Measuring environmentally sensitive productivity growth: An application to the urban water sector

a r t i c l e i n f o Keywords: Malmquist–Luenberger index Urban water utilities Greenhouse gas emissions Nonparametric productivity measurement The energy use and greenhouse gas emissions in the provision of urban water and sewerage services have become an increasingly important issue in recent times. However, the impact of negative externalities such as greenhouse gas emissions on the productivity of urban water provision has received less attention in the literature. This paper applies the global Malmquist–Luenberger (GML) productivity index, which accounts for undesirable outputs in order to evaluate the productivity trends in the Australian urban water sector. Results indicate that the inclusion of greenhouse gas emissions significantly influences the productivity measurement. Findings also indicate that the conventional index, which disregards undesirable outputs, overstates the productivity growth. Despite a declining trend in greenhouse emissions over the period, the overall productivity trend of the urban water sector experienced a downward trend while accounting for bad output. This productivity decline occurs in a period of prolonged drought, water security concerns and increased reliance on desalinization and water recycling. Efficiency and productivity analysis of water utilities has traditionally focused on measuring desirable outputs relative to a set of inputs used in the production process. However, most production processes including the provision of urban water and sewerage services entail undesirable outputs such as greenhouse gas emissions (GHGs) and effluents. An increased concern about climate change and the introduction of GHG abatement policies have attracted attention on water-related emissions in recent times (Cook et al., 2012). The urban water industry around the globe has been under pressure from an increasingly variable climate and escalating infrastructure costs to address the water supply security concerns. Consequently, water utilities have resorted to climate-independent water supply sources such as seawater desalinization and water recycling. The uptake of such options has further increased the energy use and associated GHGs in the urban water sector (Cook et al., 2012). 1 In order to formulate urban water policies that are both economically efficient and sustainable, research on the relationship between economic efficiency and undesirable outputs is necessary. Traditional measures of productivity growth such as Malmquist, Törnquist and Fischer indices focus only on the production of desirable outputs and fail to consider harmful undesirable outputs such as GHGs. Ignoring undesirable outputs and their adverse environmental effects leads to biased measures of productivity (Chung et al., 1997) and sub-optimal policy outcomes. This …