Economy or Climate? Impact of Policy Uncertainty on Price Volatility of China’s Carbon Emission Trading Markets

Zhuoer Chen, Xiaohai Gao, Nan Chen, Yihang Zhao () and Sen Guo
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Zhuoer Chen: Economic & Technology Research Institute, State Grid Shandong Electric Power Company, Jinan 250021, China
Xiaohai Gao: Economic & Technology Research Institute, State Grid Shandong Electric Power Company, Jinan 250021, China
Nan Chen: State Grid Jinan Power Supply Company, Jinan 250001, China
Yihang Zhao: CEC Technical & Economic Consulting Center of Power Construction, Electric Power Development Research Institute Co., Ltd., Beijing 100053, China
Sen Guo: School of Economics and Management, North China Electric Power University, Beijing 102206, China

Energies, 2025, vol. 18, issue 10, 1-18

Abstract: Based on the economic and climate policy uncertainty index and the price data of major carbon emission trading markets from May 2014 to August 2023, this paper uses the generalized autoregressive conditional heteroskedasticity and mixing data sampling (GARCH-MIDAS) model to analyze the impact of policy uncertainty on carbon market price volatility. The results indicate the following: (1) The price volatility in the Hubei carbon market is influenced by both economic and climate policy uncertainties, while the Guangdong market is only affected by climate policy uncertainty, and the Shenzhen carbon market is only affected by economic policy uncertainty. (2) Before the establishment of the national carbon market, the carbon market prices in Hubei were impacted by both policy uncertainties, while Guangdong and Shenzhen carbon markets were only affected by climate policy uncertainties. (3) On the contrary, after the establishment of the national carbon market, only the Shenzhen carbon market was affected by both policy uncertainties, and the price volatility in the Guangdong and Hubei carbon markets was not affected by policy uncertainties. The above research conclusions are helpful for regulatory agencies and policymakers to assess the future direction of the pilot carbon market and provide an empirical basis for preventing and resolving policy risks. At the same time, the proposed GARCH-MIDAS model effectively solves the inconsistent frequency problem of policy uncertainty and carbon price volatility, providing a new perspective for the study of factors affecting carbon market volatility.

Keywords: economic policy uncertainty; climate policy uncertainty; carbon market; GARCH-MIDAS (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: 2025
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