Extreme weather raises the prices of regional emission allowances in China.

Abstract

Extreme weather is an unexpected shock to the socioeconomic, which is likely to create climate risks in the process of global warming mitigation. The aim of this study is to investigate the impact of extreme weather on prices of China's regional emission allowances, by using the panel data of four representative pilots in China (Beijing, Guangdong, Hubei, and Shanghai) from April 2014 to December 2020. The overall findings reveal that extreme weather, especially extreme heat, has a short-term lagged positive impact on carbon prices. In particular, the specific performance of extreme weather under different conditions is as follows: (i) carbon prices in tertiary-dominated markets are more sensitive to extreme weather, (ii) extreme heat has a positive effect on carbon prices while extreme cold does not, and (iii) the positive impact of extreme weather on carbon market is significantly stronger during compliance periods. This study provides the decision-making basis for emission traders to avoid losses caused by market fluctuations.