Measuring Environmental Efficiency: Critical Issues and Solutions

31 Pages Posted: 25 Sep 2012 Last revised: 30 Nov 2012

See all articles by Chien-Ming Chen

Chien-Ming Chen

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: September 24, 2012

Abstract

This paper reveals the unintended consequences of the two most widely cited and classical models for measuring environmental efficiency --- the hyperbolic efficiency model (HEM) and directional distance function (DDF). We prove the existence of three main problems: (1) these two models are not monotonic in undesirable outputs (i.e., a firm's efficiency may increase when polluting more, and vice versa), (2) strongly dominated firms may appear efficient, and (3) some firms' environmental efficiency scores may be computed against strongly dominated points. To address these problems, we propose a weighted additive model. We use the supply-chain carbon emission data from the 50 largest publicly traded U.S. manufacturing companies to compare the existing models with our model. The empirical results corroborate our analytical findings that these two classical models may generate spurious efficiency estimates and must be used with extreme caution, and that our model provides reliable estimates of environmental efficiencies.

Keywords: environmental efficiency, undesirable outputs, data envelopment analysis, greenhouse gas emissions

Suggested Citation

Chen, Chien-Ming, Measuring Environmental Efficiency: Critical Issues and Solutions (September 24, 2012). Available at SSRN: https://ssrn.com/abstract=2151675 or http://dx.doi.org/10.2139/ssrn.2151675

Chien-Ming Chen (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

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