Environmental efficiency and abatement potential analysis with a two-stage DEA model incorporating the material balance principle

Abstract Appropriate measurement of environmental efficiency in actual production process is of great significance for promoting sustainable development. However, traditional methods of measurement based on joint production function have deviation when the approach is applied to non-joint production activities or any production activity that violates the material balance principle (MBP). In this paper, we propose a two-stage DEA linear model to evaluate environmental efficiency, which adopts MBP and meanwhile considers both production stage and end-of-pipe abatement stage. Our model fits well to the non-joint production activities where the distribution ratio of shared inputs between these two stages is ambiguous. Further, we decompose the environmental efficiency (EE) into production efficiency (PE) and abatement efficiency (AE). Then, we explore the abatement potentials from cleaning production and end-of-pipe abatement, which is demonstrated by pollutant abatement potential index and emission reduction space. We also establish a global Malmquist production index to analyze the dynamic changes of EE, PE, and AE. The proposed approaches are applied to analyze the environmental efficiency of China’s thermal power industry. The results show that PE is generally high, and the effect of AE on EE is dominant. Especially, the abatement activities of SO2 and Soot have greater impact on EE. By opening the “black box”, our work makes a greater exposure to reduction potential.