Decentralized allocation of emission permits by Nash data envelopment analysis in the coal-fired power market

Allocation of emission permits (AEP) provides valuable guidelines to support environmental regulatory policies for pollutant emission, in particular, CO2 as the key contributors to climate change. Most of previous studies in literature developed the centralized AEP model and focused on the coal-fired power market, one of the main sources of air pollution. However, the power market is usually imperfectly competitive and some of them are gradually deregulated, this justifies the motivation of developing a decentralized AEP model. This study proposes a decentralized AEP model which suggests Nash equilibrium as an allocatively efficient benchmark in an imperfectly competitive market with endogenous price. The proposed model is formulated by data envelopment analysis (DEA) and transformed into the mixed complementarity problem (MiCP) for identifying the Nash equilibrium. A study of coal-fired power plants operating in China in 2013 is conducted and the results show that the decentralized model complements the centralized model; in particular, with considering the price and market structure, the proposed decentralized model described in this study investigates the potential for efficiency improvement after AEP among the coal-fired plants.