Author(s)

Jyh-Harng Shyng ¹

Affiliation(s)

¹ Department of Landscape Architecture, School of Life Sciences, Zhaoqing University, Zhaoqing, Guangdong, China

Corresponding Author

Jyh-Harng Shyng

ABSTRACT

While a macro trading platform for PPP landscape carbon sinks has been established in China, few studies explore micro-level contract design for allocating carbon price volatility risks between public and private partners. From 2021 to 2024, China's CCER prices fluctuated wildly, and such drastic price swings greatly alter the net present value of 15–30 year PPP carbon sink projects and hinder private financing viability. Conventional PPP risk frameworks simply categorize carbon price risk as a general market risk, ignoring its unique feature as an uncontactable state variable under incomplete contract theory that severely impacts parties' relationship-specific investment returns. Based on the Grossman-Hart-Moore framework, this paper constructs an optimal risk-sharing model under carbon price uncertainty. It evaluates the efficiency flaws of three prevailing contract mechanisms—fixed-price repurchase, floating revenue sharing, and floor-ceiling price corridors—under extreme price conditions. This study further proposes an innovative three-tier contingent control rights mechanism, shifting contract design focus from predefined payoff terms to ex ante adaptive adjustment rules, including an automatic execution zone, formula-based adjustment zone, and standardized renegotiation protocol. Numerical simulations calibrated to China’s CCER market data reveal that the proposed mechanism generates social welfare merely 6–10% below the first-best benchmark across diverse carbon price scenarios, vastly outperforming static risk allocation schemes. This research enriches literature on incomplete contracts and carbon sink governance, and delivers practical contract design guidelines for policymakers launching PPP carbon sink programs.

KEYWORDS

Incomplete contract; carbon price volatility; risk allocation; PPP; carbon sink

CITE THIS PAPER

Jyh-Harng Shyng. Allocating Carbon Price Volatility Risk in PPP Landscape Carbon Sink Contracts: An Incomplete Contracting Approach. Financial Engineering and Risk Management (2026). Vol. 9, No. 1, 97-102. DOI: http://dx.doi.org/10.23977/ferm.2026.090109.

REFERENCES

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