The spillover effects among fossil fuel, renewables and carbon markets: Evidence under the dual dilemma of climate change and energy crises

The environmental emergency and energy crisis are serious challenges exposed to Europe, which results in a fundamental shift in the linkages regarding fossil fuel, renewable energy and carbon trade markets. This study investigates the spillover effects based on the quantile VAR network. We find that the impact of the extreme market on the connectedness network of underlying assets proves to be more pronounced compared to the standard conditions. The risk spillovers in extreme cases originate primarily from the renewable energy and carbon markets, while fossil fuels account for the most significant contributor under normal circumstances. Hence, investors are supposed to develop dynamic and flexible portfolios to hedge potential risks. Concerning the governments, corresponding initiatives should be implemented to facilitate the continuous evolution of the European Union carbon trading system and the energy transition. These provide a feasible solution to Europe's dual dilemma regarding energy security and the climate emergency.