Research On Carbon Finance Market Development Mechanism In China

Global carbon finance tends to be the top in global trading in replace of petroleum. Even as the biggest supplier of all developing countries in carbon trade of clean development mechanism (CDM), China has no final say and pricing right as restricted by the international buyer and its own capacity. The gloomy benefit infringes Chinese project owner. It is urgent to boom China carbon finance, to have the final say with better capacity, to coordinate environment and economy with carbon finance, to accelerate economic restructuring and transform the pattern of economic development, to enable the project owner to price in the global market, and to innovate finance. Starting from development mechanism of carbon finance market, the author explores the theory of Chinese carbon finance market and its feasibility, which may be useful to China carbon finance market in theory and practice.First, the author reviews Chinese and foreign literature on carbon finance market. Former study helps the author gain a better understanding of Chinese carbon market. Through survey and investigation, the author describes the circumstance of Chinese carbon market and finds out its problem. The carbon finance market is divided into the external and internal market with SWOT strategy. The study shows that China shall follow strength and opportunity (SO) and strength and threat (ST) in developing carbon market, while efficient market mechanism is critical to the goal.Second, based on the SWOT strategic analysis, the author formulates the scheme of developing China carbon finance market, and suggests the principle, structure and function of the scheme. The development mechanism can be further classified into that of supply and demand, pricing, competition, risk and supervision. The author studies the mechanism of the Chinese carbon market, with pricing mechanism being the center of the market mechanism, restraint by the risk mechanism.Third, the author predicts certified emission reduction (CER) futures market with autoregressive integrated moving average model (ARIMA), which is helpful to pricing in China carbon market. The study finds non-stationary time series for its1st difference unit root in the CER futures price. It is difficult to find the randomness of the time series with the obtained information because each time point is not the same random to the non-stationary time series. ARIMA is the right solution to the problem. The model is a good fit to CER through estimation and comparison of the predicted value with the actual value. CER carbon market is incapable of price discovery. It is impossible to price CER carbon market by futures theory. EUA and CER futures market is capable of price discovery in the short term, and CER futures market can be priced by futures theory. The conclusion shows that the futures pricing mechanism used for the carbon market can help Chinese CDM project owners benefit from the international carbon market and increase profit, innovate the financial market and achieve pricing right.Fourth, the author describes the feature of CER futures market characterized by leptokurtosis and fat-tail with generalized error distribution (GED). The author formulates generalized autoregressive conditional heteroskedasticity-value at risk model (GARCH-VaR), which can better describe the value at risk of CER futures market than the popular VaR model. The study can lower the investor’s risk, ensure stability and development of China carbon market, close the gap with the global carbon market, and be a great help in the global competition. VaR is used in measuring the risk of the carbon market for a good description. The study reveals that GED distribution is a good fit to leptokurtosis and fat-tail of CER. The risk of lowering price is greater than that of rising prices. GARCH-VaR improves the accuracy in estimating the risk of Chinese carbon market. It is useful both in theory and practice in measuring the risk of Chinese carbon market.Finally, the author suggests guarantee policy to development of China carbon market, which is a system engineering. The understanding and study of the carbon market by the author in view of price variation and risk measurement may help the investor in market price estimation, futures pricing and risk measurement.