Risk spillover from energy market uncertainties to the Chinese carbon market

A thorough understanding of the risk spillover from energy market uncertainties to the Chinese carbon market is significant for risk management and the construction of a unified national carbon market in China. Based on the generalized autoregressive score-driving model, this paper measures China's domestic energy market uncertainty using the conditional volatility of Daqing crude oil returns. Through merging copula approach and CoVaR methods, this paper reveals asymmetric risk spillovers from the international and China's domestic energy market uncertainties to Hubei and Shenzhen carbon pilots, which are the most representative carbon markets in China. Although both the international and China's domestic energy market uncertainties exert significant risk spillover effects on Chinese carbon pilots, the magnitudes of their effects are different. Comparing two carbon pilots, the Shenzhen market is more affected by energy market uncertainties than the Hubei market, thus revealing differences between carbon pilots. The findings in this paper provide meaningful information on investment portfolios and policies for constructing a unified national carbon market.