Does climate transition risk threaten China's energy system stability? Insights from high-dimensional systemic risk spillover network

Xin Hu, Bo Zhu and Jiahao Liu

Energy Economics, 2025, vol. 149, issue C

Abstract: This study investigates the impact of climate transition risk (CTR) on systemic risk spillovers within the energy system. Existing literature primarily focuses on firm-level effects, with less emphasis on system-wide risk contagion across firms. We develop a novel province-level CTR index for China through textual analysis of newspapers from 31 provinces and employ an Elastic Net Vector Auto-Regression (VAR) model to capture the high-dimensional systemic risk contagion network. Utilizing panel data from 95 Chinese energy firms spanning January 2011 to June 2024, we reveal that CTR significantly amplifies energy firms' systemic risk spillovers, posing great threats to energy system stability. The impact is significant for both traditional and new energy sectors, with particularly pronounced risk spillovers observed after China's announcement of the dual carbon goals and in low-carbon pilot cities. Moreover, through a dual-perspective analysis of individual firms' distress and inter-firm network vulnerability, we identify three key transmission channels of CTR: increased asset impairment losses, elevated operating costs, and heightened supply chain risks. This study provides crucial insights for maintaining energy system stability while facing low-carbon transition challenges.

Keywords: Systemic risk spillovers; China's energy system; Climate transition risk; Elastic Net VAR approach; Textual analysis (search for similar items in EconPapers)
JEL-codes: C33 C58 Q40 Q54 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325006310

DOI: 10.1016/j.eneco.2025.108804

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