Do Physical and Transition Climate Risks Drive the Volatility and Dynamic Correlations Between Fossil Energy Markets and Stocks Prices of Clean Energy?

Ying Zhang, Weifeng Li and Li Yang ()
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Ying Zhang: Institute of Environment and Economics, Faculty of Economics, Liaoning University, Shenyang 110036, China
Weifeng Li: Institute of Environment and Economics, Faculty of Economics, Liaoning University, Shenyang 110036, China
Li Yang: School of Finance and Trade, Faculty of Economics, Liaoning University, Shenyang 110036, China

Sustainability, 2025, vol. 17, issue 20, 1-26

Abstract: Climate risks are one of the major challenges facing sustainable development. This study examines how physical and transition climate risks influence the volatility and correlation of fossil energy futures and clean energy stock indices, using a mixed-frequency modeling framework. Taking the Paris Agreement as the starting point for the global energy transition, we aim to compare the impacts of climate risks on various fossil energy assets and clean energy assets and investigate how the dynamic linkages between clean energy and fossil energy assets have evolved under the influence of climate risks. The results show that climate risks have increased the volatility of fossil energy and clean energy assets to varying degrees. Correlation patterns vary by energy type: crude oil futures and clean energy indices exhibit a decoupling trend under climate risks, while natural gas futures show a more consistent, positive linkage. These findings not only provide useful guidance for investors in formulating more effective strategies under increasing climate risks but also offer policymakers valuable insights into designing optimal approaches to balance decarbonization objectives with energy security.

Keywords: climate risks; climate policy uncertainty; physical climate risk; fossil energy; DCC-MIDAS (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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