Dynamic Spillover Effects of Climate Policy Uncertainty on Energy and Carbon Markets

Asynchronous and recurrently revised climate policies across major economies elevate global climate policy uncertainty (GCPU), making it a key driver of market-wide risk. We study how GCPU propagates through internationally integrated energy and carbon markets. Using a time–frequency spillover framework combined with network analyses, we quantify return and volatility connectedness among GCPU, coal, oil, natural gas, clean energy, and carbon-futures prices based on monthly data for 2012–2023. The total spillover index varies from roughly 20% to 55%, revealing pronounced time variation. Returns display comparatively stable dynamics, whereas volatility exhibits sharper, state-dependent surges around major geopolitical and policy episodes. Roles are state contingent: GCPU tends to transmit risk to carbon and natural gas in turbulent regimes but becomes a net receiver when conditions are calm. We further find a rebalancing of transmission channels: clean energy assets increasingly seed spillovers into carbon pricing, while fossil-fuel benchmarks remain the principal hubs, indicating an ongoing shift in the architecture of risk propagation. In summary, the evidence highlights (i) the importance of distinguishing return versus volatility-driven transmission, (ii) the state dependence of GCPU, acting as a systemic risk source during turmoil, and (iii) the growing influence of clean energy signals on carbon prices. Our findings highlight the pivotal role of globally propagating policy risk in the climate transition and its implications for risk management in financial markets. JEL Classification: Q41.