Dynamic connection between climate risks and energy markets

As the world's focus on climate change intensifies, the pressures and physical dangers in the energy market during the energy transition have become more salient, challenging the stability and pricing mechanisms of energy futures markets. This study examines the dynamic relationships between climate risks and energy futures markets using daily data from March 2005 to December 2023. We analyze 4773 observations of NYMEX crude oil futures (COFs) and natural gas futures (NGFs), combined with climate transition risk and physical risk indices. Employing the rolling Hong test and DCC-MGARCH Hong test, which are effective in capturing time-varying causal relationships, we obtain many core findings. First, the relationship between climate risk and the energy market shows significant time segmentation characteristics and is highly correlated with policy milestones and market crisis events. However, the crude oil market is more sensitive to physical risks and the natural gas market is more sensitive to transition risks. In addition, the relationship between transition risks and energy markets is mainly a one-way impact, but there is two-way feedback in certain periods (e.g., 2007–2010). The relationship between physical risks and energy markets shows stronger two-way interaction in crisis years (such as 2008 and 2020). Therefore, energy market participants need to adjust their risk hedging strategies according to time-varying risk exposures, while regulators should design dynamic intervention frameworks that are aligned with the identified regime transition points.