Game analysis of carbon emission verification: A case study from Shenzhen's cap-and-trade system in China

Abstract Carbon emission verification is one of the key factors required for proper implementation of a cap-and-trade (C&T) system. However, to obtain more revenue, emission generating companies (GCs) may collude with third-party verifiers (3 PVs) and conceal real carbon emission data. Based on actual practice of Shenzhen's C&T system, a three-player game model has been devised in this paper to analyze the behaviors among GCs, 3 PVs and government. Given the government's current piecewise linear re-verification policy, the optimal reported carbon intensity for GCs has been provided. Our research reveals that if the actual carbon intensity is larger than historical carbon intensity GCs may report less carbon intensity and conceal actual carbon emission. To deal with this issue, a new exponential re-verification policy is proposed. Based on authentic data from Shenzhen's C&T system, the experimental results show that the government should devote more attention to GCs with a decreasing industrial product output value-added (IVA) than to those with high carbon emissions when selecting GCs for re-verification. Our experiments also illustrate that the new policy outperforms the current one on both total concealed amount of carbon emission and total re-verification cost if the initial re-verification probability is set within a specific range.

[1]  Nikos Nikiforakis,et al.  Punishment and Counter-punishment in Public Good Games: Can We Still Govern Ourselves? , 2005 .

[2]  Nandu J. Nagarajan,et al.  COLLUSION IN AUDITING , 1991 .

[3]  Yi-Ming Wei,et al.  How can China reach its CO2 intensity reduction targets by 2020? A regional allocation based on equity and development , 2011 .

[4]  Risto Lahdelma,et al.  CO2 emissions trading planning in combined heat and power production via multi-period stochastic optimization , 2007, Eur. J. Oper. Res..

[5]  M Gilli,et al.  Bargaining and collusion in a regulatory relationship , 2016 .

[6]  Bo Shen,et al.  California's Cap-and-Trade Programme and Insights for China's Pilot Schemes , 2014 .

[7]  Eilon Solan.  Three-Player Absorbing Games , 1999, Math. Oper. Res..

[8]  Zhu Ye-ming.  Game equilibrium analysis framework for auditing collusion , 2007 .

[9]  Xiao Jiang.  Game Analysis on Mechanism Design of Emission Declaration , 2002 .

[10]  Jacek Miekisz,et al.  Stochastic Stability in Three-Player Games with Time Delays , 2014, Dyn. Games Appl..

[11]  Jacques Lawarree,et al.  A prisoner's dilemma model of collusion deterrence , 1996 .

[12]  J. Laffont,et al.  Using Cost Observation to Regulate Firms , 1986, Journal of Political Economy.

[13]  David P. Baron,et al.  Regulation, Asymmetric Information, and Auditing , 1984 .

[14]  HE Ju-zhi.  Dynamic Game Analysis for Being Alert Against Audit Collusion , 2010 .

[15]  P. Deutz,et al.  Using game theory to describe strategy selection for environmental risk and carbon emissions reduction in the green supply chain , 2012 .

[16]  HE Da-yi.  Carbon Abatement Game between Regulator and Firms under Command-and-control Scheme , 2012 .

[17]  Nathaniel O. Keohane,et al.  Cap and Trade, Rehabilitated: Using Tradable Permits to Control U.S. Greenhouse Gases , 2008, Review of Environmental Economics and Policy.

[18]  S. J. Ho,et al.  A Copayment Auditing Scheme for Financial Misreporting , 2015 .

[19]  Jingjing Jiang,et al.  The construction of Shenzhen׳s carbon emission trading scheme , 2014 .

[20]  Tae-Woong Jung,et al.  QUANTIFICATION OF CARBON EMISSION REDUCTION BY U-TRANSPORTATION SERVICE EFFECT: A CASE STUDY OF DONGTAN U-CITY , 2012 .

[21]  A. Faaij,et al.  The influence of uncertainty in the development of a CO2 infrastructure network , 2015 .

[22]  Fu-bi Luo,et al.  Evolutionary Game Analysis on Auditing Collusion , 2013 .

[23]  T. M. Leung,et al.  A review on Life Cycle Assessment, Life Cycle Energy Assessment and Life Cycle Carbon Emissions Assessment on buildings , 2015 .

[24]  Jacques Lawarree,et al.  Collusion in Hierarchical Agency , 2013 .

[25]  Gao Jianwei,et al.  Carbon Abatement Game between Regulator and Firms , 2011 .

[26]  WU Ya-qiong.  Game Analysis on Control Modes in Emission Declaration , 2006 .

[27]  Li Zhi.  The Three Sides Dynamic Game Model on Corruption Problem and its Harness Countermeasures , 2003 .

[28]  N. Holden,et al.  Quantification of GHG emissions from sucker-beef production in Ireland , 2006 .

[29]  Andy Chadwick,et al.  The state of the art in monitoring and verification—Ten years on , 2015 .

[30]  Kai Chang,et al.  Cutting CO2 intensity targets of interprovincial emissions trading in China , 2016 .

[31]  Jianhui Wang,et al.  Cap-and-trade vs. carbon taxes: A quantitative comparison from a generation expansion planning perspective , 2012, Comput. Ind. Eng..

[32]  J. M. Verschuuren,et al.  Enforcing the European emissions trading system within the EU member states : A Procrustean bed? , 2016 .