The Integration of Carbon Price Between European and Chinese Markets: What are the Implications?

This research investigates the time-varying correlation as well as long-run cointegration relationship between the carbon prices of the European market and the China market during the period 2013–2020. We adopt the Lagrange Multiplier (LM) unit root and cointegration test based on the univariate unit root test with one structural break and wavelet coherency analysis in the time–frequency domain. Overall, we validate a long-run cointegration among carbon prices of different markets when considering structural breaks. Additionally, there is a significant correlation among the carbon prices in the long term, but a weaker correlation in the short term, as presented by wavelet coherency. Hence, there is a solid foundation for the integration of China’s carbon market with the global carbon market.