Key factors affecting carbon prices from a time-varying perspective.

Area of Science:

• Environmental Economics
• Econometrics
• Climate Policy

Background:

• Global commitment to carbon neutrality necessitates effective carbon emission reduction strategies.
• Carbon markets and carbon taxes are primary economic tools for emission control.
• Understanding the dynamic drivers of carbon markets is crucial for policy effectiveness.

Purpose of the Study:

• To identify key determinants of carbon markets using the LASSO method.
• To analyze the time-varying characteristics and driving factors of carbon markets via MSVAR.
• To provide insights for optimizing emission reduction policies.

Main Methods:

• Least Absolute Shrinkage and Selection Operator (LASSO) for determinant selection.
• Markov Switching Vector Autoregression (MSVAR) for analyzing time-varying dynamics.
• Analysis of market shocks during the COVID-19 pandemic and economic recession.

Main Results:

• Carbon markets exhibit significant time-varying characteristics and inter-market differences.
• Energy factors had long-term, while economic factors had short-term shocks on the carbon market during COVID-19.
• The oil market impacts carbon markets more during low volatility, whereas the coal market dominates during high volatility.

Conclusions:

• Shifting energy consumption structures, reducing coal reliance, and adopting cleaner energy are vital for emission reduction.
• Policy interventions should consider the dynamic and volatile nature of carbon markets.
• Economic and energy market fluctuations significantly influence carbon market performance.