Cost-based modelling of optimal emission quota allocation

Given that a fixed national emission reduction target could be achieved by imposing emission quotas among multiple decision-making units under administration, a novel nonlinear programming approach is proposed in this paper to obtain an optimal emission quota allocation in a least-cost way. Marginal emission abatement cost curves are simulated based on the environmental performance and marginal emission abatement costs measured in a set of parametric directional output distance functions with multi-inputs and multi-outputs. Further, the proposed model is applied to empirically investigate the optimal carbon emission quota allocation for China's building construction industry among thirty-three provinces in three different regions. The results indicate that the relatively developed eastern region in China has higher marginal emission abatement cost and can be imposed with more emission quotas, while the central and western regions can undertake more emission reduction. Approximately 74 million RMB can be saved by implementing the optimal emission allocation (proposed in this paper) as compared to a uniform emission quota allocation. The findings are of great theoretical, methodological, and practical significance for policymakers and social science researchers in terms of climate change mitigation.