Risk identification and regulatory system design for the carbon market

ABSTRACT

Currently, the global carbon trading systems are fragmented and belong to different governments or are under the jurisdiction of different regions, resulting in a series of new problems, such as how to link dispersed trading systems, how to compare the emission reduction of various markets and other issues. Since the development of the international carbon market is relatively immature with uncertain life expectancy and volatility during its short history, and there is a lack of quantitative data on the long-term record, the market could provide few risk management tools. Meanwhile, with the launches of China’s regional carbon trading pilots in seven provinces since 2013 and combined with the national voluntary emission trading system, carbon trading will become an important mechanism for China in achieving its emission reduction target. In the first stage, the carbon finance market is at least faced with mechanism design risks, market supply risks and compliance risks. Therefore, to secure the development of the carbon market and for public interest, relevant government departments of China should identify the risks facing the market and should make the basic principles and goals, such as ensuring effective trading and pricing mechanisms to avoid fraud and price manipulation, and balancing transparency and confidentiality of information. Consequently, the governments should develop a comprehensive carbon finance regulatory system covering regulatory legislation, regulatory institutions and their authorities, regulatory scope as well as regulatory objects.

KEYWORDS:

• Carbon market
• risks identification
• regulatory system

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This essay is supported by National Social Science Fund project “The study of carbon finance mechanisms supporting the development of low-carbon economy ” [grant number 10CJY076]; Beijing Philosophy and Social Science Project “The market pricing mechanism and price management strategy of carbon emission in Beijing ” [grant number 13JGC068]; National Science & Technology Pillar Program “The research of key support policies and techniques in green low-carbon development in China” [grant number 2012BAC20B08] and grant project from China Clean Development Mechanism Fund in the Ministry of Finance: “The study of financing, strategies, mechanism and policy system addressing climate change in China” [grant number 2012064]. This essay is also supported by the project of research innovation teams in Central University of Finance and Economics and China Financial Development Collaborative Innovation Center.