Measurement of Environmental Efficiency and Productivity: A Cross Country Analysis. Surender Kumar and Madhu Khanna

Transcription

1 Measuremen of Envronmenal Effcency and Producvy: A Cross Counry Analyss Surender Kumar and Madhu Khanna

2 Measuremen of Envronmenal Effcency and Producvy: A Cross Counry Analyss Surender Kumar * and Madhu Khanna ** Absrac Ths paper measures envronmenal effcency (EE) and envronmenal producvy (EP) and analyses dfferences n hese across counres. I explores he macroeconomc facors ha could explan hese dfferences and wheher hese dfferences can be explaned by ncome levels and by he degree of openness n hese counres. The EE ndex s found o be almos seady over he perod for he annex-i counres whle s value s declnng for non-annex-i counres over hs perod. The EP ndex ncreased over hs perod n boh groups of counres. In he annex-i counres EE exhbs an nvered U shape wh respec o per capa ncome whle s U shaped for he non-annex-i counres. Ths sudy also fnds ha whle he EP ndex ncreases wh ncome n annex-i counres s decreasng n he non-annex-i counres. The degree of openness has a sgnfcan negave mpac on EE and EP n boh groups of counres. Key-words: Envronmenal effcency Envronmenal producvy Dsance funcon Per capa ncome Openness. * Fellow Naonal Insue of Publc Fnance and Polcy 8/2 Sasang Vhar Marg Specal Insuonal Area Near JNU New Delh 0067 Inda E-mal: surender@npfp.org.n ** Assocae Professor Deparmen of Agrculural and Consumer Economcs Unversy of Illnos a Urbana-Champagn 440 Mumford Hall 30 W. Gregory Dr. Urbana IL 680 USA Emal: khanna@uuc.edu 3

3 JEL Classfcaon: C6 D24 F43 O2 P24 Q25 Q32 Acknowledgemen The auhors wsh o hank Professor B. N. Goldar for hs valuable commens. However he usual dsclamer apples. 4

4 Measuremen of Envronmenal Effcency and Producvy: A Cross Counry Analyss Inroducon There s concern abou carbon emssons due o s poenal o cause global warmng. A he same me concerns abou he coss of abang carbon emssons have made counres hesan abou reducng hese emssons. These coss are lkely o vary across counres due o dfferences n echnology dfferences n he mx of energy capal and labour used by hese counres and dfferences n he producvy of hose npus. Ths paper seeks o esmae hese coss of abaemen measured usng he concep of envronmenal effcency (EE) and envronmenal producvy (EP) and o analyse dfferences n hese across counres. I hen explores he macro-economc facors ha could explan hese dfferences and n parcular wheher hese dfferences can be explaned by ncome levels n hese counres. We measure EE and EP for a se of 42 counres for he perod usng he dsance funcon approach. These counres nclude weny-one annex-i counres and weny-one non-annex-i counres. The dsance funcon ncorporaes boh he desrable oupu (Gross Domesc Produc (GDP)) and undesrable oupu (CO 2 ) o provde a measure of how far each counry s npu vecor s from he bes pracce npu froner gven an oupu vecor. These measures of effcency and producvy are obaned under alernave assumpons abou he dsposably of CO 2 ha s could be srongly dsposable or weakly dsposable. Srong dsposably mples ha a counry can reduce CO 2 emssons whou reducng GDP or ncurrng any abaemen coss. On he oher hand weak dsposably mples ha o reduce CO 2 emssons a counry has o dver s resources from he producon of good oupus. 5

5 We measure echncal effcency under he assumpon of weak dsposably o deermne he poenal ha a counry has for reducng CO 2 emssons whle keepng good oupus consan hrough effcency gans. We compare he echncal effcency of a counry under alernave assumpons regardng dsposably of CO 2 emssons o oban a measure of s EE. The laer measures he exen o whch he ably of a counry o ncrease s effcency and reduce s npus would be consraned by he need o reduce CO 2. We examne he rends n producvy for ndvdual counres under he assumpon ha CO 2 emssons are weakly dsposable and compare hese esmaes wh he convenonal measures of producvy ha gnore he generaon of hese emssons. The rao of oal facor producvy (TFP) under weak o srong dsposably provdes he measure of EP. Producvy s convenonally measured usng ndex numbers whch requres daa on prces of all oupus and npus. The dsance funcon approach can help overcome he problems assocaed wh he ndex number approach snce requres daa only on quanes of npus oupus and polluans. Oher sudes esmang he EE of counres nclude Zam and Taskn (2000) Taskn and Zam (200) and Zofo and Preo (200). These sudes use non-paramerc mehods o esmae he EE. Whle Zam and Taskn (2000) and Taskn and Zam (200) focus on examnng he exsence of an envronmenal Kuznes curve (EKC) relaonshp for EE Zofo and Preo (200) esmae he opporuny coss of reducng CO 2 by ncreasng effcency. Taskn and Zam (200) examne he mpac of nernaonal rade also on EE for a sample of 49 developed and developng counres. However Zam and Taskn (2000) and Zofo and Preo (200) used a sample of OECD counres only. An mporan ssue n effcency and producvy sudes s he credbly of he assumpon ha all producng uns can acually reach he same bes pracce producon froner. In he presen sudy n conras o Taskn and Zam (200) we assume ha here are wo dfferen bes pracce froners one for annex-i counres and one for non-annex-i counres because non-annex-i counres may no have access o he same echnologes ha are avalable o annex-i counres. Due o lack of avalably of longer me seres of daa for he enre sample of counres consdered here our sudy s lmed o he perod only. 6

6 There are several sudes on he measuremen of effcency and producvy changes n ndusres whch produce good and bad oupus smulaneously durng he producon process. Some of hese sudes have reaed he bad oupus as npus 2 whle ohers have reaed hem as a synhec oupu such as polluon abaemen (e.g. Gollop and Rober 983). Mury and Russell (2002) have poned ou ha he reamen of bad oupus as npus s no conssen wh he maerals balance approach. The approach adoped by Gollop and Rober o rea he reducon n bad oupu as good oupu creaes a dfferen non-lnear ransformaon of he orgnal varable n he absence of base consraned emsson raes (Aknson and Dorfman 2002). To overcome hs problem Pman (983) proposed ha good and bad oupus should be reaed non-symmercally. Chung e. al. (997) used he dreconal dsance funcon o calculae producon relaonshps nvolvng good and bad oupus whle reang hem asymmercally. In dreconal dsance funcons fndng approprae dreconal vecor s a crcal ask for accepable esmaes of effcency and producvy (Lee e. al. 2002). In our daa se (Table ) here s no clear shf n oupu mx n favour of eher of he oupus. Moreover here are possbles of nfeasble soluons. 3 Therefore followng Aknson and Dorfman (2002) npu dsance funcon s used as an analycal ool n he presen sudy o oban a radal measure of effcency. Ths funcon s less resrcve n he sense ha s no reang he bad oupus eher npus or polluon abaemen as good oupu raher reas he bad oupus as an exogenous echnology shfer wh counres/frms ha can use lesser quanes of npus for producng a gven level of oupus as beng more echncally effcen. There s a large emprcal leraure 4 examnng he EKC relaonshp and seekng o esablsh an nvered U-ype relaonshp beween he level of emssons and per capa ncome levels. Ths leraure shows ha here s a sascal reduced form relaonshp beween emssons and per capa ncome bu does no explan he process ha generaes hs relaonshp. A few sudes 5 recognse ha ransformaon n he producon processes ha leads o mprovemen n envronmenal qualy peran o producon froner approach bu hese sudes have only examned he paern of EE across counres and no of EP. Ths paper conrbues o hs leraure by examnng he causes of change no only n he EE ndex bu also n he EP ndex for annex-i counres and non-annex-i counres. I ncludes per capa GDP and 7

7 openness of a counry among oher explanaory varables o explan dfferences n EE and EP across counres. The remander of he paper s organsed as follows: In secon II we dscuss he heorecal consrucon of he paper. The emprcal model s presened n secon III. Secon IV descrbes and dscusses he daa used n he sudy and resuls. The paper closes n secon V wh some concludng remarks. II. Theorecal Consruc Suppose ha a counry employs a vecor of npus x R K + o produce a vecor of good oupus y R M + and undesrable oupus b R N +. Le P(x) be he feasble oupu se for he gven npu vecor x and L(y b) s he npu requremen se for a gven oupu vecor (y b). Now he echnology se s defned as: T = {(y b x) R M+N+K + (y b) P(x) x L(y b)} () The echnology s modeled n alernave ways. The oupu s srongly or freely dsposable f (y b ) P(x) and (y b ) (y b) (y b ) P(x) whch mples ha f an observed oupu vecor s feasble hen any oupu vecor smaller han ha s also feasble. Ths assumpon excludes producon processes ha generae undesrable oupus ha are cosly o dspose. For example concerns abou CO 2 and oher greenhouse gases mply ha hese should no be consdered o be freely dsposable. In such cases bad oupus are consdered as beng weakly dsposable: (y b) P(x) and 0 θ (θ y θ b) P(x). Ths mples ha polluon s cosly o dspose and abaemen acves would ypcally dver resources away from he producon of desrable oupus and hus lead o lower good oupu wh gven npus. A funconal represenaon of he echnology s provded by Shephard s (970) npu dsance funcon whch also provdes a measure of performance or effcency. The npu dsance funcon descrbes how far an npu vecor s from he boundary of he 8

8 represenave npu se gven he fxed oupu vecor. Formally he npu dsance funcon 6 s defned as D ( y b x ) = sup{ λ : [ x / λ y b ] T } λ Equaon (2) characerses he npu possbly se by he maxmum equ-proporonal conracon of all npus conssen wh he echnology se (). If one assumes ha he effcency measures over he desrable oupus and npus are well-defned and behave as expeced he bad oupus can be reaed as exogenous shfers of he echnology se smlar o a me rend or sae of echnology varable. The mer of hs assumpon s ha creds (penalses) he counres for reducng (ncreasng) he level of bad oupus ha hey produce (Aknson and Dorfman 2002). To emphasse he pon he npu dsance funcon s now wren as: { λ : x / y b T xy b } D y x b = sup λ λ Assumng a sngle bad oupu Aknson and Dorfman have derved he approprae monoonocy condon for bad oupus. Envronmenal Effcency (EE) Followng Fare e. al. (996) we assume ha he npu dsance funcon s separable n he sense of: ) D ( y b x ) = B( b ) D ( y x ) where ) ) ) D ( y x ) = sup{ µ : ( x / µ y ) T} and T = {( y x ) : x can µ produce y }. Here se T ) s a echnology se resrced o he producon of good oupus only whou any consderaon for undesrable oupusb. Therefore wh hs assumpon one can decompose echncal effcency no he facors ha reflec he nfluence of pure ) npu echncal effcency D ( y x ) and he effec of undesrable oupus B( b ). Thus EE s defned as: (2) (3) 9

9 ) EE = B( b ) = D ( y b x ) / D ( y x ) (4) EE wll ake values less han or equal o one. I represens he exen o whch a counry would be consraned n reducng npus by s poenal o ransfer s producon process from free dsposably o cosly dsposal of CO 2 emssons. Counres ha are less consraned have a lower opporuny cos of ransfer n producon process and are consdered o be more envronmenally effcen. Envronmenal Producvy (EP) The Malmqus ndex and s componens effcency change (EC) and echncal change (TC) are defned n erms of he raos of dsance funcons. The npu-based Malmqus ndex under srong (MS) and weak (MW) dsposably of CO 2 emssons s defned respecvely as: MS ( y x ) + + ( y x ) + + ( y x ) + + ( y x ) ( y x ) ( y x 4 ) + + D D D =. + D 4 D D EffcencyChange TechncalChange 2 (5) ( y b x ) ( y b x ) ( y b x ) ( y b x ) ( y b x ) ( y b x ) D D D MW=. + D 4 D D Effcency Change TechncalChange 2 (6) The frs rao n equaons (5) and (6) measures EC under srong and weak dsposably of CO 2 emssons respecvely. The geomerc mean of he wo raos nsde he bracke n hese equaons capures he shf n echnology beween he wo perods. The value of Malmqus ndex greaer (less) han uny ndcaes he mprovemen (deeroraon) over me n producvy. 0

10 Followng Manag e. al. (2002) we decompose MW no MS and EP as follows: MW = MS. EP (7) Ths decomposon can be carred ou by compung he values of npu dsance funcons under alernave assumpon regardng dsposably of CO 2 emssons. Thus EP s measured as: EP = MW / MS (8) III. Emprcal Model We use he paramerc lnear programmng approach proposed by Agner and Chu (968) for esmang he parameers of he dsance funcon. The ranslog specfcaon ha s adoped here for he ransformaon funcon corresponds o mul-oupu/mul-npu echnology wh echncal progress defned n he usual form as a rend varable: ln D (x y b ) = α 0 + = N n α n x n N + 2 n= y + 2 β2 ln y ln y +γ ln b + 2 γ2 ln b ln b + = x n ln b +ϕ ln y ln b +λ + 2 λ2 2 + = N n N n' = N n α nn ln x n ln x n N δ n ln x n ln y + = n +β ln η n ln µ n ln x n + π ln y +θ ln b (9) The soquan of he npu se corresponds o: ln D (x y b ) = 0 and he exeror pons: ln D (x y b ) 0. Therefore hs s accomplshed by solvng he problem

11 K Mnmse { ln D ( b x ) ln } k = 2... K. k = Subjec o () ln D ( y b x ) 0 ln D ( y b x ) () 0 ln y ln D ( y b x ) () 0 ln b y (0) ln D ( y b x ) (v) 0 n =... N. ln x (v) N n= n N N α = n α nn' = δ n = π n = 0 n n' =... N n' = n= (v) α nn ' =αn' n n n' =... N where K denoe he number of observaons. The resrcon n () ensures ha he value of npu dsance funcon s greaer han or equal o one as he logarhm of hs funcon are resrced o be greaer han or equal o zero. Resrcon n () enforces he monoonocy condon of nonncreasng of npu dsance funcon n good oupus whereas he resrcons n () mpose ha he npu dsance funcon s nondecreasng n bad oupus when hey are weakly dsposable and he nequaly n () changes o equaly when he emssons are srongly dsposable. Resrcons n (v) enforce ha he npu dsance funcon s non-decreasng n npus. Resrcon (v) and (v) mpose he homogeney and symmery condons respecvely as requred by he heory. N n= Followng Orea (2002) MS and MW are calculaed as follows: 2

12 3 [ ] + = D D D D MS ) ( ln ) ( ln 2 ) ( ln ) ( ln ln x y x y x y x y () [ ] + = D D D D MW ) ( ln ) ( ln 2 ) ( ln ) ( ln ln x b y x b y x b y x b y (2) These equaons provde a meanngful decomposon of he Malmqus ndex no EC and TC. The negave sgn of he second erm ransforms echncal progress (regress) no posve (negave) value. IV. Daa and Dscusson of Resuls We oban daa on fve varables namely: GDP CO 2 labour force capal sock and commercal energy consumpon for 42 counres for he perod Ou of hese fve varables he frs wo varables GDP and CO 2 are consdered as proxes of good and bad oupus respecvely and he remanng hree are aken as npus. Daa on he GDP labour force and energy consumpon are colleced from he World Developmen Indcaors (WDI) (World Bank) whereas daa on CO 2 are obaned from he webse of World Resources Insue 7. Capal sock 8 daa are obaned from he Penn World Tables (Mark 5.6). GDP and capal sock are measured n 985 US dollars whereas CO 2 and energy consumpon s measured n housand merc ons. The labour force daa s n mllons of employees. The 42 counres 9 ncluded here are hose for whch capal sock daa alongwh oher varables are avalable over he perod of The selecon of perod s based on he avalably of capal daa ha s aken from Penn World Tables. The descrpve sascs of all he varables used n he sudy for boh of he groups.e. annex-i and non-

13 annex-i counres s presened n Table. The descrpve sascs brngs no focus he conras n hese wo groups. The newly ndusralsed counry Hong Kong regsered he hghes growh rae of GDP (7.9 per cen) and also had a hgh growh rae for CO 2 emssons (6.5 per cen). Thaland experenced he second hghes growh rae of GDP of 7.3 per cen bu a more rapd rae of growh n he producon of CO 2.e. 8.3 per cen. The hghes growh rae wh respec o CO 2 was n he Syran Arab Republc (9.4 per cen). Overall growh raes reveal ha developng counres had hgher growh raes n GDP CO 2 and commercal energy consumpon n comparson o he developed counres. Sweden Luxembourg France Belgum Uned Kngdom and Denmark regsered negave CO 2 growh raes of and 0.32 per cen respecvely. Thus we observe ha durng he sudy perod non-annex-i counres no only had hgher growh raes of ncome and emssons relave o annex-i counres bu here was also a hgher degree of varably whn hs group. The emsson nensy of oupu measured as a rao of CO 2 emsson o GDP was relavely hgher n developng counres. However he per capa GDP capal CO 2 emssons and commercal energy consumpon were subsanally hgher n developed counres n comparson o he developng economes. Esmaes of Inpu Dsance Funcon In Table 2 he compued parameers for a deermnsc dsance funcon for annex-i and non-annex-i counres are presened. The npu dsance funcon n equaon (3) s esmaed wh and whou ncludng CO 2 for boh ses of counres. Ths allows us o examne he mporance of he ncluson of CO 2 emssons n he analyss of effcency and producvy changes. Boh models when CO 2 s weakly dsposable and when s gnored yeld frs order coeffcens on npus ha have sgns conssen wh economc heory. The dsance funcons sasfy he regulaory condons on good oupus and convexy on npus and bad oupus for average values of he explanaory varables. As descrbed earler he npu dsance funcon serves as an npubased measure of echncal effcency he average value of hs funcon n boh he models a ceran pons of me are presened n Table 3 0. We observe ha he effcency scores when CO 2 emssons are gnored are 4

14 lower n comparson o he suaon when hs polluan s weakly dsposable. I reveals ha he poenal o ncrease he producon of desrable oupu wh he gven bundle of npu would decrease f he dsposal of CO 2 emssons was no free. On average he value of npu dsance funcon for non-annex-i counres ranges from.0 for Paraguay o.53 for Ngera. Ths reveals ha. per cen o 5.3 per cen of he convenonal npus could have been saved by mprovng effcency and achevng he bes pracce froner under he assumpon of srong dsposably of CO 2 emssons for hese counres. For he annex-i counres hs fgure ranges beween.002 for Ausrala Ausra Belgum Canada and France o.048 for Luxembourg. Under he weak dsposably assumpon he average values of npu dsance funcon for non-annex-i and annex-i counres are.00 and.003 respecvely. Envronmenal Effcency of Counres The esmaes of EE are presened n Table 3. Resuls for nonannex-i and annex-i counres show ha on average he EE scores are and respecvely. I reveals ha on average hese groups of counres have an envronmenally bndng producon echnology. Under boh dsposably assumpons neffcency n he non-annex-i counres s hgher n comparson o annex-i naons. In he non-annex group counres wh larger neffcency dfferenals under he srong and weak dsposably of CO 2 assumpon are Ngera Zamba Peru Morocco Kenya Mexco and Guaemala. These counres have more envronmenally bndng producon echnology han ohers. On he oher hand here s only one counry n non-annex-i counres ha s free from envronmenal consrans.e. Hong Kong. Among he annex-i counres here are only hree counres ha have dfferenal of more han one percen under alernave dsposably condons n he echncal effcency scores.e. Luxembourg Ireland and New Zealand. We also fnd ha he EE ndex s almos seady n annex-i counres whle s value s declnng n he non-annex-i counres over me (Fgure ). Counres wh dfferen effcency scores suffer congeson from CO 2 emssons.e. f he counres were o reduce emssons hey would have o sacrfce her GDP snce good and bad oupus canno be 5

15 dssocaed. Once hs neffcency s ranslaed no loss of desrable oupu resuls show ha developng counres lke Ngera Zamba Peru Morocco Kenya Mexco and Guaemala would have o lose more han wo percen of her GDP due o congeson of producon echnology. As a whole counres n our sample would lose 2.0 per cen of GDP on average due o envronmenally bndng producon echnology. The relave oupu loss due o mposon of cosly abaemen for non-annex-i counres s hgher han he average. Moreover he gap n he level of EE n annex-i and non-annex-i counres s ncreasng over me (Fgure ). The measure of effcency under weak dsposably of CO 2 can alernavely be nerpreed as a measure of he exsence of poenal wn-wn opporunes. Ths ndex shows he poenal for a counry relave o he bes pracce froner. Ths wn-wn opporuny s slghly hgher for non-annex-i counres han for annex-i counres (Table 3). The echncal effcency under weak dsposably of CO 2 s 0.99 for hese counres and for he annex-i counres. I mples ha non-annex-i counres can decrease npus along wh reducons n CO 2 emssons by 0.9 per cen per year whle developed counres can decrease npus and emssons by 0.4 per cen per year. Deermnans of Envronmenal Effcency We now examne he facors ha deermne he changes n he EE ndex over me and he dfferences across counres. I s hypohessed ha specfc arbues of an ndvdual counry conrbue o he envronmenal performance of ha counry. Usng a panel daa framework we examne he relaonshp beween EE and s deermnans by ncludng varables such as GDP per capa share of ndusral oupu n GDP capal-labour rao energy nensy measured by he use of commercal energy per un of GDP populaon densy and openness ndex. The openness ndex could be a proxy for nsuonal and polcy framework of a counry. The source of daa on per capa GDP share of ndusral oupu openness ndex and populaon densy s he WDI. The equaon below specfes a possble form relaon beween he EE and he varables dscussed above. 6

16 EE β 5 + β = β + β INDSHARE 9 2 POPDENS GDPPC + β + β ( GDPPC) + β ( INDHSARE) OPEN + β β 7 ( OPEN) + β ( GDPPC) CAPLAB ε + β ENGDP where: s counry ndex; s me ndex; ε s he dsurbance erm such ha ε ~ N (0 σ ε ) ; GDPPC s GDP per capa; INDSHARE s share of ndusral oupu n GDP; CAPLAB s capal per labour; ENGDP s use of commercal energy per un of GDP; POPDENS s populaon densy; and OPEN openness ndex defned as he rao of oal expors and mpors o GDP. The shape of polynomal shows he relaonshp beween EE and GDP per capa. I s expeced ha n he nal phases of ndusralsaon EE would deerorae and here should be an mprovemen once a crcal level of ndusralsaon s reached. Ths mples a quadrac relaonshp beween EE and share of ndusral oupu n GDP wh frs order coeffcen o be posve and second order coeffcen o be negave. A posve sgn s expeced for capal per labour varable f capal nensy leads o ncrease n EE oherwse should be negave. A negave sgn s expeced for ENGDP varable snce can be assumed ha hgher energy nensy of oupu leads o declne n EE. Wh respec o he varable populaon densy sgn can be eher posve or negave. The openness varable can show boh he posve and negave effecs of ncreased volume of rade on he EE. On he negave sde capures he envronmenally deerorang effecs ha sem from ncreased volume of rade. On he posve sde capures he envronmenally benefcal effecs ha sem from free rade and easer access o cleaner npus and echnologes. The sgn and sgnfcance of he openness varable (and s quadrac erm) wll help o selec among he compeng hypoheses on envronmen and nernaonal rade. Table 5 provdes he parameers esmaes of he regressons for he EE ndex under alernave specfcaons. The frs hree columns of he able repor he esmaon resuls for annex-i counres and he las hree columns are he parameer esmaes of models for non-annex- I counres. A LM es performed on he alernave specfcaons of he fxed effec models acceps he null hypohess of a common nercep n 7

17 favor of he model agans counry specfc nercep erms for boh of he groups of counres. Furhermore he choce beween he fxed effec models and he random effec model can be made usng he Hausman es. We rejec he null hypohess for annex-i counres whch suggess he random effec model s he approprae specfcaon and bu for nonannex-i counres we fnd he fxed effec specfcaon o be approprae. The mos apparen oucome n all he specfcaons of he model s ha varable GDP per capa s quadrac and cubc erms are sascally sgnfcan. In he annex-i counres we fnd ha n he nal phases of growh (up o an per capa GDP level of approxmaely US$ accordng o he random effec model Fgure 2) here s an mprovemen n EE whch s followed by a phase of deeroraon and hen a furher mprovemen once a crcal level of per capa GDP (approxmaely US$ Fgure 2) s reached. Bu n he non-annex-i counres he suaon s jus oppose. In hese counres we fnd ha n he nal phases of growh (up o an per capa GDP level of approxmaely US$ 5500 accordng o he fxed effec model Fgure 3) here s a declne n EE whch s followed by a phase of mprovemen and hen a furher declne once a crcal level of per capa GDP s reached (approxmaely US$ 5000 Fgure 3). Ths mples ha n he annex-i counres he opporuny cos of he ransformaon of a producon process from free o cosly dsposal of CO 2 emsson s becomng smaller afer a ceran hreshold ncome level. Bu he non-annex-i counres are far behnd n GDP per capa n comparson o her counerpar annex-i counres and he opporuny coss of ransformaon n producon process are ncreasng. Ths helps n explanng he ncreasng dfferenals beween he annex-i counres and non-annex-i counres n he level of EE ndex over me (Fgure ). The share of ndusral oupu n GDP varable exhbs a U-curve ype quadrac relaonshp n annex-i counres. Ths fndng concurs wh he fndngs of Zam and Taskn (2000). In non-annex-i counres he lnear coeffcen s nsgnfcan bu he coeffcen of he quadrac erm s negave and sgnfcan a 0 per cen of crcal level. Ths ndcaes ha n he nal phases of ndusralsaon n hese counres EE remans unaffeced bu as he process of ndusralsaon ncreases EE sars declnng. Moreover we fnd ha he coeffcen of he varables POPDENS s conssenly sgnfcan for boh he groups hs varable s posvely 8

18 and negavely relaed o EE n annex-i and non-annex-i counres respecvely. The coeffcen of he energy nensy varable s negave and sascally sgnfcan for boh he groups ndcang ha he ncrease n energy nensy leads o decrease n EE. The ncrease n capal per labour leads o ncrease n EE n boh he groups. Oher varables ha we ncluded n he model are he ndex of openness and s quadrac erm. Here we hypohesse ha he openness varable also exhbs a U shaped relaonshp wh EE. We fnd ha n he annex-i counres he coeffcen of he lnear erm of openness ndex s sascally sgnfcan and negave he sgn of he quadrac erm s posve bu nsgnfcan. Ths mples ha n he annex-i counres openness of he economy leads o decrease n EE. For he non-annex-i counres he sgn of he lnear and quadrac erms of openness ndex are negave and posve respecvely and sascally sgnfcan. Ths mples ha here s deeroraon n EE up o a ceran level of openness and hen he EE sars o mprove once a crcal hreshold level of openness s reached. Ths fndng concurs wh he fndngs of Ekns e. al. (994) and Taskn and Zam (200). Envronmenal Producvy of Counres Table 4 sums up he man resuls concernng producvy change. Insead of presenng he dsaggregaed resuls for each year we presen a summary descrpon of he cumulave performance of each group a he nerval of fve years. Recall ha ndex values greaer (less) han one denoe mprovemens (deeroraon) n he relevan performance. Here we have calculaed he Malmqus ndex and s componens for boh cases: weak and srong dsposably of CO 2. Our mehod of compung producvy change ulses a fxed base year (97) and compares all subsequen years o ha base. The cumulave MS value of ndcaes ha he annual producvy declne was 0.8 per cen for he perod when CO 2 s srongly dsposable. On average hs declne was due o echnologcal regresson raher han declne n effcency. The declne n TFP was.4 per cen for non-annex-i counres whereas n annex-i counres declned only by 0.2 per cen per year. Moreover he resuls shows ha a counry level here was echnologcal sagnaon n annex-i counres bu here was echnologcal regresson n developng counres (non- 9

19 annex-i counres). Ngera experenced he hghes declne n TFP among he developng counres. The rae of TFP declne was.9 per cen per year mos of whch s due o echnologcal regresson. Hong Kong experenced he leas declne n MS.e. per cen per year and was he counry n he concerned group ha experenced hghes rae of cach-up effec (EC).e. 0.2 per cen per year. In non-annex-i counres Israel and Venezuela also experenced some of he posve cach-up effec. From hese fgures of sagnaon n cumulave TFP changes n developed counres and declne n developng counres may be argued ha effecvely all GDP growh n he pos-970 perod was due o hgh raes of npu accumulaon. The cumulave change n he MW was -.4 per cen. Ths average TFP change was he produc of a declne n nnovaons by.5 per cen and growh n EC by 0.0 per cen. All non-annex-i counes have echnologcal regresson when CO 2 was consdered an undesrable oupu. Bu annex-i counres experenced a posve change n nnovaons excep Greece and Span. Kopp (998) also fnds ha beween 970 and 990 developed counres experenced echncal progress n a way ha economses on CO 2 emssons bu ha developng counres dd no. In he non-annex-i counres Inda experenced he hghes and Paraguay experenced he leas declne n TFP ndex.e and 7.4 per cen respecvely. In he annex-i counres Swzerland experenced he hghes growh n TFP of he amoun of 6.3 per cen; half of whch comes from 'cach-up' effec. Belgum Denmark France Japan Luxembourg Sweden and Uned Saes were he counres ha had more han 2 per cen posve change n he Malmqus ndex beween 97 and 992. Bu was echnologcal changes ha governed he change n overall producvy ndces n all counres. Recall ha he EP s measured as a rao of TFP measured under weak and srong dsposably of CO 2 emssons. Table 4 (las column) repors he cumulave value of EP ndex a ceran pons for boh of he groups. Fgure 4 reveals ha he EP s ncreasng over me n boh of he groups bu he rae of growh s hgher n annex-i counres n comparson o he non-annex-i counres. In annex-i counres he cumulave ncrease n EP was 6.2 per cen whereas he non-annex-i counres experenced only 4.2 per cen ncrease durng 97 o 992. In non-annex-i counres he counres havng more han 0 per cen ncrease n EP were Ngera (6.9 per cen) Zamba (5.8 per cen) Kenya (5.7 per cen) Paraguay (2.3 per cen) Morocco (0.8 per 20

20 cen) and Inda (0.2 per cen) bu n annex-i counres only Swzerland (.8 per cen) experenced an ncrease hgher han 0 per cen. Some counres experenced declne n he EP: Hong Kong (5 per cen) Venezuela (4.3 per cen) Mexco (2.6 per cen) Ecuador (.9 per cen) Peru (.6 per cen) Colomba (.5 per cen) and Syran Arab Republc (0.6 per cen). All hese counres were non-annex-i counres and n annex-i no counry experenced declne n EP. Thus here was hgher varably n EP ndex among developng counres n comparson o he developed one. Moreover he gap over me n EP was ncreasng beween hese wo groups (Fgure 6). Deermnans of Envronmenal Producvy We hypohesse ha he level of EP s deermned by he level of GDP per capa capal per labour share of ndusral oupu n GDP energy nensy populaon densy and openness ndex. One mporan arbue ha nfluences he envronmenal concerns and EP n a counry s he per capa GDP. Therefore we hypohesse an EKC ype relaonshp beween per capa ncome and EP. The relaonshp wh he openness varable wll deermne he mpac of nernaonal rade on he EP growh. The equaon below specfes a possble form relaon beween he EP and s deermnans: EP + β + β 5 9 = β CAPLAB ( OPEN + β ) 2 2 GDPPC + β + ε 6 + β ENGDP 3 ( GDPPC + β 7 ) 2 POPDENS + β 4 INDSHARE + β 8 OPEN where: s counry ndex; s me ndex; ε s he dsurbance erm such ha ε ~ N (0 σ ε ) ; GDPPC s GDP per capa; INDSHARE s share of ndusral oupu n GDP; CAPLAB s capal per labour; ENGDP s use of commercal energy per un of GDP; POPDENS s populaon densy; and OPEN openness ndex defned as he rao of oal expors and mpors o GDP. 2

21 Table 6 provdes he parameers esmaes of he regressons for he EP ndex under alernave specfcaons. A LM es performed on he alernave specfcaons of he fxed effec models acceps he null hypohess of a common nercep agans he model wh counry specfc nercep erms for boh groups. Furher more he choce beween fxed effec model and he random effec model can be made usng he Hausman es. For boh groups we accep he null hypohess whch suggess ha he fxed effec model wh common nercep erm s he approprae specfcaon. The sgns and sgnfcances of all coeffcens are however robus across alernave models. For he annex-i counres we fnd ha coeffcens for GDP per capa and s quadrac erm capal-labour rao energy nensy populaon densy and openness and s quadrac erms are sascally sgnfcan. All oher coeffcens are nsgnfcan. For he non-annex-i counres we fnd ha only hree varables.e. energy nensy capal per labour and populaon densy are sascally sgnfcan varables. In he annex-i counres here s presence of posve relaonshp beween capal per labour and EP mplyng ha capal nensy leads o ncrease n EP. Bu n he non-annex-i counres an ncrease n he capal nensy decreases EP. Furhermore he populaon densy s negavely affecng EP for boh groups. We fnd ha energy nensy conrbues posvely o EP as s coeffcen s posve for boh groups of counres. Here should be noed ha EP can lke convenonal measure of producvy be decomposed no envronmenal effcency change and envronmenal echncal change. In he analyss of EE we observed ha energy nensy leads o declne n EE. Therefore he posve relaonshp beween energy nensy and EP mples ha may be he energy nensy ha s encouragng envronmen frendly echnologcal changes. Of parcular neres are he sgns and sgnfcance of he coeffcens of GDP per capa and s quadrac erm and openness ndex and s quadrac erm. In he annex-i counres s found ha here s an mprovemen n EP up o per capa GDP level of approxmaely US$ (Fgure 7) bu a phase of deeroraon afer ha. Bu n he non-annex-i counres s found ha a he nal phases of growh (up o per capa GDP level of approxmaely US$ 5500 Fgure 8) here s an mprovemen n EP whch s followed by a phase of deeroraon. Here should be noed ha for he non-annex-i counres he coeffcens 22

22 of GDP per capa and s quadrac erms are sascally nsgnfcan even a he 0 per cen crcal level. Ths mples ha here exss an EKC ype relaonshp for EP n annex-i counres (Fgure 7). Moreover he openness varable also exhbs a U-curve ype relaonshp wh EP. For he annex-i counres he sgn of he lnear and quadrac erms of openness ndex are as expeced and sascally sgnfcan. Ths mples ha here s deeroraon n envronmenal performance up o a ceran level of openness and hen he envronmenal performance sars o mprove once a crcal hreshold level s reached. The negave effec of nernaonal rade may be due o energy relaed envronmenal damage such as carbon emssons ha sem from ncreased ransporaon ha s more pronounced below a hreshold level of openness. However as he degree of openness ncreases hs negave effec seems o be offse by he posve effecs of harmonsaon of nernaonal envronmenal sandards. For he nonannex-i counres he sgns of he coeffcens of openness are as expeced bu hese are sascally nsgnfcan even a he 0 per cen crcal level. The man explanaory varables explanng EP n non annex I counres are populaon densy and energy nensy. V. Concluson Ths paper develops EE and EP ndexes usng producon froner analyss and compares hem across counres and over me. The parcular emphass s on he ransformaon of producon processes ha allow free dsposably of carbon emssons o cosly dsposal of hese emssons o consruc hese ndexes. As opposed o mehods whch measure he envronmenal qualy wh he levels of emssons of polluans he ndexes ha are derved n hs sudy are based upon a producon approach ha dfferenaes beween he dsposably characerscs of he envronmenally desrable and undesrable oupus. EE and EP ndexes are calculaed usng he paramerc npu dsance funcon for wo groups annex I and non-annex-i each havng 2 counres for he perod of 97 o 992.On average he world has 23

23 wnessed envronmenally bndng producon echnology durng hese wo decades. The opporuny cos of he ransformaon of he producon process from free o cosly dsposal of CO 2 emsson was abou 2 per cen of GDP. The relave oupu loss due o mposon of cosly dsposal of CO 2 emssons for non-annex-i group was hgher han he average. The EE ndex was almos seady for he annex-i group whle s value s declnng for non-annex-i group over me. TFP measures show ha he progress wnessed by he world durng he 970s and 980s was due o facor accumulaon raher han mprovemen n he producvy of facors of producon. EP measured as he rao of TFP under weak o srong dsposably of CO 2 emssons shows ha ncreased over me n boh he groups. However he rae of growh was hgher n annex-i counres n comparson o her counerpar non-annex-i counres. A closer nspecon of he EE ndex reveals ha here was an mprovemen n EE n he nal phases of growh followed by a phase of deeroraon and hen a furher mprovemen once a crcal level of per capa GDP was reached n he annex-i counres. Ths fndng s smlar n spr o he resuls obaned n an EKC analyss. Bu he suaon s jus oppose n he group conanng non-annex-i counres. In he annex- I counres he opporuny cos of he ransformaon of a producon process from free o cosly dsposal of CO 2 emsson s becomng smaller afer a ceran hreshold ncome level. Bu he non-annex-i counres are far behnd n developmen n comparson o he annex-i counres and he opporuny coss of ransformaon n he producon process are ncreasng. Ths sudy also fnd an EKC ype relaonshp for he EP ndex n annex-i counres. A closer nspecon of hese ndexes reveals ha afer accounng for he effec of changes n per capa ncome level on EE and EP here remans some varaon n hese ndexes ha can be explaned by energy nensy degree of ndusralsaon capal per labour rade relaed varables ec. We also fnd n general ha openness nally has a negave mpac on EE and EP bu ha he effec ncreases as openness ncreases furher. Ths mples ha nally rade lberalsaon negavely affecs he envronmenal performance of counres as hey srve o compee n he world marke bu as hey become more negraed wh he world markes her envronmenal performance mproves. 24

24 Table : Descrpve Sascs of he Varables Used n he Sudy (97-992) Varable Mean Sd. dev. Mnmum Maxmum Annex- Counres GDP growh rae CO 2 growh rae Labour growh rae Capal growh rae Energy consumpon growh rae Indusry share ( per cen GDP) Capal per labour (US$) GDP per capa (US$) Energy/GDP (merc ones/mllon US$) Populaon densy Openness (expor+mpor as per cen GDP) Non-Annex-I Counres GDP growh rae CO 2 growh rae Labour growh rae Capal growh rae Energy consumpon growh rae Indusry share ( per cen GDP) Capal per labour (US$) GDP per capa (US$) Energy/GDP (merc ones/mllon US$) Populaon densy Openness (expor+mpor as per cen GDP)

25 Table 2: Parameer Esmaes of Inpu Dsance Funcon Annex-I Counres Non-Annex-I Counres D GDP CO D ( x y) * D ( x y)* * D ( x y) * ( x y) ** Labour Capal Energy Tme GDP CO Labour Capal Energy E E Tme 2 2.3E E E-05.29E-05 GDP CO Labour Capal Labour Energy Capal Energy GDP Labour GDP Capal GDP Energy GDP Tme E E-04 CO 2 Labour CO 2 Capal CO 2 Energy E CO 2 Tme E E-04 Labour Tme -.90E E-04 Capal Tme E E-04 Energy Tme 6.27E E E E-04 Inercep Noe: ( x y) dsposable. D *: CO 2 s srongly dsposable; D ( x y) **: CO 2 s weakly 26

26 Table 3: Descrpve Sascs of Effcency Measures (Geomerc Mean) Year D ( x y) * D ( x y) ** Envronmenal Effcency Mean S.D. Max Mn Mean S.D. Max Mn Mean S.D. Max Mn Annex-I Counres Non-Annex-I Counres Noe: D ( x y) *: CO 2 s srongly dsposable D ( x y) **: CO 2 s weakly dsposable. 27

27 Table 4: Cumulave Values of Malmqus Index s Componens and Envronmenal Producvy (97=) Srong Dsposably of CO 2 Weak Dsposably of CO 2 Envronmenal Year EC TC MS EC TC MW Producvy Annex-I Counres Non-Annex-I Counres Noe: EC Effcency Change; TC Techncal Change; MS Malmqus Index under srong dsposably; MW Malmqus Index under weak dsposably. 28

28 Table 5: Deermnans of Envronmenal Effcency (EE) Varable Annex-I Counres Non-Annex-I Counres Consan nercep Fxed Effec Random Effec Consan nercep Fxed Effec Random Effec GDPPC 5.27E-05 (7.287)* 5.70E-05 (7.973)* 5.52E-05 (7.754)* -2.6E-04 (-5.766)* -2.05E-04 (-5.390)* -2.6E-04 (-5.70)* (GDPPC) E-09 (-5.763)* -2.E-09 (-6.452)* -2.03E-09 (-6.230)* 2.75E-08 (4.982)* 2.5E-08 (4.438) * 2.74E-08 (4.922) * (GDPPC) E-4 (4.368) * 2.34E-4 (5.03) * 2.23E-4 (4.809) * -9.07E-3 (-4.045) * -7.82E-3 (-3.363) * -9.05E-3 (-3.992) * INDUSTRY -7.79E-03 (-.009) -.74E-02 (-2.7) ** -.40E-02 (-.794) ***.60E-02 (.64).69E-02 (.634).60E-02 (.597) (INDUSTRY) 2.9E-04 (.083) 2.66E-04 (2.336) ** 2.3E-04 (.907) *** -2.53E-04 (-.722) *** -2.66E-04 (-.738) *** -2.53E-04 (-.704) *** CAPLAB 7.68E-07 (2.267) ** 2.88E-07 (0.793) 5.35E-07 (.54) 2.00E-05 (6.267) * 2.06E-05 (6.337) * 2.00E-05 (6.203) * ENGDP -3.9E-02 (-.633)*** -3.67E-02 (-.562) -3.76E-02 (-.60) -2.22E-0 (-.230) * -2.6E-0 (-0.743) * -2.22E-0 (-.07) * DENSITY 6.56E-05 (2.223) ** 5.29E-05 (.83) *** 5.93E-05 (2.042) ** -.9E-04 (-2.906) * -.79E-04 (-2.627) * -.9E-04 (-2.872) * OPEN -4.97E-04 (-.476) -5.82E-04 (-.758) *** -5.49E-04 (-.659) *** -6.60E-03 (-3.708) * -5.32E-03 (-2.87) * -6.59E-03 (-3.656) * (OPEN) 2.05E-06 (0.44).59E-06 (0.677).38E-06 (0.586) 3.57E-05 (2.333) ** 2.82E-05 (.76) *** 3.56E-05 (2.300) ** Consan (72.482) * (72.36) * (55.530) * (54.904) * R LM Tes (p-value).50 (0.22) 2.7 (0.4) Hausman Tes (p-value) 5.99 (0.099) *** 2.25 (0.268) N Noe: Values n parenheses represen '-sascs'. * ** and *** show he level of sgnfcance a per cen 5 per cen and 0 per cen respecvely. 29

29 Table 6: Deermnans of Envronmenal Producvy (EP) Varable Annex-I Counres Non-Annex-I Counres Consan nercep Fxed Effec Random Effec Consan nercep Fxed Effec Random Effec GDPPC.83E-06 (3.40)*.95E-06 (3.5)*.85E-06 (3.4)* 5.60E-06 (0.96) 6.64E-06 (.09) 6.8E-06 (.02) (GDPPC) 2-2.5E- (-.69)*** -2.49E- (-.89)*** -2.2E- (-.72)*** -4.92E-0 (-0.87) -5.70E-0 (-.0) -5.34E-0 (-0.954) INDUSTRY.03E-04 (0.67).87E-04 (.0).6E-04 (0.678) 2.94E-04 (0.744) 2.47E-04 (0.629) 2.67E-04 (0.684) CAPLAB 7.99E-07 (8.66)* 7.42E-07 (7.32)* 7.89E-07 (8.37)* -4.69E-06 (-6.75)* -4.95E-06 (-7.2)* -4.84E-06 (-6.99)* ENGDP.59E-02 (2.5)**.56E-02 (2.46)**.58E-02 (2.49)**.73E-02 (4.48)*.69E-02 (4.44)*.7E-02 (4.84)* DENSITY -.30E-05 (-.67)*** -.40E-05 (-.76)*** -.32E-05 (-.68)*** -3.3E-05 (-3.00)* -3.9E-05 (-2.83)* -3.23E-05 (-2.92)* OPEN -.93E-04 (-2.06)** -2.07E-04 (-2.9)** -.97E-04 (-2.09) -2.98E-04 (-0.854) -3.6E-04 (-.02) -3.32E-04 (-0.950) (OPEN) 2.2E-06 (.69)***.9E-06 (.77)***.4E-06 (.7)*** 4.98E-06 (.52) 4.99E-06 (.5) 4.97E-06 (.52) Consan (72.8)* (54.48)*.002 (763.72)*.003 (742.46)* R LM Tes (pvalue) 0.37 (0.54).80 (0.8) Hausman Tes (p-value) 5.05 (0.75) 9.37 (0.3) N Noe: Values n parenheses represen '-sascs'. * ** and *** show he level of sgnfcance a per cen 5 per cen and 0 per cen respecvely. 30

30 Fgure Fgure : Envronmenal Envronmenal Effcency Effcency Index Index Non-Annex-I Counres Annex-I Counres Non-annex Annex Fgure 2: EKC n EE for Annex-I Counres EE GDP per capa 3

31 Fgure 3: EKC n EE for Non-Annex-I Counres EE GDP per Capa Fgure 4: Convenonal Malmqus Index (97=) Non-Annex-I Counres Annex-I Counres 32

32 Fgure 5: Envronmenally Sensve Malmqus Index (97=) Non-Annex-I Counres Annex-I Counres Fgure 6: Envronmenal Producvy Index (97=) Non-Annex-I Counres Annex-I Counres 33

33 Fgure 7: EKC n EP for Annex-I Counres EE GDP per capa Fgure 8: EKC n EP for Non-Annex-I Counres EE GDP per Capa 34

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