Measuring the Demand Connectedness among China’s Regional Carbon Markets

Li-Yang Guo and Chao Feng ()
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Li-Yang Guo: School of Economics and Business Administration, Chongqing University, Chongqing 400030, China
Chao Feng: School of Economics and Business Administration, Chongqing University, Chongqing 400030, China

IJERPH, 2022, vol. 19, issue 21, 1-16

Abstract: After years of emission trading in segmented pilots, China operates a unified market in the power system and plans to involve more industries in the coming future. The aim of this study is to detect the commonalities of transaction behaviors across China’s regional carbon pilots, so as to provide an empirical basis for a future multi-sectoral expansion of national trading. Based on a dataset of daily trading volume in seven regional markets during 2014–2021, the empirical results from connectedness measures show that the total demand connectedness ranges from 10% to 24%, indicating the existence of interactions among China’s regional markets. This not-so-wide range of fluctuation usually shows a trend of rising first and then falling within each year, during which the upward trend is basically related to the accounting, verification and compliance of allowances. After these time nodes, the total connectedness declines. In addition, the directional connectedness could help clarify the specific roles that regional markets play in the variations of total demand connectedness when facing the shocks of these time nodes. Meanwhile, the frequency decomposition reveals that a longer-term component of more than 10 days dominates the connectedness. Based on these findings, some policy implications are provided alongside.

Keywords: emission-trading market; trading volume; demand for emission allowances; connectedness; frequency decomposition (search for similar items in EconPapers)
JEL-codes: I I1 I3 Q Q5 (search for similar items in EconPapers)
Date: 2022
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