Institute of the Environment and Sustainability

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. Over the past two decades, researchers have increasingly used frontier efficiency models to evaluate productive efficiency in the presence of undesirable outputs, such as greenhouse gas emissions. In this paper, we identify critical flaws of existing frontier models and show that under these models eco-inefficient firms can be identified as eco-efficient. We develop a new eco-inefficiency frontier model that rectifies these problems. Our model allows us to calculate, for each firm, an eco-inefficiency score and improvements in outputs necessary to attain eco-efficiency. We demonstrate, through a Monte-Carlo experiment that our eco-inefficiency model provides a more reliable measurement of corporate eco-inefficiency than the existing frontier models. In the simulation experiment we develop a production function of multiple desirable and undesirable outputs that extends the classical Cob-Douglas function of a single output. The multi-output production function allows for greater flexibility in the simulation analysis of frontier models.