Dependence structure among carbon markets around the world: New evidence from GARCH-copula analysis

This paper investigates the dependence structure among carbon markets around the world through the application of different copulas. The analysis provides important insights into the relationship between carbon prices being traded across different exchanges across the world. The novelty of this study rests into assessing carbon allowances for both futures and spot prices across all the key carbon markets, such as the EU, RGGI, California, Quebec, South Korea, as well as the three oldest Chinese pilot carbon markets, Shenzhen, Guangdong and Hubei for the period 2011 to 2019 for future prices and 2015 to 2020 for spot prices. The results demonstrate an asymmetric relationship between most carbon markets. A low tail dependence has been noted between the EU and western carbon markets, while higher tail dependence has been registered with the eastern carbon markets. Further, carbon markets that have linkage agreement, ongoing cooperation or are geographically close tend to have positive and higher tail dependence. The paper points out to regional carbon clubs being formed as per the dependence structure.