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A comparison of the operation of China's carbon trading market and energy market and their spillover effects

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  • Song, Xiang
  • Wang, Dingyu
  • Zhang, Xuantao
  • He, Yuan
  • Wang, Yong

Abstract

This study measures the liquidity and volatility of the operation of the carbon trading and energy markets using liquidity ratio indicators and log return indicators. It adopts China's carbon trading and energy markets as the research objects, and evaluates the mean spillover effects and volatility spillover effects between the two using the vector autoregression (VAR) model and the BEKK-MGARCH model. The findings indicate that: (1) The liquidity of China's carbon trading market is better than that of the energy market. The average liquidity ratio of the Hubei and Shenzhen carbon trading markets is much lower than that of the coal market, 43016.131. It may be attributed to the fact that China's carbon trading market is currently small and easy to regulate. (2) The volatility of both the Chinese carbon trading market and energy market is small, and the absolute values of the mean log return rate are close to 0. It could be because China's carbon trading market is mainly distributed through free quota allocation, while the energy market has been mature and stable for many years. (3) There is a spillover effect between the carbon trading and energy markets in some parts of China, but the direction and degree of spillover effect vary, which may be due to differences in the economic development level, energy consumption structure, and environmental policies of each pilot carbon trading region. (4) The spillover effect between the two markets is stronger, perhaps due to China's current model of using coal as the main fuel.

Suggested Citation

  • Song, Xiang & Wang, Dingyu & Zhang, Xuantao & He, Yuan & Wang, Yong, 2022. "A comparison of the operation of China's carbon trading market and energy market and their spillover effects," Renewable and Sustainable Energy Reviews, Elsevier, vol. 168(C).
    • Handle: RePEc:eee:rensus:v:168:y:2022:i:c:s1364032122007468
    DOI: 10.1016/j.rser.2022.112864
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