Resource Use Efficiency of U.S. Electricity Generating Plants During the So2 Trading Regime: A Distance Function Approach

National Institute of Public Finance and Policy Working Paper No. 17/04

46 Pages Posted: 7 Jun 2004

See all articles by Surender Kumar

Surender Kumar

University of Delhi - Department of Business Economics

Shreekant Gupta

University of Delhi - Delhi School of Economics

Date Written: 2004

Abstract

This paper measures resource use efficiency of electricity generating plants in the United States under the SO2 trading regime. Resource use efficiency is defined as the product of technical efficiency and environmental efficiency, where the latter is the ratio of good output (electricity) to bad output (SO2) with reference to the best practice firm, i.e., one that is producing an optimal mix of good and bad outputs. This concept of environmental efficiency is similar to that of output oriented allocative efficiency. Using output distance functions we compare three methods for the calculation of resource use efficiency, namely, stochastic frontier analysis (SFA), deterministic parametric programming and nonparametric linear programming. This paper reveals the strengths and weaknesses of these methods for estimating efficiency. Both SFA and linear programming approaches can estimate the efficiency scores. For plants in the dataset the overall geometric mean of the three methods for technical efficiency, environmental efficiency and resource use efficiency is 0.737, 0.335 and 0.248, respectively. The rank correlation coefficient between technical efficiency, environmental efficiency and resource use efficiency is 0.213, 0.617 and 0.877, respectively. The regression analyses of performance across plants shows units in phase I of the SO2 trading programme are negatively related to measures of economic and environmental performance. This suggests that the market for SO2 allowances, per se, may not be minimizing compliance cost. We also find that a decrease in SO2 emission rates not only increases environmental efficiency but also leads to an increase in resource use efficiency. This finding concurs with the hypothesis that enhancement in the environmental performance of a firm leads to an increase in its overall efficiency of resource use as well.

Keywords: Technical Efficiency, Environmental Efficiency, Resource-Use Efficiency, Distance Functions, SO2 Allowance Program

JEL Classification: L94, Q40

Suggested Citation

Kumar, Surender and Gupta, Shreekant, Resource Use Efficiency of U.S. Electricity Generating Plants During the So2 Trading Regime: A Distance Function Approach (2004). National Institute of Public Finance and Policy Working Paper No. 17/04, Available at SSRN: https://ssrn.com/abstract=552582 or http://dx.doi.org/10.2139/ssrn.552582

Surender Kumar (Contact Author)

University of Delhi - Department of Business Economics ( email )

New Dehli
India

Shreekant Gupta

University of Delhi - Delhi School of Economics ( email )

University Enclave
Delhi-110007
India
+91 11 27667005 (Phone)
+91 11 27667159 (Fax)

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