The purpose of this study is to assess how identifying, tracking, and monitoring environmental costs can assist an agenda adopted to improve environmental performance. We do so by providing a theoretical discussion and contextual model of eco‐efficiency that includes cost management as part of its activities. This approach draws on the quality management literature and the Porter hypothesis, which assumes that pollution is a form of technical inefficiency and that properly designed regulations stimulate firms to develop pollution control innovations. Our paper provides several specific contributions. First, for all stakeholders we provide additional insight into the ongoing debate over the value relevance of environmental cost management by developing a general model of eco‐efficient behavior. Second, our models demonstrate that there is room for opportunities to reduce pollution while simultaneously improving the value of the firm. To do so, however, requires a coordinated effort on the part of both the business community and legislators to understand the needs of each and to offer alternatives that will provide benefits for each party.

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