Asymmetric effects of oil shocks on carbon allowance price: Evidence from China

Highlights: • Investigate asymmetric relationship between China's CET market and oil shocks from different sources by using NARDL model. • Oil shocks have a long-run asymmetric effect on carbon allowance prices and oil supply shocks are the main factors. • The positive and negative effects of oil supply and demand shocks are in opposition as well. • Consider the impact of establishing a unified carbon market in 2017 in the relation between oil shocks and the CET market. • The main factors affecting carbon allowances' price have changed from oil demand shocks to oil supply shocks. This paper investigates the asymmetric relationship between oil shocks and the carbon emission trading market in China using the nonlinear autoregressive distributed lag (NARDL) model. The results show that: oil shocks have a long-run asymmetric effect on carbon allowance prices, and the oil supply shock is the main factor causing carbon allowance price changes in 2013–2020. The oil supply shock and oil demand shock cause the price of carbon allowances to rise, and the oil risk shock causes the price of carbon allowances to decrease. Moreover, we consider the impact of establishing a unified carbon market in 2017. We find that the main factors affecting carbon allowances' price have changed from oil demand shocks to oil supply shocks. This provides a meaningful reference for the establishment and improvement of China's carbon trading market.