Emission trading and carbon market performance in Shenzhen, China

Abstract

China has developed its own domestic carbon markets by setting up emission trading schemes. This study addresses concerns about the functioning of these schemes and the financial performance of the Chinese carbon market. It aims to assess an actual outcome of this policy intervention, i.e. trading records, which were used in our analysis to examine a key financial property of the allowance-based market in Shenzhen. In a mature market, assets that incur higher risks are likely to yield higher returns, i.e. a positive relationship. To examine this property, we solicited historical data on the price and trading volume of emission allowances. We statistically estimated the degree of volatility in the Shenzhen market andits relationship with expected return premium. We found that the rate of return was negatively associated with expected risk. This stands at odds with the usual expectation in the financial market and the prediction of asset pricing theory. Also, kurtosis in trading volume was excessively high and its fluctuations were highly concentrated. We discuss these findings in terms of market liquidity and information uncertainties, and offer some policy recommendations. More regulatory attention and economic fixes are needed to improve market efficiency and eliminate sources of market distortions.

Factors affecting the pilot trading market of carbon emissions in China

“…China's pilot carbon emission trading programs began operating in the second half of 2013 in Beijing, Tianjin, Shanghai, Chongqing, Hubei, Guangdong and Shenzhen (Zeng et al 2017) The carbon emission trading schemes in 7 regions in China marked a watershed in the history of Chinese climate policy (Ren and Lo 2017;Tan and Wang 2017). At the end of 2015, the cumulative turnover in seven pilot carbon trading markets was nearly 80 million tons and the cumulative payment was more than 2.5 billion RMB (Zhou et al 2016).…”

Back to the future: Can Chinese doubling down and American muddling through fulfill 21st century needs for environmental governance?

“…For instance, the target disaggregation scheme used to assign China's national energy intensity targets to provinces in the 11th FYP period was widely criticized for failing to take into account the different potential for energy conservation in different provinces, though the problem was later alleviated under the 12th FYP (Zhao & Wu, ). There are serious doubts at this stage regarding the efficiency as well as the effectiveness of the nationwide cap‐and‐trade system China plans to rely on to restrict and ultimately reduce greenhouse gas emissions (Cong & Lo, ; Goron & Cassisa, ; Zhao, Jiang, Nie, & Chen, ).…”

“…There are serious doubts at this stage regarding the efficiency as well as the effectiveness of the nationwide cap-and-trade system China plans to rely on to restrict and ultimately reduce greenhouse gas emissions (Cong & Lo, 2017;Goron & Cassisa, 2017;Zhao, Jiang, Nie, & Chen, 2016).…”

Can China’s Carbon Emissions Trading Rights Mechanism Transform its Manufacturing Industry? Based on the Perspective of Enterprise Behavior

“…As a means of environmental regulation, the carbon emissions trading rights policy offers a natural experiment. Compared with using measured or calculated environmental regulation variables, the carbon trading policy can effectively avoid such measurement errors and make the results more robust [29,30]. In addition, the advantage of using a double-differential model to study the impact of carbon trading rights on the productivity of manufacturing enterprises is that it enables us to control for non-observable factors and differences between groups that do not change over time.…”