Financial Stability in the Low-Carbon Transition: Climate Transition Risk, Energy-Market Uncertainty, and Systemic Stress in the European Union

The transition towards a low-carbon economy creates important interactions among climate policy uncertainty, energy-market conditions, and financial stability. This study examines the nonlinear and asymmetric interdependencies among climate transition risk (TRISK), energy-market risk (ENR), and systemic financial stress (CISS) in the European Union (EU), using weekly data from July 1, 2005, to December 22, 2023. Three complementary approaches are employed: the Cross-Quantilogram, Wavelet Cross-Quantile Correlation, and quantile-on-quantile regression. Together, these methods capture directional dependence, state-dependent relationships, and their persistence across different time horizons. The results reveal a significant positive relationship between climate transition risk and systemic financial stress, with dependence strengthening markedly under elevated-risk conditions. Energy-market risk similarly exhibits a persistent and asymmetric positive relationship with systemic stress, particularly in the middle and upper quantiles. The relationship between transition and energy risks is more complex: positive dependence dominates in the short run, while negative dependence emerges at longer horizons and in some quantiles. This longer-horizon negative dependence indicates that the relationship between transition and energy risks changes across time horizons, but the empirical design does not identify the mechanism underlying this pattern. It may reflect several processes, including market adjustment, mean reversion in risk measures, or the unwinding of short-run risk premia. Overall, the findings demonstrate that financial vulnerabilities associated with the low-carbon transition are nonlinear, state-dependent, and sensitive to time horizons. The results underscore the importance of integrating environmental policy design with climate-related financial supervision, transition stress testing, energy resilience, and predictable policy implementation to limit financial tail-risk amplification while preserving the investment required for an orderly and economically resilient low-carbon transition.