Research on Risk Measurement of China’s Carbon Trading Market

Yanzhi Duan, Chunlei He, Li Yao, Yue Wang (), Nan Tang and Zhong Wang
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Yanzhi Duan: Natural Gas Economic Research Institute, PetroChina Southwest Oil & Gas Field Company, Chengdu 610051, China
Chunlei He: Natural Gas Economic Research Institute, PetroChina Southwest Oil & Gas Field Company, Chengdu 610051, China
Li Yao: Natural Gas Economic Research Institute, PetroChina Southwest Oil & Gas Field Company, Chengdu 610051, China
Yue Wang: College of Management Science, Chengdu University of Technology, Chengdu 610059, China
Nan Tang: College of Management Science, Chengdu University of Technology, Chengdu 610059, China
Zhong Wang: College of Management Science, Chengdu University of Technology, Chengdu 610059, China

Energies, 2023, vol. 16, issue 23, 1-28

Abstract: In today’s environmentally conscious world, carbon trading has emerged as a widely accepted economic instrument to mitigate the externalities resulting from deteriorating environmental problems. Consequently, the use of market-based mechanisms to address environmental issues has reached a global consensus. Many countries are implementing progressive steps by establishing carbon markets to promote low-carbon development and meet their carbon reduction targets. However, the inherent risks in carbon trading markets may hamper the formation of a reasonable carbon price signal, leading to inadequate stimulation of low-carbon technology investments and potential failure to achieve national emission reduction goals. Therefore, managing the risks associated with carbon trading markets is crucial. This study focuses on measuring the risk of China’s carbon market, with the primary aim of exploring carbon price fluctuation patterns and precisely measuring market risks. The risks associated with China’s carbon market are quantified and analyzed using the exponential generalized autoregressive conditional heteroskedasticity (EGARCH) model, extreme value theory (EVT), and the value at risk (VaR) method. Results show that (1) the effect of external shocks on each carbon market is asymmetrical, and positive shocks exert considerable leverage effects on carbon price fluctuations. (2) EVT can be used to effectively fit the risks in the carbon markets. The risks of each carbon market show different characteristics. The risk of Hubei and Guangdong carbon markets is relatively small, and the dynamic VaR is nearly ±0.2. (3) Compared with the performance of the Chinese carbon market, the performance of the European Union Emission Trading Scheme is more stable, and its dynamic VaR for most of the period is within ±0.1, which is considerably lower than the VaR of other Chinese carbon markets. This study also proposes suitable policy implications to ensure the healthy and sustainable development of China’s carbon market.

Keywords: carbon market; price volatility; risk measurement; EGARCH; extreme value theory (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2023
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