Can energy predict the regional prices of carbon emission allowances in China?

The carbon emission trading is an important market-oriented tool in the process of China's carbon neutrality, which makes companies face tremendous pressure to reduce emissions while having strong energy demands. In order to evaluate whether energy prices can be robust predictors of the prices of emission allowances, this study perform extreme bounds analysis (EBA) in four representative markets. The empirical results reveal that energy prices can indeed predict the prices of emission allowances, but the robustly predictive capabilities of different energy prices vary with regions. Among them, thermal coal is the robustly positive predictor for Guangdong, Hubei and Shanghai market; natural gas is the robustly negative predictor for all the four chosen regions; and crude oil can only positively predict Hubei market with robustness. Meanwhile, the horizons that predictions from energy to emission allowance can be performed as well as the predictive coefficients also vary with energy types and regions. And some trading implications are also provided alongside.

Automated summary

This study finds that energy prices can indeed predict the prices of emission allowances, but the predictive capabilities vary with regions and energy types. Specifically, thermal coal prices are robustly positive predictors in Guangdong, Hubei, and Shanghai markets, while natural gas prices are robustly negative predictors in all four chosen regions. Crude oil can only positively predict the prices in the Hubei market with robustness.