Time-frequency spillovers between carbon, fossil fuels, and clean energy markets: New insights from the TVP-VAR framework

Qing Yi and Yuanying Jiang

Energy, 2025, vol. 323, issue C

Abstract: As the largest developing country and carbon emitter, China has been actively advancing the development of its carbon emission trading market and transitioning toward low-carbon energy to address the dual challenges of climate change and environmental protection. This study employs the TVP-VAR connectedness method to construct a risk spillover framework within the "Carbon-Fossil Energy-Clean Energy" system. From the perspectives of returns and volatility, it investigates the scale, short-term and long-term differences, and time-varying characteristics of risk spillovers. Furthermore, it investigates the influence of significant events of risks and uses a connectedness network structure to reveal the risk transmission relationships among markets during different market cycles. Finally, it tests the event-related attributes of the Total Connectedness Index in the context of policy uncertainty. The findings indicate that there are risk contagion relationships within the "Carbon-Fossil Energy-Clean Energy" system. Return spillovers are predominantly short-term, while volatility spillovers are inclined toward long-term effects. The scale of risk spillovers is closely tied to carbon market efficiency. Notably, the clean energy market exhibits a substitution effect on the carbon market; during periods of carbon price volatility or policy tightening, increased demand for clean energy contributes to achieving carbon reduction targets.

Keywords: Carbon markets; Fossil fuel; Clean energy; Risk spillovers; TVP-VAR connectedness (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:energy:v:323:y:2025:i:c:s0360544225013799

DOI: 10.1016/j.energy.2025.135737

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