Sustainable Power Generation in Europe: A Panel Data Analysis of the Effects of Market and Environmental Regulations

Climate change and greenhouse gas emissions have become increasingly more pressing environmental concerns in European policy agenda. Environmental energy efficiency (EEE) has been identified as one of the main tools for fostering the sustainable energy transition. The current policy debate on the organization of energy markets focuses both on promoting higher market efficiency and environmentally sustainable production. Consequently, in this study we analyze the impact of market and environmental regulatory tools on EEE for the electricity sector of European countries using an innovative econometric technique. We conduct an empirical analysis of the dynamics of the technical and environmental performance of the electricity sectors of 18 EU countries during 2006–2014. The contribution of the present study to the literature is threefold. First, we propose a redefinition of the technology set and a new index for the productivity change feasible and consistent with the presence of bad output. Second, we decompose the productivity changes in the two main components (the efficiency gains and the technological progress), and we measure the co-joint effects of the stringency of both market and environmental policies on these two main drivers of EEE. Third, we model country heterogeneity using a Bayesian shrinkage estimator to avoid the estimates’ poolability assumption. Results suggest that the dynamic of the effects of regulations on EEE depend on the policy instrument used. Finally, the country-specific results highlight the effects of the interactions among different policy instruments and they can be used by policy makers to balance the stringency of market regulation according to the level of environmental regulation.