To Compete or Complement? Multiple Green Building Certifications in China

Photo via Shutterstock.

By Xia Li

Certification is used in many industries to solve information problems when product quality or firm behavior is hard to assess. In fact, it is so common that many industries have multiple voluntary certification programs, including the building sector.

This is true in China, where there are two widely used certifications for green building. This diversity of certification is important, as China is home to the largest building market in the world, accounting for 20 percent of all construction investment globally. China’s construction industry is also a major source of energy consumption, amounting to 24 percent of all global energy consumption in 2018. On the domestic level, the building sector accounts for one third of China’s total energy use, and is also a very significant source of carbon dioxide emissions.

Within such a complex and major market, how then do these different certifications and labels interact with each other? Are the various certifications that serve the same market substitutes, complements, or perhaps both? While traditionally seen as competitors, in a new Strategic Management Journal study, our team of authors at Boston University examine how, when and why “competing labels” might actually be complements in the context of green building certifications in China.

The two green-building labels widely used within China are the Green Building Evaluation Label (GBEL) and the Leadership in Energy and Environmental Design (LEED) label. GBEL is a government-led voluntary certification scheme introduced in 2006 and is used primarily within China. LEED is an industry-led voluntary certification program managed by the US Green Building Council (USGBC). It was introduced in 1998 and has since become a global standard.

In the study, we develop a framework for understanding how spillovers – that is, increased adoption of one certification due to the pre-existing use of another one – arise through three channels: suppliers, adopters and users of various labels. We also use the framework to analyze the diffusion of Chinese green-building labels, finding evidence of large positive spillovers through the supplier and audience channels. Our empirical analysis also measures the spillover effect of GBEL adoption (driven by provincial incentives) on the diffusion of LEED in the same geographic markets.

The main results suggest that doubling GBEL adoption produces a 20 percent increase in LEED adoption. The study also found evidence that these spillovers operate through the “supplier” and “user” channels, but there was little evidence of “adopter” level spillovers. In particular, very few buildings adopted both LEED and GBEL at the same time. The result implies that LEED and GBEL may be substitutes at the building level, but complements at the city-level.

These findings have policy and management implications. For policymakers, this study suggests that policies stimulating the adoption of one green building standard can encourage the adoption of another. This policy multiplier effect indicates that regulators could consider subsidizing shared inputs directly as a method of promoting the adoption of multiple certification programs without having to pick favorites. Managers of standardsetting organizations, like USGBC, and building developers may benefit from using this spillover framework developed in this paper as a roadmap for attracting various stakeholder groups, such as owners and users.

In sum, we found that “competing” green building labels can be complements at the market level. As such, this study adds a new dimension to the certification and green building literature, where the competition is well known, but complementarity has received less attention. Our study suggests market level complementarities can promote the co-existence of multiple certifications, indicating that the risks of tipping towards a single label may be small in practice.

Read the Journal Article