Unveiling the UK emissions trading scheme: Dynamics and decarbonization

Zhang, Ran 2025. Unveiling the UK emissions trading scheme: Dynamics and decarbonization. PhD Thesis, Cardiff University. Item availability restricted.

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Abstract

This thesis encompasses three empirical studies to investigate the UK Emission Trading Scheme (UK ETS), anchoring the country’s independent carbon market after Brexit. Grounded in the fuel switching theory, dual characteristics of emissions trading, and financialization of carbon markets, we conducted first comprehensive examination of the UK ETS’s cross-market spillovers, tail risk characteristics, and emission-reduction potential. These interconnected chapters develop an integrated theoretical and empirical framework for analyzing early-stage carbon markets such as the UK ETS, offering both market-and policy level perspective on the dynamics of the UK ETS prices. The first chapter investigates cross-market spillovers of the UK ETS within an improved “carbon-energy-finance” network. Building on a novel time-frequency connectedness approach, it analyzes dynamic return and volatility spillovers and market connectedness across normal and turbulent periods. The evidence shows that the UK ETS functions mainly as a net spillover receiver and presents unique spillover patterns with clean energy and stock markets. Our second chapter analyzes risk management strategies for the UK ETS market. Motivated by its distinct tail risks and quantile spillover patterns, we employ a novel “CAViaR-QVAR copula” framework to identify suitable diversification, hedging, and safe-haven instruments. Among these, gold, green bonds, and green investments distinguish themselves by their dual function as diversifiers and safe-haven assets. Based on the identified instruments, we construct and compare a set of multivariate portfolio strategies to assess their risk-return performance. The third chapter moves to explore the emission reduction potential of the UK ETS. Using a wavelet local multiple correlation approach, we examine the dynamic interactions between the UK ETS and carbon emissions across time and frequency domains. We also investigate the role of climate change concerns in shaping this relationship. The results reveal that the UK ETS achieves lower emission reduction effectiveness than renewable electricity generation yet outperforms low carbon investments. Collectively, this thesis contributes to a deeper understanding of the UK ETS through a three tiered framework, integrating cross-market spillovers, risk management strategies, and environmental outcomes. Our findings provide critical insights to support carbon market stability, enhance emission policy effectiveness, and advance broader sustainable development goals.

Item Type:	Thesis (PhD)
Date Type:	Completion
Status:	Unpublished
Schools:	Schools > Business (Including Economics)
Date of First Compliant Deposit:	15 June 2026
Last Modified:	15 Jun 2026 14:48
URI:	https://orca.cardiff.ac.uk/id/eprint/187528

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