How do carbon, stock, and renewable energy markets interact: Evidence from Europe

Abstract

In a low-carbon context, the connectedness among carbon, stock, and renewable energy markets has been strengthening. This study examines the effect of Brexit, the launch of the European Green Deal and the COVID-19 pandemic on the connectedness among carbon, stock, and renewable energy markets by employing Time Varying Parameter -Vector Auto Regression (TVP-VAR). First, equal interval impulse response analysis shows that in the short term, the renewable energy market suffers from a positive shock from the carbon market and this shock gradually decreases from the initial 1.6×10−3. In the long run, the connectivity between the carbon market and the stock market, and between the carbon market and the renewable energy market is almost 0. Second, we can conclude that the positive connectivity between stock market to carbon market and renewable energy market to carbon market is enhanced by COVID-19 in the short term, with values of 7.5×10−3 and 3.6×10−3 respectively. Finally, renewable energy market received a greater negative impact from the carbon market during COVID-19 than during the release of the European Green Deal, while Brexit allowed positive carbon price spillover to renewable energy price.