Research Information System
ENVIRONMENTAL MODELING & ASSESSMENT, 2026 (SCI-Expanded, Scopus)
This study investigates the interconnectedness between the European Emissions Trading System (ETS) and key sources of uncertainty, Geopolitical Risk (GPR), Physical Climate Risk (PCI), and Transitional Climate Risk (TCI), using a novel Quantile-on-Quantile Connectedness Index (QQCI) for EU countries from 2005 to 2022. Our results reveal that geopolitical and climate risks exert significant influences on ETS dynamics, with the strongest spillovers occurring at inverse quantile combinations, where low risk levels coincide with high ETS quantiles. Specifically, the connectedness from TCI to ETS reaches 66.5 at extreme conditions, where low levels of risk coincide with high ETS values, indicating pronounced sensitivity of carbon prices to transition-related shocks. Correlation analysis shows that ETS maintains weak but statistically significant ties with GPR about 0.021 and GPRACTS by 0.009, while PCI - 0.009 and TCI - 0.007 display small negative associations. Furthermore, temporal analysis highlights sharp spikes in connectedness during major events such as the COVID-19 pandemic and the Russia-Ukraine war. These findings underscore the need for adaptive, data-driven risk-management strategies within the ETS framework. Incorporating real-time geopolitical and climate-risk indicators into carbon-market design, combined with the expansion of green finance initiatives, can enhance market stability and support long-term carbon-neutrality objectives.