The legal governance of the carbon market: challenges and application of private law in China

Abstract

The carbon market has gained widespread consensus as an important means to address the climate change. The legal system of the carbon market is the cornerstone of the stable operation, which currently relies on a top-down model promoted by the government. A question worth considering is, as the carbon trading is based on the market mechanism that depends on the autonomy of will, what kind of role does private law play in the legal system of the carbon market? This study sorts out various risks of the carbon market and point out that they are mainly originated from information asymmetry and the principal-agent problem. These two reasons of market risks indicate the imbalance of rights and obligations among market participants. Precisely, private law is a significant way to achieve equal and fair transactions between private entities. This paper conducts empirical analysis on China’s carbon market and finds that the carbon brokerage is based on the principal-agent relationship, the carbon asset management is belonging to the trust relationship, and the information consulting is according to the contract of mandate. The conclusion shows that information asymmetry and the principal-agent problem can be prevented and mitigated by the rights of intervention and option, fiduciary duty, and fault liability. Private law can rebalance rights and obligations between private entities of the carbon market. In addition, there are also limitations of private law, so the recommendation is to make a diversified mechanism of the legal governance to achieve a robust development of the carbon market.