Grantee Research Project Results
2003 Progress Report: Pollution Prevention: The Role of Environmental Management and Information
EPA Grant Number: R830870Title: Pollution Prevention: The Role of Environmental Management and Information
Investigators: Khanna, Madhu , Deltas, George , Joshi, Satish
Institution: University of Illinois Urbana-Champaign , Michigan State University
Current Institution: University of Illinois Urbana-Champaign
EPA Project Officer: Hahn, Intaek
Project Period: May 30, 2003 through May 29, 2006 (Extended to May 29, 2007)
Project Period Covered by this Report: May 30, 2003 through May 29, 2004
Project Amount: $286,539
RFA: Corporate Environmental Behavior: Examining the Effectiveness of Government Interventions and Voluntary Initiatives (2002) RFA Text | Recipients Lists
Research Category: Environmental Justice , Pollution Prevention/Sustainable Development
Objective:
The objective of this research project is to examine whether and to what extent the adoption of total quality environmental management (TQEM) is fostering pollution prevention (P2) activities and its implications for the environmental and economic performance of firms. These issues will be investigated using a sample of Standard and Poor’s (S&P) 500 firms that emit toxic releases. The specific objectives of this research project are to:
- Develop a theoretical framework to examine the incentives provided by the market for firms to produce greener products and its implications for the ability of the market to achieve social optimality. We will examine the implications of consumer preferences for product quality and social welfare and the supplementary regulatory policies needed to achieve social optimality.
- Empirically examine the extent to which TQEM and information provision have been effective in motivating the adoption of P2 activities and whether P2 adoption is improving environmental performance. We will examine if P2 adoption is occurring in response to adoption of TQEM and information provision about toxic releases and P2 activities and the types of P2 activities being adopted. This analysis will control for differences in various firm- and industry-specific attributes and direct regulatory and market pressures to adopt P2.
- Examine the implications of TQEM and P2 for the economic performance of firms. We will examine the sources of economic benefits, such as higher market share and higher price earnings ratio, abnormal changes in stock market returns for firms that adopt TQEM and/or P2, and whether stock market reactions to the environmental information in the Toxics Release Inventory (TRI) are influenced by information about the toxicity of releases and about TQEM and P2 activities.
Progress Summary:
We have developed a theoretical framework to examine the effect of market pressures stemming from environmentally conscious consumers in motivating firms to produce greener products. This general framework recognizes that consumers care not only about the environmental attributes of products, but also about other brand-specific characteristics of products. Firms compete with each other to differentiate their products by their attributes and gain market share. We examine whether these market-based incentives for environmental product differentiation, arising from environmentally aware consumers, would achieve the socially optimal levels of product greenness. We also examine the type of firm that is more likely to choose to produce a greener product, that is, whether firms that already are considered high-quality firms by consumers are more likely to produce a greener product. We examine the effects of different types of policies to induce the production of greener products on firm profits and social welfare. The policies examined here include increasing consumer awareness about the environmental attributes of products, uniform and differentiated product quality subsidies, and cost-sharing subsidies.
We have compiled data on environmental management practices adopted by the S&P 500 firms. These data were obtained from the Investor Research Responsibility Center in Washington, DC, for 1994, 1995, and 1996. These data are supplemented by detailed and broad-based parent company-level data on toxic releases and P2 activities from the TRI, financial performance data from Research Insight, and data from the U.S. Environmental Protection Agency on a number of Superfund sites for which firms are held potentially responsible and on the number of times firms were inspected and civil penalties were levied. For the first part of our empirical analysis examining the extent to which TQEM adoption is leading to P2 activities, we use a two-step empirical method.
As a first step in our empirical analysis, we examine the factors motivating TQEM adoption, and then we use instrumental variable methods to examine the effects of TQEM adoption on various types of P2 activities. We classify the P2 activities being undertaken by firms into three categories: good operating practices; waste, spill, and leak prevention; and process and product modification. Our analysis so far shows that TQEM does motivate P2 activities directed towards waste, spill, and leak prevention as well as P2 activities directed towards product and process modification. It has only a weak effect, however, in motivating P2 activities that represent good operating practices. Additionally, firms that were producing larger hazardous air pollutants in the past, that were inspected more frequently, that reported a larger number of chemicals to TRI, and that had a higher sales-asset ratio were more likely to adopt P2 activities. We find that TQEM adoption and a firm’s innovativeness, measured by its research and development expenditures, are substitutes in motivating P2 activities targeted towards process and product modification. This implies that adoption of an environmentally friendly management system is less effective in motivating process and product modification among highly innovative firms that likely are to be undertaking such efforts in any case.
Future Activities:
There are three major research objectives for the next year. First, we will extend our theoretical framework to consider the case where consumers cannot perfectly observe the environmental attributes of products. Firms may adopt TQEM to provide a signal of their environmental stewardship to consumers. We will analyze the incentives for firms to produce greener products in this case and whether TQEM adopters are more likely to produce a greener product. We also will examine whether government incentives targeted towards inducing TQEM are more or less effective than incentives provided for actually improving product greenness. Second, we will complete the event-study analysis. We will be estimating the abnormal stock market returns obtained by firms following the release of the TRI to the public. We then will analyze the extent to which the magnitude of these abnormal returns is influenced by the toxicity of the chemicals released by firms and by their adoption of TQEM and other environmental management practices. Third, we will extend our analysis about P2 to examine the implications of P2 for the environmental performance of firms. We intend to undertake this analysis at the facility level rather than the parent-company level. To do that we are compiling data on toxic releases and P2 at the facility level.
Journal Articles:
No journal articles submitted with this report: View all 36 publications for this projectSupplemental Keywords:
toxic releases, good operating practices, process and product modifications, waste, spill and leak prevention, technological innovativeness, information disclosure, SIC codes 13, 20, 26, 28, 29, 33, 34, 36, 37, 38, 45, 48, 49, 50, 51, 54, 59, 72, 73., RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Sustainable Industry/Business, cleaner production/pollution prevention, Corporate Performance, Economics and Business, decision-making, Economics & Decision Making, environmental management systems (EMS), corporate decision making, environmental management systems, toxic release inventory, decision making, pollution prevention assessment, corporate compliance, cost benefit, environmental evaluation, behavior change, outreach and education, pollution prevention, EMS, environmental behavior, benefits assessment, corporate environmental behavior, corporate cultureRelevant Websites:
None.Progress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.