Idiosyncratic information spillover and connectedness network between the electricity and carbon markets in Europe

With a systematic approach, this study investigates the roles of the peak-valley prices and idiosyncratic factors in the information spillover mechanism between the electricity and carbon markets in Europe. Our findings show that electricity demand plays a crucial role in the idiosyncratic information spillover channel, especially in the risk spillover channel. Moreover, the German and Austrian electricity market operators reveal the dominating power in the system while the carbon market is the net information receiver from the system. The results also indicate that the EU-ETS functions well in prompting the integration of European electricity market and reducing the greenhouse gas emission. Crucially, we find that after the clean energy for all Europeans package were adopted in 2016 by the European Commission, the European internal electricity markets gradually integrated. The results provide supportive evidence for the effectiveness of the new rule on developing a single European electricity market. Our research can provide useful information for policy-makers, regulators, and investors.

Automated summary

This study investigates the information spillover mechanism between the electricity and carbon markets in Europe, focusing on the roles of peak-valley prices and idiosyncratic factors. The findings show that electricity demand plays a crucial role in the idiosyncratic information spillover channel, and the German and Austrian electricity market operators dominate the system, while the carbon market is the net information receiver. The EU-ETS is effective in promoting the integration of the European electricity market and reducing greenhouse gas emissions. The adoption of the clean energy for all Europeans package further contributes to the integration of the European internal electricity markets.