Exploring the effect of carbon cap-and-trade policy in China based on the evidence from multi-dimensional association

ABSTRACT

The integration or segmentation of regional carbon prices implies that barriers may hinder prices from adjusting efficiently and impede linkages between regional carbon markets. Past studies have found that cross-regional carbon prices in China tend to diverge, indicating unbalanced regional markets and that carbon cap-and-trade policies may be insufficiently effective. China’s carbon trading pilots opened in 2013. Is the integration efficient? This is the research question addressed in this study. This paper uses the carbon prices of four carbon-trading pilot regions in China (i.e. Beijing, Shanghai, Tianjin, and Guangdong) over the period of January 1, 2014, to March 23, 2021, to explore whether prices are correlated across three dimensions: long-term convergence, short-term correlation, and volatility transmission by adopting a vector error correction model with heterogeneous variances. And by using longer-term daily data and empirical tests that can account for the multiple-faceted correlations, this paper provides evidence showing that long-term convergence and risk transfer between the four regional carbon prices exist, which indicates significant regional integration. The results indicate that the price behavior of the Beijing pilot is efficient and that the Shanghai pilot has the lowest volatility. The paper also documents an information transfer pattern. For example, the Beijing pilot is shown to be the leading risk transfer market, whereas the Shanghai pilot is shown to be the market where most risk is transferred. Contrary to findings elsewhere, our main results demonstrate that China’s carbon markets exhibit integration efficiency and no imbalance between regions. This may be because the efficiency of China’s carbon markets has improved over time. The evidence also implies that if a multi-dimensional correlation has not been considered, it may underestimate the efficiency of regional carbon prices’ integration.

KEYWORDS:

• China’s carbon market
• carbon market efficiency
• integration of carbon prices
• the carbon cap-and-trade policy
• regional carbon price correlation

Acknowledgements

I am immensely grateful to Professor Jacopo Torriti (Editor-in-Chief) and the three anonymous referees for the constructive comments of this paper. Funding from the Ministry of Science and Technology (Taiwan) under Project No. MOST 110-2410-H-007-100-MY2 has enabled the continuation of this research and the dissemination of these results.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The website is www.tanjiaoyi.com.

² Fan et al. (2018) used the carbon price return data of seven pilot carbon markets in China and employed the general Hurst exponents to establish a market efficiency index. From a long-term perspective, the Beijing pilot had the highest efficiency.

Additional information

Funding

The work was supported by the Ministry of Science and Technology, Taiwan [MOST 110-2410-H-007-100-MY2].