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

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  • Zhao, Yihang
  • Zhou, Zhenxi
  • Zhang, Kaiwen
  • Huo, Yaotong
  • Sun, Dong
  • Zhao, Huiru
  • Sun, Jingqi
  • Guo, Sen

Abstract

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 European 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.

Suggested Citation

  • Zhao, Yihang & Zhou, Zhenxi & Zhang, Kaiwen & Huo, Yaotong & Sun, Dong & Zhao, Huiru & Sun, Jingqi & Guo, Sen, 2023. "Research on spillover effect between carbon market and electricity market: Evidence from Northern Europe," Energy, Elsevier, vol. 263(PF).
    • Handle: RePEc:eee:energy:v:263:y:2023:i:pf:s0360544222029930
    DOI: 10.1016/j.energy.2022.126107
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    Cited by:

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    3. Shoirahon Odilova & Zebo Sharipova & Sardor Azam, 2023. "Investing in the Future: A Systematic Literature Review on Renewable Energy and its Impact on Financial Returns," International Journal of Energy Economics and Policy, Econjournals, vol. 13(4), pages 329-337, July.
    4. Ghaemi Asl, Mahdi & Ben Jabeur, Sami, 2024. "Could the Russia-Ukraine war stir up the persistent memory of interconnectivity among Islamic equity markets, energy commodities, and environmental factors?," Research in International Business and Finance, Elsevier, vol. 69(C).
    5. Wang, Yong & Liu, Shimiao & Abedin, Mohammad Zoynul & Lucey, Brian, 2024. "Volatility spillover and hedging strategies among Chinese carbon, energy, and electricity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    6. Theodoros Syriopoulos & Efthymios Roumpis & Michael Tsatsaronis, 2023. "Hedging Strategies in Carbon Emission Price Dynamics: Implications for Shipping Markets," Energies, MDPI, vol. 16(17), pages 1-27, September.
    7. Lee, Chien-Chiang & Hussain, Jafar, 2023. "Energy sustainability under the COVID-19 outbreak: Electricity break-off policy to minimize electricity market crises," Energy Economics, Elsevier, vol. 125(C).

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