ABSTRACT
This study utilizes a nonparametric DEA approach, to assess the energy efficiency of 135 selected countries across the globe during the period of 2000 – 2014 to account for environmental factors in energy efficiency analysis and to analyze the relationship between economic factors and energy efficiency within a two – stage framework. Three kinds of variables are used: input, desirable output, and undesirable output. The inputs are labor, capital, and energy consumption. The undesirable outputs (environmental factors) are Carbon dioxide (CO2), methane (CH4) and Nitrous oxide (N2O) emissions, the desirable output variable is gross domestic product (GDP). Energy efficiency is measured within a total factor framework by way of an SBM-Undesirable model. The second stage assesses the determinants of energy efficiency in countries by way of a bootstrapped truncated regression, FE, 2SLS and Systems Generalized Methods of Moments to control for possible heteroscedasticity, autocorrelation and endogeneity.
The results showed that the selected countries are on average 39% energy efficient within the study period, suggesting that increasing the levels of energy consumption in countries is not being used to produce the maximum GDP possible. The results also showed that incorporating the environmental factors improves the efficiency scores. Income per capita (GNIPC) and CAPLAB (Technological progress) are found to have significantly positive effects on energy efficiency of the countries, whilst higher debt stock and population growth leads to higher inefficiency given their negative significant relationship with energy efficiency.
CHAPTER ONE INTRODUCTION
- Background of the study
Energy has become the wheels on which all economies drive as it is a key factor used in the production of almost all goods and services (Narayan & Smith, 2008; Odhiambo, 2009; Wolde- Rufael, 2009). According to the World Resources Institute, the use of energy is the major cause of greenhouse gas emissions and global warming and accounts for 61.4% of total greenhouse gas emissions (Sadorsky, 2010).
In the light of increasing globalization, environmental concerns have captured serious attention from both governments and international organizations as production processes are accompanied by certain bad outputs from production processes (Al-Tuwaijri, 2004; Cherchye, Rock, & Walheer, 2015; Chiu, Liou, Wu, & Fang, 2012; K. Wang, Lu, & Wei, 2013). There is therefore the need for environmentally efficient production processes.
Environmental efficiency is of interest to every nation, due to the increase in emissions associated with the environmentally unsustainable production processes in most economies (Zaim & Taskin, 2000). Though the term environmental efficiency might mean different things to different people, it is simply defined as using less inputs to produce outputs with minimal environmental concerns (Pittman, 1983). Therefore, Environmental efficiency is seen as a necessary condition for economic and social development (Bai-Chen, Ying, & Qian-Qian, 2012; Halkos & Petrou, 2019).
In the development and economic growth of most economies, energy is one key factor that plays an essential role and has therefore become a fundamental part of global economic life ( Barros & Assaf, 2009; Cleveland, 1997; Kashani, 2005; Murphy & Hall, 2011; Ramachandra, Loerincik, & Shruthi, 2006). Countries consume energy in their production processes which has both positive and negative impact on the environment such as greenhouse-gas emissions which is a threat to the world climate (Stern, 2007). This pollution growth has heightened global concern for climate change. This led to the September 2015 adoption of the 17 Sustainable Development Goals (SDGs) to be accomplished by 2030, among which is the crucial call to “take urgent action to combat climate change and its impacts” (SDG 13) (United Nations Environment Programme, 2016).
According to the Intergovernmental Panel on Climate Change (IPCC), the unprecedented increase in the global greenhouse gas (GHG) emissions in recent years is mainly driven by economic and population growth (IPCC, 2014). The IPCC (2014) reported that more than half of the average global temperature observed from 1951 to 2010 was caused by these gases; carbon dioxide (CO2), methane (CH4), nitrogen oxide (N2O) and the fluorinated gases (F-gases).With the strong growth of emerging economies such as China and India, reliance on energy is expected to further increase heavily (Barros & Assaf, 2009) leading to a rise in the concerns on global warming (Zhang, Cheng, Yuan, & Gao, 2011).
Fare, Grosskopf, Lovell, and Pasurka (1989) posit in their weak disposability assumption that production processes will always be accompanied by some undesirable output such as carbon dioxide (CO2), sulfur oxide (SOX) and nitrous oxide (N2O) that are detrimental to the natural environment. As economies rapidly expand and businesses increase their demand for energy, there is an increase in the green- house emissions, as the desirable output is accompanied by some bad outputs. Since these green-house emissions and other air pollutants derived from the consumption
of energy is a major contributor to global warming and regional atmospheric contamination, academic researchers, industry entrepreneurs and government officials, have recently recognized that sustainable development is one core solution to balance economic and social development with environmental protection and climate change mitigation (Zaim & Taskin, 2000).
Growing demands for environmental quality has forced policy-makers to consider the consequences of their actions in the formulation of economic policies. As environmental concerns are pronounced increasingly in relation to global warming, it is treated as an international matter (Zaim & Taskin, 2000) and therefore it is necessary to put in substantial effort to enhance environmental efficiency in this sector so as to cope with the massive demand and combat these green-house emissions.
