How do external uncertainties impact connectedness among carbon, fossil and clean energy markets? An analysis of extreme risk

The carbon and energy markets have become increasingly interconnected. External uncertainties, occurring with growing frequency, significantly impact the connectedness among these markets. Understanding the mechanisms through which external uncertainties impact the extreme risk spillover between the carbon and energy markets is crucial to promoting the carbon market. We compare the static and dynamic spillover effects among the carbon, fossil and clean energy markets under regular return and extreme risk situations using the conditional extreme value theory, time-varying parameters vector autoregressive spillover model, and nonlinear quantile models. The results show that extreme risk spillover should be given more consideration because of the difference from conventional return, such as the total spillover index for the system being substantially higher than that of conventional return spillover. For the dynamics of extreme risk spillover effects, we can see most of the time, the carbon market is a net receiver, and the effect from the gas market is especially high. We investigate the impact of four different external uncertainties. In comparing economic policy uncertainty, climate physical risk, and climate transition risk, geopolitical risk demonstrates the most potent driving force in promoting extreme risk spillovers. Significant causal relationships are found between external uncertainties and spillover effects from energy markets to carbon market, which are weaker from carbon market to energy markets. The degree of influence of external uncertainties on extreme risk spillover is asymmetric, and the impact effects under different quantiles vary.