Permit Allocation in Emissions Trading using the Boltzmann Distribution

TL;DR

This paper proposes a novel permit allocation method in emissions trading using the Boltzmann distribution, aiming for a fair, unbiased, and natural distribution among countries, demonstrated through empirical data analysis.

Contribution

It introduces a new permit allocation approach based on the Boltzmann distribution, offering a simple, versatile, and unbiased alternative to existing methods.

Findings

The Boltzmann-based method provides the most probable permit distribution.

Empirical analysis shows practical applicability among countries.

The method enhances fairness and neutrality in permit allocation.

Abstract

In emissions trading, the initial allocation of permits is an intractable issue because it needs to be essentially fair to the participating countries. There are many ways to distribute a given total amount of emissions permits among countries, but the existing distribution methods, such as auctioning and grandfathering, have been debated. In this paper we describe a new method for allocating permits in emissions trading using the Boltzmann distribution. We introduce the Boltzmann distribution to permit allocation by combining it with concepts in emissions trading. We then demonstrate through empirical data analysis how emissions permits can be allocated in practice among participating countries. The new allocation method using the Boltzmann distribution describes the most probable, natural, and unbiased distribution of emissions permits among multiple countries. Simple and versatile, this new method holds potential for many economic and environmental applications.