Lead-lag relations between the Chinese carbon and energy markets: Evidence from extreme climate shocks

• Lead-lag relationships exist between Chinese carbon prices and prices of international energy commodities. • The lead-lag relationship strengthens when climate events happen, especially extreme hot and cold periods as these demand more energy. • Knowledge about these varying lead-lag relationships can be used to improve hedging and trading decisions. • The thermal optimal causal path methodology detects changes in lead-lag relationships. We examine how lead-lag relationships between China's carbon market and energy markets change during extreme climate events. We show that extreme climate events strengthen the lead-lag relationship between markets, especially during extreme cold and heat periods during which energy demand spikes.