Energy efficiency in the European Union: What can be learned from the joint application of directional distance functions and slacks-based measures?

Over the last few years there have been increasing concerns about the energy mix in many countries. These concerns have been of greater magnitude for countries with a common energy regulation such as European Union (EU) member states. In order to choose a given energy mix, an important aspect to take into account is the efficiency involved to generate it. In this context, the present study analyzes the efficiency with which electricity and derived heat is produced in 25 EU member states over the last decade. This is carried out considering not only the inputs and outputs involved but, more importantly, which undesirable by-products are generated during the production process, which is a relevant issue for the EU climate policy. To this end, two nonparametric frontier models are considered. First, a Directional Distance Function, based on Briec’s (1997) proposal and, second, a modified version of Tone’s (2001) Slack Based Measure (SBM) model, both of which are especially appropriate in this particular context due to its treatment of undesirable outputs. Results from both models show that there are remarkable efficiency differences among EU countries and, therefore, the initiatives aiming at harmonizing environmental policies have still to be intensified.