Is China's carbon trading market efficient? Evidence from emissions trading scheme pilots

Xiao-Qing Wang, Chi-Wei Su, Oana-Ramona Lobonţ, Hao Li and Moldovan Nicoleta-Claudia

Energy, 2022, vol. 245, issue C

Abstract: This paper examines whether the efficient market hypothesis (EMH) holds in the Chinese carbon trading pilots by employing the Sequential Panel Selection Method (SPSM) which is combined with the Panel KSS unit root tests with Fourier function. This approach serves as a highly valid tool in controlling for cross-sectional dependence and heterogeneity as well as structural shifts and nonlinearities. In virtue of the SPSM, the paper could divide the whole panel into two groups and clearly identify which and how many series belong to stationary or non-stationary group. The results show that carbon prices follow mean reversion process, indicating that the EMH does not hold in the Chinese emissions trading scheme (ETS), with the exception of Shanghai. The inefficiency of ETS pilots can be explained by irrational behaviors, poor information transparency, imperfect market mechanism and transaction costs. Accordingly, the failure of EMH implies the existence of profitable arbitrage opportunities for market participants. To establish the nationwide ETS market, policy lessons should be learned from Shanghai as this pilot is demonstrated to be an efficient market. Additionally, policymakers should improve the trading information disclosure system and formulate uniform guidelines, which is propitious to enhance market efficiency of the Chinese ETS.

Keywords: Carbon trading; Efficient market hypothesis; Sequential panel selection method; Panel KSS unit Root test (search for similar items in EconPapers)
JEL-codes: C23 G14 Q58 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:245:y:2022:i:c:s0360544222001438

DOI: 10.1016/j.energy.2022.123240

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