Asymmetric Information, Carbon Data Manipulation, and Policy Choices for Carbon Reduction: Insights into the High-Quality Development of China's Carbon Market
ZHANG Yilin, CAI Zhen, YU Yunjun
Lingnan College, Advanced Institute of Finance, Sun Yat-Sen University; Business School, Sun Yat-Sen University; Wenlan School of Business, Zhongnan University of Economics and Law
Summary:
At the 75th United Nations General Assembly, China solemnly committed to the international community to achieve carbon peaking by 2030 and carbon neutrality by 2060. Under this “dual carbon” target, a major challenge facing China is promoting a comprehensive green and low-carbon transition among enterprises and continuously advancing carbon emission control and reduction. The government typically adopts environmental regulatory policies to manage corporate carbon emissions, primarily employing two types of policy tools: The first is command-and-control policies, represented by the “dual control of energy consumption,” in which administrative authorities enforce emissions reduction based on laws, regulations, and standards. The second type is market-based policies centered on carbon emissions trading. In practice, due to difficulties in accurately obtaining each firm's carbon emissions and abatement costs, as well as deficiencies in the Monitoring, Reporting, and Verification (MRV) system, regulated firms may manipulate carbon emission data to conceal their actual emissions—referred to here as “carbon emission fraud”—resulting in a discrepancy between the observed emissions data and the actual emissions. Faced with the potential risks of carbon emission manipulation, how should the government set the policy parameters for command-and-control and market-based policies, including emissions caps and penalties for excess emissions？ Which policy tool is more effective in curbing firms' incentives for carbon data manipulation and achieving better emission reduction outcomes？ To address these questions, this paper constructs a principal-agent model involving the government and heterogeneous firms, under conditions of asymmetric information where the government cannot observe firms' low-carbon transition costs or actual emissions. The model endogenizes firms' decision-making on carbon emission fraud to facilitate the subsequent analysis. The study finds that market-based policies achieve greater resilience to carbon data distortion and higher social welfare These have two additional comparative advantages. First, market-based policies exhibit greater tolerance for carbon data distortion. Under market-based policies, even if the government does not explicitly account for the potential for data manipulation or firms' fraudulent motives, social welfare is not significantly compromised. Second, market-based policies result in lower total hidden carbon emissions compared to command-and-control policies. Furthermore, we find that carbon markets have heterogeneous impacts on firms' motivations for carbon data manipulation. For firms on the demand side of the carbon market—those at a comparative disadvantage in abatement costs—the “cost-saving effect” brought by purchasing carbon allowances effectively reduces their incentives for fraud. On the other hand, for firms on the supply side—those with a comparative advantage in abatement costs—the “revenue-generating effect” from selling allowances strengthens their incentive to falsify carbon data. Based on these findings, this paper makes three policy recommendations. First, accelerate the transition from command-and-control policies to market-based policies and expand the coverage of the carbon market. Second, optimize policy parameters and strengthen carbon data governance. During the transition from command-and-control to market-based policies, carbon reduction policy design should be adapted to the risk of carbon leakage. Moreover, given that carbon emission fraud risks cannot be eliminated by adjusting policy parameters, the government should prioritize carbon data quality, prevent carbon leakage arising from data falsification and production relocation, and continually improve the MRV system. Third, enhance the intensity and scope of regulation regarding carbon data distortion in the carbon market. As the government promotes policy transition, it should simultaneously strengthen carbon data governance. In terms of regulatory targets, the government should not only oversee firms without a comparative advantage in green innovation but also focus on those with such an advantage, as the revenue-generating effect of the carbon market may increase the incentives for carbon emission manipulation among the latter group.
张一林, 蔡桢, 郁芸君. 信息不对称、碳数据质量与碳减排政策选择——兼论中国碳市场的高质量发展[J]. 金融研究, 2024, 531(9): 114-133.
ZHANG Yilin, CAI Zhen, YU Yunjun. Asymmetric Information, Carbon Data Manipulation, and Policy Choices for Carbon Reduction: Insights into the High-Quality Development of China's Carbon Market. Journal of Financial Research, 2024, 531(9): 114-133.
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