may face difficulty in meeting the EU criteria on COD and Chromium III/I in the tannery effluent. However, the industry will be able to meet demands on reduction or non-use of harmful chemicals during the fabrication and finishing of shoes and use of recycled packaging material.

Even if the domestic industry is capable of achieving criteria, their European importers are unwilling to pay extra price for added environment friendliness.

The large European buyers increasingly focus on social standards like the use of child labour, minimum wages and working conditions and demand compliance on them rather than environmental aspects.

What can be done to Reduce the Impact of EU’s Ecolabel on India’s Exports

There are a number of steps that can be taken both by official agencies and industry in India and EU countries. These include the following: