Impact of Covid-19 on Returns-Volatility Spillovers in National and Regional Carbon Markets in China
60 Pages Posted: 1 Apr 2022
Abstract
China wants to play a leading role in international carbon reduction and has ambitious reduction plans. National and regional carbon emissions markets now have increasing trading volumes to operate efficiently. However, trade wars and the COVID-19 pandemic may have created challenges for the Chinese government to create a competitive national market. As carbon emissions are now a key policy instrument and important financial asset, it is important to analyze volatility spillovers, as one of the largest carbon emitters globally makes an interesting case study. Here we investigate daily data for China’s carbon markets and analyzes prices, returns, and volatility spillovers. The Diagonal BEKK model is used to examine financial returns and determine conditional covariances and volatility spillovers across the national and regional markets before, during and after COVID-19. The empirical results show that the signs of the conditional means and covariances, and partial covolatility spillovers for regional returns are similar before and during COVID-19, but not for national returns. Moreover, the magnitudes of the spillovers during COVID-19 are much larger than before and after COVID-19. The impact of COVID-19 on China’s economy leads to greater risk transmission across carbon markets. The channels of risk transmission are discussed to help understand the relevance of carbon markets for investment decisions and public policy making. China’s experience (from regional to national) will be useful in informing any international carbon markets. Finally, motivations, challenges and possible forms of cooperation between China and the Euro zone on establishing a common carbon market are discussed.
Keywords: Carbon Markets, China, Diagonal BEKK, Volatility, spillovers, Risk, COVID-19, Euro zone
Suggested Citation: Suggested Citation