Abstract
Europe was the first continent to create concomitantly a large-scale carbon market to reduce the level of carbon emissions and to create a green bond market to finance the transition to low-carbon economies. In this chapter, we study the respective roles of these instruments, their price trajectories, their interaction, and their potential complementarities over a six-year period (2014–2019). We enrich the literature on environmental markets in several respects. First, we report significant short-run and long-run persistence of shocks to the conditional correlation between the European carbon and the European green bond markets. Second, we detect bidirectional shock transmission effects between those markets but no significant spillover effects. Taken together, these results suggest that a green bond issued in Europe may be used to hedge against the carbon price risk.