The asymmetric correlation and causality between the European Union carbon market and fossil energy markets caused by COVID-19

• Published in: Energy & environment (Essex, England) England), 2024-09
• Main Authors: Wang, Shuo, Yuan, Di, Chen, Xuesheng, Cui, Fenghui, Hua, Guanfen, Yan, Xiaodong
• Format: Article
• Language: English
• ISSN: 0958-305X; 2048-4070
• DOI: 10.1177/0958305X241279954

The carbon and fossil energy markets have been significantly affected by the COVID-19 pandemic. This article examines the nonlinear correlation and the spillover effect between the global fossil energy markets and the European Union carbon market prior to and following COVID-19. The nonlinear correlation is captured by the localized Gaussian correlation approach, and the spillover effect is evaluated using a quantile-based Granger causality analysis method. Empirical evidence demonstrates that COVID-19 strengthens the correlation between the carbon and oil markets. Conversely, the correlation between the carbon and coal markets is weakened by COVID-19. Furthermore, COVID-19 only resulted in the contagion between the carbon and Texas gas markets. Finally, the spillover effect between the European Union carbon market and fossil energy markets changes from unidirectional to bidirectional. This article provides inspiration for investors to adjust their portfolios to reduce investment risks and meaningful information for policymakers to maintain market stability.