How green is my valley?

- evaluating the environment impact of products and production processes

by Jonathan Linton

Attempts have been made to compare the environmental impact or burden of different products or processes by equating different types of pollution. The results of these attempts are highly debated and time sensitive, due to the evolving understanding of the relative danger of different pollutants. In order to develop a method to better understand the magnitude of environmental impacts of a process or product, the relative impact on air pollution of electrical generation in forty-nine states is examined. Three pollutants (NOx, SOx, and CO₂) are considered simultaneously. A States electrical generation is ranked as efficient if its environmental burden is relatively less then at least one other state in one or more of the three categories. States that have a greater environmental burden for air pollution in all of the three categories of air pollutants are ranked as inefficient and the degree of inefficiency is calculated. Data envelopment analysis (DEA) is used for this analysis and is able to reduce a set of forty-nine options to one efficient option. The limitation of DEA for analysis of environmental burdens is also discussed.

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Introduction

A method of ranking the environmental impact of products or processes that involve multiple incomparable pollutants is considered. Attempts at quantifying environmental damage, risk, and impact of the production of goods and services is ongoing. There are two reasons for continued activity in this area: (1) environmental degradation is a great concern to many people and (2) a way of comparing environmental impacts of alternative products or processes, that is widely accepted, is elusive. There have been many attempts to produce a simple environmental index that summarises incomparable environmental impacts with a single value but the presence of multiple incomparable impacts, and change in the relative importance of the impact as a factor of scientific knowledge (time) and location has made these attempts controversial and limited their acceptance.

It is possible that the complexity of comparing environmental impacts may prevent a widely acceptable single variable environmental index from ever being identified. In this case, the value of these single variable indexes may be limited to assisting a manufacturer in understanding whether the quantity of their production of emissions is increasing or decreasing (for example, see Nortel). It will not, however, indicate whether or not the organisations environmental impact or footprint is decreasing. One can argue that all other things being equal an overall decrease in quantity will result in a decrease in overall impact. Unfortunately, in environmental science it has been found too often that one pollutant can have an impact several orders of magnitude greater than another pollutant.

If we accept, at least for now, that a single environmental index is unrealistic, an alternative should be considered. Operations Research techniques have proven useful for assisting in decision making for a variety of environment related concerns (examples include: Salminen et al and Bloemhof-Ruwaard et al). However, operations research techniques have not been applied to obtain an understanding of the relative attractiveness of environmental impacts of products. The proposed method compares the generation of incomparable impacts to determine if one or more of the products or processes is clearly superior to its alternatives. In other words, which subset of a group of alternatives minimizes the emission of each of the incomparable pollutants, under consideration. By using such a method, we can avoid decisions that result in greater negative environmental impacts and a lower production of the desired output. Because this type of method does not place a relative value on incomparable impacts it will not identify the best product, but will identify the group that has the best overall impact given any weighting or conversion factor that could be applied to any of the environmental impacts under study.

The goal set out in the prior paragraph can be accomplished through the use of data envelopment analysis (DEA). The next section addresses DEA in general and more specifically the DEA model that is used for examining incomparable impacts. Finally, the use of DEA for examining environmental impacts is demonstrated by considering the emission of air pollutants by utilities that generate electricity in 49 US States.

The Data Envelopment Analysis Method

The purpose of this study is to evaluate a set of pollution generators, relative to each another, in order to identify which pollution generators are more efficient. In other words which pollution generators produce less pollution per unit of desired output. This will allow for best practices to be noted and environmentally rational choices to be made. The tool to be utilised for this purpose is the Data Envelopment Analysis (DEA) methodology. DEA was developed, by Charnes et al, to measure the relative efficiencies of a set of comparable decision making units. Applications have included schools, maintenance crews and innovation implementation.

In many application areas, the problem of developing a measure of performance may become complicated by at least two factors. First, the economic outputs and inputs may not have their prices clearly defined, a challenge presented by environmental impacts. Consequently, clearly established prices are not available and flexibility in the choice of these prices is needed. The second potential difficulty in evaluating performance may be the presence of non-economic factors. Referring again to environmental impacts, if one argues that the climate and geography of a region makes it more susceptible to certain types of impacts then weather should be considered and a case can be made for including this factor as a type of environmental input. The problem is then to determine how to weight such an input relative to other more tangible economic variables.

The basic concept in DEA is to measure the performance of a Decision Making Unit (DMU) against a projected point on an efficient frontier. In the application setting described here, states are viewed as decision making units. This paper demonstrates the use of DEA to determine which of a series of options (power production of US states) are environmentally efficient. Furthermore, DEA is used to produce an estimation of the percentage reduction in pollutants required to make an inefficient option, a states power production, efficient. To demonstrate the novel application of data envelopment analysis for comparing environmental impacts, data from the electrical generation industry is considered. The electrical industry is used as an example, because reliable data is publicly available. Unfortunately, environmental impact data is often unreliable or unavailable (see Linton). It is acknowledged that there are a large number of factors not considered in this paper such as the age of generating facility and the means of power generation (nuclear, hydro, coal, or other sources). However, the data on air pollution from power generation is suitable for a demonstration of the ability of Data Envelopment Analysis (DEA) to produce a subset of efficient options that are greener than the other, inefficient, set members no matter what the relative weightings of the pollutants are.

Example: Rating Polluting Efficiency of a Series of Options

Data envelopment analysis and other methods have been used previously to obtain insights into the efficiency of the electrical generation industry. However, these studies examine the relative efficiencies of generators based on a variety of input and output factors. This paper considers the efficiency of power generators at producing electricity while minimising the emission of air pollutants. Data on electrical power generation and associated air pollution is taken for forty-nine jurisdictions in the United States, see Table 1. (Vermont is eliminated from this analysis, due to the zero values for two of the three pollutants, due to the lack of precision of the data.) Three environmental impacts are considered carbon dioxide, nitrogen oxides, and sulphur dioxide. These impacts are a result of the generation of power in millions of kW hours. The first decision to be made for the DEA analysis is what constitutes an input and an output variable? Common sense may suggest that the three environmental impacts and power generation are all output variables. But we must consider that the environmental impacts are an unwanted by-product of the generation of power. Consequently, we wish to minimise the volume of the air pollutants for a unit of power generation.

Table 1: Electrical generation (in Million KiloWatt Hours) and air pollutants (in Thousand Short Tons) for fifty jurisdictions and the associated efficiency required for air pollution to be on the efficient frontier.

Minimisation of variables for a given quantity of another variable corresponds to an input oriented model, with power generation as the output and the environmental impacts as the inputs.

Consideration is also given to whether to treat the production of product using a Constant-Returns to Scale (CRS) model or Variable-Returns to Scale (VRS) model. If we assume that returns are constant to scale it suggests that the pollutant generated for each unit of output is constant. If VRS is assumed, it suggests that the marginal and average costs, in terms of air pollution, will decline with increasing output of product — in this case electricity. For this study, a Constant-Return to Scale (CRS) model is assumed.

Table 2: Electrical generation (in Million KiloWatt Hours) divided by air pollutants (in Thousand Short Tons) for fifty jurisdictions and the associated efficiency required for air pollution to be on the efficient frontier.

The analysis of alternative pollution scenarios will now be demonstrated using DEA and will be discussed further in the implications and conclusions section. In the following section we discuss the use of DEA in the area of evaluating environmental impacts of products and processes. More specifically the results of a DEA analysis of electrical generation are considered.

Results

An input oriented DEA model found (see Table 1) that most of the jurisdictions were inefficient. All inefficient jurisdictions are clearly dominated by the efficient jurisdiction — Oregon. In other words, lower levels of all three pollutants result from switching from power generation in an inefficient jurisdiction to Oregon’s power generation (see Table 2), all other things being equal. In Table 2, the output in power generation is shown divided by each of the respective inputs. For clarity, the ‘efficient’ generator of electricity is shown in a bold font. The efficient energy generator, that minimises pollution for each kWh produced, is Oregon. Energy use in any of the other states results in more air pollution than Oregon. For example, New York is an inefficient energy generator, for it to become an efficient generator would require a proportionate reduction to about 3.41% (Iota = 0.0341) of the current inputs (pollutants) while producing the same quantity of output. An examination of the data shows that after Oregon the most efficient states are: California, Alaska, Washington, and Maine with efficiencies of 0.3559, 0.1934, 0.1060, and 0.1020, respectively. All other jurisdictions have an iota of less than 0.1 — all of these states require a decrease of pollutants at least an order of magnitude to become efficient.

Implications and conclusions

It is unlikely that an individual will move from one state to another to reduce the amount of air pollution that is produced when they watch television or conduct any other activities that consumes electricity. Furthermore, it can be argued that this specific analysis is misleading since electricity generated in one state is frequently used in another state. However, this data clearly demonstrates how a series of products or processes with multiple incomparable environmental impacts can be compared to each other. And that in this process a large number of options can be reduced to a small set of options (a decrease in this case by well over an order of magnitude).

If a decision is made based on environmental impact forty-eight of forty-nine cases under study in the electrical generation example (in Tables 1 and 2) are rejected. Consequently, we can state that DEA is a powerful tool to rate the ‘greenness’ of either products or processes with outputs of comparable value. DEA offers a non-controversial method of obtaining a single metric that in some cases will offer sufficient information for decision making. DEA allows for the identification of manufacturing facilities that produce the smallest quantity of pollutant per product (or value added). Consequently, DEA can be used in clean production benchmarking studies for identifying the facilities with ‘best practices. Another use for DEA is to determine what product choice offers the most economic benefit for the lowest environmental impact.

Finally, by identifying the set of efficient decision making units (DMUs) we can determine for what range of coefficients there are two or more efficient DMU’s (not an issue with this data set). By examining what weights (for example, a factor to convert SOx impact to NOx impact equivalents) are necessary for different members of the efficient set to be preferable it is possible to reduce the number of efficient alternatives further — even to as few as one alternative. The elimination of DMU’s that are efficient requires agreement on what range of weightings or conversion factors is not acceptable. This process results in a clear indication of which efficient set member is preferable for which range of weights (conversion factors from one environmental impact to another). Consequently, it is easier to obtain agreement than the currently proposed single weighting systems that require agreement on a specific value for conversion factors.

Even though the relationships between product and impacts are equivalent to an input oriented model with pollutants as inputs and product as outputs, consideration of environmental impacts as inputs and a desired good or service as an output may make some uncomfortable. If pollution is considered not as an undesired by-product, but as a reduction in the planet’s carrying capacity for accepting additional units of pollutant then the specification of pollutants as inputs is consistent with traditional DEA applications. The earth can absorb a certain quantity of pollutant, by producing pollutants some of this carrying capacity is absorbed. Consequently, a unit of pollution emitted is a reduction, by a unit, of the planet’s carrying capacity for that pollutant. The carrying capacity perspective is consistent with the moral philosophy and economics literature — pollution may be considered as an input.

DEA offers a non-controversial option to compare controversial environmental metrics. In certain cases, DEA will offer sufficient information for decision making. However, if DEA does not offer sufficient information to reduce the number of possible efficient producers or products it still facilitates the choice of one or more ‘best solutions’.

This is accomplished by reducing the task of the analyst from choosing conversion factors or weights of incomparable environmental impacts to making decisions when presented with a range of possible conversion factors. For the decision-maker, DEA offers a widely accepted method to obtain non-controversial input to a decision that is frequently controversial.

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JONATHAN LINTON is an Assistant Professor of Management at Polytechnic University of New York. He prefers to examine questions that overlap environmental, Operations and technology management. Dr Linton maintains close ties with industry through writing the occasional article on technology or environmental management for trade magazines. Email: jlinton@poly.edu

First published to members of the Operational Research Society in OR Insight July- September 1999