What Drives the Carbon Price? - An Empirical Analysis of Chinese Emission Trading Scheme

Abstract

In this paper, we focus on the major influential factors of the carbon price, by using both static panel model(FGLS) and dynamic panel model(PVAR) of each trading pilot in 2014-2018, totally six kinds of indicators were selected to establish the quantitative model to explain what drives the carbon price in China. We also employed the Bai-Perron test to identify the structural breakout points of carbon price fluctuation. This study finds that, in China, in terms of market fundamental influential factors, (1) the high-carbon energy price represented by coal has a negative impact on the carbon price, while the other energy indicators of oil and LNG are not statistically correlated; while (2) the cooling/heating days and temperature differences' impacts are not statistically significant; (3) the relationship between industrial development, stock index and carbon price, is positively and negatively correlated, respectively, indicating that the Marco economy affects the carbon price at a high significance level. (4) However, in terms of non-market fundamental influential factors, the policy factors will not greatly affect the carbon price, indicating that the model we employed might not apply to the policy factor. (5) Besides, electricity production from wind power will lower the carbon price significantly due to it reduces the demand for carbon emission rights for the electricity sector in ETS. (6) Among all factors, coal price is the most significant influential factor. During the 1-10th period, the impact of coal price is small, and ranges 9.98-56.97%. As time passed by, the interpretation has gradually strengthened. After the 20th period, it stably explains about 70.37-73.87% on variance change of carbon price.