How do fossil energy markets and carbon markets affect each other? Based on the grainger causal relationship on quantiles

Abstract

The fossil energy and the carbon market are closely connected, but few articles have applied the Granger causality method on quantiles to explore the bi-directional causality between carbon prices and fossil fuels. Most articles use conditional mean regression models to test linear Granger causality, but are unable to assess tail causality or nonlinear causality. In order to accomplish the objective of studying the interaction of carbon and fossil energy markets at different quartiles, we use the method of Granger causality at quartiles, which allows us to assess median and tail causality and to gain insights into how carbon and traditional fossil energy markets interact under different market conditions. This paper analyzes the causal relationships between carbon prices and coal, oil, and gas from June 1, 2015 to October 31, 2022 across all quantiles. We find no indication of Granger-causality from carbon to oil and gas at the middle quantile. However, at the lower and upper quantiles, we discover the causal relationship between changes in carbon prices and traditional energy prices. The asymmetric two-way causal relationship between the carbon market and the fossil energy market has prompted the government to carry out differentiated management, as well as to improve energy efficiency.