Carbon price signal failure and regulatory policies: A systematic review

The current failure of carbon price signals is hindering the orderly operation of the carbon market. Based on a statistical review, this study extends the systematic theoretical framework of price signal failure. It was found that: (1) the government is a key creator of demand and supply, and cannot play the role of night watchman as in general commodity markets; (2) information asymmetry, systematic supply-demand deviation and excessive intervention all account for price signal failures; (3) the boundaries of carbon price failure are determined by a combination of factors, including market efficiency, probability of carbon quota shortage, and carbon intensity. In order to better respond to such failures, this study not only proposes an innovative theoretical analytical framework for selecting 12 policy tools, but also presents additional viewpoints based on real-world experience. While mixed tools are more cost-effective, political acceptability, a combination of mixed tool risk, excessive intervention, uncertainty, carbon leakage and technology spillovers are significant issues that cannot be overlooked. These novel findings provide a reference for governments around the world to judge the impact of policy tools in a comprehensive way. •Improve the theoretical framework for carbon price signal failure.•Construct a theoretical analytical framework for policy tool selection.•Figure out the 6 potential difficulties and hidden issues.•Propose an approach to identifying the corrective effects of policy tools.