The Spillover Effect between Carbon Emission Trading (CET) Price and Power Company Stock Price in China
- Although there is abundant research about the relationship between the CET market and energy markets in China, this paper is the first to examine the spillover effect between the CET market and power sector in China. The empirical results of the spillover effect between the two markets can reflect the effectiveness of the policy well. Based on the results, we put forward some suggestions for the construction of China’s CET market.
- The existing research on the interactions between the CET market and power sector is mainly at the industry level, while this paper measures the connectedness between these two markets both at the industry level and company level with the connectedness network method. This could provide useful information for company managers and financial market participants when they make strategic decisions.
- In addition to the connectedness network method, this paper adopts the rolling window method to obtain dynamic connectedness between these two sectors. By measuring time-varying connectedness, the relationship between the CET market and the power sector is further investigated.
2. Data and Methodology
2.1.1. Carbon Price
2.1.2. Power Company Stock Price
2.1.3. Preliminary Analysis
2.2.1. The Connectedness Network Method
2.2.2. The Rolling Window Method
3. Empirical Analysis and Discussion
3.1. Static Connectedness Analysis
- There was a significant system-wide spillover effect, and the variables of the carbon-power system were closely connected. The TSI was 60.5735%, which indicates that, on the whole, 60.5735% of the changes of the variables in the system could be explained by the changes of other variables in the system. As to each variable, it was found that all the variables gained more spillovers from others than themselves except for carbon price and Beijing Jingneng Clean Energy Co. Ltd. (BJCE). The spillovers carbon price and BJCE gains from the system were 35.3618% and 35.9368%, respectively, and others gained more than 60% from the system.
- There were weak bidirectional spillovers between the carbon market and the electricity market, and the spillover effect was asymmetric. A total of 35.3618% of the changes of carbon price returns could be explained by the changes of power companies’ stock price returns, while the changes of the carbon price returns only contributed to the changes of power companies’ stock price returns by 0.0541%.
- According to the second finding, the net connectedness of the carbon market was 35.3076% (35.3618% minus 0.0541%). This indicates that China’s carbon market mainly received information from the electricity market during the sample period, but transmitted less information to the electricity market. This was consistent with the results of the research of Ji et al. on EU CET . The stock price of power enterprises can provide some information for the change of carbon price, and future research on carbon price should also take financial market factors into consideration.
- BJCE only gained 35.9368% of spillovers from the system, which was far lower than that of the other nine companies. It was found that although the BJCE’s spillovers from carbon price was relatively low, the gap between BJCE’s and other power enterprises’ was very small. The main reason for its low spillovers was that it obtained less spillovers from other power enterprises. We therefore suppose that BJCE is weakly related to the other enterprises in the sample, and this assumption was supported by some information in its annual report. According to BJCE’s 2018 annual report, BJCE’s holding installed capacity in Beijing was 4702 MW, accounting for 54.25% of its total holding installed capacity. Its power generation accounted for more than 50% of Beijing’s gas-fired power generation and more than 60% of central heating. Furthermore, BJCE states that focusing on Beijing and surrounding areas is an important part of its development strategy.
- From the perspective of net connectedness, carbon, GHE, Shenzhen Nanshan Thermal Power Co. Ltd. (SNTP), Binhai Energy Development Co. Ltd. (BHE), and CYEP are information receivers, and Huaneng Power International INC. (HNP), Datang International Power Generation Company (DTP), BJCE, Guangdong Electric Power Development Co. Ltd. (GEPD), Shanghai Electric Power Co. Ltd. (SHEP), and Guangdong Baolihua Electric Power Co. Ltd. (GBEP) are information transmitters. For information transmitters, their stock returns are less likely to be affected by carbon price returns and other enterprises’ stock price returns. They play a leading role in the system to some extent. For information receivers, their stock returns are more likely to be affected by carbon price returns and other enterprises’ stock price returns. As a result, they face more uncertainty.
- The interactions between the power enterprise and the carbon-power system may be related to its total holding installed capacity. According to Table 1, the information transmitters in the system were in a leading position in terms of total installed holding capacity, while SNTP and GHE, with the smallest capacity, were information receivers.
- The interactions between power enterprises and the carbon-power system may be related to the degree of power enterprises’ dependence on renewable energy to generate electricity. As shown in Table 1, the proportions of information transmitters’ renewable energy holding installed capacity were at a very high or high level. The enterprises with very high, high, and medium levels of renewable energy holding installed ratios were information transmitters, while the renewable energy installed ratios of information receivers were at a low or very low level. This finding indicates that the stock price returns of power enterprises with a higher proportion of renewable energy installed are less likely to be affected by carbon price returns and stock price returns of other enterprises, and, thus, they are less likely to be exposed to uncertainty in the carbon-power system. This suggests that increasing the proportion of the renewable energy installed is helpful for power enterprises to reduce their risks.
3.2. Dynamic Connectedness Analysis
- In the first stage, from the end of 2015 to the beginning of 2017, the spillover index was generally at a relatively stable and relatively high level. During this period, China’s carbon trading market was very active, and both the volume and the price of carbon quota spot trading showed an upward trend with an obvious growth rate. In addition, the high spillover index during this period was also related to financial markets. In 2015, China’s stock market experienced several market shocks. In the first half of 2015, China’s stock market experienced a period of continuous rise, but from June to August, the stock market suffered a rare consecutive slump, with the Shanghai stock exchange composite index dropping by more than 40% from its highs. The impact of this incident lasted for a long time until the stock market gradually stabilized in 2016. When financial markets are more volatile, the connections between financial market participants are also strengthened, which also leads to a higher spillover effect of the carbon-power system.
- In the second stage, the spillover index had a significant decline after March 2017, and reached its lowest level during this period. During this year, the carbon trading market was less active. It was found that the total trading volume of carbon quota spot and its growth rate declined compared with 2015 and 2016.
- In the third stage, the spillover index showed a slow upward trend on the whole, during which China started the construction of a national carbon trading market and the total carbon trading volume picked up. In this stage, there were two spikes.
- The first spike may have been affected by the release of the policy to construct the national CET market in China and a series of carbon emission verification activities. Since the end of 2017, China has begun the construction of a national CET market, and a series of policies and measures have been introduced in the following months. In December 2017, the National Development and Reform Commission (NDRC) announced the National Carbon Emission Trading Market Construction Plan (Power Generation Industry), which proposed to first launch the national CET market in the power industry. This policy released a very important message that the construction process of the CET market was going to be further promoted, which greatly strengthened the information flow in the carbon-power system. In addition, the NDRC issued a document in February 2018, requiring local governments to strictly check the carbon emission data of key enterprises in 2016 and 2017, which promoted power enterprises to actively participate in CET market to meet the allowance target.
- The second spike may have been caused by the active allowance transactions. First, the regulated enterprises in the CET market in China have little incentive to engage in allowance trading and tend to make transactions close to the deadline of the compliance period. The deadline of the compliance period in pilot markets in 2018 was from May to July, and transactions during these months were very active. Second, the transactions were very active during September 2018, to October 2018, according to the market liquidity index of China’s CET market. (The index was released by the Beijing Green Finance Association. It was calculated based on the daily transaction volume of allowances in Shenzhen, Beijing, Shanghai, Tianjin, Guangdong, and Chongqing pilot markets, which reflects the activity of allowance transactions.) The index reached much higher levels during September and October than other periods. The active transactions in the CET market can enhance the interactions between the enterprises, as well as the information exchange in the system.
4.1. Main Findings
- The spillover effect of this carbon-power system is relatively strong. This shows that the CET market and power companies are closely connected, and the emission trading policy has worked in China.
- There is a weak spillover effect between the CET market and the power sector in China, and the CET market is a net receiver of the information from the power sector. This means that the information in the CET market cannot be quickly incorporated into the stock price of power companies, and the effectiveness of the policy still needs to be improved.
- Through the analysis of dynamic connectedness, we found that, although the spillover of the CET market to the power sector is very low most of the time, the CET market occasionally generates a high degree of spillover for the power sector, which company managers and financial market participants should pay attention to.
- From the perspective of the company level, we found that the interactions between the power company and the carbon-power system—that is, whether it is mainly affected by the system or plays a leading role in the system—may be related to the power generation capacity or energy mix of the power company.
4.2. Implications and Suggestions
- Set the total volume of allowances at national level and allocate them according to certain standards. In Phase I and Phase II of the EU CET market, the total volume of allowances—the emission cap—and allocation scheme were mainly set by the members of the market, which caused the over-allocation of allowances. To solve the problem, National Allocation Plans (NAPs) were canceled in Phase III, the cap was determined at the EU level, and a single set of rules were adopted to govern their allocations . China should also set the emission cap at a national level and allocate allowances to different areas based on certain standards, which might be applicable for other countries or regions that plan to establish the CET market.
- Gradually reduce the proportion of free allowance and increase the proportion of auctioned allowances. Compared to the free allocation of allowances, the auction is more efficient, as it is beneficial for allocating allowances to the agents who need them most . For the CET market in China, only the Hubei and Guangdong pilot market has adopted the auction method, and the proportion of auctioned allowances is very low. The CET market in China should gradually increase the proportion of auctioned allowances to improve the efficiency of allowances allocation. Other countries or regions can also consider increasing the proportion of auctioned allowances with the development of the market to promote enterprises to reduce carbon emissions.
- Adopt the benchmarking method to allocate free allowance. The grandfathering method was widely adopted by the members of EU CET market in Phase I and Phase II to allocate allowances, which is not conducive to promoting enterprises to invest in low-carbon technology. In Phase III, the benchmarking method was adopted, which can overcome the shortcomings of the grandfathering method. In China, the benchmarking method should be adopted to allocate free allowances before all the allowances are auctioned.
- Promote the marketization of electricity prices. CET internalizes the external environmental cost, which increases the cost of regulated companies. However, the regulated electricity price in China has not incorporated an emission reduction cost, which damages the motivation of power companies actively involved in the CET market. Other countries with regulated electricity prices can also promote the power enterprises to participate in carbon trading through price marketization.
- Improve the efficiency and transparency of information disclosure. Timely and transparent information can help regulated enterprises better understand the policies and market situations and provide an incentive for the companies to actively participate in carbon trading.
4.3. Limitations and Future Research
Conflicts of Interest
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|Stock Code||Name||Total Holding Installed Capacity (104 kW)||Main Methods of Power Generation||Renewable Energy Installed Ratio||Abbreviation|
|600011.SH||Huaneng Power Internatinal INC.||10,599,100.00||thermal|
|601991.SH||Datang International Power Generation Company||6,285,330.00||Thermal|
|00579.HK||Beijing Jingneng Clean Energy Co. Ltd.||866,700.00||thermal|
|000539.SZ||Guangdong Electric Power Development Co. Ltd.||2095.00||thermal|
|600021.SH||Shanghai Electric Power Co. Ltd.||1500.25||thermal|
|000966.SZ||Guodian Changyuan Electric Power Co. Ltd.||369.43||thermal|
|000690.SZ||Guangdong Baolihua Electric Power Co. Ltd.||351.80||thermal|
|000037.SZ||Shenzhen Nanshan Thermal Power Co. Ltd.||126.00||thermal||Very Low||SNTP|
|000531.SZ||Guangzhou Hengyun Enterprises Holdings Ltd.||117.00||thermal||Very Low||GHE|
|000695.SZ||Binhai Energy Development Co. Ltd.||-||thermal||Very Low||BHE|
|To||0.000541||0.815022||1.038943||0.452803||0.994847||0.753567||0.497766||0.788039||0.455665||0.390290||0.475598||TSI = 0.605735|
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Li, Y.; Nie, D.; Li, B.; Li, X. The Spillover Effect between Carbon Emission Trading (CET) Price and Power Company Stock Price in China. Sustainability 2020, 12, 6573. https://doi.org/10.3390/su12166573
Li Y, Nie D, Li B, Li X. The Spillover Effect between Carbon Emission Trading (CET) Price and Power Company Stock Price in China. Sustainability. 2020; 12(16):6573. https://doi.org/10.3390/su12166573Chicago/Turabian Style
Li, Yanbin, Dan Nie, Bingkang Li, and Xiyu Li. 2020. "The Spillover Effect between Carbon Emission Trading (CET) Price and Power Company Stock Price in China" Sustainability 12, no. 16: 6573. https://doi.org/10.3390/su12166573