Regulatory game model of carbon leakage collusion: Prospect theory and verification agency dynamics

The compliance of carbon data quality is a key factor that concerns national image, market stability, and policy-making, and has always been one of the hot issues widely concerned by all sectors of society. As an important tool for promoting corporate environmental, social, and governance (ESG) behaviors, the Emission Trading System (ETS) plays a significant role in achieving carbon emission reduction targets. This study introduces prospect theory to construct a regulatory game model of carbon leakage collusion behavior involving both passive and active participation of verification institutions, and discusses the collusion conditions of various participants under different model parameters. Through numerical simulation, the study explores the impact of key factors such as collusion benefits on the shift in the collusion behavior of verification institutions and on the collusion situation of multiple behavior subjects under different model parameters. The main conclusions are as follows: 1) The choice of collusion method by the actors of carbon verification institutions is influenced by their subjective perception of the probability of successful government supervision and the benefits of collusion; 2) The behavior subjects are more sensitive to changes in the degree of loss aversion coefficient than to changes in the degree of marginal sensitivity coefficient. • Current literature on the supervision of carbon leakage behavior primarily focuses on carbon transfers between cities and countries. Therefore, this paper extends the research perspective on carbon leakage regulation to the corporate level, examining the collusion and data falsification between third-party verification agencies and enterprises. • Existing literature on the collusion of carbon verification agencies assumes that these agencies actively participate in the collusion, with a simplified behavior of colluding entities that deviates significantly from real-world cases. In light of this, this paper considers the diversified collusion targets of controlled-emission enterprises, which not only involve active participation in carbon data falsification by verification agencies but also indirect collusion due to the minimal effort principle applied by these agencies. • This paper introduces Prospect Theory to analyze the psychological and behavioral characteristics of individuals involved in carbon leakage collusion, revising the assumption of complete rationality in game theory. It examines the different interest relationships between passive collusion and active participation by verification agencies and discusses the collusion conditions of each participant under different model parameters.