Climate policy uncertainty and risk spillovers: Evidence from China’s carbon markets

Under China’s “dual carbon” strategy, carbon emissions trading has become a key instrument for mitigating climate-related financial risks. However, climate policy uncertainty (CPU) has emerged as an important source of systemic risk, reshaping volatility dynamics and cross-regional risk spillovers in carbon markets. This study examines how CPU is associated with the structure and transmission of risks within China’s carbon market system. Using provincial-level CPU indices, we integrate a TVP-VAR-based connectedness framework with GARCH-MIDAS models and network analysis to investigate dynamic risk spillovers across China’s eight regional carbon markets from January 2018 to May 2024. The results show that risk spillovers are highly asymmetric and time-varying: Shenzhen, Chongqing, and Fujian consistently act as net risk transmitters, while Beijing, Hubei, and Tianjin mainly absorb external shocks. CPU significantly amplifies long-term carbon price volatility but temporarily suppresses short-term total risk spillovers by dampening market expectations, an effect that weakens as market integration deepens. Moreover, the impact of CPU on regional net spillovers is heterogeneous, reflecting differences in economic structure and policy sensitivity. Overall, the findings suggest a descriptive pattern in which the relative importance of policy-driven and market-driven factors varies across time horizons, warranting further formal investigation and provide important implications for climate-related risk management and market stability.