Rule-Based Delegation or Reward-Based Contracting? Central-Local Governance of China’s CCER Program

The 2024 relaunch of China’s Certified Emission Reduction (CCER) program creates a dual-track carbon market, posing a key governance dilemma: how should the central government set the CCER offset rate when local governments possess private information on emissions but hold divergent policy goals? We model this challenge using a principal-agent framework featuring the central government, local governments, as well as abatement firms and CCER suppliers. Our core contribution is to derive and unify the optimal delegation mechanisms for two distinct institutional settings: “Greenfield” regions without policy history and “Brownfield” regions with established path dependence. We find that local governments’ “status quo veto power”, acquired from historical practice, drives a governance shift from ex-ante control (rules) to ex-post incentives (rewards). For Greenfield regions, the optimal policy is partial discretion with a cap , theoretically justifying China's national 5% limit. For Brownfield regions, this veto power necessitates a menu of contracts with financial rewards to manage information rents, explaining why some pilot regions maintain their original, higher standards. Our analysis also confirms the “double-edged sword” effect of CCERs, which lower costs but can dilute the carbon market's environmental effect by crowding out firms' internal abatement efforts. The optimal offset rate is shown to be sensitive to key economic and policy parameters.