Climate stress, energy shocks and carbon-market connectedness in the European emissions trading system

Purpose This study aims to examine state-dependent connectedness in the climate-energy uncertainty-carbon system surrounding the European Union Emissions Trading System. It asks whether average connectedness differs from carbon-market stress states and extreme-heat states. Design/methodology/approach This study constructs a monthly data set for 2011–2024 covering heat anomalies, geopolitical risk, energy transportation uncertainty, crude oil returns, European gas returns and carbon allowance returns. It combines correlation and tail-dependence evidence, partial-correlation networks and generalized forecast error variance decomposition to compare contemporaneous dependence and directional spillovers across average and stressed states. Findings The average monthly system is only modestly connected, with carbon allowances mainly receiving shocks. Connectedness rises in both lower- and upper-tail carbon-return states and during extreme-heat months, indicating that stressed conditions reveal stronger energy-carbon-uncertainty transmission than full-sample averages suggest. Under upper carbon-return states, carbon allowances also become more active in transmitting shocks. Originality/value This study integrates physical climate stress, energy shocks and uncertainty indicators into a state-dependent connectedness framework for the European carbon market. The evidence shows that average-state monitoring can understate spillover intensity when carbon-market or heat-stress conditions become extreme.