Emissions Trading Scheme Brings Transition Risks to Industrial Supply Chain in China

Li-Yang Guo, Si-Qi Yu, Yong-Qiu Wu, Chao Feng and Jun Yang

Emerging Markets Finance and Trade, 2024, vol. 60, issue 8, 1643-1657

Abstract: Emissions trading scheme (ETS) is a market-oriented measure to promote green transition. In order to determine systemic risk among ETS pilots and industrial supply chain in China, this study applies a financial network approach on a system consisting of 7 emission allowances and 27 commodities. The empirical findings confirm that ETS poses transition risks to industrial supply chain by creating new information channels between emission allowances and commodities. Such channels are generated by the extensive financial connections within the ETS-commodity system. The degree of financial connection dynamically responds to shocks from institutional events of ETS, transaction adjustments for commodities, and extreme risk event like COVID-19. Analysis of connection structure shows that most of the products within the ETS-commodity system differ in the ability to generate financial connections. The bidirectional connection feedbacks between them and their connectors exhibit asymmetry. Several centrality indicators also screen out systemically important products from multiple scales. The findings could have policy implications for related authorities, manufacturers and investors.

Date: 2024
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DOI: 10.1080/1540496X.2023.2284308

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