Assessing Provincial Energy Efficiency Considering the Social Cost of Greenhouse Gases: A Three-Level Cross-Border Approach in Iran

This study aims to measure energy efficiency and decompose the sources of inefficiency across 31 provinces of Iran during 202 by employing a three-level cross-frontier framework based on the SBM–VRS model. In the model, capital stock, labor, and energy consumption measured in barrels of oil equivalent are included as inputs; gross provincial product is specified as the desirable output; and the social costs of emissions of carbon dioxide, methane, and nitrogen oxides are incorporated as undesirable outputs. Provincial efficiency is calculated at three levels: the climate–economic-sector frontier, the economic-sector frontier, and the national cross-frontier, and overall inefficiency is decomposed into managerial, climatic-regional, and technological-structural components. The results show that average energy efficiency decreases as the reference set expands, from 0.926 at the climate–economic-sector level to 0.742 at the economic-sector level and 0.46 at the national cross-frontier level. Only seven provinces—Ilam, Bushehr, Tehran, South Khorasan, North Khorasan, Khuzestan, and Kohgiluyeh and Boyer-Ahmad—are efficient at all three levels. The national technical energy-saving potential in 2021 is estimated at approximately 885.5 million barrels of oil equivalent, of which 13 percent is attributable to managerial inefficiency, 46.3 percent to the climatic-regional component, and 40.7 percent to the technological-structural component. Therefore, the majority of the potential for improving efficiency is associated with the gap between regional and technological frontiers, and a uniform policy approach for all provinces is not appropriate. Improving energy efficiency requires a combination of better consumption management, development of infrastructure suited to regional conditions, and modernization of production technology and structure.