Application Of Game Theory In Allowance Allocation Of Emission Trading Scheme And Its Policy Design

A series of steps have been taken to deal with the climate change issue in China. Giving the fact that CDM program is no longer the majority in the Carbon market globally, carbon emission permit trading scheme becomes the primary policy instrument. As the largest carbon permit market in the world, the European Union Emission Trading Scheme (EU ETS), which allocates its majority of permits for free to emitters, encounters the problems of allowances over allocation and permit price sharp declining. Besides, most of ETSs in the world, including China, will allocate permits for free in their early stages. In this process, information asymmetry may make government fail in laying enough emission restriction on emitters.We designed two methods to overcome it. The first one it to use principle-agent theory to analyze the confliction between different objective functions of government and emitters, and suggests that government could design different contracts for emitters to choose. In this way, governments will find out whether the emitter has high emission reduction capabilities. The second one is to use Nash bargaining model to simulate the emitters’ lobbying behavior and propose a final negotiation framework.Finally, combining the theoretical analyses and practical experiences from ETSs all around the world, policy suggestions are put forward for China’s pilot regions.