Grantee Research Project Results
2004 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, 2004 through May 29, 2005
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 purpose 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 performance and economic performance of firms. These issues will be investigated using a sample of S&P 500 firms that emit toxic releases. The specific objectives of this research are to:
1. 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.
2. Empirically examine the extent to which TQEM and information provision have been effective in motivating the adoption of P2 activities and if 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.
3. 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, higher price earnings ratio, abnormal changes in stock market returns for firms that adopt TQEM and/or P2, and if stock market reactions to the environmental information in the Toxics Release Inventory (TRI) are influenced by information about toxicity of releases and about TQEM and P2 activities.
Progress Summary:
During Year 2 of this project, we have been working on achieving Objective 2 and parts of objective 3. More specifically, under Objective 2, we develop an empirical framework to examine the motivations for firms to adopt TQEM and whether or not it leads to the adoption of P2 activities for reducing toxic chemicals, as reported to the TRI. We analyze the role of market pressures, regulatory pressures, and location-specific factors (such as membership in environmental groups, non-attainment status of counties) in motivating TQEM and P2. We also examine the effects of firm innovativeness in motivating TQEM and P2. Furthermore, we distinguish between two different types of P2, Low Technology P2 and High Technology P2. We examine the relative effects of TQEM and firm innovativeness on each of these types of P2. We use an instrumental variables approach with panel data for the 1994-1996 period using data for an unbalanced panel of 169 firms from the S&P 500 list.
As a first step in our empirical analysis, we examine the factors motivating TQEM adoption. In the second step, we use instrumental variable methods to examine the effects of TQEM adoption on various types of P2 activities. Among the factors motivating the adoption of TQEM, we find that supply-side considerations, such as a firm’s internal technical capability, size of operations, and volume of emissions, are positively associated with the decision of a firm to adopt TQEM. In contrast, demand side and regulatory considerations, such as the desire to improve a firm’s image with customers and regulators, earning good-will with regulators, and the anticipation of future regulations, appear not to be associated with the adoption of TQEM. Our analysis of the implications of TQEM for the adoption of P2 activities shows that TQEM does lead firms to adopt more techniques that prevent pollution, as compared to firms that did not adopt TQEM. Information disclosure is found to create positive but weakly significant external pressures toward the worst toxic polluters in an industry to undertake pollution prevention. Moreover, we find that the presence of ‘complementary assets’ within a firm, acquired through prior experience with similar pollution prevention techniques, is important for creating an internal capacity to undertake incremental adoption of such techniques. Finally, we find that regulatory pressure from current and anticipated regulations do play an important role in motivating voluntary pollution prevention. In contrast, market pressures are found to have an insignificant effect on firm behavior. These results suggest that firms’ claims of adopting TQEM are not simply a ‘greenwash’ nor are they simply to achieve social legitimacy. Such firms are indeed changing their operations to make them more environmentally friendly.
With regards to our research on Objective 3, we examine if relative risks of pollutant emissions, pollution preventions activities undertaken by the firm, and the characteristics of firm environmental management systems affect stock market reactions to toxic release information. Using a 6-year panel dataset (1991-1996) and the event study methodology, we find that stock market reactions to toxic release information incorporate information on relative risks, pollution prevention efforts, and selected features of firm environmental management systems, such as external reporting and employee incentives. These findings point to the effectiveness of initiatives that provide environmental information to investors from a regulatory perspective. From the firm’s perspective, the results show that stock markets penalize polluters and reward proactive environmental management. It appears, however, that investors use familiar and simpler models for assessing relative risks of different pollutants and mainly use externally visible symbols of proactive environmental management to assess a firm’s readiness to effectively manage their toxic pollution.
Future Activities:
There are three major objectives of research for Year 3 of the project.
First, we plan to continue to extend our theoretical framework (under Objective 1) 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 plan to analyze the incentives for firms to produce greener products in this case and if TQEM adopters are more likely to produce a greener product. We also plan to examine whether government incentives targeted towards inducing TQEM are more or less effective than incentives provided for actually improving product greenness.
Second, we plan to extend our analysis of the motivators for P2 and examine the implications of P2 for the environmental performance of firms. We intend to undertake this analysis at the facility-level instead of the parent company-level. To do that, we have finished compiling a large panel of data set for the period 1987-2001 with facility-level information on pollution prevention activities, toxic releases, inspections, penalties, and number of Superfund sites at which the firm is potentially responsible. We will be developing econometric models to analyze these data.
Third, we plan to finish compiling the data to examine the sources of economic benefits of P2 activities and the extent to which P2 improves the economic performance of firms. We are compiling a panel of data for the years 1985-2001 at the parent company-level on the financial performance, P2 adoption, toxic releases and market share, penalties, inspections, and number of Superfund sites to conduct this analysis. We will use this to examine the impact of P2 adoption on market share, price earnings ratio, and market value of the firm using a structural model.
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 Code 13, SIC Code 20, SIC Code 26, SIC Code 28, SIC Code 29, SIC Code 33, SIC Code 34, SIC Code 36, SIC Code 37, SIC Code 38, SIC Code 45, SIC Code 48, SIC Code 49, SIC Code 50, SIC Code 51, SIC Code 54, SIC Code 59, SIC Code 72, SIC Code 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 cultureProgress 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.