Regional dependence and contagion structure of carbon tail risk

Abstract

The stability of carbon market development is pivotal for reducing climate risk, maintaining the "double-carbon" route, and ultimately achieving a low-carbon economy target. The most likely factors that jeopardize such a stable trend are extreme contagious events. Therefore, we employ a copula-CoVaR model to evaluate tail risk spillovers among four Chinese regional carbon markets. The empirical results show a prominent bidirectional contagion structure among the Hubei, Shanghai, and Guangdong markets. The Shenzhen carbon market displays slight risk spillover to Guangdong and a one-way risk acceptance effect on other markets. Overall, Hubei and Shenzhen are risk spillover markets, while Shanghai and Guangdong are risk absorption markets. Moreover, we discover no distinctions between the conditional and unconditional values at risk in a regional setup. These findings have regulatory implications that may help effectively mitigate carbon tail risk.