Dependence Structure among Carbon Markets around the World: New Evidence from GARCH-Copula Analysis

In this paper, we investigate the dependence structure among carbon markets globally through different copulas. The analysis examines the relationship between carbon prices being traded across different emission trading systems (ETS) worldwide. The novelty of our approach lies in assessing carbon allowances for both futures and spot prices across all the key carbon markets as well as the three Chinese carbon markets for the period from 2011 to 2019 for future prices and the period from 2015 to 2020 for spot prices. The results demonstrate an asymmetric relationship between most carbon markets. A low tail dependence was observed between the European Union ETS and Regional Greenhouse Gas Initiative ETS, California and Quebec carbon markets, while higher tail dependence was found in the Asian carbon markets. Furthermore, carbon markets that have linkage agreements, ongoing cooperation or are geographically close tend to have positive and higher tail dependence. Our findings suggest the formation of regional carbon clubs based on the dependence structure.