Dynamic Spillovers Between Carbon and Energy Futures Markets

As a key indicator for carbon market participants, the significance of researching spillover effects between carbon futures and energy futures markets is increasingly evident. This paper examines the interactions between three energy futures—coal, crude oil, and natural gas—and carbon futures in the American and European markets over the period from November 21, 2013, to April 29, 2024. A Vector Autoregressive Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (VAR-DCC-GARCH) model was employed to investigate interconnections and spillover effects across different regions. The results indicate a strong linkage between energy futures and carbon futures, with coal futures showing a particularly strong connection. Significant dynamic spillovers were observed, with crude oil and natural gas futures exerting stronger spillovers to carbon futures. Energy futures have significant long-term impacts, with natural gas futures showing strong volatility spillover effects, especially in Europe.