Dynamics of China's carbon prices in the pilot trading phase

This paper is the first to investigate empirically the link between carbon prices and macro risks in China's cap and-trade pilot scheme. Using data from four pilot markets in Beijing, Guangdong, Hubei, and Shenzhen from 2014 to 2016, we demonstrate that the carbon price in Hubei is weakly linked to international prices of natural gas. Our results also indicate that energy, utilities, industrial and materials sector indices are positively related to the allowance prices in Shenzhen and Guangdong, suggesting that higher emitters in the region may have factored the carbon price into their production mix. We find no statistically significant relationship in the Beijing pilot. Overall, the findings suggest that China's carbon market is currently in an early stage of development, as the carbon price fundamentals are weak and the markets are comparatively less efficient than the European trading scheme in an informational sense. The findings of the paper have policy implications for the upcoming integration of regional markets into the national carbon market.