The Interplay Between Green Finance, Policy Uncertainty and Carbon Market Volatility: A Time Frequency Approach

Abstract

Climate change and the transition to sustainable development have heightened the global focus on carbon markets and green finance as critical tools for reducing greenhouse gas emissions. Understanding the factors driving carbon market volatility has become increasingly important as countries strive to meet climate goals. In this connection, our study investigates the interplay between green finance and carbon market volatility in China. For this purpose, we use monthly data from January 2015 to April 2023. The findings reveal that policy uncertainty significantly influences carbon market volatility, with a positive short-term relationship indicating that heightened policy uncertainty drives carbon market volatility upward due to increased market volatility. Conversely, issuing green finance-related certificates dampens carbon market volatility, suggesting that enhanced green finance reduces the demand for carbon allowances. This study underscores the critical role of stable economic policies and robust green finance initiatives in mitigating carbon market volatility, providing valuable insights for policymakers aiming to foster resilient and sustainable carbon markets.