Research On The Correlations Of The European Union Emissions Trading Scheme And The International Energy Markets

On July 16,2021,China announced the launch of the national carbon emissions trading market based on the ten-year pilot experience.However,compared with the European Union Emissions Trading Scheme,which has entered the fourth stage,China’s national carbon market is still immature.This paper takes the correlation between the European carbon market and the three major international energy markets as the starting point to study the correlation structure and dynamic risk spillover effects between the European carbon market and the energy markets.According to the European experience,the measures and suggestions about carbon market development and risk management are given to improve the internal operation mechanism and the risk detection system of China’s carbon market.This paper first summarizes the development process of the European carbon market in four stages.Then,the impacts of price fluctuations in the European carbon market on the market equilibrium price are analyzed from the supply side.And the income effect and substitution effect are combined to analyze the long-term and shortterm effects of price fluctuations in three fossil energy markets on the European carbon market price and market equilibrium price from the demand side respectively.These efforts clarify the mechanism of the interaction between the European carbon market and the international energy markets.Afterward,the Vine Copula model based on the ARMA-GARCH-partial t method is used to study the high-dimensional and twodimensional correlation structures between the European carbon market and the energy markets,and the rolling horizon procedure is used to analyze the dynamic tail correlations between the carbon market and the energy markets.The empirical results show that the high-dimensional structure among the four markets is D-vine Copula,that is,there is no dominant market.And the static correlation structures between the two markets are all Frank Copula.The correlation between the European carbon market and the natural gas market is the strongest but also quite low,followed by the correlation between the carbon market and the oil market,while there is almost no indirect correlation between the carbon market and the coal market.Furthermore,the order of the dynamic correlations of the upper and lower tails between the markets is also like the static one.The sharp rises in the price of natural gas have caused the most dramatic rises in the European carbon market,which have concentrated in recent times and mainly occurred after the pandemic caused by COVID-19,followed by the oil market.Moreover,the dynamic upper tail correlations are significantly stronger than the lower ones.According to the empirical results,the key conclusion is that the energy structure is the radical cause of the static correlation and the strong correlations of the upper and lower tails.In the light of the theoretical analysis,the empirical analysis,China’s energy structure,and the current status of China’s national carbon market,the outlook puts forward two major suggestions for investors,risk managers,market participants,and investors,which includes promoting the coordinated development of the carbon trading market and the energy markets,and strengthening the risk management capability of China’s national carbon market.