Oil price shocks, policy uncertainty, and China’s carbon emissions trading market price

As a market mechanism to address climate change, carbon allowance has been endowed with financial asset property. As a result, the carbon emissions trading market prices (CP) are likely to be affected by oil prices and policy uncertainty. Therefore, this study employs a quantile regression model to examine the nonlinear effects of oil price shocks and policy uncertainty on the CP. Empirical results show that although both oil price and policy uncertainty positively influence the CP in all quantiles, there is a nonlinear effect of oil prices on CP, with larger coefficients observed in the high quantiles compared to those in the medium and low quantiles. Furthermore, the impact of structural oil price shocks on the CP is heterogeneous in that supply and demand shocks negatively affect the CP. In contrast, risk shocks affect the CP positively in all quantiles. In addition, policy uncertainty positively influences the CP. This influence is heterogeneous and varies across different categories of policy uncertainty. Specifically, in the low quantiles, monetary policy uncertainty positively affects the CP while exchange rate and trade policy uncertainty negatively affect the CP. Meanwhile, in the medium and high quantiles, climate policy uncertainty positively affects the CP. The findings suggest that policymakers should adopt stabilization policies to reduce the occurrence of drastic fluctuations in China’s CP to fulfill the target of cheaper emission reduction via market systems.