Volatility and Linkage of China’s Carbon Pilot Markets Based on Wavelet Analysis

Abstract

Against the backdrop of accelerating global climate governance and the full advancement of China’s “Dual Carbon” goals, the carbon emissions trading market has become a core market-based policy tool for promoting greenhouse gas emission reduction and achieving green and low-carbon economic transformation. However, China’s carbon market is still in the early stage of development and faces practical problems such as unbalanced development among regional pilots. Clarifying the price volatility characteristics, inter-market linkages, and price transmission paths of regional carbon markets is critical to improving the construction of a unified national carbon market. This paper takes China’s eight carbon trading pilots as research samples, selects the daily closing prices of carbon emission allowances for each pilot as core indicators, and constructs a time-frequency dual analysis framework using continuous wavelet transform and wavelet coherence analysis. It systematically explores the heterogeneous characteristics of price volatility and regional linkage effects in carbon pilot markets. The study finds that the price volatility of carbon allowances in China’s carbon market shows significant time-frequency heterogeneity, and policy shocks and market maturity are the core factors determining volatility patterns. The linkage effects among pilot markets present remarkable cycle heterogeneity. The Shenzhen pilot has outstanding price discovery and leading roles in the national pilot system, and it forms stable long-term linkages with pilots that are geographically adjacent and institutionally coordinated. This paper remedies the deficiencies of existing studies in sample coverage and analytical methods, and provides empirical evidence and decision references for policy expectation management, carbon price stabilization mechanism construction, deepening regional market coordination, and improving the unified national carbon market in China.