Unveiling Worldwide Fossil Fuel Demands and the Dynamics of the Carbon Market

Abstract

This study delves into the intricate interplay between global fossil fuel demands and the evolving landscape of the carbon market. Fossil fuels remain fundamental to global energy systems, yet the imperative to curb greenhouse gas emissions necessitates a comprehensive understanding of the dynamics shaping their consumption.  Employing copula models, the research analyzes the tail dependence relationships between the carbon credits and four distinct energy sources including crude oil, coal, natural gas, and ethanol daily data. The study reveals that carbon-related emissions stemming from crude oil and coal demonstrate a pronounced reliance on carbon credits, whereas cleaner energy sources such as natural gas and ethanol exhibit a weaker correlation. Throughout the crisis period, there was a notable increase in the interdependence between the European Union Emissions Trading System (EU ETS) and most energy commodities, except for ethanol, which shows a decline in correlation. Notably, the relationship between EU ETS and natural gas appears insignificant. During market downturns, the observed low correlations offer beneficial diversification prospects. These findings underscore the need for nuanced risk management approaches and inform decision-making processes amidst the evolving dynamics of fossil fuel demands and carbon markets.