Employing Value-Based DEA in the eco-efficiency assessment of the electricity sector

Abstract

This paper combines Value-Based Data Envelopment Analysis with Economic InputOutput tables to assess the eco-efficiency of the production and supply chains of the Electricity Sector in the European Union 28. We incorporate the preferences of a hypothetical decision-maker, assuming a value function that is framed in prospect theory, but with the zero-state employed as the reference state. Thus, the value functions used are normally concave for economic concerns and convex for environmental impacts. We therefore assume that some temporary and limited form of economic growth is expected from high-income countries, which enables low- and middle-income countries to meet their needs of economic growth. Furthermore, we consider that countries with already good environmental performance evaluate emission increases more critically. Overall, we concluded that Germany and France stand out, being at the top of efficient countries for all electricity chains. In general, the highest performance of eco-efficiency is attained by richer Western European countries and depends heavily on the Gross Value Added generated by the electricity sector. In contrast, most eco-inefficient electricity systems belong to low- and mid-income Eastern European countries and need to focus on improving their environmental performance. These findings are the result of the differing energy paths along the West-East European axis, and clearly envisage a shift on EU policy to specifically tackle the distinct attitudes towards the benefits of renewable energy.