Allocation of Emissions Permit for China's Iron and Steel Industry in an Imperfectly Competitive Market: A Nash Equilibrium DEA Method

China is currently the world's largest producer and consumer of iron and steel. This industry is one of the most energy- and emission-intensive industries in China. It is unsuspicious that energy conservation and emission reduction in this industry are crucial for China to fulfill its obligations of reducing greenhouse gas emission and mitigating global climate change. An appropriate allocation of CO₂ emissions permit is the most important precondition for establishing an efficient and effective emissions trading system that had recently been launched in China's pilot regions. This paper proposes a new emissions permit allocation method based on a Nash equilibrium data envelopment analysis model. This method is more appropriate in emissions permit allocation for China's iron and steel firms in an imperfectly competitive market where the product price is endogenous. A noncooperative game is formulated and the mixed complementarity problem is utilized to identify a Nash equilibrium in the allocation of emissions permit (AEP). The most up-to-date AEP using a unique data set of China's major iron and steel enterprises in 2014 is provided in this paper. The results show that the AEP improves the desirable output generation by satisfying the reduction targets of the undesirable outputs.