Spillover Effects of the Carbon Market on Financial Markets: Lessons for Vietnam

Abstract

Purpose: This study investigates the extent of spillovers from carbon markets to financial markets over the period 2021–2025 in the EU, China and the United States with a view to deriving policy implications for the operation of Vietnam’s carbon market.
Design/methodology/approach: The study applies the Vector Autoregres-
sive (VAR) model and then conducts impulse response function (IRF) analysis and forecast error variance decomposition (FEVD).
Findings: The EU market has almost no significant spillover to the financial market, on the contrary, the global, Chinese and US equity markets have created a clear short-term spillover effect, especially on the Chinese stock market. Meanwhile, US and European stocks reacted negatively, the bond market, although reacting weakly, still recorded safe haven behavior against carbon price shocks.
Originality/value: This study contributes to empirical research on capital market development and sustainable development by identifying the role of ETS as a central component in a multi-tiered policy system, connecting capital markets and financial markets, financial supervision, technological transformation, and capital market development. This approach broadens the analytical framework of capital market communication, viewing ETS primarily as an environmental tool, while providing concrete evidence for designing transformational policies appropriate to the context of Viet Nam and other developing economies.