Allocation of emission permits using DEA-game-theoretic model

Abstract

This paper discusses schemes for allocation of emission permits (AEP) among a group of manufacturing companies, aiming at controlling the total emissions of the group while maintaining efficient production. Game theory and data envelopment analysis have been integrated in different ways for constructing two variants of AEP models. The first situation is where all members in the group are cooperative and a reasonable permit allocation scheme maximizes the overall payoff of the group. The second situation is where group members are non-cooperative and each member makes every effort to selfishly maximize its own payoff. The decision maker allocates permits to firms according to their non-cooperative game equilibrium scores. Proposed models are applied to study a group of paper mills to analyze their payoffs. The results show that the methods proposed in this work can provide reasonable allocation results for all firms. In addition, although our allocation methods adopt the principle of maximizing the payoff of the firm, the efficiency of each firm from current output and input levels is still a factor that determines the permit allocation.