A DEA-based approach for fair reduction and reallocation of emission permits

Abstract

How to allocate initial emission permits is vital for the cap-and-trade system in controlling the total emission level and improving the operation efficiency of the trade mechanism. And data envelopment analysis (DEA) has been proved to be more suitable to fairly resolve the problem as a performance-based allocation is involved here. In this paper, we present a novel DEA approach for fair reduction and reallocation of emission permits for areas under administration. The presented DEA models are based on the ideas, where, according to their eco-efficiency and current emission levels, all decision making units (DMUs) compete with each other for the least reduction amount by introducing a bargaining game, on the other hand, the central authority can improve the overall efficiency by reallocating the remaining emission permits. The approach is applied on the dataset of agricultural greenhouse gas emissions from 15 European Union members (EU15). The results of the application show that the reduction and reallocation mechanism is fair, which benefits the countries that work at the optimal scale operation while punishes those that fail to operate on the optimal scale. Furthermore, it is effective in improving the overall efficiency of the system.