MEASURING ECO-EFFICIENCY OF PRODUCTION IN OECD MEMBER COUNTRIES : A STOCHASTIC FRONTIER ANALYSIS

This paper analyzed the eco-efficiency of 27 OECD member countries by using output-oriented Stochastic Frontier Analysis (SFA) model. In the set-up of the model, Gross Domestic Product (GDP) was used as a good output whereas Carbon dioxide (CO2), Sulphur dioxide (SO2) and Nitrogen oxide (NOx) emissions were used as bad outputs. The results indicated that Denmark, Australia, Netherlands, France and Japan are the most eco-efficient countries whereas Turkey is the least eco-efficient country within OECD. In general, the values of the eco-efficiency scores within OECD member countries are not good enough. This is an indication that the policy makers must be concerned. Moreover, the results indicated that for a particular OECD member country, the eco-efficiency score increases when environmental policy stringency index (epsi) increases. It is imperative for the policy makers to consider the weights of the environmental pollutants whenever they introduce new stricter environmental policy. The policy makers must set sterner environmental policy on SO2 emissions and NOX emissions as compared to CO2 emissions because CO2 offers more contribution to the GDP which in turn boost eco-efficiency score. In a nutshell, for any particular OECD member country, CO2 emissions’ reduction will be more costly than the reduction of SO2 or NOX emissions. Furthermore, this paper found no evidence of Environmental Kuznets Curve (EKC) hypothesis. On the contrary, other previous studies such as Zaim and Taskin (2000) proved the existence of EKC hypothesis. This aspect strongly supports my proposition that the evidences of existence of inverted U-shape relationship between environmental performance and GDP per capita are mixed and inconclusive