Financial interdependencies between carbon markets and energy commodities: an application for the European Union Emissions Trading System

Andrea Flori

Chapter 23 in Handbook of Climate Change and Financial Markets, 2026, pp 491-524 from Edward Elgar Publishing

Abstract: This chapter investigates the spillover propagation between energy commodities and the market dynamics of the European carbon allowances (EUAs). Notably, the EUA market acts as a net transmitter of spillovers toward electricity markets, while typically operating as a net recipient of spillovers from energy commodities and equity markets. These relationships persist even under phases of market distress. These findings suggest that external shocks—particularly from energy commodity markets—can disrupt the functioning of the EU ETS by affecting its carbon market, potentially undermining the effectiveness of this policy as a cap-and-trade solution designed to facilitate cost-effective carbon abatement. Moreover, such interdependencies between energy commodities and the EUAs reduce portfolio diversification benefits, thereby limiting the carbon market's effectiveness as a hedging instrument within portfolio analysis frameworks.

Keywords: EU ETS; Spillovers; Carbon market; Energy; Commodities; Hedging Effectiveness (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
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