An economic approach to environmental indices

Abstract

This study uses the directional output distance function from economic productivity theory as an alternative approach to environmental index construction. We use the directional output distance function to aggregate multiple environmental objectives into one measure of environmental performance. We apply this method to a set of watershed data and compare our results to the existing U.S. Environmental Protection Agency (EPA) index values. When modeling the same set of objectives, the directional output distance function and the existing EPA index yield similar measures of environmental performance. We discuss the mathematical properties of both indices using the axioms of economic index theory, and explore the possible advantages to our approach. The mathematical properties of the directional output distance function are well established and this approach provides a nonparametric way to aggregate individual characteristics. This advances the standard use of a priori-weighted summation, and circumvents the often contentious selection of index weights.