Eco-efficiency analysis of power plants: An extension of data envelopment analysis

In public discussion on environmental policy, the notion of eco-efficiency is often used. The joint production of goods and undesirable outputs, such as pollutants which may not be freely disposable without costs, causes difficulties to measure the overall performance of the firm. Because of the absence of market prices for the undesirable outputs, we are not able to estimate the environmental costs. Some of the measurement and evaluation difficulties can be overcome by employing data envelopment analysis (DEA) as the efficiency measurement vehicle. We propose the use of two different approaches. In the first approach, we start by decomposing the problem into two parts: (1) the problem of measuring technical efficiency (as the relation of the desirable outputs to the inputs) and (2) the problem of measuring so-called ecological efficiency (as the relation of the desirable outputs to the undesirable outputs) separately. Those two efficiency indicators are then combined. In the second approach, we treat pollutants as the inputs in the sense that we wish to increase desirable outputs and decrease pollutants and inputs. The approaches are applied to the problem of measuring the efficiency of 24 power plants in a European country.