Spillover Effects and Market Dynamics In China’s Carbon Markets: An Empirical Analysis

China’s carbon market has played a pivotal role in reducing greenhouse gas emissions through cap-and-trade mechanisms. As the world’s largest carbon emitter, China has developed regional pilot programs since 2013, later integrating them into a national carbon trading system in 2021. This study provides an empirical analysis of spillover effects and market dynamics within China’s "8+1" carbon market framework, examining price transmission mechanisms and market integration. Using an extensive dataset spanning from 2013 to 2025, the study applies Panel Fixed Effects, the Diebold and Yılmaz (2014) Spillover Index, and a Vector Autoregression (VAR) model to quantify spillovers dynamically. Additionally, Hasbrouck’s Information Share Model assesses market leadership in price discovery. Results indicate that liquid markets such as Guangdong and Hubei function as key hubs for price transmission, while less active markets like Chongqing and Tianjin exhibit delayed responses. The establishment of the national carbon market has strengthened market cohesion and integration but has also introduced new volatility channels. The study highlights persistent regional disparities in pricing mechanisms and regulatory frameworks, suggesting that regulatory harmonization and financial instruments such as carbon futures could stabilize prices and improve market resilience. These findings provide critical insights for policymakers, institutional investors, and businesses seeking to mitigate risks in carbon-exposed industries and enhance market efficiency. Strengthening regulatory oversight and encouraging broader market participation are key to fostering a more stable and integrated carbon trading system in China.