Environmental efficiency and regulatory standards: the case of CO2 emissions from OECD industries

Abstract It is generally accepted that production processes should take into account environmental sustainability principles. Hence, any attempt to measure the performance of these processes should highlight, as a reference standard, those processes that combine greater amounts of desirable production with lower levels of undesirable outputs, e.g. waste generation or emissions of greenhouse gases. Using this concept of environmental performance, it is possible to establish efficiency scores within a Data Envelopment Analysis (DEA) framework, and to calculate desirable output losses when specific environmental standards on undesirable production are set by the authority, i.e. legislative opportunity costs. This can be achieved by solving programming models that call for a reduction of undesirable outputs and that stress the weak disposability of such outputs. Once a standard is set, it congests or binds the technology if the reductions in undesirable production required to meet it imply lower desirable output levels, i.e. the regulation is costly. DEA enables us to simulate, for each producer, the effect of any regulatory standard on production, and the limits beyond which production is impossible — lower limits, or superfluous — upper limits, because the chosen standard does not bind production. The empirical implications of the DEA process are analyzed considering different regulatory scenarios on CO2 emissions for the Organization for Economic Cooperation and Development (OECD)'s manufacturing industries.