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The effects of efficiency and TFP growth on pollution in Europe: a multistage spatial analysis

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Abstract

It is common in efficiency studies which analyse the environment for pollution to form part of the production technology. Pollution therefore affects efficiency and the TFP growth decomposition. As an alternative approach we draw on theoretical studies from the environmental economics literature, which demonstrate that TFP affects environmental quality. Along these lines we adopt a two-stage empirical methodology. Firstly, we obtain two estimates of productive performance (efficiency and TFP growth) using a stochastic production frontier framework in Stage 1 for European countries (1995–2008), from which we omit emissions. Secondly, in Stage 2 these measures of productive performance are used as regressors in spatial models of per capita nitrogen and sulphur emissions for European countries. From our preferred Stage 2 spatial models we find that a country’s TFP growth must fall to reduce its per capita nitrogen and sulphur emissions. This is likely to be because nitrogen and sulphur emissions in the EU have been tightly regulated for a long period of time via air quality standards and consequently, substantial reductions in emissions from cleaner and more productive technology were achieved some time ago.

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Notes

  1. The approach in Reinhard et al. (1999, 2000) and Glass et al. (2013a) involves estimating a standard input distance frontier where the negative externality is modelled as an input. Atkinson and Dorfman (2005), on the other hand, use an input distance frontier but instead of the negative externality being modelled as an input, the externality is allowed to shift the best practice frontier.

  2. We can include both efficiency and TFP growth as regressors in models of per capita \(NO_{x}\) and \(SO_{x}\) emissions to capture different aspects of productive performance for two reasons. Firstly, in contrast to TFP growth, efficiency is a level variable. Secondly, it will become clear further in the paper that the efficiency change component of TFP growth is relatively small. In addition, although we are not aware of an empirical study which uses measures of productive performance from a fitted stochastic frontier model as independent variables in a second-stage model of emissions, this approach is common in the extensive literature on banking efficiency. For example, Wheelock and Wilson (2000) use cost inefficiency as an explanatory variable in a model of competing risks in US banking; Cipollini and Fiordelisi (2012) explain the financial distress of European banks using, among other things, profit efficiency; and cost efficiency is a regressor in a model of bank competitiveness in Casu and Giradone (2009).

  3. Most emissions of a transboundary pollutant are internalised (i.e. emissions come to rest within the borders of the country which is responsible) as they fall to ground in their dry form within 300 km of the source. Sulphuric acid rain, on the other hand, is often externalised (i.e. it comes to rest outside of the borders of the country which is responsible) as it can have a long-range impact and may fall to ground up to 2,000 km from its source (Maddison 2007).

  4. As pointed out by an anonymous referee, Anselin (2001) outlines some of the issues which arise when using spatial econometric techniques to model environmental quality. To illustrate, one issue which is often encountered is the spatial scale mismatch between economic data for administrative units and the measurement of environmental quality which may take the form of values for a regular grid of squares or pixels. This is not an issue in our empirical analysis because the economic data, emissions data and EMEP source-receptor tables all relate to individual European countries.

  5. As a result, relatively little of the impact associated with \(NO_{x}\) and \(SO_{x}\) emissions is felt by countries such as Moldova and Latvia. To illustrate, gaseous sulphur dioxide emissions have been found to preceed small particulate matter which have been linked to premature mortality (Pope et al. 1995). Also, these particles impair visibility in urban areas and are thought to alter planetary reflectivity masking temporarily the effects of climate change (Stern and Kaufmann 2000).

  6. Countries do not cooperate when each country only considers the national marginal damage of its emissions. Alternatively, countries cooperate when each country considers the marginal damage of its emissions across Europe.

  7. See Figure 10.15 in Perman et al. (2003).

  8. An \(SO_{2}\) scrubber system is the informal name for flue gas desulphurisation technology, which removes or ‘scrubs’ \(SO_{2}\) emissions from the exhaust of coal-fired power plants.

  9. Although global spatial estimators such as that which we use in Stage \(2\) can be extended to unbalanced panel data, their asymptotic properties may become problematic if the reason why data are missing is not known (Elhorst 2009). Extending global spatial estimators from balanced to unbalanced panel data therefore involves making a strong assumption about why observations are missing. For example, Pfaffermayr (2013) assumes that data are missing at random for an unbalanced spatial panel.

  10. We thank Joseph Pearlman for suggesting this approach to estimate real capital stock for the first year of the sample. Although this is not the usual approach to estimate real capital stock for the first year of a sample, it will become apparent that the capital elasticities in Stage 1 using this approach are sensible. The conventional approach to estimate real capital stock for the first year of a sample is to use fully depreciated real GDP but this would require several years of additional data, which was not available for all the countries in the sample.

  11. As noted in Sect. 3.1.1 above, all the specifications of \(\mathbf {W}\) in Stage 1 are row-normalized so the spatial lags of the inputs and exogenous variable which shift the production frontier technology in Eq. 1 are weighted averages of observations for neighbouring units. The specification of \(\mathbf {W}\) in Stage 2 is also row-normalised. The spatial lag of the dependent variable in Stage 2 is therefore a weighted average of observations for the dependent variable for neighbouring units. As result, in Stages 1 and 2 spillovers are positively related to the relative (and not the absolute) measure of proximity used to configure \(\mathbf {W}\).

  12. We control for the possibility of an EKC relationship but this is not a relationship which we focus on in this paper. This is because, firstly, the empirical focus of Stage 2 is the direct and indirect effects of \(TFPG\) and \(TE\) on \(NO_{x}/Pop\) and \(SO_{x}/Pop\). Secondly, the EKC literature is very well developed. For an up-to-date appraisal of the EKC literature see Carson (2010). Furthermore, we explored including \(\left( RGDP/Pop\right) ^{3}\) to capture the possibility of a further turning point but for reasons which are explained in the analysis of the results this variable was dropped.

  13. The impact of trade on the environment is an issue which has received a lot of attention in recent years. We control for the effect of trade on the environment but we do not focus on this relationship in the analysis of the results because our interests lie elsewhere. For a recent survey of the literature on the trade-environment nexus see Frankel (2009).

  14. We follow the spatial analysis of sulphur emissions in Europe by Ivanova (2011) and do not include dummy variables for international environmental agreements (IEAs). This is because a lot of the empirical evidence on the effects of IEAs suggests that they are symbolic, as they mandate reductions in pollution which would have been achieved in their absence (e.g. Murdoch and Sandler 1997; Murdoch et al. 1997). See Ivanova (2011) for a discussion of the empirical and game theoretic rationales for not including dummy variables relating to IEAs.

  15. To further illustrate, the LR test statistics range from \(68.98\) \((\mathbf {W }_{4Near})-180.35\) \((\mathbf {W}_{7Near})\) for the eleven tests.

  16. We experimented with a range of other efficiency estimators by allowing the non-spatial and spatial variables which shift the frontier technology to also affect the mean of the pre-truncated inefficiency distribution or affect the variance of the inefficiency distribution and/or the variance of the idiosyncratic disturbance. Despite a number of countries in the sample being at different stages of development and transition we obtained the most sensible set of efficiencies using the time varying decay estimator.

  17. The fitted local spatial stochastic frontier models which are not reported are available from the corresponding author upon request.

  18. It was noted in footnote 10 above that the assumption about the value of real capital stock in the first year of the sample yields reasonable estimates of the capital elasticities at the sample mean for the non-spatial and local spatial frontier models. This assumption about the initial value of real capital stock, however, is not the conventional approach to obtain a starting value for the stock and was made because of data availability issues.

  19. When the FEs and REs are correlated with variables like this, the estimated parameters can be biased and inconsistent.

  20. \(\frac{-10.00 }{1.21}=-8.26\) and \(\frac{-10.00}{0.74}=-13.51\), where 1.21 and 0.74 are the significant own \(TFPG\) and \(TE\) parameters, respectively, from model \(3\).

  21. \(\frac{-10.00}{1.381}=-7.24\), where 1.381 is the significant total \(TFPG\) parameter from model 9. Then \(-7.24\times \frac{ 1.112}{1.381}=-5.83\) and \(-7.24+5.83=-1.41\), where 1.112 is the significant direct \(TFPG\) parameter from model 9.

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Authors

Corresponding author

Correspondence to Robin C. Sickles.

Appendices

Appendix 1

Countries in the sample

Albania

Denmark

Latvia

Romania

Armenia

Estonia

Lithuania

Russia

Austria

Finland

Luxembourg

Slovakia

Azerbaijan

France

Macedonia

Slovenia

Belarus

Germany

Malta

Spain

Belgium

Greece

Moldova

Sweden

Bulgaria

Hungary

Netherlands

Switzerland

Croatia

Iceland

Norway

Turkey

Cyprus

Ireland

Poland

Ukraine

Czech Republic

Italy

Portugal

UK

Appendix 2

Values of the information criteria for the stochastic frontier models

Model

AIC

BIC

Base non-spatial

−1,323.05

−1,245.15

\(\mathbf {W}_{All}\)

−1,467.57

−1,368.03

\(\mathbf {W}_{3Near}\)

−1,398.26

−1,298.72

\(\mathbf {W}_{4Near}\)

−1,382.03

−1,282.48

\(\mathbf {W}_{5Near}\)

−1,421.76

−1,322.21

\(\mathbf {W}_{6Near}\)

−1,479.07

−1,379.52

\(\mathbf {W}_{7Near}\)

−1,493.40

−1,393.86

\(\mathbf {W}_{3Big}\)

−1,425.49

−1,325.95

\(\mathbf {W}_{4Big}\)

−1,455.53

−1,355.98

\(\mathbf {W}_{5Big}\)

−1,483.98

−1,384.44

\(\mathbf {W}_{6Big}\)

−1,481.38

−1,381.84

\(\mathbf {W}_{7Big}\)

−1,459.40

−1,359.86

Appendix 3

Average TE scores and average TE ranks

Country

Model 1-\(\text {No Spatial} \text {Dependence}\)

Model 2-\(\mathbf {W}_{All}\)

Model 3-\(\mathbf {W}_{3Near}\)

Model 4-\(\mathbf {W}_{7Near}\)

Model 5-\(\mathbf {W}_{3Big}\)

Model 6-\(\mathbf {W}_{7Big}\)

 

Av \(TE\)

Av \(TE\) Rank

Av \(TE\)

Av \(TE\) Rank

Av \(TE\)

Av \(TE\) Rank

Av \(TE\)

Av \(TE\) Rank

Av \(TE\)

Av \(TE\) Rank

Av \(TE\)

Av \(TE\) Rank

Albania

0.252

36

0.155

39

0.219

36

0.259

35

0.227

36

0.158

37

Armenia

0.210

39

0.161

38

0.148

39

0.137

39

0.214

37

0.135

38

Austria

0.820

12

0.805

7

0.723

9

0.789

12

0.857

9

0.691

9

Azerbaijan

0.215

38

0.205

37

0.157

38

0.138

38

0.188

39

0.135

39

Belarus

0.335

34

0.688

12

0.235

34

0.210

36

0.292

35

0.219

35

Belgium

0.832

11

0.332

31

0.762

8

0.833

9

0.925

5

0.666

12

Bulgaria

0.430

30

0.429

27

0.318

31

0.433

29

0.438

28

0.279

31

Croatia

0.458

29

0.752

9

0.422

26

0.485

25

0.460

27

0.330

28

Cyprus

0.627

19

0.454

26

0.535

21

0.570

21

0.504

23

0.473

20

Czech Republic

0.604

21

0.495

21

0.574

19

0.607

18

0.605

18

0.452

23

Denmark

0.847

9

0.478

23

0.716

11

0.857

8

0.836

10

0.545

18

Estonia

0.485

27

0.240

34

0.402

27

0.439

28

0.416

29

0.284

30

Finland

0.778

14

0.819

6

0.620

16

0.830

10

0.745

14

0.585

16

France

0.898

4

0.603

16

0.952

4

0.937

7

0.885

6

0.890

3

Germany

0.865

7

0.975

2

0.856

5

0.954

6

0.831

11

0.860

4

Greece

0.749

15

0.948

3

0.465

24

0.505

24

0.724

15

0.588

15

Hungary

0.611

20

0.634

13

0.580

18

0.650

17

0.579

19

0.437

24

Iceland

\(0.838\)

10

\(0.343\)

30

\(0.720\)

10

\(0.773\)

13

\(0.752\)

13

\(0.767\)

7

Ireland

\(0.804\)

13

\(0.477\)

24

\(0.644\)

15

\(0.693\)

15

\(0.720\)

16

\(0.584\)

17

Italy

\(0.857\)

8

\(0.752\)

10

\(0.688\)

12

\(0.805\)

11

\(0.882\)

7

\(0.825\)

5

Latvia

\(0.461\)

28

\(0.579\)

17

\(0.366\)

29

\(0.419\)

30

\(0.410\)

30

\(0.252\)

33

Lithuania

\(0.511\)

24

\(0.840\)

5

\(0.383\)

28

\(0.456\)

27

\(0.463\)

26

\(0.323\)

29

Luxembourg

\(0.980\)

2

\(0.362\)

29

\(0.981\)

1

\(0.982\)

1

\(0.983\)

1

\(0.983\)

1

Macedonia

\(0.386\)

32

\(0.984\)

1

\(0.251\)

33

\(0.345\)

32

\(0.355\)

32

\(0.221\)

34

Malta

\(0.701\)

17

\(0.206\)

36

\(0.654\)

14

\(0.579\)

20

\(0.554\)

22

\(0.638\)

13

Moldova

\(0.148\)

40

\(0.070\)

40

\(0.100\)

40

\(0.101\)

40

\(0.115\)

40

\(0.061\)

40

Netherlands

\(0.984\)

1

\(0.210\)

35

\(0.966\)

3

\(0.977\)

4

\(0.981\)

2

\(0.799\)

6

Norway

\(0.966\)

3

\(0.769\)

8

\(0.813\)

6

\(0.979\)

3

\(0.972\)

4

\(0.708\)

8

Poland

\(0.486\)

26

\(0.876\)

4

\(0.488\)

23

\(0.563\)

23

\(0.483\)

24

\(0.478\)

19

Portugal

\(0.501\)

25

\(0.606\)

15

\(0.436\)

25

\(0.478\)

26

\(0.480\)

25

\(0.398\)

26

Romania

\(0.312\)

35

\(0.560\)

18

\(0.221\)

35

\(0.325\)

33

\(0.318\)

34

\(0.256\)

32

Russian Fed

\(0.370\)

33

\(0.494\)

22

\(0.316\)

32

\(0.271\)

34

\(0.344\)

33

\(0.462\)

21

Slovakia

\(0.554\)

23

\(0.300\)

32

\(0.541\)

20

\(0.587\)

19

\(0.565\)

21

\(0.382\)

27

Slovenia

\(0.572\)

22

\(0.616\)

14

\(0.494\)

22

\(0.566\)

22

\(0.577\)

20

\(0.456\)

22

Spain

\(0.740\)

16

\(0.454\)

25

\(0.681\)

13

\(0.685\)

16

\(0.706\)

17

\(0.678\)

11

Sweden

\(0.865\)

6

\(0.416\)

28

\(0.767\)

7

\(0.962\)

5

\(0.865\)

8

\(0.685\)

10

Switzerland

\(0.692\)

18

\(0.560\)

19

\(0.616\)

17

\(0.743\)

14

\(0.753\)

12

\(0.593\)

14

Turkey

\(0.428\)

31

\(0.284\)

33

\(0.363\)

30

\(0.364\)

31

\(0.408\)

31

\(0.419\)

25

Ukraine

0.226

37

0.558

20

\(0.182\)

37

\(0.163\)

37

\(0.195\)

38

\(0.181\)

36

UK

0.892

5

0.728

11

0.979

2

0.982

2

0.973

3

0.971

2

Sample Av \(TE\)

0.607

 

0.530

 

0.533

 

0.576

 

0.580

 

0.484

 

Sample \(TE\) Std Dev

0.244

 

0.246

 

0.247

 

0.266

 

0.252

 

0.238

 
  1. Average TE ranks are in descending order

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Adetutu, M., Glass, A.J., Kenjegalieva, K. et al. The effects of efficiency and TFP growth on pollution in Europe: a multistage spatial analysis. J Prod Anal 43, 307–326 (2015). https://doi.org/10.1007/s11123-014-0426-7

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  • DOI: https://doi.org/10.1007/s11123-014-0426-7

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