The Green Premium Puzzle: Empirical Evidence from Climate-Friendly Food Products

TL;DR

This study examines whether climate-friendly food products in Sweden command a price premium, finding no evidence of positive pricing and revealing a complex green premium puzzle influenced by market frictions.

Contribution

It provides empirical evidence that climate-friendly food products do not have a positive price premium and introduces the concept of the green premium puzzle caused by market frictions.

Findings

No evidence of positive green premium in Swedish supermarket data.

In some categories, climate-friendly products have lower prices.

Market frictions may suppress the intended price signals for sustainability.

Abstract

This paper investigates whether climate-friendly food products command a price premium in consumer markets. Using product-level data from a supermarket in Sweden, we examine the relationship between front-of-package climate impact scores and retail prices, controlling for product size, nutritional content, and fixed effects. Contrary to the intuitive expectation of a positive green premium, we find no evidence that climate-friendly products are priced higher. In some product categories, products with better climate scores are in fact associated with lower prices, suggesting a negative premium, an outcome that gives rise to what we refer to as the green premium puzzle. We argue that market frictions such as competing consumer priorities, psychological distance from climate issues, and skepticism toward environmental labeling may suppress the price signals intended to reward sustainable consumption. These findings offer important insights for producers, retailers, and policymakers seeking to align climate goals with effective market incentives in the transition toward a more sustainable society.