The Effect of Geopolitical Risk on the Volatility of Connectedness Between Carbon Neutrality and Energy Markets: Evidence From China

ABSTRACT As China plays a pivotal role in shaping global energy trends, the healthy development of energy markets faces formidable challenges, making the achievement of carbon neutrality, particularly, crucial. Unfortunately, geopolitical risk (GPR) introduces significant uncertainties for the interactions between China's carbon neutrality process and energy markets. To this end, we explore the connectedness between China's carbon neutrality index and energy futures prices from both return and risk perspectives using the TVP‐VAR method. Additionally, we analyse the impact mechanisms and predictive effects of GPR on the volatility of this connectedness applying the GARCH‐MIDAS method. Our empirical findings reveal several key insights. First, the GPR drives the volatility in connectedness between China's carbon neutrality index and energy futures prices, particularly, within the petrochemical industry, while the opposite impact is observed in certain coal‐related sectors. Moreover, the models indicate that poor GPR predictive effects are primarily evident in industries with a close link to coal energy in their production processes. Secondly, the risk connectedness of China's carbon neutrality index and energy futures prices contains more implicit information and is more responsive to GPR shocks compared to return connectedness. This explains why the GPR is less effective in forecasting the volatility of risk connectedness. Finally, the global GPR is more helpful than the China‐specific GPR in forecasting the volatility of connectedness in China's carbon neutrality index and energy futures prices. These insights reveal the potential vulnerability of China's carbon neutrality and energy markets to GPR, offering actionable guidance for strengthening risk management strategies.