The Regulation of Third‐Party Verification Entities in Greenhouse Gas Emissions Trading Schemes: Lessons From China

ABSTRACT Greenhouse gas emissions trading schemes worldwide broadly adopt third‐party verification, introducing private actors into public climate governance. However, the involvement of third‐party verifiers can create the risk that no accurate and reliable data concerning emissions is acquired, and this potentially harms the proper implementation of emissions trading schemes. This paper explores why the intervention of third‐party verifiers in emissions trading schemes requires regulation and addresses the regulatory tools for controlling verifiers. To illustrate the need to regulate verifiers, China's emissions trading schemes are discussed. It is argued that the regulation of third‐party verification in China's emissions trading schemes is justified by potential concerns about the independence of verifiers. Moreover, adverse selection and moral hazard may arise. This paper also analyzes the extent to which China's emissions trading scheme regulations for third‐party verifiers conform to the economic theories of regulation.