Influence of allowance allocation events on prices in China’s carbon market pilots– an AR-GARCH-based analysis

ABSTRACT

China has established seven pilot carbon markets and has made efforts to establish a national carbon market. This paper constructs an AR-GARCH model and adopts bilaterally modified dummy variables to investigate the impacts of regulatory update events (allowance allocation plans and allowance auctions) on the pilot carbon markets in China. The pilots of Guangdong, Shanghai, and Hubei are chosen as case studies. We find that each pilot reacted differently to the same events due to mechanism design diversity. The allowance allocation plan in the Shanghai and Guangdong pilot markets generated relatively distinct influences on the carbon price. Furthermore, to a certain extent, allowance auctions played a role in carbon price discovery in Guangdong and Hubei. However, such an impact was not remarkable in the Shanghai pilot market. Based on the empirical results, policy recommendations are presented for the establishment of a national carbon market.