Abstract: Greenhouse gas emissions and the development of low-carbon economy are the biggest market failures, which are mainly manifested in such problems as the low-carbon economy being the world’s largest externality, the low-carbon economy being the global public goods, and the free-rider along the development of low-carbon economy. The major reason for the market failures during the development of low-carbon economy is lacking of secured property ownership as well as the greenhouse effect. Thus, in order to establish secured property rights through institutional innovation, it is necessary not only to reduce the exploitation of fossil fuels from the source, but also to allocate the emission rights fairly. To develop the low-carbon economy is faced with market failures, but we can not therefore deny the basic roles of the market mechanism in the development of low-carbon economy, rather to correct and adjust the market through institutional innovations, so as to facilitate the establishment and operation of the low-carbon economy. For the sake of the sustainable development of human society, we have to adjust or change the rules of the resource allocation in the market economy, embedding such factors as emission reduction, low-carbon, environmental protection, etc. into the institutional framework of the market via rules, systems and policies.

Key words: low-carbon economy; market failure; externalities; public goods; free-rider