AI and carbon pricing in turbulent times: Navigating market dynamics for a sustainable future

The paper explores the impact of AI technologies on carbon pricing dynamics, specifically under the COVID-19 context and its aftermath. We examine whether AI market returns affect carbon pricing, and show that AI market returns exhibited increased volatility during the pandemic, mirroring significant changes in geopolitical risks, while the European Union Allowance (EUA) showed heightened volatility since 2021, suggesting that geopolitical tensions amplify market volatility. The AI returns-EUA connection is time-varying, nonlinear, and asymmetric, with negative impacts observed at lower quantiles of AI returns, indicating market skepticism during periods of low AI performance. This relationship is moderated by geopolitical risks, with a shift from negative to positive impacts from the pre- to post-COVID-19 periods, reflecting a growing confidence in the role of AI in carbon emission markets. AI market returns exert a more substantial influence on carbon pricing in the post-pandemic period, suggesting that AI markets have become more integrated with carbon markets, affecting pricing dynamics over both short and long-term horizons. Our study underscores the dynamic interplay between technological progress and market expectations, influenced by external events such as the pandemic and geopolitical risks.