Block connectedness between the EU-ETS and corporate returns: Evidence from high- and low-emission firms

This study analyzes volatility transmission between the EU-ETS –used here as a proxy for carbon price dynamics– and the stock returns of European firms with varying emission levels during the third and fourth phases of the EU-ETS (from January 01, 2013 to April 30, 2025), applying a connectedness framework that integrates time-frequency decomposition and block-level analysis. The empirical evidence confirms that carbon market volatility significantly affects corporate financial dynamics, especially in the short term and particularly for high-emission firms. These results validate the three hypotheses posed: (i) there is statistically significant volatility connectedness between carbon and stock markets; (ii) short-term spillovers dominate; and (iii) high-emission firms are more exposed to volatility transmission than their low-emission counterparts. These findings are robust across two different classification criteria and highlight the relevance of carbon pricing not only as an environmental policy tool but also as a financial market signal.