Unpacking Clean and Dirty Energy Market Linkages: Fresh Evidence from Quantile-on-Quantile Connectedness and Causality-in-Quantiles

Abstract

This research investigates the interrelationships between clean and dirty energy markets, focusing on both return and volatility dynamics over the period from March 03, 2005 to August 30, 2024. Employing the recently developed quantile-on-quantile connectedness (QQC) framework, alongside a causality-in-quantile (CiQ) analysis, the study explores directional spillovers across varying market conditions. The findings reveal several key insights. First, connectedness is highly heterogeneous across quantiles, with stronger spillovers observed in the tails of the distribution—indicating that extreme market conditions foster intensified transmission between energy sectors. Second, total connectedness among directly related quantiles is consistently higher than that of reversely related quantiles, for both return and volatility spillovers. Third, the connectedness between clean and dirty energy markets surpasses that between clean energy and WTI crude oil, reflecting tighter financial integration between equity-based energy indices. Notably, while the dirty energy market initially receives shocks from the clean market, it later emerges as a shock transmitter. Meanwhile, WTI plays a more symmetric role in return spillovers but predominantly transmits volatility shocks at moderate to higher quantiles. Additionally, quantile-based spillovers show marked time variation, spiking during systemic events such as the global financial crisis and the COVID-19 pandemic. CiQ analysis confirms the existence of bidirectional causality. These findings have important implications: for policymakers, they highlight the need to account for sectoral interdependence in energy transition planning; for investors, they underscore the limited hedging capacity between clean and dirty energy assets and the necessity of quantile-aware risk management strategies.