Financial stress and idiosyncratic risk spillovers in global carbon-energy-green finance markets

The carbon-energy-green finance (CEG) nexus has become a central focus for risk management and coordinated policy governance. While prior studies focus on mean and volatility spillovers, little is known about how market-specific idiosyncratic shocks propagate within the CEG system and contribute to systemic risk clustering. This study investigates the transmission mechanisms of idiosyncratic spillovers within CEG markets and their interaction with financial stress from August 2, 2021, to February 25, 2025. Using an elastic-net VAR on 20 variables (carbon allowances, energy commodities, green bonds, and uncertainty indices), we trace transmission channels and find WTI, Brent (XBR), EU coal, and VIX to be the dominant net risk emitters. Financial stress and idiosyncratic interconnectedness within CEG markets exhibit bidirectional, time-varying Granger causality, linking micro shocks to systemic risk. Stress events driven by policy shifts, energy shocks, and dislocations in CEG markets raise spillover exceedance probabilities above 90%. These findings highlight the importance of monitoring idiosyncratic risk spillovers across markets during periods of stress and underscore the role of energy and volatility as early transmitters, calling for adaptive climate-financial coordination to mitigate systemic risk contagion.