Regional regime-switching behavior of China’s carbon price during regional and nationwide emissions trading scheme pilots

Abstract

Regime-switching process reflects mechanistic transition states and forecasts extreme carbon price volatility; this article tends to investigate the regional regime-switching behaviors of China’s carbon price using the Markov switching model. Our empirical results demonstrate that carbon prices in Beijing, Shanghai, Shenzhen, Guangdong, and Hubei exhibit significant regime-switching for the period from January 2, 2014 to April 30, 2022; our results are similar with the regime-switching behavior of European Union’s carbon and energy price. Shenzhen’s carbon prices generate greater market fluctuations than those of Beijing, Shanghai, Guangdong, and Hubei. The switching probabilities of carbon prices from low-variance to high-variance state in Shanghai and Beijing are greater than those of Guangdong, Shenzhen, and Hubei. Annual compulsory allowance submissions, allowances allocation corrections, phase-switching between regional and nationwide ETS pilots, and sophisticated energy markets are the main driving factors of regime-switching behavior in China’s carbon prices.