Two Methods for Measuring the Environmental Returns to Scale Using Data Envelopment Analysis Approach

Abstract

Nowadays, the assessment of environmental performance has received considerable attention by environmental strategy advocators and decision makers. In recent years, increased emission of CO₂ into the air, water pollution, and global warming are universal problems all over the world. Therefore, development of firms with less CO₂ emission is an important issue of attention in every area of production. This paper applies data envelopment analysis (DEA) as a management technique for assessing the environmental performance of the firms. We then explore the measurement of scale economies (SE) and returns to scale (RTS) for environmental issues which have not been given the attention they deserve in the last few decades. Associated with SE and RTS for desirable outputs, the new concepts of ESE (Environmental Scale Economies) and ERTS (Environmental Returns to Scale) are proposed for both desirable and undesirable outputs. This paper presents two methods for determining the type of ERTS of efficient DMUs, and demonstrates their equivalency within a theorem. Finally, the offered models are employed to study the CO₂ emission of Japanese electric power companies. Afterwards, the type of ERTS is determined for efficient companies and based on their type of ERTS, the optimal size is suggested for them.