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This study assesses economic and environmental performance in the Chinese industry sector across 30 provinces during the period of 2006–2017. The study relies on a nonparametric framework and we apply a novel decomposition of the overall inefficiency scores into three components of technical, scale and mix inefficiency at the aggregate level by incorporating undesirable outputs. As we rely on by-production technology, industry performance is split into economic and environmental dimensions. Our results show that Chinese industry inefficiency is equally due to economic and environmental performance during 2006–2017, whereas technical and scale inefficiencies are relatively higher for environmental sub-technology (which relates energy to CO2 emission) if opposed to the economic sub-technology (which relates all the inputs to the economic value added). This implies that Chinese industry still requires improvements in environmental performance. The eastern region shows a relatively low average economic overall inefficiency if compared to other regions, yet its total OI (overall inefficiency) is the highest among the regions. Thus, environmental performance and misallocation of resources constitute the underlying causes of the total inefficiency. Therefore, structural reforms are necessary besides improvements in the production processes in the eastern region. This is important since China has experienced economic growth, but also policy must pay attention to environmental issues and sustainability.

Evaluating Economic and Environmental Performance of the Chinese Industry Sector