Economic policy uncertainty and carbon emission trading market: A China's perspective

Abstract

This paper investigates the heterogeneous responses of the carbon emission trading price (CETP) to different time frequencies of economic policy uncertainty (EPU) through a wavelet-based quantile-on-quantile regression approach. The empirical results indicate that when EPU is in different quantiles and frequencies, the coefficients between EPU and CETP are dynamic and even change in opposite directions, which demonstrates that their relationship is unstable. The major contribution of this paper is that it fully considers the heterogeneity of EPU with different frequencies, distinctive carbon emission markets, and the varying relationship between EPU and CETP, providing more valuable and accurate conclusions. Based on these findings, policies are proposed to reduce negative shocks from EPU volatility on the carbon emission trading market. The government needs to construct platforms for encouraging innovation and accelerating the energy transition. The auction-based mode of allocating carbon emission rights should gradually replace free issuance. Enterprises should also actively join the carbon emission trading market and undertake social responsibilities, complying with environmental regulations.