WEAI/AERE 2012 - Individual Paper Abstract
Title: Environmental and Cost Efficiency Analysis of the Electricity Production Industry in Nebraska: An Application of the Materials Balance Principle
Author(s): Diego ALVAREZ, University of Nebraska-Lincoln, Lincoln, Nebraska, USA, 402-419-0021, 402-472-3460, diego.alvarez at huskers dot unl dot edu [Photo credit: pixelperfectdigital.com/freestock]
Abstract:
During the past two decades, the environmental side effects of economic activities have been at the center of public and political debate. This has motivated abundant research on whether firms operating in a certain industry can reduce pollution emissions and, if so, at what cost. In order to answer these questions researchers have recognized the need to adjust the standard technical and economic efficiency measures traditionally used in productivity and efficiency analyses.
In this respect, several attempts have been made to integrate technical, economic and environmental performance measures. One line of research has applied Data Envelopment Analysis (DEA) to develop technical efficiency measures that incorporate pollution as (1) inputs, (2) multiplicative inverse outputs, or (3) weaklydisposable outputs (Fare et al., 1996; Scheel, 2001; Zaim, 2004; Kumar, 2006, and many others).
While the above mentioned studies represent an impressive research base, their impact is limited by the fact that the findings offer no economic interpretation: if a firm's technical efficiency declines (or increases) when a pollution variable is added to the model, the change provides no information about the economic cost (or benefit) of this outcome (Welch and Barnum, 2009). In addition, modeling of pollution-generating technologies, in which the pollution variables simply mimic either conventional inputs or conventional outputs, is inconsistent with the material balance condition, a fundamental imperative of physical science (Murty and Russell, 2002). This study applies a Data Envelopment Analysis (DEA) methodology that incorporates the materials balance condition to estimate the environmental and cost efficiency of 9 fossil fueled electricity plants in the state of Nebraska and uses this information to obtain the environmental and economic tradeoffs among different types of fuels used by these plants.
As noted by Welch and Barnum (2009) this methodology provides a worthwhile vehicle for setting out the benefits and costs of carbon abatement by electric utilities. For example, if the gap between efficient cost and efficient environmental production is wide, it would take substantial policy intervention, technological change or market adjustment before it could be narrowed. But also, this approach conveys information on the economic and environmental tradeoffs for the economy as a whole as the electricity sector is responsible for about 40 percent of U.S. carbon dioxide (CO2) (EPA, 2009).
The data utilized in this paper consists of annual net generation of electricity measured in MWh, CO2 equivalent emissions in tons, quantity consumed in physical units of fossil fuel (coal, natural gas and oil) and expenditures on fuels, for years 2010-2011.
This data-set was collected from secondary sources including forms EIA-906, EIA-920, EIA-923 and EIA- 860 from the Energy Information Administration, from EPA (Clean Air Markets, as well as from primary sources, through direct communication with the Nebraska Public Power District (NPPD) and Omaha Public Power District (OPPD)