Energy efficiency in the European Union: What can be learned from the joint application of directional distance functions and slacks-based measures?

Abstract

Over the last few years concerns have increased about the energy mix in many countries. These concerns have been of greater magnitude for countries with a common energy regulation such as European Union (EU) member states. An important aspect to take into account when choosing a given energy mix is the efficiency involved in its generation. In this context, the present study analyzes the efficiency with which electricity and derived heat was produced in 25 EU member states over the last decade. This analysis considers not only the inputs and outputs involved but, more importantly, which undesirable by-products were generated during the production process, a relevant issue for EU climate policy. To this end, two nonparametric frontier models are applied: first, a Directional Distance Function (DDF), based on Briec’s (1997) [16] proposal and, second, a modified version of Tone’s (2001) [51] Slacks-Based Measure (SBM) model, both of which are especially appropriate in this particular context due to their treatment of undesirable outputs. Results are partly innovative since, with few exceptions, applications on this issue are relatively scarce. From a policy implications’ point of view, our achievements are also interesting because they reveal remarkable efficiency differences among EU countries: those countries from the latest EU enlargements account for the lowest efficiencies, with large opportunities for improvement in CO2 abatement and primary energy saving. Results also show stable efficiencies along the evaluated period and, therefore, highlighting the need to further intensify the initiatives designed to harmonize environmental policies and identifying drivers for efficiency improvement turn out to be still key objectives.