Research on spillover effect between carbon market and electricity market: Evidence from Northern Europe

Due to the consistency of participants and emission reduction targets, the carbon market and electricity market have the necessity and possibility of coordinated development. As matter stands, the information transmission and linkage between the two markets are still unclear and difficult to quantify. Thus, this paper innovatively conducts an in-depth study on the spillover effect between the carbon market and the electricity market, and further analyzes the intermediary role of the energy market in the carbon-electricity synergy. First, the return spillover effect and volatility spillover effect in various markets are researched based on the vector autoregressive (VAR), Baba-Engle-Kraft-Kroner (BEKK) and generalized autoregressive conditional heteroskedasticity (GARCH) model. Then, the relationship between oil, natural gas, carbon and electricity markets is further analyzed. Finally, an empirical study is carried out with the data of the Nordic electricity market and the Eu-ropean Union Emission Trading System. The result shows that the impact between the carbon market and the electricity market is more the transmission of price fluctuations than the direct impact of returns. Moreover, the energy markets play a bridge role in promoting carbon-electricity market coupling. Hence, it is necessary to further strengthen the prevention of external risks and improve the regulatory policy system, so as to ensure the smooth and sustainable operation of the market.

Automated summary

Due to the consistency of participants and emission reduction targets, the carbon market and electricity market have the necessity and possibility of coordinated development. However, the information transmission and linkage between the two markets are still unclear and difficult to quantify. Thus, this paper innovatively conducts an in-depth study on the spillover effect between the carbon market and the electricity market, and further analyzes the intermediary role of the energy market in the carbon-electricity synergy.