Fair and Efficient Allocation of EU Emission Allowances

Under the European Union Emission Trading System (EU ETS), the European Union issues and allocates emission allowances (EUA) to the member states to cap the total volume of Greenhouse Gas (GHG) emissions. Since the first years of operation, the EU ETS allocation procedure has undergone multiple changes in an attempt to both fix over-allocation issues and balance surplus as well as to protect firms from carbon leakage. This is partially done through the means of grandfathering emission permits, auctioning or benchmark-based allocation. In this work, we study the allocation methods applied by the EU throughout the years, and we establish a notion of fairness based on the goals that the EU aims to achieve. Aiming to reach a balance between fairness and efficiency, we collect a series of indicators that describe the economic conditions and the energy intensity of each member state, and we perform a cluster analysis to categorize the countries. We then perform a regression analysis to examine whether our selected indicators best describe the free allowance allocation of the EU ETS throughout the years and observe similarities between countries in the same clusters. Finally, we provide a simple yet flexible allowance allocation optimization problem which can incorporate various fair allocation principles proposed by the literature.