American Journal of Energy Research, 2014, Vol. 2, No. 1, 9-17 Available online at http://pubs.sciepub.com/ajer/2/1/2 © Science and Education Publishing DOI:10.12691/ajer-2-1-2 Energy Efficiency with Undesirable Output at the Economy-Wide Level: Cross Country Comparison in OECD Sample Nevzat Simsek * Department of Economics, Dokuz Eylul University, Izmir, Turkey and Department of Economics, Hoca Ahmet Yesevi International Turkish-Kazakh University, Turkestan, Kazakhstan *Corresponding author: nevzat.simsek@deu.edu.tr Received January 04, 2014; Revised February 14, 2014; Accepted February 16, 2014 Abstract Measuring the environmental efficiency of countries is important in the climate change process. The aim of this paper is to measure the energy efficiency of OECD countries with undesirable output. For this purpose, the Bad Output index (non-radial and non-oriented, CRS) developed by Tone (2001) is used in order to obtain the efficiency scores for the period 1995-2009. In this paper, I focus on the production process where labour, capital stock (mostly omitted in such papers), and energy consumption are inputs, GDP is a desirable output and CO 2 emission is an undesirable output. To see the energy inefficiencies separately, if there are any, energy input is considered as three separate variables in the model. For this purpose, oil and natural gas consumption are incorporated as one input. Hydropower and nuclear are incorporated as another input. Coal is the third input. An important contribution of this paper is to use various proxy variables for the capital stock. Determining the reasons of these inefficiencies is important for these countries. But modelling the factors behind these inefficiencies is the subject of another paper. Keywords: energy efficiency, environmental efficiency, Bad Output model, DEA, climate change, sustainable development Cite This Article: Nevzat Simsek, “Energy Efficiency with Undesirable Output at the Economy-Wide Level: Cross Country Comparison in OECD Sample.” American Journal of Energy Research, vol. 2, no. 1 (2014): 9-17. doi: 10.12691/ajer-2-1-2. 1. Introduction Energy is closely related to policy making discussions because of its importance to the social, economic and environmental development of many countries. Two issues seem to define the current debate on energy markets and policy. Firstly, the world depends to a great extent on a limited number of countries for their supply of fossil fuels. Energy usage is very important in every phase of a country’s economic development. In the past the dependency of industries on oil in national economies was high due to its being relatively cheap. The 1970s energy crisis caused by the sharp hike in oil prices led to serious problems for both developed and developing countries. After the 1970s oil crisis, the energy problem, and especially the relationship between supply and demand, began to come to the fore for policy-makers. In the 1970s and early 1980s, energy efficiency, which can be achieved either by decreasing total energy use or increasing production rate per unit of energy consumed, was considered to be one of the major components of energy policies in the countries for reasons of security of supply, and as a way of returning to some kind of economic optimality. Improving energy efficiency will enhance the energy security of countries. Secondly, the large amount of climate gas emissions by developed and developing countries seriously threatens the climate. Especially in the early 1990s, major environmental concerns arose, regarding the greenhouse effect that was strongly related to fossil fuel combustion, which gave new impetus to the improvement in energy efficiency (Bosseboeuf et al., 1997, Phylipsen et al., 2002, Grösche, 2008). It is obvious that combating climate change requires the international community to work together to reduce the total amount of CO 2 emissions globally, ultimately stabilizing its atmospheric concentration at a level that would prevent dangerous anthropogenic interference with the climate system. At the third conference in Kyoto in 1997, legally binding emission reduction targets were determined for Annex-I countries (OECD countries and the countries of Eastern Europe and the former Soviet Union). But the concept of the Clean Development Mechanism in the Kyoto Protocol is implicitly based on this assumption: Developing countries are not very energy-efficient, and cheap emission reduction options can be found in those countries (Phylipsen et al., 2002). That is why improving energy efficiency in these countries is thought to be an important option for limiting energy-related greenhouse gas emissions, especially in the fast-growing industry sectors 1 (Stern, 2007). Over the last few years there has been an increasing need to provide governments with useful information to assist them in 1 See also Price et al., 2000a and Price et al., 2000b for details.