article · Research in International Business and Finance
An analysis using a time-varying parameter vector autoregression model examines the dynamic connections between carbon emissions futures and volatility within the renewable energy sector. The investigation shows that overall system-wide connectedness reached its highest level in early 2020 following the onset of the COVID-19 pandemic. Furthermore, carbon emissions futures and wind energy serve as both net transmitters and net receivers of market shocks, a pattern that persisted across periods before and after the health crisis. These insights can assist in formulating policies designed to curb rapid fluctuations in carbon pricing, establish stable carbon price mechanisms, and reduce the adverse consequences of carbon risk across energy markets. Additionally, understanding these relationships aids in safeguarding the renewable energy industry against systemic financial risks while supporting a dependable green energy supply.
Understanding how carbon markets interact with renewable energy volatility helps regulators and energy planners manage financial uncertainty. When shocks transfer between carbon pricing and clean energy sectors like wind power, identifying these transmissions allows for better market interventions. This helps stabilise prices, protects renewable investments from broader systemic financial disruptions, and supports an uninterrupted transition toward sustainable energy sources.
This early-stage analytical research offers insights rather than a direct commercial product. The findings could inform risk management frameworks and analytical tools used by energy market regulators, carbon traders, and green fund managers seeking to hedge volatility spillovers. Because the work focuses on econometric policy formulation, practical application remains at an early stage, depending on financial institutions integrating these connectedness measures into operational risk assessment systems.
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Our paper applies a time-varying parameter vector autoregression (TVP-VAR) in combination with an extended joint connectedness approach to investigate interlinkages among carbon emissions futures and the volatility of the renewable energy sector. The findings show that the system-wide dynamic connectedness realized a peak in early 2020 in the wake of the COVID-19 crisis. Net total directional connectedness proves that carbon emissions futures and wind energy play the roles of both net transmitters and net receivers of shocks in both periods – before and after the pandemic. The findings of this paper can support policy formulations to avoid rapid fluctuations in carbon prices, make the carbon price table, and limit the negative effect of carbon risk on the energy market, while promoting the protection of systemic financial risks in the renewable energy sector and ensuring a green energy supply.
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DOI: 10.1016/j.ribaf.2024.102278
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