China has established seven ETS pilots mainly for reducing emissions of carbon dioxide (CO2) since 2013. Compared to more mature ETS such as the one in the European Union, Chinese ETS remains an explorative practice. Given that there are very few empirical studies on the price dynamics of China’s CO2 emission allowance and considering that ETS will continue to play an important role in CO2 emission reduction in China, this study investigates the implementation of the seven ETSs in China, addressing the responses of CO2 emission allowance prices to energy prices, macroeconomic indicators and institutional events.
The empirical analysis shows that the seven ETS pilots were all informationally inefficient, with high price volatility and low liquidity during 2013-2016, even though some pilots are doing better than others. The prices of CO2 emission allowances are mainly influenced by their own historical prices. In Beijing, Hubei and Guangdong, the price returns of energy prices have significant correlations with the price returns of CO2 emission allowances. Additionally, in Beijing, Guangdong and Shanghai, price returns significantly decreased following the deadlines for submitting valid allowances in 2014, implying the influence of institutional events on price changes. This study contributes to the understanding of the policy instrument of ETS by adding empirical evidence in the context of China. The development of ETS in China is a learning-by-doing process, which needs more empirical studies and consistent regulatory updates in order to deliver a long-run sustainable outcome.