Climate Risk Transmission Across Brown and Green Energy Equity Markets During the Energy Transition

The global energy transition is reshaping the relationship between traditional fossil-fuel and renewable energy sectors, making the transmission of financial shocks across brown and green energy equity markets increasingly important. This paper examines connectedness between brown and green energy equity markets using a unified quantile–frequency framework that captures both market-state dependence and investment-horizon heterogeneity, and it further investigates how innovations in transition and physical climate risk are associated with changes in connectedness. Using global energy equity ETFs representing carbon-intensive and renewable energy sectors, we obtain three main findings. First, connectedness is substantially stronger in both lower- and upper-tail market states than around the median, indicating pronounced state dependence in risk transmission. Second, the frequency decomposition reveals that short- and long-horizon connectedness contribute similarly on average, but their relative importance varies markedly across market states: long-horizon connectedness is relatively more important in the lower-tail state, whereas short-horizon connectedness is relatively more important around the median. Third, transition and physical climate risks exhibit distinct frequency-specific associations with connectedness. Physical risk innovations are negatively associated with changes in total connectedness, whereas transition risk innovations are positively associated with changes in short-horizon connectedness; the latter association is also stronger at the short than at the long horizon, although this cross-horizon difference is only marginally significant. These findings show that risk transmission across brown and green energy equity markets is jointly state- and horizon-dependent and that the association between climate risk and connectedness differs across climate risk dimensions and investment horizons. The results have implications for portfolio diversification, risk management, renewable energy investment, and the assessment of financial risks associated with the global energy transition.