Asymmetric dependence structure between emissions allowances and wholesale diesel/gasoline prices in emerging China's emissions trading scheme pilots

This paper investigates the co-movement and dependence structure between China's emissions allowances (CEA) and wholesale diesel (gasoline) markets using a GARCH-copula with a generalized error distribution (GED). Chinese emissions allowances prices exhibit significantly extreme co-movement with wholesale diesel and gasoline prices using GARCH and TARCH models based on a GED. The empirical results confirm that different markets except Hubei's emissions-gasoline market exhibit a greater divergence of asymmetric tail dependence structure between emissions allowances and wholesale diesel (gasoline) markets. Beijing's emissions allowances prices show an asymmetric mixture of right-tail and left-tail dependence structures with wholesale diesel and gasoline prices in northern China, implying stronger right-tail dependence. Shanghai and Guangdong's emissions allowances prices indicate a significant right-tail dependence structure with wholesale diesel and gasoline prices in East and South China. Hubei's emissions allowances prices exhibit an asymmetric mixture of right-tail and left-tail dependence structures with wholesale diesel prices, implying stronger left-tail dependence and a significantly symmetric dependence structure with wholesale gasoline prices in central China.