Do climate policy uncertainty, green finance, and the energy market matter for carbon price? Evidence from China

Abstract

Using quantile Granger causality test and Quantile Vector Autoregression (QVAR) dynamic time and frequency, this paper investigates the driving factor of China carbon pricing and provide risk hedging strategies. We examine the relationship between the carbon trading market, clean energy market, traditional energy market, green finance market, and climate policy uncertainty under different quantiles and periods. Our study reveals that the overall relationship between China's carbon market and other markets, such as the clean energy market, traditional energy market, and green financial market, follows a U-shaped curve. During financial stress periods (τ=0.05 and τ=0.95), the total connectedness of the system reaches 85.78 % and 84.18 %, respectively, compared to 22.13 % under normal conditions (τ=0.50). Meanwhile, we also find incorporating energy market and the green stock market into a portfolio can significantly hedge systemic risks, irrespective of the level of climate policy uncertainty.