Dynamic Risk Spillover between the Chinese Carbon and International Energy Markets from Extreme Weather Shocks

The immense attention on climate change has stimulated increasing interest in carbon market and their linkages to other markets. This study mainly investigates the dynamic risk spillover relationships between the Chinese carbon and international energy markets, and the impact of extreme weather events on the relationships, by using a TVP-VAR-based connectedness approach. Empirical results show that the international oil and the Chinese carbon (GDC) markets are the largest risk transmitter and receiver, respectively, and the volatility spillovers of GDC with the new energy and the EU carbon markets are relatively small. The total volatility spillover among markets and the net spillover of GDC with other markets both have obvious periodicity. The results of exogenous shocks show that the Chinese carbon market changes from the risk receiver to the main risk transmitter after the shocks of extreme weather events. In addition, the shocks of the Sino-US trade war, the Covid-19 outbreak and the COP 26 have the different effects on the volatility spillovers among markets. Some economic and policy implications for investors and regulators are also provided along with these findings.