Research on spillover effect between carbon market and electricity market: Evidence from Northern Europe

• Published in: Energy (Oxford) Vol. 263; p. 126107
• Main Authors: Zhao, Yihang, Zhou, Zhenxi, Zhang, Kaiwen, Huo, Yaotong, Sun, Dong, Zhao, Huiru, Sun, Jingqi, Guo, Sen
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 15.01.2023
• Subjects: Carbon market; Electricity market; Energy market; Return spillover effect; VAR-BEKK-GARCH model; Volatility spillover effect; VAR-BEKK-GARCH model; Return spillover effect; Energy market; Volatility spillover effect; Electricity market; Carbon market
• ISSN: 0360-5442
• DOI: 10.1016/j.energy.2022.126107

Due to the consistency of participants and emission reduction targets, the carbon market and electricity market have the necessity and possibility of coordinated development. As matter stands, the information transmission and linkage between the two markets are still unclear and difficult to quantify. Thus, this paper innovatively conducts an in-depth study on the spillover effect between the carbon market and the electricity market, and further analyzes the intermediary role of the energy market in the carbon-electricity synergy. First, the return spillover effect and volatility spillover effect in various markets are researched based on the vector autoregressive (VAR), Baba–Engle–Kraft–Kroner (BEKK) and generalized autoregressive conditional heteroskedasticity (GARCH) model. Then, the relationship between oil, natural gas, carbon and electricity markets is further analyzed. Finally, an empirical study is carried out with the data of the Nordic electricity market and the European Union Emission Trading System. The result shows that the impact between the carbon market and the electricity market is more the transmission of price fluctuations than the direct impact of returns. Moreover, the energy markets play a “bridge” role in promoting carbon-electricity market coupling. Hence, it is necessary to further strengthen the prevention of external risks and improve the regulatory policy system, so as to ensure the smooth and sustainable operation of the market. •The VAR-BEKK-GARCH model is adopted to estimate the spillover effect between carbon market and electricity market.•The intermediary role of energy markets in carbon-electricity market synergy is studied.•The empirical analysis is conducted on two carbon markets, two energy markets and six electricity markets.