The Asymmetric Correlation and Causality between the European Union Carbon Market and Fossil Energy Markets before and after COVID-19

Abstract This paper analyzes the correlation and causality between the European Union carbon emission allowance market and international fossil energy markets. Asymmetric correlation is examined using local Gaussian correlation and asymmetric causality is assessed using a quantile Granger causality test. Empirical results show that, after the COVID-19 outbreak, the EU carbon emission market is more correlated to the crude oil market, but it is less linked to the coal futures market. In contrast to the UK natural gas futures market, the EU carbon emission market shows contagion with the US natural gas market. During the COVID-19 pandemic, unidirectional causality from the EU carbon emission market to the fossil energy market has been becoming bidirectional.JEL classification: C22, I18, O13, O52, Q43