Study On The Extreme Risk Spillover Effect Between China And EU Carbon Market

Since the National Development and Reform Commission launched carbon emission trading pilot projects in seven provinces and cities of Shanghai,Beijing,Chongqing,Shenzhen,Hubei,Tianjin,and Guangdong in 2011,the linkage phenomenon between the domestic carbon market and the EU carbon market has become increasingly frequent,leading to a further increase in risk transmission across markets.The 2018 Brexit event in the UK and the opening of China’s carbon emissions trading market in 2021 both demonstrate a certain degree of risk transmission between the EU carbon market and China’s carbon market.Therefore,studying the extreme risk spillover effects between the domestic carbon market and the EU carbon market is of great significance for strengthening risk monitoring of China’s carbon emission trading market,reducing the impact of external risk shocks,and building a carbon trading market.On the basis of defining relevant concepts,the paper elaborates on the reasons for the formation of cross market risk transmission and the transmission mechanism of extreme risk effects between the domestic carbon market and the EU carbon market.Starting from these theories,analyze the current situation of carbon trading markets in European and China,summarize the reference points of the European Union carbon market for China’s carbon market.Subsequently,the paper selected the Hubei pilot and Guangdong pilot data with the largest sample size to represent the domestic market.Firstly,the ARMA-GARCH model was used to measure the unconditional extreme risk values of the domestic carbon market and the EU carbon market.Then,the DCC-GARCH-Co Va R model was used to empirically study the extreme risk effects between the domestic carbon market and the EU carbon market,The results indicate that the annual mean and standard deviation of unconditional extreme risk in the Guangdong carbon market are significantly higher than those in the EU and Hubei carbon markets,indicating that the Guangdong carbon market has a higher level of extreme risk and greater risk volatility;The extreme risk effect between the domestic carbon market and the EU carbon market is characterized by asymmetry.The risk spillover from the EU carbon market to the domestic carbon market is significantly higher than that from the domestic carbon market to the EU carbon market,meaning that the EU carbon market is at the center of risk information.Specifically,compared to the Hubei carbon market,the risk contagion between the EU carbon market and the Guangdong carbon market is higher.Subsequently,the reason for this phenomenon was explained,Meanwhile,through analysis,it was found that the opening of China’s carbon emission trading market and the Brexit event in the UK have exacerbated the extreme risk effect between the domestic carbon market and the EU carbon market.Finally,based on the conclusion,this article provides suggestions to the government,relevant regulatory authorities,and investors respectively.Based on the research findings,this article proposes the following suggestions:1,prioritize the improvement of the Guangdong carbon trading market;2,Establish a risk mechanism that comprehensively considers the China Europe market;3,Accelerate the integration of China’s carbon market with the EU’s carbon market;4,Improve and unify China’s carbon market institutional arrangements,and innovate trading products.