The influence of N and O functionalization of CNT on the morphology of supported Pd-PVA nanoparticles is studied with respect to the catalytic activity in the liquid phase oxidation of benzyl alcohol to benzaldehyde. The impact of specific N and O sites on the carbon surface induced by the high temperature N-functionalization in the temperature range 673–873 K was observed by HRTEM as increased nanoparticles dispersion and enhanced metal wetting at the carbon surface. Those small nanoparticles that stabilized at the N-CNTs surface are beneficial for improving catalytic performance. The interaction of O₂ with the metal surface was studied by microcalorimetry. At 353 K, the PVA shell hinders the dissociative oxygen chemisorption at the surface of the fresh catalyst. Differently, a very high (maximum for Pd/N-CNT873K 750 kJ mol⁻¹) and oscillating exothermic differential heat is registered for the washed samples. Such high differential heat on the “washed” sample is due to the sum of oxygen chemisorption and PVA oxidation. Thereby, it is demonstrated that the PVA overlayer suppresses the total combustion reaction pathway. This contribution has highlighted the impact of the dynamic change of morphology of these Pd nanoparticles under the reaction conditions on the catalytic performance and how this is modulated by the nature of the support as well as the PVA. The support with its varying ability to strongly bind Pd regulates the morphology of the nanoparticles on which the sub-surface penetration of O, H, C from the reactants depends, all modulating the electronic structure and thus the reactivity.