THE INTERRELATION BETWEEN THE CARBON TRADING SYSTEMS AND ENERGY MARKETS AND ECONOMIC OUTLOOK: A COMPARATIVE ANALYSIS USING VECM AND ARDL

Abstract

This study examines the mutual relationship between carbon markets, energy markets, power markets, and the economic outlook. The analysis utilizes daily data from 2008 to 2023, encompassing all phases of the European Emissions Trading System. The relationship between the variables is examined through comparative analysis in both the long and short term, employing VECM (Vector Error Correction Model) and ARDL (Autoregressive Distributed Lag) analyses. The study findings indicate a persistent and mutual relationship between carbon markets, energy markets, power markets, and economic outlook over the long term. Short-term fluctuations decrease in order to reach long-term equilibrium. Both the energy and power markets, as well as the economic outlook, have an impact on carbon prices, and there is a positive relationship between them..Carbon markets have a minor and temporary impact on power and energy markets and the economic outlook. Companies choose cheaper and ecologically harmful fuels in response to an increase in fossil fuel costs. As the economic forecast improves and companies experience improved financial conditions, they are inclined to boost their industrial production, thus leading to higher levels of emissions. The rise in carbon costs results in a minimal and temporary decline in corporations' demand for fossil fuels. © 2025 Elsevier B.V., All rights reserved.