Research On Trading Characteristics Of European Union Carbon Market

Climate change has had an unprecedented impact on a global scale.Changes in weather patterns have threatened food production,and the risk of catastrophic floods caused by rising sea levels has also increased.If urgent action is not taken now,adapting to these impacts in the future will become more difficult and costly.In the past fifteen years,the European Union has taken the lead in controlling carbon dioxide emissions by establishing the EU Emissions Trading System(EU ETS),which is a carbon trading system based on the theory of Cap-and-Trade.By leveraging this system,the EU has successfully reduced its domestic carbon dioxide emissions in the past few years.This system has become the cornerstone of the EU’s climate change policy and a key tool for the EU to reduce greenhouse gas emissions economically and efficiently.Driven by the EU’s carbon emissions trading system,the carbon emissions trading system is gradually being cited by other economies and has become the preferred policy tool for all economies to reduce emissions.The EU is also using its own development experience to provide assistance for other economies to establish carbon markets,such as Japan,South Korea,and New Zealand.Under the guidance of the EU’s carbon emissions trading system,in order to achieve the goal of peak carbon and carbon neutrality,China is also actively working to promote the establishment of a national carbon market,and is currently handling account opening procedures for more than2,000 companies that have been included in the carbon market.As a policy-based artificial market for the purpose of reducing emissions,it shoulders the important mission of achieving greenhouse gas emissions reduction and is also related to the realization of the "14th Five-Year Plan" emission reduction target.Therefore,whether China’s carbon market can make a good start is important for the entire country.As the world’s earliest and largest carbon emission trading system,the initial operating results of TU ETS did not meet expectations.There are some problems in the market,especially the first two phases from market establishment.The main problems include abnormal price fluctuations,poor market liquidity and low corporate participation,etc.The solution of these problems is of great significance to the development of the EU carbon market,and more importantly,it can provide experience and lessons for the establishment of China’s carbon market and promote the smooth operation of China’s carbon market.Therefore,the research on the first two phases of the EU carbon emissions trading system is particularly important.With the end of the first two phases of the EU’s carbon emissions trading system and the publication of trading data during this period,more and more scholars have participated in relevant research.However,due to the difficulty of obtaining data,there is currently no systematic study on the trading characteristics of European Union Carbon Market.As a systematic study of trading characteristics in the EU’s carbon market,this article firstly studies the impact of economic policy uncertainty on carbon prices from a macro perspective,and then analyzes the impact of carbon prices on trading behavior;Secondly,from a meso-level perspective,it analyzes the trading structure of the EU carbon market;finally,based on behavioral finance theory,it conducts a psychological research on the trading behavior of individual traders in the market.The main work of this paper is as follows(1)From a macro perspective,based on GARCH-MIDAS model,this paper uses the European Economic Policy Uncertainty Index and the Global Economic Policy Uncertainty Index as representative variables to analyze the impact mechanism of policy fluctuations on carbon prices.Moreover,according to the impact mechanism,the fluctuations of carbon prices are predicted.It shows that both two indexes can explain the carbon price return fluctuations in the EU carbon market,and the model based on the global economic policy uncertainty index has a better fitting effect and a better prediction effect on the fluctuation of the carbon price return.(2)After revealing the impact of economic policy uncertainty on carbon prices,this paper builds an EGARCH model to analyze the impact of carbon prices on the trading behavior of emission companies.The results show that the return on carbon prices will have an impact on the compliance trading and non-compliance trading.The trading behavior of emission companies is more sensitive to the carbon price in the second phase,which means that the EU carbon market’s price mechanism in the second phase is more effective.Moreover,the impact of the carbon price on the trading of emission companies is asymmetric: in the first phase,the compliance trading is more sensitive to the decline in the carbon price return,and the non-compliance trading is more sensitive to the increase in the carbon price return,while the results in the second phase is opposite.(3)From a meso perspective,this paper analyzes the mutual influence of different types of trading in the market.The results show that there are mutual influences between different types of trading.Among them,non-compliance trading is easily affected by compliance trading and financial intermediaries’ trading.However,in the first phase,non-performing transactions did not form unique market power.Traders who execute such trading only imitate compliance trading and financial intermediaries’ trading.However,in the second phase,non-compliance traders played the role of hedging market transactions,meeting the trading needs of compliance traders and financial intermediaries.While compliance trading is not affected by other market trading.Emissions companies that execute such trading take trading actions only based on their long-term allowance positions.(4)From a meso perspective,this paper analyzes the impact of various trading behaviors on carbon price trends and fluctuations by constructing a GARCH model.The results show that whether in the first or second phase,non-compliance trading of emission companies and speculative trading of financial intermediaries will affect the long-term trend of carbon prices,as this kind of trading reflect the overall supply and demand of allowances in the market.The non-compliance trading of emission companies will have an impact on the short-term fluctuations of carbon prices,because after the non-compliance trading,in order to meet the final compliance needs,sooner or later they will conduct reverse-hedging non-compliance trading.In the first phase,non-compliance buying aggravated the volatility of carbon prices.In the second phase,after market participants had a clearer understanding of the oversupply of market allowances,non-compliance selling aggravated carbon prices fluctuations.(5)From a meso perspective,based on a complex network method,this paper analyzes the inter-industry trading structure of the EU’s carbon market.The results show that in the trading network formed by the industry as the node,the trading relationship gradually becomes closer from the beginning of each phase,and in the middle phase,the trading network structure tends to be stable.At the beginning of the phase,electricity,banks,brokers and exchanges played the role of trading center in the trading network,providing sufficient liquidity for the market.With the diversification of inter-industry counterparties,the effect of above-mentioned industries gradually decreases.The role of exchanges in the network is quite special,although the existence of exchanges has greatly increased the density of the trading network and reduced the information asymmetry of the trading market,the shortest path from the supply side to the demand side of allowances in the market has not been shortened.This is because only industries have a large amount of trading demand tend to trade through exchanges.(6)Based on the theory of behavioral finance,this paper analyzes the trading psychology of micro-individuals in the EU carbon market with the help of endowment effect theory.The results show that traders in the market do have endowment effect psychology when trading allowances,and this psychology reduces the market liquidity of allowances.Regardless of whether the trader has allowance trading experience,there is endowment effect psychology.Through empirical analysis,it is found that the degree of endowment effect of these traders decreases with the accumulation of trading experience.Since the emission companies in the carbon market have compliance requirements,the trading pressure formed by such compliance requirements will reduce the endowment effect,and the greater the compliance demand,the lower the performance of the endowment effect.