Price Dynamics and Interactions between the Chinese and European Carbon Emission Trading Markets

Abstract

The European carbon emission trading market is the largest and most mature market, while China’s carbon market has a short history. Institutionally, cross-market transaction is infeasible between the two markets. This paper investigates the long-run trend between the two markets as well as the price dynamics. Results show that a long-run trend exists between the Chinese and European carbon markets. Both markets possess self-correction capability in reducing price deviations, signaling a certain level of market efficiency. However, both markets also exhibit pricing inefficiency as historical price movements are able to impact prices. The European market informationally leads the Chinese market. Policy implications are that China should further upgrade its information disclosure system, such as unifying information disclosure standards across industries, and further develop its carbon derivatives markets to improve market transparency and market competition.