Government Supervision and Control Mechanisms for the Carbon Market in China: A Principal-Agent Perspective

Abstract Drawing on semi-structured interviews with 36 policymakers, experts and scholars, this paper employs a principal-agent framework to analyse China’s carbon market governance. The findings reveal that institutional misalignment between central and local priorities undermines market efficacy. While mechanisms like the Target Responsibility System (TRS) and environmental inspections aim to enforce compliance, fragmented incentives and passive central supervision exacerbate policy incoherence. Owing to competing mandates, local governments prioritize short-term GDP growth over the development of the carbon market, thereby relegating emissions trading to a peripheral status. State-owned enterprises (SOEs) dominate market participation, fulfilling compliance through political alignment but distorting price signals and marginalizing private actors. China’s hybrid governance model, which combines top-down controls with decentralized experimentation, generates systemic contradictions where weak enforcement, ritualistic compliance and data opacity persist as the dominance of SOEs colludes with local developmentalism to weaken carbon pricing. Overall, carbon market governance mechanisms have paradoxically incentivized regulated entities to prioritize developmental goals over improving carbon market infrastructure.