Against the backdrop of the COVID-19 pandemic and the Russia-Ukraine conflict, this study investigates the dynamic correlation between the EU ETS and fossil fuel markets (natural gas, crude oil, and coal). By combining DCC-GARCH and TVP-SV-VAR models, the analysis uses daily data from 2018 to 2023 to capture time-varying dependencies and structural shocks. The findings show that the carbon market maintains its strongest dynamic correlation with the natural gas market. Notably, while the pandemic led to a simultaneous decline in energy and carbon prices, the Russia-Ukraine conflict caused energy supply disruptions and industrial production cuts, resulting in the divergence of carbon and energy prices. Time-varying impulse response analysis further indicates that carbon and energy prices fluctuate in the same direction during demand shocks but move in opposite directions under supply shocks. Furthermore, the EU’s energy structural dependence amplifies the impact of natural gas supply shocks, while the Market Stability Reserve (MSR) effectively suppresses carbon price fluctuations through quota adjustment. This study distinguishes for the first time the differentiated transmission pathways of supply and demand shocks to the carbon-energy linkage. It provides a theoretical basis for the EU to design shock response policies, proposing to optimize the MSR mechanism to buffer demand shocks, hedge supply risks with energy diversification, and prioritize the stability of the natural gas supply chain to balance climate goals and energy security.
Guo et al. (2026) studied this question.