Abstract: The carbon emission trading mechanism has been found to play an important role in tackling climate change as the carbon emissions costs are included in the financial decision making. The initial allocation of carbon emission allowances has always been a difficult point in the establishment of the carbon trading mechanism. Three typical methods have been adopted for the allocation when the market information is complete and undistorted: grandfathering, benchmarking and auctioning. However, the ideal decision-making environment required by these methods does not often exist in the real world. Based on this, data envelopment analysis (DEA) approach can provide an alternative perspective to the carbon emissions allocation problems as it is based on an empirical production function derived from observed historical input and output data.

Key words: carbon emission allowance allocation; input-output scale; DEA model; common set of weights