Energy price bubbles and extreme price movements: Evidence from China's coal market

Abstract

This study investigates the factors behind the extreme price movements in China's coal market, with a particular focus on the impact of climate risk and energy transition in recent years. The Generalized Sup Augmented Dickey-Fuller (GSADF) method is employed to detect coal price bubbles, and a dynamic model averaging (DMA) approach is then used to analyze the causes of these price bubbles. The findings reveal that price bubbles in the Chinese coal market are mainly triggered by fluctuations in international energy prices. The extreme prices are rooted in supply-demand imbalances resulting from energy transition, economic development, and geopolitical conflicts. Policies aimed at adjusting coal supplies can effectively mitigate abnormal coal price fluctuations in China, while normal coal price fluctuations are significantly influenced by changes in energy demand driven by macroeconomic development. During the green transition towards renewable energy, the current high prices of fossil energy present challenges to China's energy supply security but also offer opportunities for the development of the renewable energy market. However, energy transition has facilitated the spread of price bubbles across coal, natural gas, and renewable energy markets, potentially leading to contagion effects.