The risk spillover from economic policy uncertainties to the European Union Emission Trading Scheme

The European Union Emission Trading Scheme is a carbon emission allowance trading system designed by Europe to achieve emission reduction targets. The amount of carbon emission caused by production activities is closely related to the socio-economic environment. Therefore, from the perspective of economic policy uncertainty, this article constructs the GARCH-MIDAS-EUEPU and GARCH-MIDAS-GEPU models for the impact of European and global economic policy uncertainty on carbon price fluctuations. The results show that both European and global economic policy uncertainty will exacerbate the volatility of carbon price returns, with the latter having a stronger impact. Moreover, the volatility of carbon price returns can be forecasted better with the predictor of global economic policy uncertainty. This research can provide some implications for market managers in grasping market trends and helping participants control the risk of fluctuations in carbon allowances.