Dynamic Linkages of Carbon Price: An Investigation of National and Regional Market Integration in China

50 Pages Posted: 28 Apr 2023

See all articles by Chenyan Lyu

Chenyan Lyu

Department of Economics, Copenhagen School of Energy Infrastructure, Copenhagen Business School

Abstract

China's regional and national Emission Trading Schemes (ETS) are fast-growing, forming the largest carbon trading system in the world. The differences in the construction of legal foundations, market regulation development, and price maturity in regional carbon markets have led to nine carbon prices in one country, which induce difficulties in unifying the cost of emission reduction in China. The study focuses on the interactions among China's regional ETS and national ETS, with a particular emphasis on carbon price integration. This is the first study that investigates the relationship between carbon prices of nine ETS - Beijing, Chongqing, Fujian, Guangdong, Hubei, Shanghai, Shenzhen, Tianjin and national ETS in China. Employing the co-integration technique and vector error correction model (VECM), the paper suggests that the regional ETS markets in China are not mutually exclusive, and that market integration is possible. The results are highly relevant for investors and policymakers worldwide who are interested in understanding China's carbon market integration level from 2014 to 2022. The results show that China’s nine ETS were examined to have entered the long-run relation, and it seems that the regional ETS are moving towards a more integrated system in the recent period. On the policy level, cointegration indicates that efforts to integrate regional ETS markets better are possible and desirable from an economic efficiency viewpoint. This paper supports the importance of the Shanghai and Hubei emission allowances prices as key drivers of Guangdong’s prices in the long term. Investors interested in the Shanghai ETS and Shenzhen ETS can use historical information containing the change in Beijing ETS to improve the short-run forecasting of future carbon prices. Any deviation from the equilibrium co-integrating relationships is mainly caused by changes in the Guangdong ETS. The development of a national and regional carbon market requires more consultation and negotiation between the central and local levels, and incentives for localities to undertake clean energy transitions.

Keywords: Carbon markets, China's regional emissions trading, Emission allowances, Market architecture, Cointegration, Vector Error Correction

Suggested Citation

Lyu, Chenyan, Dynamic Linkages of Carbon Price: An Investigation of National and Regional Market Integration in China. Available at SSRN: https://ssrn.com/abstract=4432209 or http://dx.doi.org/10.2139/ssrn.4432209

Chenyan Lyu (Contact Author)

Department of Economics, Copenhagen School of Energy Infrastructure, Copenhagen Business School ( email )

Denmark
+45 53501305 (Phone)

HOME PAGE: http://chenyanlyu.com

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