Do severe weather events increase tail risk? Evidence from Chinese regional carbon markets

This study examines the risk of extreme price changes in Chinese carbon markets due to extreme severe meteorological events. We first quantify tail risk from emission rights prices using Conditional Autoregressive Value-at-Risk and then employ event studies to examine changes in tail risk before and after the occurrence of severe weather. We find that (i) the carbon markets in Beijing, Shenzhen, and Tianjin exhibit a higher degree of tail risk, largely attributable to their lower liquidity and slow progress on market reforms; (ii) the effect of extreme weather events on carbon markets emerges with a some lag; and (iii) severe heatwaves exert the most pronounced influence on carbon market tail risk among the five types of severe weather, while severe hazy weather has the smallest impact.