Exploring the asymmetric impact of economic policy uncertainty on China's carbon emissions trading market price: Do different types of uncertainty matter?

Abstract

Carbon allowance is a market mechanism that is used to deal with climate change in the scientific community, and is gradually regarded as a financial asset. Uncertainty plays a vital role in affecting financial assets, and whether it affects carbon prices is an important question. Therefore, this article aims to examine the impact of four economic policy uncertainties (EPU) on China's carbon emissions trading (CET) market price from the year 2013 to 2021, by employing the nonlinear ARDL model and the asymmetric causality test. Empirical results show that the trade policy uncertainty (TPU) and monetary policy uncertainty (MPU), both positively affect the CET market price, while the exchange rate policy uncertainty (ECPU) comes with negative influences. Furthermore, the increase of TPU, MPU, and ECPU has a greater impact on the CET price. Our findings are consistent with the real effects of uncertainty shocks by Bloom (2009) who asserts that the uncertainty transfer mechanism has an asymmetric pattern. Therefore, policymakers should pay careful attention to the increasing fluctuations of different economic policies. Moreover, Chinese authorities should adopt firmer policy stances to avoid high volatility in the CET market price to achieve the goal of low-cost emission reductions through market mechanisms.