The Impossible Triangle of Carbon-Market Sustainability: Trade-Offs Among Price Stability, Market Liquidity, and Emission Abatement

A carbon market is often expected to deliver a stable allowance price, continuous market liquidity and a rigidly binding abatement trajectory, yet these objectives may not be jointly attainable. This paper proposes a sustainability trilemma of carbon markets, arguing that at most two of price stability, market liquidity and abatement rigidity can be achieved simultaneously. We formalise this trade-off in a simple equilibrium framework and examine it using daily price and volume data from China’s national thermal-power emissions trading scheme from 2021 to 2025, together with energy-sector fundamentals proxied by thermal-power generation and power-sector coal consumption. The evidence shows that market liquidity improved substantially over the sample period, while price stability weakened markedly: median daily trading volume rose from near-dormant levels in 2022 to close to one million allowances in 2025, whereas the intra-year price range expanded sharply. Meanwhile, allowance-price changes remained weakly correlated with coal-consumption changes, suggesting that prices were driven more by allocation policy and expectations than by realised emission scarcity. The findings imply that carbon-market design should not pursue an unattainable optimum, but should manage the trade-off among stability, liquidity and abatement rigidity according to policy priorities.