DEA approach for unified efficiency measurement: Assessment of Japanese fossil fuel power generation

This study discusses a new DEA (Data Envelopment Analysis) approach to measure the unified (operational and environmental) efficiency of energy firms. It is widely known that they produce not only desirable (good) outputs (e.g., electricity) but also undesirable (bad) outputs (e.g., CO2) as a result of their plant operations. The proposed approach incorporates an output separation (desirable and undesirable outputs) for the performance evaluation of energy firms. In addition to the output separation, this study separates inputs into energy and non-energy inputs. Consequently, the proposed approach incorporates not only the output separation but also the input separation within a computational framework of DEA non-radial measurement. This study compares the proposed approach with other previous DEA approaches used for the performance evaluation of energy firms. After the methodological comparison, this study applies the proposed approach for measuring the unified efficiency of Japanese fossil fuel power generation. This empirical study confirms that the implementation of Kyoto Protocol (2005) has not been effective on the unified efficiency of Japanese fossil fuel power generation during the observed period (2004-2008). Although the empirical result is inconsistent with the current Japanese environmental policy under Kyoto Protocol, it contains policy implications for guiding the future direction of Japanese environmental policy on the electric power industry.