Assessment of Productive and Environmental Efficiencies of Japanese Industries

The global warming and climate change becomes a major policy issue in the world. To partly deal with the climate change issue from economics and business concerns, this study proposes a use of Data Envelopment Analysis (DEA) as a methodology for unified (operational and environmental) assessments. The proposed DEA approach has been long serving as an important methodology to evaluate the performance of various organizations. Recently, many researchers have applied DEA to various environmental issues. A contribution of the previous DEA studies was that they found the importance of an output separation into desirable (good) outputs and undesirable (bad) outputs (e.g., CO2 emission and air pollution substances from production activities). Acknowledging a contribution of these previous studies on DEA environmental assessment, this study classifies efficiency measures into the two categories according to the treatment of undesirable outputs: (a) productive efficiency and (b) unified efficiency under natural disposability. The first efficiency does not incorporate undesirable outputs in the performance evaluation, while the second measure incorporates them to the environmental assessment. Using a data set regarding the manufacturing industries of 47 prefectures in Japan, this study examines their productive and environmental efficiencies to obtain policy implications. The important empirical finding suggests that Japanese regional industries need to make their further efforts to reduce air pollution substances and increase energy efficiency.