Decarbonisation under cap-and-trade: an integrated network Data Envelopment Analysis model with a second-scoring auction mechanism

This study develops a centralised Network Data Envelopment Analysis (NDEA) model within a Directional Distance Function (DDF) framework and integrates it with a second-scoring auction mechanism for carbon permit reallocation under a cap-and-trade system. The model evaluates the performance of Decision-Making Units (DMUs) within a two-stage network structure and determines surplus and deficit volumes of CO2 permits. An endogenous scarcity-based pricing framework is then introduced to link carbon permit prices to the permit shortages and surpluses derived from the model. Subsequently, a second-scoring auction mechanism determines endogenous transaction prices and trading volumes through bilateral permit exchanges. The proposed framework is applied to the European bioenergy supply chain to investigate whether the mechanism can facilitate permit reallocation and reduce the inefficiency of participating DMUs.