Impacts of carbon market and climate policy uncertainties on financial and economic stability: Evidence from connectedness network analysis

• Published in: Journal of international financial markets, institutions & money institutions & money, 2024-04, Vol.92, p.101977, Article 101977
• Main Authors: Liang, Chao, Goodell, John W., Li, Xiafei
• Format: Article
• Language: English
• Subjects: Carbon market; Climate policy uncertainty; Conditional network connectedness; Economic stability; Financial market stability
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2024.101977

•Conditional network connectedness approach to explore complex linkages.•Linkages between the carbon market, climate policy uncertainty, and economic stability.•Carbon market changes energy production and consumption structure.•Extreme negative changes in the carbon market catalyze shocks to CPI.•Impacts persistently stronger post March 2020. We use the conditional network connectedness approach of Stenfors et al. (2022) along with its frequency-domain, and tail and dynamic extensions to explore complex linkages among the carbon market, climate policy uncertainty, economic stability, and financial market stability. We focus on whether the carbon market and climate policy uncertainty impact US economic and financial market stability, and how these impacts occur. We identify a dynamic impact of the carbon market on economic and financial market stability, with these impacts varying in different frequency-domains and different quantile levels. Energy consumption and production structures as well as carbon emissions are found to be important mediators for carbon market to affect economic stability, while renewable energy equity is found to be a mediator through which the carbon market affects financial market stability. Further, while the impact of climate policy uncertainty on economic and financial market stability is typically weak, it strengthens under some circumstances, particularly in the long-term frequency-domain, right-tailed, prior to 2020. In these cases, carbon market, energy production structure and financial market stability are found to be weak mediators for climate policy uncertainty to impact economic stability.