Measuring Energy Use Efficiency in Presence of Undesirable Output: An Application of Data Envelopment Analysis (DEA) to Indian Cement Industry

In most cases, energy use in the production of a given desirable output results in the generation of undesirable output also as a by-product. Thus, the aim of this paper is to estimate energy use efficiency in Indian cement industry considering energy related undesirable emission. Depending on the presence and absence of undesirable output and environmental regulation, three measures of efficiency have been estimated at the state level from 2000-01 to 2004-05 by applying Data Envelopment Analysis. The first measure of energy efficiency considers both desirable and undesirable output simultaneously and assumes weak disposability of undesirable output, i.e. presence of environmental regulation aimed at reducing pollution levels, while the second measure considers only desirable output. The third measure also considers both desirable and undesirable output but it assumes strong disposability of undesirable output, i.e. absence of environmental regulation. Energy efficiency is defined as the ability of the producer to reduce the energy input to the largest extent possible, conditional on the given level of output, non-energy inputs and undesirable output. A comparison of energy efficiency estimates from the first two measures reveals that energy efficiency estimates are biased if only desirable output is considered. Results from the third measure demonstrate that environmental regulation has a reinforcing effect on energy use efficiency.