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Are Green Bond and Carbon Markets in Europe complements or substitutes? Insights from the activity of power firms

Author

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  • Yves Rannou

    (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA [2017-2020] - Université Clermont Auvergne [2017-2020], ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand)

  • Mohamed Amine Boutabba

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay)

  • Pascal Barneto

    (IAE - IAE BORDEAUX - Université Montesquieu - Bordeaux 4, IRGO - Institut de Recherche en Gestion des Organisations - UB - Université de Bordeaux - Institut d'Administration des Entreprises (IAE) - Bordeaux)

Abstract

This paper studies the interactions between the European carbon and green bond markets from the lens of the European power firms' trading activity over an eight-year period (2013-2020). Those power firms have used two segments of carbon markets differently: one for shortterm hedging and speculative purposes and one for long-term hedging needs. The second one is found to have an informational advantage over the other and complements it. Interestingly, we show that power firms have used the green bond market as a complement to the carbon futures market used for their short-term hedging or speculative activities. Instead, they have employed the green bond market as a substitute for the carbon futures market used for their long-term hedging activities since 2018. Taken together, our results shed light on a pivotal change in the behaviour of European power firms that progressively abandon the carbon market to issue more green bonds in order to finance their transition to clean energy production systems.

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  • Yves Rannou & Mohamed Amine Boutabba & Pascal Barneto, 2021. "Are Green Bond and Carbon Markets in Europe complements or substitutes? Insights from the activity of power firms," Post-Print hal-03435879, HAL.
    • Handle: RePEc:hal:journl:hal-03435879
    DOI: 10.1016/j.eneco.2021.105651
    Note: View the original document on HAL open archive server: https://hal.science/hal-03435879
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    5. Li, Houjian & Li, Qingman & Huang, Xinya & Guo, Lili, 2023. "Do green bonds and economic policy uncertainty matter for carbon price? New insights from a TVP-VAR framework," International Review of Financial Analysis, Elsevier, vol. 86(C).
    6. Gao, Yang & Zhou, Yueyi & Zhao, Longfeng, 2024. "Quantile interdependence and network connectedness between China's green financial and energy markets," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 1148-1177.
    7. Zhong, Yufei & Chen, Xuesheng & Wang, Chengfang & Wang, Zhixian & Zhang, Yuchen, 2023. "The hedging performance of green bond markets in China and the U.S.: Novel evidence from cryptocurrency uncertainty," Energy Economics, Elsevier, vol. 128(C).
    8. Boutabba, Mohamed Amine & Rannou, Yves, 2022. "Investor strategies in the green bond market: The influence of liquidity risks, economic factors and clientele effects," International Review of Financial Analysis, Elsevier, vol. 81(C).
    9. Huang, Wenyang & Zhao, Jianyu & Wang, Xiaokang, 2024. "Model-driven multimodal LSTM-CNN for unbiased structural forecasting of European Union allowances open-high-low-close price," Energy Economics, Elsevier, vol. 132(C).
    10. Dunbar, Kwamie & Owusu-Amoako, Johnson & Treku, Daniel N., 2024. "Unveiling the Nexus: Carbon finance and climate technology advancements," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    11. Niu, Xiaoyan & Zhang, Yuwen & Li, Baoqi & Chen, Zhenling & Ni, Guohua & Lyu, Ning, 2024. "How does carbon emission trading scheme affect enterprise market value? A roadmap towards natural resources sustainability," Resources Policy, Elsevier, vol. 88(C).
    12. Liu, Rongyan & He, Lingyun & Xia, Yufei & Fu, Yating & Chen, Ling, 2023. "Research on the time-varying effects among green finance markets in China: A fresh evidence from multi-frequency scale perspective," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    13. Cicchiello, Antonella Francesca & Cotugno, Matteo & Monferrà, Stefano & Perdichizzi, Salvatore, 2022. "Which are the factors influencing green bonds issuance? Evidence from the European bonds market," Finance Research Letters, Elsevier, vol. 50(C).
    14. Qi, Shaozhou & Pang, Lidong & Qi, Tianbai & Zhang, Xiaoling & Pirtea, Marilen Gabriel, 2024. "The correlation between the green bond market and carbon trading markets under climate change: Evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 203(C).
    15. Yuan, Xi & Qin, Meng & Zhong, Yifan & Nicoleta-Claudia, Moldovan, 2023. "Financial roles in green investment based on the quantile connectedness," Energy Economics, Elsevier, vol. 117(C).
    16. Hu, Xin & Zhu, Bo & Lin, Renda & Li, Xiru & Zeng, Lidan & Zhou, Sitong, 2024. "How does greenness translate into greenium? Evidence from China's green bonds," Energy Economics, Elsevier, vol. 133(C).
    17. Kim, BuKwon & Dong, Xiyong & Yoon, Seong-Min, 2024. "Does uncertainty affect the relationship between green bond and carbon markets?," Finance Research Letters, Elsevier, vol. 70(C).
    18. Tang, Chun & Liu, Xiaoxing & Chen, Guangkun, 2023. "The spillover effects in the “Energy – Carbon – Stock” system – Evidence from China," Energy, Elsevier, vol. 278(PA).
    19. Mohammed Ahmar Uddin & Bisharat Hussain Chang & Salem Hamad Aldawsari & Ruoyu Li, 2025. "The Interplay Between Green Finance, Policy Uncertainty and Carbon Market Volatility: A Time Frequency Approach," Sustainability, MDPI, vol. 17(3), pages 1-28, February.
    20. Ding Wu & Zhenqing Luo & Tidong Zhang & Lu Tang & Mahmood Ahmad & Xiaoyun Fang, 2023. "The Linkage between Carbon Market and Green Bond Market: Evidence from Quantile Regression Based on Wavelet Analysis," Sustainability, MDPI, vol. 15(13), pages 1-17, July.
    21. Lin, Xudong & Meng, Yiqun & Zhu, Hao, 2024. "Exploring hedging potentials of green bonds against oil price shocks: Evidence from quantile-on-quantile connectedness measures," Finance Research Letters, Elsevier, vol. 65(C).
    22. 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.
    23. Hussain, Jafar & Lee, Chien-Chiang & Chen, Yongxiu, 2022. "Optimal green technology investment and emission reduction in emissions generating companies under the support of green bond and subsidy," Technological Forecasting and Social Change, Elsevier, vol. 183(C).

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    Keywords

    Futures Hedging; Green Bond Market; Power firms; Substitute; Complement; Carbon Market;
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