Carbon allowances amid climate change concerns: Fresh insights from wavelet multiscale analysis

Abstract

We examine the dynamic nexus between the carbon emission price and climate change concerns using novel measures of alternatively both physical and transitional climate risks. We apply a wavelet coherence approach to European and North American cap-and-trade programs, highlighting strong correlation between carbon prices and transitional climate risks since 2019. We also reveal a positive relationship between carbon prices and physical climate risks before the Paris Agreement, with this relationship becoming negative in February 2022. Our findings show the important role of climate change concerns on the dynamics of the carbon market.