The spillover effects among fossil fuel, renewables and carbon markets: Evidence under the dual dilemma of climate change and energy crises

The environmental emergency and energy crisis are serious challenges exposed to Europe, which results in a fundamental shift in the linkages regarding fossil fuel, renewable energy and carbon trade markets. This study investigates the spillover effects based on the quantile VAR network. We find that the impact of the extreme market on the connectedness network of underlying assets proves to be more pronounced compared to the standard conditions. The risk spillovers in extreme cases originate primarily from the renewable energy and carbon markets, while fossil fuels account for the most significant contributor under normal circumstances. Hence, investors are supposed to develop dynamic and flexible portfolios to hedge potential risks. Concerning the governments, corresponding initiatives should be implemented to facilitate the continuous evolution of the European Union carbon trading system and the energy transition. These provide a feasible solution to Europe's dual dilemma regarding energy security and the climate emergency.

Automated summary

This study investigates the spillover effects in the European fossil fuel, renewable energy, and carbon trade markets using the quantile VAR network. The results show that extreme market conditions have a stronger impact on the connectedness network, with renewable energy and carbon markets being the main contributors. However, under normal circumstances, fossil fuels play the most significant role. Therefore, investors should adopt dynamic and flexible portfolios, while governments should implement initiatives to support the European Union carbon trading system and energy transition.