Innovative Applications of O.R.
Assessing eco-efficiency with directional distance functions

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Abstract

Eco-efficiency is a matter of concern at present that is receiving increasing attention in political, academic and business circles. Broadly speaking, this concept refers to the ability to create more goods and services with less impact on the environment and less consumption of natural resources, thus involving both economic and also ecological issues. In this paper we propose the use of directional distance functions and Data Envelopment Analysis techniques to assess eco-efficiency. More specifically, we show how these functions can be used to compute a wide range of indicators representing different objectives regarding economic and ecological performance. This methodological approach is applied to a sample of Spanish olive-growing farms to illustrate its great potential to provide policymakers and farm managers with sound information as a basis for strategic decision making. We also suggest further avenues to explore in this burgeoning line of research.

Highlights

► We propose the use of directional distance functions and Data Envelopment Analysis techniques to assess eco-efficiency. ► We compute indicators of eco-efficiency representing different objectives regarding economic and ecological performance. ► Our methodological approach is applied to olive-growing in Southern Spain. ► Eco-inefficient management is a widespread practice across olive farmers.

Introduction

The notion of economic-ecological efficiency, commonly known as eco-efficiency, emerged in the 1990s as a practical approach to the more encompassing concept of sustainability (Schaltegger, 1996). Generally speaking, eco-efficiency refers to the ability of firms, industries or economies to produce goods and services while incurring less impact on the environment and consuming fewer natural resources. At the end of the 1990s, the OECD defined eco-efficiency as ‘the efficiency with which ecological resources are used to meet human needs’ (OECD, 1998). Later, the concept was popularised by the World Business Council for Sustainable Development (WBCSD, 2000) as a way of encouraging companies to become simultaneously more competitive and more environmentally responsible.

In the last 15 years, the concept of eco-efficiency has received growing attention from policymakers, researchers and firm managers. While politicians face the challenge of upholding longer-term sustainability, researchers are charged with the task of providing them sound information to improve the design of their environmental policies. Furthermore, most firm managers have realised that taking the lead in ecological behaviour could bring them important benefits (Elsayed and Paton, 2005). Creating better performing products with less environmental impact is nowadays an important competitive strategy for firms (Porter and van der Linde, 1995, Picazo-Tadeo and Prior, 2009). The assessment of eco-efficiency therefore emerges as a practice with great potential to provide policy decision-makers and firm managers with relevant information as a sound basis for strategic decision making.

Eco-efficiency can be assessed by using ratios that relate the economic value of goods and services produced to the environmental pressures or impacts involved in production processes. The assessment of eco-efficiency was initially approached using very simple indicators such as GDP over CO2 at macro-level, or units of output per unit of waste or environmental pressure at micro-level. In spite of their straightforwardness, these indicators have important shortcomings, ignoring, for example, that a given economic output can be produced with different combinations of pressures or impacts on the environment. In recent years, more sophisticated approaches to assessing eco-efficiency have been developed, including those which use benchmarking techniques and activity analysis or Data Envelopment Analysis techniques (DEA).

According to Korhonen and Luptacik (2004), who propose several models to assess the eco-efficiency of European power plants, two different approaches to modelling and assessing eco-efficiency in a DEA-based framework can be followed. The first one involves making use of activity models in an initial step to obtain separate evaluations of both economic efficiency and ecological efficiency, and then joining them together in a second stage by means of a new DEA-based model. One example of this is the work by De Koeijer et al. (2002), in which scores of both environmental efficiency and profit efficiency are computed for a sample of sugar beet farms in The Netherlands in a first step and then joined together in another model of sustainable efficiency.

The second approach to assessing eco-efficiency with DEA-based models takes into account economic and ecological performance jointly and leads to a wide range of models depending on how economic product and/or wastes and environmental pressures are treated. In this line of research, one outstanding paper is that by Kuosmanen and Kortelainen (2005), which uses conventional Shephard’s distance functions to assess the eco-efficiency of road transportation in three towns in Finland. Moreover, Kortelainen and Kuosmanen (2007) analyse eco-efficiency in consumer durables with DEA techniques measuring efficiency in terms of absolute shadow prices, which have a direct economic meaning as monetary losses due to inefficiencies. Zhang et al. (2008) addresses undesirable outputs as inputs and uses several linear programming transformations of conventional activity analysis models to evaluate the eco-efficiency of thirty provincial industrial systems in China.

Other recent papers that have addressed the issue of assessing eco-efficiency from different perspectives are Barba-Gutiérrez et al., 2009, Lin et al., 2010, Picazo-Tadeo et al., 2011, Wang and Côté, 2011, Wursthorn et al., 2011, Yang et al., 2011, Zhao et al., 2011.

This paper belongs to the research stream that deals with economic and ecological performance jointly. Building on previous work by Kuosmanen and Kortelainen (2005), we contribute to this burgeoning literature by using directional distance functions and Data Envelopment Analysis techniques to assess eco-efficiency. More specifically, by assuming diverse scenarios for the so-called direction vector, we calculate a range of indicators of eco-efficiency representing different objectives concerning economic performance and ecological performance. As far as we are aware, directional distance functions have not been used before to assess eco-efficiency as we do in this paper. Furthermore, our methodological approach is applied to a sample of olive-growing farms located in the South of Spain, providing policymakers and farm managers with information on potential improvements in their ecological and economic performance as a sound basis for strategic decision making.

Following this Introduction, Section 2 develops the methodology. Next, Section 3 describes the dataset and comments on the results and their implications for policymakers and farm managers. Finally, Section 4 concludes and suggests several avenues for further research.

Section snippets

Eco-efficiency and directional distance functions

In this paper, we use the most common definition of eco-efficiency in the ecological literature as the ratio between economic value added and environmental pressures (Schmidheiny and Zorraquin, 1996). Eco-efficiency improves when environmental pressures decrease as value added is maintained, value added increases as environmental pressures are maintained or, also, when value added increases at the same time as pressures decrease. In this way, according to the classification in Huppes and

Assessing eco-efficiency in olive farming

This Section is devoted to illustrating how approaching the assessment of economic and ecological performance with directional distance functions, as we propose in this paper, has great potential to provide both managers and policymakers with sound information for strategic decision making, thus contributing to achieving long-term sustainability. In doing so, we carry out an empirical application of our indicators of eco-efficiency on a representative sample of olive-growing farms located in

Concluding remarks and suggestions for further research

The simplicity of the notion of eco-efficiency and its built-in advantage of considering economics and ecology simultaneously have made this concept a matter of practical interest for researchers, firm managers, politicians and society as a whole. Furthermore, as recognised by various international organisms, assessing eco-efficiency is acquiring increasing importance as an instrument which supports decisions that contribute to sustainable development. Accordingly, from the end of the 1990s

Acknowledgements

The authors would like to thank three anonymous referees for their comments which have contributed to a much improved manuscript. Andrés J. Picazo-Tadeo gratefully acknowledges the financial support received from the Spanish Ministry of Science and Technology (Project ECO2011-30260-C03-01), the Andalusian Department of Economy, Innovation and Science (Project P11-SEJ-7039) and the Generalitat Valenciana (Program PROMETEO 2009/098). Mercedes Beltrán-Esteve and José A. Gómez-Limón acknowledge the

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