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Modelling Environmental Adjustments of Production Technologies: A Literature Review

Externalities and Environmental Studies

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The Palgrave Handbook of Economic Performance Analysis

Abstract

This chapter theoretically discusses existing methodologies to model environmental adjustments of technologies. We elaborate on the limitations of treating pollution as an input or weakly disposable output, as commonly occurs in the literature. Moreover, we discuss the drawbacks of models that rely on the materials balance principle. We advocate the use of multi-equation modelling, which explicitly models the subprocesses of the production technology. Applied to the context of pollution, such an approach separately models the conventional technology, on the one hand, and the pollution-generating technology, on the other. Finally, we discuss abatement options as well as the possibility of adjusting for good environmental outputs (e.g. carbon sinks).

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Notes

  1. 1.

    Pigou (1920) initiated the integration of externalities into a partial static analysis framework and supported the idea that public intervention is a vector of efficiency. Welfare economics has thus focused on the processes of internalization of these externalities.

  2. 2.

    In this chapter, we refer to negative externalities as environmental bads, pollution, residuals, detrimental outputs, undesirable outputs, bad outputs, wasters or unintended outputs. On another hand, we refer to the traditional outputs as good outputs or intended outputs. About positive externalities, we refer to them as environmental goods.

  3. 3.

    See Pethig (2003) and Baumgärtner (2004) for more discussion on the Inada conditions.

  4. 4.

    See Hoang and Coelli (2011) for the case of directional distance function.

  5. 5.

    This situation particularly makes sense since the relation describing how bad outputs are generated is missing.

  6. 6.

    Lauwers (2009) has considered FEE models as a special case of pollution-generating technology modelling. Moreover, he has referred to the model presented in Eq. (17) as environmentally adjusted production efficiency models.

  7. 7.

    The genesis of the FEE model can be found in Tyteca (1996, 1997).

  8. 8.

    The fundamental problem with Fig. 2 is that when the bad \(z\) is treated as a normal good, then the obvious result is that a zero level of \(z\) can be realized. However, the crucial point is that the relation showing how \(z\) is generated is missing. The apparent trade-off between \(y\) and \(z\) is therefore an illusion and goes against the materials balance. The bad output is generated using input \(x_{M}\) that is constant along the output transformation curve implying that \(y\) cannot be increased and \(z\) decreased. This fact is independent of whether disposability is strong or weak, it simply follows from how the bad output is generated (Førsund 2018).

  9. 9.

    This cost can be lowered using abatement options. The pollution excess then equals \(a^{\prime}x_{ \hbox{min} } - a^{\prime}x_{e}\).

  10. 10.

    This idea suggests substituting high emission factor inputs with ones with low emission factor or substituting low recuperation factor outputs with ones with high recuperation factor.

  11. 11.

    \(v\) is sufficiently large so that the new variable is positive.

  12. 12.

    For the case of the banking industry, Berg et al. (1992, p. 219) have used the additive inverse where \(v = 0\) to introduce loans losses as negative outputs.

  13. 13.

    See also Liu and Sharp (1999) for further discussion on issues related to data transformation.

  14. 14.

    Even if the idea around this concept is clear, it is worth mentioning that it is very strange to quote ‘nature’s emission generating mechanism’.

  15. 15.

    We believe that the expression ‘polar opposite’ used by Murty et al. (2012) simply refers to a systematic reverse in the inequalities. This means that free disposability and costly disposability are complete/exact opposites of one another.

  16. 16.

    Using the same ideas of trade-off estimation, MRL also proved the issues related to the single structure representation of a pollution-generating technology.

  17. 17.

    In the stochastic frontier framework, the idea of describing production systems using separable technologies for intended and unintended outputs has also been discussed in Fernández et al. (2002), Fernández et al. (2005), and Malikov et al. (2018).

  18. 18.

    See Zhou et al. (2008b) for more applications.

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  1. Economie Publique AgroParisTech, INRA, Université Paris-Saclay, Thiverval-Grignon, France

    K. Hervé Dakpo

  2. Business Economics Group, Wageningen University, Wageningen, The Netherlands

    Frederic Ang

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Dakpo, K.H., Ang, F. (2019). Modelling Environmental Adjustments of Production Technologies: A Literature Review. In: ten Raa, T., Greene, W. (eds) The Palgrave Handbook of Economic Performance Analysis. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-23727-1_16

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