The impact of carbon markets and climate policy uncertainty on financial and economic sustainability: Evidence from G7 countries

Carbon markets are increasingly recognized as a pivotal mechanism for mitigating greenhouse gas emissions and fostering sustainable growth, yet their implications for financial and economic stability remain contested. Recent research demonstrates that carbon trading enhances long-term development and facilitates sustainable finance, while short-term volatility links carbon futures to fluctuations in green financial instruments such as bonds. In parallel, climate policy uncertainty (CPU) has been shown to amplify systemic risks and erode investor confidence in financial markets. This study provides empirical evidence on the joint effects of carbon markets and CPU on financial and economic stability in G7 countries over the period 2013–2023, marked by major global shocks including the COVID-19 pandemic and international conflicts. Employing panel econometric techniques (ordinary least squares (OLS), fixed effects model (FEM), random effects model (REM), generalized least squares (GLS)) with robustness tests (White, Fisher, Lagrangian multiplier (LM), and Hausman), the findings underscore that carbon markets contribute to long-term economic stability, whereas CPU induces short-term financial instability.