An Efficiency Evaluation of the EU’s Allocation of Carbon Emission Allowances

Abstract

The allocation of carbon dioxide emission allowances has become one of the most important global issues. The main argument is the equity in the allocation of emission allowances. If the allocation is unfair, then economic development of some countries will be impeded. Therefore, to promote an emissions trading system, an equitable and reasonable allocation method that benefits every participant country is needed, so that countries will accept and implement the system accordingly.

This study uses emission allowance as an input variable for evaluation and analysis. The output variables are energy consumption, government spending, and gross domestic product, based on the model developed by Gomes and Lins (2008). The study takes the zero sum game data envelopment analysis model to explore the allocation of emission allowances and the reallocation of emission allowances among 24 European Union members, hoping to find a comparatively fair and efficient allocation method for them. The empirical results show that first, the current allocation of emission allowances is inefficient. Second, after reallocation, those countries which implemented it most efficiently have more allowances. andThird, after the reallocation, G8 countries including the United Kingdom, France, and Italy have higher allowances than their initial allowences, implying that industrialized countries need more allowances to maintain their economic growth.

Keywords:

• DEA
• efficiency
• energy
• emission allowance
• zero sum game

Notes

¹ The Group of Eight. The members are the UK, France, Germany, the United States, Japan, Italy, Canada, and Russia.