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Resource use efficiency of US electricity generating plants during the SO2 trading regime: A distance function approach


  • Kumar, Surender

    () (National Institute of Public Finance and Policy)

  • Gupta, Sreekant

    (National Institute of Public Finance and Policy)


This paper measures resource use efficiency of electricity generating plants in the United States under the SO2 trading regime. Resource use efficiency is defined as the product of technical efficiency and environmental efficiency, where the latter is the ratio of good output (electricity) to bad output (SO2) with reference to the best practice firm, i.e., one that is producing an optimal mix of good and bad outputs. This concept of environmental efficiency is similar to that of output oriented allocative efficiency. Using output distance functions we compare three methods for the calculation of resource use efficiency, namely, stochastic frontier analysis (SFA), deterministic parametric programming and nonparametric linear programming. This paper reveals the strengths and weaknesses of these methods for estimating efficiency. Both SFA and linear programming approaches can estimate the efficiency scores. For plants in the dataset the overall geometric mean of the three methods for technical efficiency, environmental efficiency and resource use efficiency is 0.737, 0.335 and 0.248, respectively. The rank correlation coefficient between technical efficiency, environmental efficiency and resource use efficiency is 0.213, 0.617 and 0.877, respectively. The regression analyses of performance across plants shows units in phase I of the SO2 trading programme are negatively related to measures of economic and environmental performance. This suggests that the market for SO2 allowances, per se, may not be minimizing compliance cost. We also find that a decrease in SO2 emission rates not only increases environmental efficiency but also leads to an increase in resource use efficiency. This finding concurs with the hypothesis that enhancement in the environmental performance of a firm leads to an increase in its overall efficiency of resource use as well.

Suggested Citation

  • Kumar, Surender & Gupta, Sreekant, 2004. "Resource use efficiency of US electricity generating plants during the SO2 trading regime: A distance function approach," Working Papers 04/17, National Institute of Public Finance and Policy.
  • Handle: RePEc:npf:wpaper:04/17
    Note: Working Paper 17, 2004

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    References listed on IDEAS

    1. Murty, Sushama & Russell, R. Robert, 2010. "On modeling pollution-generating technologies," The Warwick Economics Research Paper Series (TWERPS) 931, University of Warwick, Department of Economics.
    2. John Swinton, 2004. "Phase I Completed: An Empirical Assessment of the 1990 CAAA," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 27(3), pages 227-246, March.
    3. Coggins, Jay S. & Swinton, John R., 1996. "The Price of Pollution: A Dual Approach to Valuing SO2Allowances," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 58-72, January.
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    5. Drake, Leigh & Simper, R., 2003. "The measurement of English and Welsh police force efficiency: A comparison of distance function models," European Journal of Operational Research, Elsevier, vol. 147(1), pages 165-186, May.
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    7. Osman Zaim & Fatma Taskin, 2000. "A Kuznets Curve in Environmental Efficiency: An Application on OECD Countries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 17(1), pages 21-36, September.
    8. Murty, M.N. & Kumar, Surender, 2002. "Measuring the cost of environmentally sustainable industrial development in India: a distance function approach," Environment and Development Economics, Cambridge University Press, vol. 7(03), pages 467-486, July.
    9. Fare, Rolf, et al, 1989. "Multilateral Productivity Comparisons When Some Outputs Are Undesirable: A Nonparametric Approach," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 90-98, February.
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    More about this item


    Technical efficiency ; Environmental efficiency ; Resource-use efficiency ; Distance functions ; SO2 allowance program;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General


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