Does pollution prevention enhance firm efficiency? Insights from U.S. manufacturing firms

Pollution prevention is the EPA’s highest-priority approach to managing toxic chemicals, yet its effects on firm efficiency remain largely unexplored. We address this using a by-production stochastic frontier framework that models desirable output and emissions as linked but distinct production processes, allowing us to separately identify technical and environmental efficiency. The model is estimated across three broad U.S. manufacturing industries (NAICS 31, 32, and 33), using a panel of Compustat, TRI, and EPA P2 data over 1991–2016. Under maintained timing assumptions, we find that a 10% increase in cumulative source reduction improves technical efficiency by 0.09%–0.17% across industries, corresponding to $5.5–$11.2 million in additional real sales at the respective industry means. Source reduction also reduces environmental inefficiency in NAICS 32 and NAICS 33, implying reductions of 4,435–5,802 pounds of toxic releases at the industry means; the effect is not significant in NAICS 31. A disaggregated analysis reveals that different source-reduction activities operate through distinct channels, with material substitution as the most consistent driver of gains in both technical and environmental efficiency.