Joint Environmental and Cost Efficiency Analysis of Electricity Generation

Fossil-fuel based electricity generation produces the largest proportion of human-related carbon pollution in the United States. Hence, fuel choices by steam plants are key determinants of the industry's impact on national and global greenhouse gas emissions, and key foci for climate change policy. Yet, little research has been done to examine the economic and environmental tradeoffs among the different types of fuels that are used by these plants. This paper applies a Data Envelopment Analysis procedure that incorporates the materials balance principle to estimate the allocations of coal, gas and oil inputs that minimize carbon emissions and costs. Using EIA 906 and FERC 423 data, the paper estimates cost/carbon tradeoffs facing two sets of plants: those that use coal and gas inputs, and those that use coal, gas and oil inputs. Findings for our three-input sample show that there would be a 79 percent increase in cost for moving from the cost efficient point to the carbon efficient point, while there would be a 38 percent increase in carbon for moving from the carbon efficient point to the cost efficient point. These conclusions indicate that, in general, the gap between efficient cost and efficient environmental production is wide, and would require substantial policy intervention or market adjustment before it could be narrowed. However, our examination of individual plants shows that what is true in general is often not true for specific plants. If plants that are currently less efficient than those on the production frontier were to become efficient, they could produce the same amount of electricity with less carbon output and less fuel input. Additionally, many plants on the production frontier could improve both cost and carbon efficiency by changing their mixture of fossil-fuel inputs