The Resilience of the Carbon Market: From Carbon Price Signals to Carbon Chains


Student thesis: Doctoral Thesis

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Awarding Institution
Award date20 Jul 2023


Carbon resources are becoming increasingly scarce and are indispensable in many production processes. Market mechanisms and policy interventions through carbon markets are primarily responsible for reducing emissions and internalizing negative environmental externalities. However, climate policies are often introduced after a market or governmental failure, such as irregular fluctuations in trading prices and volume, or when emission reduction effects drastically drop. To mitigate these risks and uncertainties, it is important to understand the mechanisms of competition across intergovernmental and agent cooperation within the carbon market. A theoretical game model can be a useful tool for achieving this understanding, as it can help to identify potential challenges and inform policy decisions.

The term “resilience” has gained significant attention in both environmental and economic circles over the past few years, leading to a growing number of papers and reports exploring “carbon market resilience.” However, several questions surrounding this topic remain unanswered, such as how to define carbon market resilience in the presence of multiple agents, environmental policies, and internal and external shocks. Assessing, comparing, and forecasting potential problems in carbon market resilience can be challenging, making it crucial to understand the driving mechanisms behind it. This thesis aims to address these central research questions by exploring and studying the topic in depth.

This thesis seeks to address persistent questions in the realm of carbon market resilience. To do so, it first analyzes the pricing of carbon, the functions of carbon markets, and associated risks and uncertainties. Chapter 2 provides a theoretical framework for assessing resilience by examining theories that capture carbon pricing in the face of flux and uncertainty, analyzing game theories in carbon trading, and exploring resilience theory. These theories are critical in defining and analyzing carbon market resilience in the face of multiple agents, policies, and uncertain internal and external shocks. Chapter 3 discusses data and methodology, covering relevant models and essential techniques across management, economics, and computable social sciences. These techniques include the vector autoregression (VAR) model, impulse response analysis, variance decomposition approach, game models, agent-based modeling (ABM), and carbon market resilience assessment models.

Chapters 4 to 6 form the core of this thesis, delving deep into the topic of carbon markets. Chapter 4 provides a systematic discussion of carbon pricing, examining the challenges and dilemmas related to carbon trading price transfers. It then delves into the dynamic relationships between carbon trading prices, volume, and emission reductions through a short timescale analysis. Chapter 5 considers carbon pricing from the point of view of multi-regional and multi-agent competition and decisions, exploring game models for carbon price variation under different climate policy scenarios. Specifically, it examines three different game scenarios, and analyzes the effects of setting a minimum emission reduction target, a unified minimum carbon trading guideline price, or a proportion of free carbon allowances in the carbon market.

Based on this, in Chapter 6, the concept of carbon market resilience is explored in depth. It defines carbon market resilience as a category of market resilience, low-carbon resilience, organizational resilience, and system resilience. The chapter shows how the resilience of carbon markets is tested by the capability of the trading ecosystem to resist risks and adapt to a steady state and a new equilibrium. The chapter also explores the key role played by the carbon price signal and the game of various agents in the carbon market. Agent-based modeling is applied to simulate the carbon market in Chinese pilots carefully, with the assessment system and comparison approach designed in complementary ways. The carbon market resilience theory is tested using a simulation of China’s national carbon market and seven pilots. Chapter 7 provides a summary of the key findings of the thesis, highlighting the marginal contributions and policy implications. Limitations and directions for future studies are also presented.

This thesis has great potential to make significant contributions in the field of carbon markets. One of its key contributions is the development of systematic theoretical innovations and enhancements to the preliminary conceptual framework, evaluation approach, and modeling techniques for carbon market resilience. The thesis presents a basic interdisciplinary definition of “resilience,” tailored specifically to the carbon market within the context of the complex system. These theoretical advancements can offer practical assistance in implementing carbon market policies and promoting the development of a regional emissions trading system.

Furthermore, this thesis broadens the application of game theory in carbon markets by examining the role of price in a multi-regional and multi-agent setting. The thesis carefully investigates the multi-agent game relationships between the central government, local governments, manufacturers, retailers, and consumers using the carbon trading price signal as an indicator. Additionally, the thesis explores the quantitative links between carbon pricing, trading volume, and emission reductions. It utilizes various statistical and econometric models based on short-term (daily) trading and emissions data from frontier databases.

Overall, this thesis presents a comprehensive analysis of carbon markets, offering valuable insights into carbon pricing and game theory. This work can provide policymakers and market participants with essential information and guidance needed to make informed decisions regarding the viability of carbon markets in the long run. For example, even though China announced that it would aim to reach its carbon peak by 2030 and achieve carbon neutrality by 2060, it is essential not to rush the emissions reduction process. If not, the carbon market-covered industries will suffer a more significant economic burden, which will hinder the completion of the plan. Further, setting a high unified carbon trading guideline price for China’s carbon market might not be the best idea at the moment. In addition, local governments should be cautious when setting free allowance ratios and not act aggressively to prevent systemic failures.