Co-Movement between Carbon Prices and Energy Prices in Time and Frequency Domains: A Wavelet-Based Analysis for Beijing Carbon Emission Trading System

Abstract

This study aims to investigate the co-movement and lead–lag relationship between carbon prices and energy prices in the time–frequency domain in the carbon emission trading system (ETS) of Beijing. Based on wavelet analysis method, this study examines the weekly data on oil and natural gas prices and carbon prices in Beijing ETS from its establishment in November 2013 to April 2019. Empirical results show the following important findings: (1) Carbon and natural gas prices are mainly negatively correlated, with natural gas prices occupying a leading position in the 12–20 weeks frequency band, indicating that the increase (decrease) of natural gas price will lead to the decrease (increase) of carbon price; (2) carbon and oil prices show an unstable dependence relationship, and their leadership position in the market constantly changes. The partial wavelet coherency and partial phase differences vary greatly in different time–frequency domains, indicating that there is no stable coherency between oil prices and carbon prices. The estimation results prove the existence of coherency between the carbon and energy prices in the Beijing ETS. The research findings of this paper provide quantifiable references for investors to achieve risk control in asset allocation and investment portfolio in the ETS market.