Does Win-Win Opportunity Always Result in Pollution Abatement? An Application of Directional Distance Function to Indian Cement Industry

Environmental regulation has traditionally been considered to have as detrimental impact on firm performance as it compels the complying firms diverting their resources from productive purpose to pollution abatement. Contrary to this, Porter hypothesis says that a well-designed environmental regulation, if implemented properly, may result in lower level of pollution with enhanced firm performance - a proposition called ‘win-win opportunity’. The objective of the paper is two-fold. Firstly, to examine whether there exists any ‘winwin opportunity’ for Indian cement firms complying with environmental regulations. Secondly, to verify whether such ‘win-win opportunity’, if exists, can actually lead to pollution abatement. We assume Indian cement firms produce two outputs, cement as desirable output and pollution (CO2 emission) as bad output and measure firm performance by environmental efficiency defined as ability of the firms to simultaneously increase the desirable output and reduce the bad output by same proportion. We adopt directional distance function approach to compute efficiency of the firms under regulated and nonregulated scenarios and compare the efficiency scores using Wilcoxon Rank Sum Test. We have used firm level input-output data of Indian cement industry from Annual Survey of Industries (ASI) for the year 1999-00 through 2004-05.Our estimates shows, under regulated scenario, mean (in) efficiency scores of the Indian cement firms for the year 1999-00 through 2004-05 are 0.3946, 0.2038, 0.2989, 0.2778, 0.3276 respectively. These efficiency scores imply that in the year 1999-00, Indian cement firms could simultaneously expand good output cement and reduce bad output carbon dioxide to an extent of nearly 40% without using inputs any more, if they strictly comply with the stipulated environmental standards meant for them. Therefore, a potential win-win opportunity does exist in the industry. However, Wilcoxon Rank Sum Test confirms that (in) efficiency scores are much higher under non-regulated scenario, implying higher feasible expansion of good output. Therefore, such win-win opportunity may not necessarily induce the Indian cement firms to spontaneously comply with the environmental regulation since regulation imposes a significant cost on them in terms of lower feasible expansion of the desirable output. Possibility of higher feasible expansion of the good output under non-regulated scenario may not motivate the firms for pollution abatement. We propose that the strategy of information disclosure might be of immense help for the regulatory authority to incentivize the firms in favor of pollution abatement. Since there is always very high monitoring and enforcement cost associated with environmental regulation, the strategy we proposed on the basis of our findings may be used while formulating environmental policy for the polluting industries, in general and Indian cement industry, in particular.