Improving the liquidity of China’s carbon market: Insight from the effect of carbon price transmission under the policy release

Through a series of policies release, the trading system of China's carbon market is being improved, but its current liquidity is still low. To improve market liquidity, this paper analyzes the relation between the release of policy related to carbon market operations and the volatility of carbon price, thus arranging an optimal adjustment scheme for government's policy-making. Through the jump test and Logit regression, we investigate historical policies and prices of 7 Emission Trading Scheme pilots in China to explore the impact of policy release on carbon price, and then quantify the effectiveness of these policies. Empirical results indicate that in the short-term, new policies can rapidly lead to a large volatility of carbon price, but it can also reduce the abnormal volatility with the spread of price information. Further, the demand-stimulus policies promote a positive volatility of carbon price. In the long-term, the insufficient demands for carbon emissions quota raise the disappearance of market dividends caused by the policy release and lead to an excessive call-back of carbon price, thus increasing mid-and long-term risks in carbon markets. Additionally, China's macro environment policy can stabilize carbon price, and thus an effective tool for improving the liquidity of carbon markets is developing demand-stimulus policies.