An event study of price changes in China’s national carbon market

Using the available information sources and an econometric approach for the time series dataset, this study tests the price volatility of the national carbon market, and identifies the interactions between electricity, carbon and fossil fuel prices in China. The result confirms an overreaction of carbon market prices to the considered events. There exists a long-term co-integration between carbon price and the prices of coal. Conversely, coal prices have no impact on the short-term dynamics of carbon prices. The prices of electricity spot market are significantly and positively associated with LNG prices and the first difference of coal prices but indicate no significant relationship with the first differences of carbon prices. This analysis gives some implications on the synergy between power sector reform and national carbon market in China. On the one hand, the liberalization of the power industry should be further advanced to create conditions for passing carbon costs onto the electricity markets. On the other hand, the national ETS should apply simpler and stricter benchmarks, as well as conduct auctioning to allocate the emission allowances in the power sector for the formation of substantial carbon prices and the shift to a low-carbon power supply portfolio.