Institute for Social, Behavioral, and Economic Research

Increasing social concerns over the environmental externalities associated with business activities are pushing firms to identify activities that create economic value with less environmental impact and to become more eco-efficient. However, this task has proven challenging because there is no systematic methodology to integrate undesirable outputs, such as emissions, in the calculation of economic or productive efficiency. In this paper, we develop a methodology based on the nonparametric frontier approach to measure corporate eco-efficiency, and to compare it to productive efficiency. Our eco-efficiency model rectifies several problems encountered in existing approaches. Our methodology allows us to calculate, for each firm, the reduction in emissions necessary to attain eco-efficiency. In addition, our methodology measures changes in efficiency attributed to undesirable outputs. We apply our methodology to data from 84 U.S. electric utilities in 2007. Our analysis demonstrates how incorporating undesirable outputs in the measurement of efficiency can impact the distance of the firm to the best industry practice. We describe future research directions and potential applications of the methodology for managers and policymakers.