Dynamic Correlation Between China’s Regional Emissions Allowances And Fossil Energy Markets

Climate issue is one of the most serious challenge human beings facing in the 21st century,which is closely related to men’s existence and development.Greenhouse gas emission has become an inevitable byproduct of fossil energy consumption.In order to protect the global climate system,the limited capacity of the atmosphere to accommodate greenhouse gas emissions has become a scarce resource,but the“domination”of greenhouse gas emission rights is still unclear.International cooperation is,therefore,needed to develop an international climate system,for which carbon emissions trading mechanism came into being.The establishment of regional carbon emissions trading pilot programs in China is a newly revolutionary and exploratory practice.In 2013,China launched a pilot operation successively in five cities and two provinces（Shenzhen,Shanghai,Beijing,Guangdong,Tianjin,Hubei,Chongqing）,which has made a great progress,while compared with the European and American international carbon market,there is still a gap.EU ETS is by far the largest and the most successful emission system in the world;meanwhile it is also the sole inter-country,multi-industry emissions trading system in operation,whose establishment made Europe a pioneer and leader in international climate issues.Because of the different economic development level,the target of carbon market construction and the task of emission reduction in the pilot region,the development of the pilot carbon market in China presents its own characteristics.The carbon market,as a tool to assist greenhouse gas abatement policy,is a major innovation in the area of climate change,due to its cost and environmental effectiveness as well as its political feasibility,more and more countries and regions have applied to their own actions to reduce emissions in recent years.Thus,the development of the carbon market has become the focus of many experts and scholars.Obvious differences are shown between China’s institutional design,carbon trading and energy market and that of European and American market.Compared with the related studies of existing European and American carbon and energy market,this paper makes up for the lack of low intertwined degree of research on carbon and energy market in China,which contributes to enrich and extend the linkage mechanism of carbon and energy market and the research of risk spillover theory,at the same time,it helps government policy makers and carbon trading agencies to improve synergies between carbon trading and energy markets.Based on the operating background of China’s pilot carbon market and the characteristics of carbon price volatility and agglomeration,this paper analyzes the volatility spillover effect of carbon market and other energy market in Beijing,Guangdong,Shenzhen,Shanghai and Hubei by using economic principles,financial theory and DCC-GARCH model.Based on the daily trading prices of carbon,coal,oil and natural gas from April 2014 to September 2017,this paper tests the ARCH effect of carbon price and energy price in each pilot carbon market,establishes GARCH model,and conducts DCC-GARCH test.The empirical conclusions:First,from various markets GARCH（1,1）,it can be known that carbon prices and oil,natural gas,and coal prices all have price fluctuation agglomeration,and the sum of ARCH and GARCH coefficients of oil market and Shenzhen carbon market isα₁+β₁ is very close to 1,which reflects the persistence of the fluctuations in these two markets.The impact of the conditional variance is sustained.Second,the correlation coefficient in the DCC-GARCH model is significant.China’s pilot carbon market and energy market There is a linkage between the carbon market and the energy market fluctuations in the long-term sustainability;in the three major energy markets,the long-term sustainability between the pilot carbon market and the coal market yield series ranks first,including the Shenzhen carbon market,Beijing.The dynamic coefficient of the carbon market and the coal market is at the forefront of the pilot carbon market,reaching 0.9997 and0.9968 respectively;the long-term sustainability of the yields of the pilot carbon market and the oil market and the natural gas market are different,and the performance of each pilot carbon market is inconsistent;A correlation chart of the dynamic coefficients of the energy market and the carbon market can be found in the Shanghai carbon market and coal,oil,Natural gas market without significant time-varying characteristics.The impact of natural gas is slightly weaker.Fluctuations in oil prices can have a negative impact on carbon prices.Based on the above empirical results,it can be known that with the gradual promotion of China’s pilot carbon market and the establishment of a national carbon market,the linkage between China’s carbon market and energy market will be enhanced,and the possibility of risk transfer between markets will increase.Pay attention to the impact of energy prices,optimize investment strategies and portfolio strategies,and improve asset hedging and risk management capabilities.