Recent Papers
[1] Lyu, C., Yang, P., and Zhang, C. (2025). Corporate Environmental Governance: A Global Study of Internal Carbon Pricing. Available at SSRN.
Keywords: Internal Carbon Pricing, ESG, Sustainable Investing, Science-Based Targets, Carbon Emissions
Abstract: The paper studies the determinants of internal carbon pricing (ICP) around the world as an emerging mechanism for corporate environmental governance. We employ a comprehensive dataset of publicly listed firms that adopt ICP in 54 countries and explore the heterogeneity of various types of ICP strategy, including shadow price, implicit price, internal fee, internal trading, and offsets. We find that firms with a smaller board of directors or with a sustainability committee set higher carbon prices internally. Firms' exposure to carbon transition risk, measured by direct carbon emissions, increases the likelihood of adopting ICP. Firms that are committed to Science-Based Targets of carbon emission are more likely to adopt ICP and set higher ICP prices. The withdrawal of the United States from the Paris Agreement in 2017 reduces the likelihood of ICP adoption by American firms. Our results highlight the importance of internal governance mechanisms and external climate policies for firms to internalize the external cost of carbon.
[2] Lyu, C., Xin, W., & Zhang, C. (2025). Internal Carbon Price and Firm Performance. Available at SSRN.
Keywords: Internal Carbon Pricing, ESG, Sustainable Investing, Science-Based Targets, Carbon Emissions
Abstract: This paper investigates how internal carbon pricing (ICP) affects firms' financial and environmental performance using a comprehensive dataset of publicly listed firms from 60 countries between 2012 and 2021. We find that the adoption of ICP reduces the future profitability of firms, with a decline in net profit margin of 1.1% over the next year. While this has a negative effect on stocks' total returns in the future, we do not find a significant impact on risk-adjusted returns. The adoption of ICP is correlated with an increase in the valuation of firms, suggesting that investors value the sustainability commitment. In contrast, the price levels of ICP do not significantly affect future profitability, stock returns, or firm valuation, but we find significant variations in the ICP-performance relation across industries and countries. Using the adoption of science-based targets and direct carbon emissions of firms to measure corporate carbon transition risks, we find limited evidence of their effects on the ICP-performance relation. Furthermore, the adoption of ICP reduces the growth rate of carbon emissions over the next two years, but the overall effect on emission reductions is mixed. The results have implications for the differential profitability and effectiveness of ICP strategies as an emerging mechanism for firms to manage climate-related risks and opportunities.
[3] Lyu, C., & Scholtens, B. (2024). Integration of the International Carbon Market: A Time-Varying Analysis. Renewable and Sustainable Energy Reviews 191, 114102.
Highlights:
Analyses carbon prices for California, China, the EU, and New Zealand.
Models market connectedness with time-varying parameters and autoregression.
The aggregated average return (volatility) spillover is 10.42 % (12.10 %).
California and EU have a persistent net-transmitting role in return and volatility.
Crises significantly impact market connectedness.
Abstract: Emission Trading Schemes (ETSs) have become vital for meeting global emission reduction targets. They are gaining momentum, as witnessed by increasing market size and improving information mechanisms. Examining key emission markets - European Union, New Zealand, California, and Hubei (China) — from April 2014 to December 2021, a Time-Varying Parameter Vector Autoregressive (TVP-VAR) model is applied to discern the markets' connectedness. In a novel approach to global carbon market research, this study uniquely combines the TVP-VAR with the connectedness approach, overcoming fixed parameters estimation and ensuring precise parameter estimates. The approach sheds light on patterns of total, directional, and net return/volatility spillovers, striving to identify which markets act as transmitters and which are receivers. Linking market spillovers to market characteristics, events, and policies offers insights for investors and policymakers. The total connectedness index of 10–12 % suggests a relatively low level of spillover, when compared to other market integration studies. The dynamic nature of return and volatility spillovers is evident, especially during the energy crisis and Covid-19 outbreak. The EU's ETS consistently acts as a net transmitter, predominantly in return connectedness, while New Zealand's ETS emerges as a major shock receiver in both return and volatility systems. Global climate negotiations and carbon market events have only a minor impact on the level of connectedness, in contrast to energy or financial crises and the Covid-19 outbreak. By highlighting the intricacies of carbon price volatility and market transmissions, the findings equip stakeholders with invaluable, actionable insights.
[4] Lyu, C., Do, H. X., Nepal, R., & Jamasb, T. (2024). Volatility Spillovers and Carbon Price in the Nordic Wholesale Electricity Markets. Energy Economics, 134, 107559.
Highlights:
Analyzes price volatility and spillover effects in Nordic electricity wholesale markets (2010−2022).
Utilizes time-varying parameter VAR and rolling window VAR for novel insights on market integration.
Sweden emerges as the primary net volatility spillover transmitter, Denmark experiences significant shocks.
Total connectedness index responds to EU ETS transitions, market coupling, and Covid-19 impact.
Unveils a positive link between carbon prices and Nordic electricity market risks.
Abstract: This paper investigates price volatility and spillovers in the Nordic electricity wholesale markets. We use the Time-Varying Parameter Vector Autoregressive (TVP-VAR), Rolling Window-based VAR (RW-VAR), and high dimensional VAR with common factors (VAR-CF) methods and analyze the integration dynamics among these markets and impact of carbon prices on volatility spillovers. We use 107,352 hourly price data from January 2010 to March 2022. The novelty of this research is four-fold. First, we adopt a connectedness approach to explore volatility interactions among the four Nordic markets, contributing to the scarce literature on volatility in this market. Second, we segment the Norwegian market into southern and northern regions, revealing differences in volatility spillover patterns. Third, we investigate the effect of carbon prices on volatility spillovers and market dynamics. Last, we show significant contribution of covariances to interdependence among markets. We find significant connectedness between the Nordic markets, with an average Total Connectedness Index of between 50% (with a system of variance) and 90% (with a system of both variance and covariance). Sweden is the sole net volatility spillover transmitter, while Denmark experiences the largest shocks from the system. We further find that carbon prices exert a 5% significant impact on the volatility spillover index.
[5] Lyu, C., Jamasb, T., Spanholtz, J. P. G. (2022). The long COVID of Energy Markets and Prices. European Energy & Climate Journal. 11(1): 3-7
Keywords: Natural gas; Carbon price; Economic recovery; Integrated energy markets
Abstract: The 2021 energy crisis comes at an inconvenient time for the green transition agenda and can affect disposable income, unemployment and inflation. This article discusses the likely effects and implications for energy networks and policy. The economic principles behind the crisis may seem intractable, but they are familiar. A combination of known factors has caused the crisis. Europe is dependent on gas imports and a shortage of supplies has contributed to rising gas and electricity prices. The low-price elasticity of energy demand and supply makes them susceptible to price volatility even with modest quantity shocks. Higher CO2 abatement costs have forced some firms to increase their reliance on natural gas, which in turn drives up the gas prices. The crisis has brought forward the need for some overdue measures and policies including a more robust transition management, new transmission capacity, more storage, balance of contract types, and network regulation models.
[6] Lyu, C (2023). Dynamic Linkages of Carbon Price: An Investigation of National and Regional Market Integration in China. Available at SSRN.
Keywords: Carbon markets, China emissions trading, Emission allowances, Market architecture, Cointegration, Vector Error Correction
Abstract: China's regional and national Emission Trading Schemes (ETS) are fast-growing, forming the largest carbon trading system in the world. The differences in the construction of legal foundations, market regulation development, and price maturity in regional carbon markets have led to nine carbon prices in one country, which induce difficulties in unifying the cost of emission reduction in China. The study focuses on the interactions among China's regional ETS and national ETS, with a particular emphasis on carbon price integration. This is the first study that investigates the relationship between carbon prices of nine ETS - Beijing, Chongqing, Fujian, Guangdong, Hubei, Shanghai, Shenzhen, Tianjin and national ETS in China. Employing the co-integration technique and vector error correction model (VECM), the paper suggests that the regional ETS markets in China are not mutually exclusive, and that market integration is possible. The results are highly relevant for investors and policymakers worldwide who are interested in understanding China's carbon market integration level from 2014 to 2022. The results show that China’s nine ETS were examined to have entered the long-run relation, and it seems that the regional ETS are moving towards a more integrated system in the recent period. On the policy level, cointegration indicates that efforts to integrate regional ETS markets better are possible and desirable from an economic efficiency viewpoint. This paper supports the importance of the Shanghai and Hubei emission allowances prices as key drivers of Guangdong’s prices in the long term. Investors interested in the Shanghai ETS and Shenzhen ETS can use historical information containing the change in Beijing ETS to improve the short-run forecasting of future carbon prices. Any deviation from the equilibrium co-integrating relationships is mainly caused by changes in the Guangdong ETS. The development of a national and regional carbon market requires more consultation and negotiation between the central and local levels, and incentives for localities to undertake clean energy transitions.