Research On The Pricing Mechanism And Price Operation Mechanism Of Carbon Financial Market

Some foreign developed countries, especially the EU, have established relatively mature carbon financial market systems. The carbon finance market has the extremely important practical significance to promote the development of the carbon market. The carbon finance and carbon trading price mechanism is the foundation of promoting the effective operation of the carbon trading market. Meanwhile China needs to construct a national carbon trading market and actively develop various types of carbon financial products. But the carbon financial market is a new thing, and the development time is short, so the data resources are lacking. The factors, which affect the price operating mechanism of carbon financial market related products, are complex. The relevant markets are fragmented, and different markets show different price mechanisms and operating mechanisms. Even if the EU has established the relatively mature carbon trading market system, the prices of carbon finance products still fluctuate dramatically. Therefore, the pricing mechanism and price operation mechanism of carbon financial products are relatively inadequate and need further research.This paper takes the foreign and domestic carbon financial markets as the research object, especially the exchanges of the European Union carbon emissions trading system and the pilot provinces and cities of China’s carbon trading as analysis sample. This paper systemically researches the pricing mechanism and price operation mechanism of carbon finance market in narrow sense through the literature comparative analysis method, panel data econometric model, vector autoregression model, GARCH model and Black-Scholes option pricing model. The quota allocation mechanism of carbon finance primary market plays a decisive role to market transaction price level and volatility of secondary market, so the paper systematically analyses the emission quota allocation mechanism of foreign and domestic carbon financial markets. The secondary market for carbon finance mainly includes carbon emissions quota trading products and carbon futures and carbon option derivatives, so the paper studies the influence factors of the carbon emissions quota trading prices fluctuations, the relationship of the carbon emission quota futures prices and spot prices, the price discovery function of the futures, and carbon option pricing mechanism. The specific research conclusions are as follows.1. Carbon Emission Quota Allocation Mechanism(1) The carbon emission quota allocation mode directly impacts on the carbon emission quota price. The quota allocation modes include free distribution, sale distribution and mixed distribution. The free distribution subdivides grandfather distribution method and the benchmark allocation method. The sale distribution subdivides auction and fixed price sale distribution. The progressive mixed allocation mode or industry mixed allocation mode are used more. The grandfather allocation method is relatively simple, only relying on historical emissions data, and is conducive to stimulate the enthusiasm of market players. However, the grandfather allocation method violates the principle of ’paying for the pollution’, is unfair to the pioneers, and is narrow to the scope of application. The benchmark allocation method is conducive to encourage emission reduction pioneer and is fairer to new enterprises. But the industry reference value is complicated to calculate based on the carbon emission density of each industry. And the method is easy to be resisted by the backward enterprises with low efficiency. The auction method has obvious advantages in price discovery function and optimization of resource allocation. And it also has the double dividend effect. The allocation process is more transparent and efficient. But it is easy to increase the cost of enterprise performance, reduce the competitiveness of enterprises, reduce the participation enthusiasm, and interfere the carbon trading market.(2) The different trading systems adopt different quota allocation mechanisms. In EU ETS the free distribution gradually transits from grandfather to the benchmark. And the auction ratio gradually increases. RGGI allocates carbon quota mainly through auction. The market forces of supply and demand play a leading role to the initial price. And it improves the efficiency and fairness. The method also provides the reference price for the secondary market transactions. CAL ETS takes the quota allocation methods from free allocation in pre to auction gradually. CAL ETS establishes quota allocation method based on the emission efficiency. AU ETS takes a fixed price for sell in the first phase. In order to reduce the cost burden on enterprises, some industrial enterprises are provided free quota aid. The emission reduction fund replaces the flexible price mechanism(auction) in the second phase.(3) China’s carbon trading pilot provinces refer more to the relevant experience in the European Union, the United States and other foreign carbon emissions trading system. The quota allocation method is mainly through free distribution, paid as a supplement. The allocation combines grandfather distribution and the benchmark distribution method. And China’s certified emission reduction is widely used for quota cancellation. The pilot provinces take measures to protect the stability of the market price.2. Carbon Quota Spot Trading Price Fluctuation and Operation MechanismThe paper systematically studies carbon spot price volatility characteristics and influence factors taking EUA spot prices of bluenext phase 1 and phase 2, EEX phase 1, phase 2, phase 3, and the quota spot price of the pilot provinces in China as samples. The main research conclusions include:(1) Under the EU ETS, the coal price, oil price and electricity price are related to the carbon spot price. This indicates that the energy market is an important factor to affect carbon trading price fluctuations in the spot market. When the market increases the energy demand, the energy prices rise, thereby the amount of carbon emissions also increases. The demand of carbon emission quota rises, so the quota transaction prices rise. In the financial market, the relationships of the stock price index and EUA spot price are inconsistent in different stages of the transaction and different exchanges. Perhaps the carbon trading market system is not perfect. The EU ETS construction has been in groping forward. The quota supply is continuously improved and optimized. The carbon trading spot prices fluctuate widely. The correlation with other financial market is not significant. The macroeconomic variables are the euro zone economic sentiment index and the euro zone manufacturing PMI in this paper. The relationship of the macroeconomic variables and EUA spot price is not obvious, or there is a negative correlation. This illustrates the carbon finance market is not mature. In different exchange and trading phase, the relationship between carbon trading spot prices and macroeconomic variables is unstable.(2) The empirical test shows about spot transaction price fluctuations factors in China’s six carbon trading pilot provinces that carbon emissions quota spot prices are highly positively correlated to PMI, which is on behalf of the macro social economic development level. The coal price is highly positively correlated to the carbon emissions quota spot prices. The carbon emissions quota spot prices are negatively correlated to the monthly average temperature. The relationship of carbon spot prices and policy variables such as trading system, quota allocation and performance status is not evident. The possible reason is that China’s carbon emissions trading market is relatively short, the policy variables information is less, or the relationship of the policy variables and the carbon quota trading price is nonlinear or a mutation. There is a negative correlation between the SSE Composite Index and the carbon stock price. Due to China’s stock market and the macroeconomic level are deviated, the stock index is difficult to reflect the macro economy as a ’barometer’.3. Carbon Finance derivatives price operation and pricing mechanismThe paper systemically studies carbon futures discovery function on the spot price and carbon futures option pricing mechanism taking EUA products prices of European energy exchange and Intercontinental Exchange as samples. Main conclusions include:(1) The paper respectively studies the relationship between EUA spot closing price of European energy exchange and the EUA futures settlement price of Intercontinental Exchange through Johansen cointegration test, Granger causal hypothesis test, impulse response function analysis, variance decomposition analysis, and vector error correction model test. The volatility of carbon futures price and spot price is closely related. The carbon futures price has significant findings function to the spot price.(2) The paper takes Intercontinental Exchange(ICE ECX) options contracts as samples to predict and compare the options theory price and the actual closing price by GARCH model and Black-Scholes option pricing model. The research results show that the theory prices of call option predict the actual closing prices in a certain extent, but there is still a certain prediction error. Because the settlement prices of the put option contracts’ underlying futures are higher than the execution prices of option contracts, there has a great error between the forecast prices and actual closing prices of research samples. So there are some differences between the theoretical value of carbon options which is calculated through the GARCH model and the Black-Scholes model and the real transaction prices of the option.The innovation contributions of this paper are as follows.(1) This paper systematically analyses the price mechanism of carbon finance market firstly, which mainly includes the allocation mechanism of emission quota, the carbon spot market price mechanism, the price relationship of carbon futures and spot market, the price discovery function of carbon futures market and the carbon option pricing mechanism. Due to the lack of data and price volatility, the paper selects comprehensive and systematic research samples as far as possible to obtain a more comprehensive and objective understanding of the price mechanism of carbon financial market.(2) The paper comprehensively and systemically analyses the operation mechanism of the carbon spot price taking EUA spot prices of EU carbon emissions trading system and the quota trading prices of China’s carbon trading pilot provinces and cities as samples through the time series model and panel data model.(3) The paper systematically and comprehensively analyses the relationship of carbon futures and spot market, the price discovery function of carbon futures market taking EUA spot closing price of European Energy Exchange(EEX) and EUA futures settlement price of Intercontinental Exchange(ICE ECX) as samples through the vector autoregression(VAR) model.(4) The paper explores the carbon option pricing mechanism taking the call options contracts and the put option contracts of Intercontinental Exchange(ICE ECX) as samples through the GARCH model and the Black-Scholes model. The results show that there is a certain difference between the carbon option contract theory values which are predicted by the model and option actual transaction closing prices. So they are not the ideal models.In theoretical aspect the paper further enriches the theory research of carbon finance market pricing mechanism and price operation mechanism through systemic study of carbon emissions quota price formation mechanism, carbon spot, futures, options price operation and pricing mechanism. In practical aspect the paper will help us to further understand the carbon financial products price laws and provide decision reference for the construction and development of China’s carbon finance market through the empirical research of the carbon emissions quota and financial derivatives price formation and operation mechanism in the foreign and China’s carbon finance market.