Explosive behaviors in Chinese carbon markets: are there price bubbles in eight pilots?

Emission Trading Scheme (ETS) is one of the most important instruments introduced to meet carbon neutral targets internationally. To reduce carbon emissions, China has established eight regional ETS since 2013 to reduce carbon emissions. However, significant heterogeneities exist across the eight pilots, resulting in distinctively different carbon price movements. Traded as a financial asset, carbon allowance is vulnerable to internal and external shocks. Though carbon prices have been fluctuating fiercely since the inception of the carbon market, little is known about potential carbon price bubbles in any of these pilots. To this end, this paper resorts to the generalized sup Augmented Dickey-Fuller (GSADF) test, which allows the detection of multiple bubbles, as well as the date stamping of bubbles in carbon prices. For the first time, price bubbles are found in the Chinese carbon markets. The empirical results find three bubbles in Guangdong pilot, two bubbles in Tianjin pilot, and one bubble in Hubei pilot. These explosive episodes are closely related to immature market mechanisms and policy implementations. The results provide insightful implications for the upcoming unified national carbon market.