Political Uncertainty and Carbon Emission Trading : Evidence from China

As an alternative carbon pricing tool to carbon taxes, carbon emission trading systems (ETS) combine market incentives with policy targets. Inevitably, ETS markets are linked to domestic and international political environment. Yet, there is a lack of research on the relationship between political uncertainty and activities in carbon emission trading markets. Using data from four carbon ETS markets in China between 2014 and 2019, our logistic regression and AR(1)-GARCH estimations suggest a negative relationship between political uncertainty and carbon emission trading volume, and a risk premium on carbon emission trading daily returns for political uncertainty in China. We also identified significant variations among the responses to political uncertainty in these markets. The locally focused empirical strategy distinguishes our research from existing studies where the analyses are at the national level. The empirical findings from the four largest carbon ETS markets in China are helpful for policymakers in China and beyond to understand how ETS markets work in China, where political uncertainty has always been playing an important role in economic activities