Abstract
Aim/purpose – This study investigates the impact of the Israel-Hamas conflict on carbon emission allowance prices within the European Union Emissions Trading System (EU ETS). Given the growing significance of geopolitical risks in carbon markets, this study examines the extent to which such conflicts influence spot and futures carbon prices, and whether these effects are short term or persistent.
Design/methodology/approach – The study employs two complementary econometric techniques: event study methodology and wavelet analysis. The event study method captures short-term price reactions to the conflict, while wavelet analysis provides insights into both short-term and long-term dynamics. The dataset consists of daily trading prices of CO2 emission allowances from June 1, 2022, to December 30, 2023, sourced from the Refinitiv Eikon database. The research design allows for the identification of market participants’ immediate reactions and the subsequent adjustment of market expectations.
Findings – The empirical results indicate a divergence in the short-term responses of spot and futures carbon markets. The event study shows that the carbon spot market reacted positively to the onset of the Israel-Hamas conflict, whereas the carbon futures market reacted negatively. Wavelet analysis confirms this short-term divergence but also shows that, in the long term, both markets eventually move in the same direction. This suggests that short-term market dislocations driven by geopolitical shocks are temporary, and carbon markets tend to stabilize over time.
Research implications/limitations – This study underscores the need to account for geopolitical risks when analyzing carbon market volatility. However, its focus on the EU ETS may limit the generalizability of the findings to other carbon markets. Additionally, the lack of detailed military emissions data prevents a direct analysis of such impacts. Future research should explore other carbon markets and incorporate more granular data on military-related emissions.
Originality/value/contribution – This study is probably the first to examine the influence of the Israel-Hamas conflict on carbon markets, thereby filling a gap in the literature on geopolitical risks and carbon pricing. Unlike prior studies that assume parallel movements in spot and futures markets, this research reveals a short-term divergence that eventually converges in the long run. The findings provide policymakers and market participants with valuable insights by emphasizing the role of geopolitical shocks in shaping carbon market dynamics and advocating risk mitigation strategies for emissions trading systems.