Exploring production-theoretical insights for analyzing trade-offs between economic performance and environmental pressure at firm level

Abstract

The objective of this paper is to construct a framework for analyzing trade-offs between economic performance and environmental pressure at firm level. Based on a literature review, partially conflicting economic-environmental trade-off paradigms are structured and five necessary conditions for adequate trade-off analysis are put forward. These conditions are delimitating a clear system for which trade-offs are analyzed, assessing the direction of causality between economic performance and environmental pressure, allowing for firm-specific trade-off differences, comprehensiveness with respect to management activities that can be evaluated and flexibility to analyze trade-offs under different market and environmental regulation conditions. To deal with the causality condition, theoretically consistent production, cost, revenue and emission functions are constructed, taking into account the materials balance principle for emission. The linkage between production, economic performance and environmental pressure is then used to construct a framework that integrates the five necessary conditions for trade-off analysis. Our theoretical elaboration shows that economic-environmental implications are firm-specific and depend on the management activity that is applied, on market conditions and on environmental regulation conditions. Theoretically, both pollution prevention and end-of-pipe measures may yield positive or negative economic-environmental trade-offs. Economic-environmental implications of different management activities represent different stages in the trade-off curve. In fact, the partially conflicting trade-off paradigms in literature are also different stages in the trade-off curve. At the end of this paper, some recommendations are given for making the framework operational.