Carbon pricing, commodity markets, and economic stability: Evidence from the EU ETS

This study investigates the dynamic spillover effects between European Union Allowance (EUA) futures and major commodity futures, including energy, agricultural products, and precious metals, across all four phases of the EU ETS. Using the quantile connectedness framework, we capture heterogeneous and asymmetric transmission mechanisms under different market regimes. The results show that EUA futures are predominantly net receivers of shocks from global commodity markets, reflecting their strong integration with energy and financial systems. Nevertheless, EUAs act as net transmitters to fossil fuels—particularly natural gas and coal—under specific conditions, while spillovers to wheat occur mainly in extreme positive markets, raising concerns over food affordability. These findings highlight that EUA prices within the 20 %–60 % quantile range are “reasonable,” effectively constraining fossil fuels without destabilising agricultural or precious metal markets. Overall, the study enriches carbon finance literature by extending connectedness methods to the EU ETS, demonstrating that carbon markets function not only as emission reduction instruments but also as key nodes in global commodity interdependence.