China Policy Journal Volume 1, Number 1, Fall 2018 | Page 51

China Policy Journal
emissions and CEA demand. And, according
to the joint F test, changes in
oil price granger cause changes in CEA
price of Beijing at 5% significance level.
Additionally, the changes in stock
index displayed a weakly positive effect
in Eq.2 of Beijing ETS. It implies that
the increase in stock returns, as a sign
of future economic growth, drives the
industrial output and the associated
emissions, which raises CEA price.
With respect to Shanghai, the
lag order one of the coal price returns
had a negative effect on CEA price returns,
which is similar to Beijing but
more significant. And, the F-test indicates
that changes in coal price granger
cause changes in Shanghai CEA price.
In the contrast, the 1 week lagged LNG
price return (D.lnLNG t
) displayed a significantly
positive effect on CEA price
returns. The result meets our expectation
based on the substitution theory
that CEA price increases when LNG is
substituted by cheaper and carbon-intensive
fuel such as coal. No Granger
causality was found between LNG
price and CEA price based on the joint
F-test. Eq.3 shows a slight Granger causality
from stock returns to CEA price
returns.
The regressions for Shenzhen
ETS found no significant relations between
CEA price and energy prices.
However, there was a significant shortrun
effect of stock returns on CEA price
return with a two-week lag. The positive
coefficient implies that CEA price
would increase under good economic
conditions due to more economic output
and the associated emissions. The
joint F-test also indicates a significant
Granger causality from stock returns to
CEA price returns.
Further, we can see from Table
9 that Beijing, Shanghai, and Shenzhen
all experienced a decrease in CEA price
returns after Break2014. This is similar
to the previous finding that the piloting
ETSs had higher level CEA prices
at the beginning of their establishment
in 2013, but displayed significant decreases
of the prices after the compliance
break in the second calendar year
(2014). However, Shanghai CEA price
increased after June 2016 and Shenzhen
CEA price increased after June 2015
which may be caused by the demand
from new entrants.
4. Discussion and
Policy Implications
In general, as newly born markets,
the local ETS markets in China face
thin trading and volatile price. One
reason is the low market liquidity. It
may be difficult for a seller of CO 2
emission
allowances to quickly find a buyer
that they want to make the transaction
with. And, some entities with allowance
surplus may want to keep the allowances
for their own use in the next compliance
year rather than selling them.
In China, the spot trading is allowed,
but derivatives trading is off-limits.
This limited type of commodities in the
market in addition to firms’ lack of understanding
and capacity of playing in
the ETS market can also be the reasons
for a dearth of actual trading.
The local CEA prices are far less
than the ideal prices that can cause substantial
low-carbon actions. The prob-
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