Considering Production Limits in Greenhouse Gas Emission Trading Using the Data Envelopment Analysis Approach

Greenhouse gas emissions have been proven to be closely related to global climate changes. Thus reducing and trading greenhouse gases are important issues around the world. In order to solve this critical issue, this paper presents an alternative approach to implementing greenhouse gas (i.e., undesirable outputs) emission trading mechanisms, considering the balance between the environment and economic development. Specifically, an aggregated concept in the form of data envelopment analysis (i.e., Centralized DEA) is used to construct a cap-and-trade model that considers production limitations. An application that illustrates undesirable output (i.e., greenhouse gases: CO₂ and SO₂) emission and trading in 51 countries is also demonstrated. The application effectively illustrates the constant buying and selling of information under total amount quotas while maximizing desirable output levels. The results also present directions for possible improvements in country efficiency.