The market performance of carbon trading in China: A theoretical framework of structure-conduct-performance

Abstract

In order to provide feasible platform for the establishment of national carbon market in China and other developing countries, it is vital to competitively assess China’s seven Pilot emissions trading schemes (ETS) by comparing market performances. Hence, this paper employs the structure-conduct-performance (SCP) framework to qualitatively evaluate the external and internal performances of the China’s carbon market. Particularly, a structural vector auto-regression (SVAR) approach is adopted to calculate the three invisible indicators of internal performance using time series of three typical Pilot ETS from the launching dates till May 4, 2016 with restrictions on return, trading volume and volatility variables. The results depicted that: (i) absence of legal binding forces (Market environment), market segmentation (Structure), excessive allowance allocation and lack of investment (Conduct) are main reasons for poor performance of China’s Pilot ETS; (ii) with respect to internal performance, Hubei ETS has higher speculation and volatility sensitive to pricing returns. Hubei ETS also has the fastest information diffusion speed followed by Guangdong and Shanghai ETS. Guangdong ETS has a conservative investment environment and volatility is receptive to the changes in trading volume whereas Shanghai ETS has a mature investment environment.