Air Quality and China’s Carbon Market: Causal Relationship in Tails

Purpose/Significance The establishment of the carbon market is a major measure for air quality, especially global warming. As the country with the most carbon emissions in the world, establishing a sound Chinese carbon market is both trend and responsibility. Design/Methodology Based on the Granger non-causality test model under the quantile framework, the causal relationship between air quality and carbon market returns in different contexts is studied. Conclusions/Findings First, the causal relationship between air quality and the five carbon market returns mostly exists in the tail region, indicating that the two will affect each other only under extreme conditions; second, there is a two-way causal relationship between air quality and carbon market returns, but the impact of carbon market returns on air quality is relatively weak, which means that air quality can be used as an important factor in explaining changes in carbon market returns, the effectiveness of carbon market emissions reduction still needs long-term verification; third, the causal relationship between air quality and carbon market returns in different sample periods is heterogeneous. The conclusions will help improve the pricing mechanism of the pilot carbon market, improve air quality more effectively, and provide inspiration for the comprehensive establishment of China’s carbon trading market.