Return and volatility linkages between CO2 emission and clean energy stock prices

The emission of CO2 has emerged as one of the key factors behind the significant growth of clean energy sources that are less carbon-intensive than conventional energy bases. However, investigating the link between the carbon emission market and the market of clean energy stocks remains extremely understudied. Accordingly, this study examines daily return and volatility linkages between the European Union Allowance (EUA) prices and clean energy stock returns. Employing the bivariate VAR-GARCH approach, we document that variations in the EUA prices affect the renewable energy stock returns positively, though the association is usually found to be statistically insignificant. Our findings further indicate a significant volatility linkage between emission and European clean energy price indexes. Such findings, however, do not hold for the US market, suggesting that emission return and volatility shocks are country- or region-specific. Further results show that the average correlations between emission and stock prices is very low and hence portfolio diversification benefits seem to be attainable if investors hold assets in the EUA and clean energy equity markets.