The Research On Price Mechanism Of Carbon Financial Trading In China

Climate change has been an important obstacle for the sustainable developmentof economy and society, which was seen as the largest market failure till now. Inorder to cater to climate change, we should pay great attention to reduce theenvironmental influence of humanity as well as improve their adaptability. Thecontrol of greenhouse gas emission with CO2as a representative should be exertedsimilar emphasis as economic development. With Pigovian tax and Coase theorem astheoretical basis, plenty of scholars have worked on and still exploring how to usemarket mechanism to internalize the external cost of carbon emission. They comparethe hybrid strategy with price instruments and quantity instruments, finding the socialwelfare of former is more than the other. In the hybrid strategy, the price mechanismis the key element, which can not only provide reference for the “policy-makers”, butinduce the transformation of manufacture. In this article, we accord to the logicsequence. First, we concentrate on how to determine the initial price of carbonemission. Then we analyze the drivers of carbon price fluctuations after the permithas been put into the secondary market. After that, we discuss how to smooth thedramatic fluctuations.For the price formation mechanism, we review the traditional price theory andthe modern pricing theory and their application in carbon finance trading market. Wesummarize the experiences of foreign emission trading system with the conclusionthat the allocation mechanism as well as the potential supply and demand playing amajor role during the formation of price. Then we take marginal cost theory as a basis,build an improved version of the parameterized quadratic directional output distancefunction, add environmental governance investments to traditional input variables inorder to avoid the underestimation of the marginal abatement costs. Taking theregional features of trading pilots in China, We choose the secondary industry assamples to estimate the shadow price of CO2in province-level. The outcome shows that the shadow price of CO2ranges from2377Yuan/ton to47722Yuan/ton, whichare much high than expected and the real price. Taking the individual characteristicsof different districts into account, we compute the weighted shadow price using theaccount of intended output and unintended output as weight. We find the weightedshadow price of CO2is more suitable to act as a reference for the initial carbon priceof national market. In order to analyze the causes of the difference, we select theoutput, energy structure, energy intensity, emission and emission intensity asexplanatory variables. The result shows that the effect of emission is stronger than theemission intensity while the influence of output and emission are significant. Thus,we should pay more attention to the absolute emission when determine the initialprice even the target has been set as intensity. Finally, we provide suggestions for thedetermination of initial carbon price in China from two aspects: one is the selection ofcontrol scope, the other is the how to link the regional carbon trading system.For the operation mechanism, we use the theory of equilibrium price (AlfredMarshall,1890) as a basis, induct the relevant research with literature study method.We divide the potential drivers into two categories, one is the market fundamentals(including the economic environment, energy price, weather etc.), the other is theemergent events (including the publication of real emission, system vulnerabilitiesand the economic crisis, etc.). We find that the cointegrating relationship existsbetween the carbon price and market fundamentals. More specifically, economicenvironment is significant, the impact of energy prices has not get the sameconclusion which pending further examination, the extreme weather is significant butwith a lesser extent; unexpected events bring shocks to the carbon price and even leadto suspension of trading. Subsequently, we choose the daily average price of tradingpilots as the research object. We select six variables from both supply and demand. Atfirst, we use Granger test to check the casual chain between variables and find that thefunction of information about the supply is still under investigation while the marketfundamentals about the demand are robust via two paths: the one is through the priceof local coal, the other is through the demand of energy. In order to verify theoutcome and test the individual effect of different pilots, we build the unbalancedpanel data model with fixed effect. The result shows that the influence of market fundamentals is significant while the differences between individual effects can benegligible. Finally, we summarize the operating law of permit price.For the management mechanism, we use market failure theory as a basis toexpound the necessity of carbon price management initiatives in terms of controllingcost risk, guiding low-carbon investment and achieving reduction targets. Then, wecompare the details of management measures in foreign trading system and tradingpilots in China from three aspects, like symmetric safety valves mechanism, offsetmechanism as well as banking and borrowing mechanism. Subsequently, we analyzethe dynamic features of three measures in the life-cycle of carbon financial trading,with the research from Du Li and Zhang Yun (2015) as a basis. We find that thesymmetric safety valves mechanism will enhance automatic stabilization of thecarbon market, which constitute the main mode of price management mechanismwith offset mechanisms, banking and borrowing mechanism together. In the long run,due to the increasing shrinking of carbon emissions quota and the rising of marginalabatement costs, the fixed valve is not feasible. Instead, the dynamic safety valveswith automatic adjusting mechanism perform better in guiding market expectations aswell as smoothing the price fluctuations. We propose to use the1/4quantile ofaverage price during the test run as the symmetrical safety valves. The increasing ratecan be set as3%-5%above the inflation rate. It is more suitable to use price limit tomaintain the safety valves at the beginning, then it can transfer to reserving a bit ofpermit when the carbon market moves into maturity. Considering the variety of priceinfluents, it is not rational to take the transient or short-time trigger as the standard ofstarting of symmetric safety valves. For the offset mechanism, we should be set aflexible ratio. When carbon price in the market is higher than the warning value, itcan automatically adjust the offset ratio to increase (or decrease) the available CER tomaintain the smooth running of carbon price. Due to the "crowding out effect" ofoffset mechanism, it is essential to gradually reduce emission source from offsetmechanism, which is an inevitable trend when carbon market approach to maturity.Banking and borrowing mechanism aims at the inter-temporal use of carbon permit.At the beginning, the permit is allowed to banking intra-phase, then it extends tointer-phase. However, the borrowing is forbidden unless the carbon financial market becomes mature and efficient.Finally, we summarize our research on the carbon financial trading priceformation mechanism, operation mechanism and management mechanism. Wepropose for the establishment of national carbon market in china in terms of buildinglocal allocation mechanism, accelerating the cultivating of market demand, perfectingthe monitoring, reporting and verifying system and refining the price managementmechanism.