Allocation of emission permits using DEA: centralised and individual points of view

Abstract

This paper discusses mechanisms for the allocation of emission permits (AEP) among a group of manufacturing companies aiming at controlling the total emission level of the group. Data envelopment analysis is adopted and extended to construct the AEP models. Proposed methods allocate the permits on the basis of the current input and output levels of individual firms, rather than historical records. Two variations of AEP mechanisms are considered. One situation is that one of the member firms dominates the responsibility of allocating emission permits on behalf of the group (individual AEP scenario). This dominating firm will maximise its own emission permit before allocating permits among other members in the group. The other situation is that a third-party central governing body is centrally responsible for coordinating the AEP among all group members (Central AEP scenario). Proposed mechanisms are applied to analyse efficiencies of a group of paper mills. The result shows that the mode of central AEP mechanism is a better choice than that of the individual AEP mechanism. Central AEP not only maximises the whole efficiency of the group but also improves efficiencies of individual firms. In contrast, with individual AEP, one firm gains efficiency at the loss of others.