Cryptocurrency Markets and Carbon Emissions Future Prices: Fresh Insight From the Time-varying Wavelet-windowed Cross-correlation Approach

This paper aims to explore the relationships between five major cryptocurrency markets (Ethereum, Bitcoin Cash, Ripple, Bitcoin, and the Ethereum Operating System) and carbon emission futures from both a time and frequency perspective. It seeks to address the implications for environmental sustainability arising from the uncertainty surrounding the coupling and decoupling of cryptocurrency markets. To examine the time-varying cryptocurrency-carbon relationship, we employ novel approaches including empirical mode decomposition (EEMD) and wavelet windowed cross-correlations (WWCC). The EEMD-WWCC analysis yields three major conclusions. Firstly, the lead-lag nexus between carbon future prices and cryptocurrencies exhibits equal forces across all time scales. Secondly, a weak WWCC between carbon prices and cryptocurrency markets in the short run suggests that carbon future prices offer significant diversification benefits. Thirdly, we observe a bidirectional relationship between the two-time series in the medium and long run, particularly evident in the very long run. Put differently, longer time horizons reveal the highest intensity of cross-correlations, indicating that market behavior is predominantly determined by its own characteristics in the long run. Moreover, comprehending the time-frequency dynamics of the co-movements between the two markets can facilitate the development of environmental and climate change policies, as well as the reevaluation of cryptocurrencies.