The interconnected carbon, fossil fuels, and clean energy markets: Exploring Europe and China's perspectives on climate change

Abstract

Carbon allowances represent a crucial financial instrument for mitigating the consequences of global warming and climate change. However, the feedback mechanism for Carbon-Energy- Finance systems introduces complexity due to the incorporation of equity, bond, and non- energy commodity assets. This study examines the volatility dynamics between carbon markets in Europe and China and their interactions with fossil fuel energy and clean energy indices. To measure this connectivity, we use advanced methodologies, such as the Diebold and Yilmaz method, to shed light on the complex relationships between these markets. Our study highlights significant disparities between China and Europe in terms of return spillover. In the short term, our results indicate that the Chinese carbon market acts as a receiver of shocks from other markets, while the European carbon market acts as a transmitter of shocks to various energy sources. In the specific contexts of China and Europe, these results provide valuable insights for policymakers and investors interested in tailoring approaches to sustainable energy transitions and financial stability.