How carbon markets reshape the structure of traditional energy markets: New evidence from EU energy and carbon markets

The rapid development of carbon markets is reshaping the structure of traditional energy markets. Using EU energy, electricity, and carbon market prices from 2008 to 2025, this study adopts the Diebold-Yilmaz (DY) spillover framework and event study methodology to examine how the EU ETS drives traditional energy mix transformation. The results show that carbon pricing has become an important driver of cross-market connectedness, with particularly strong spillovers to coal and, increasingly, natural gas. As carbon costs are incorporated into production and fuel-switching decisions, natural gas assumes a more central role in the energy price system. Two key channels support this effect: cost pass-through and policy expectations. Specifically, the launch of EU ETS Phase IV has enhanced the pass-through of rising carbon prices, greatly increasing price linkages between the carbon and traditional energy markets, as well as the natural gas market’s relative position. Additionally, the Paris Agreement has created positive policy expectations for carbon markets, increasing their impact on traditional energy markets and lifting the natural gas market’s position with a one-period lag.