Dynamic Correlations Between Carbon Futures and Energy Futures Markets

Abstract

An essential instrument for reducing carbon emissions worldwide is the carbon market. Comprehending the dynamic relationships between carbon and energy futures prices is crucial as carbon trading picks up promote globally. This research examines how two energy futurescrude oil and natural gasinteract with carbon futures in the American and European markets between November 21, 2013, and March 28, 2024. We examine correlations between futures returns across different regions using the Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model. Our findings reveal significant, albeit fluctuating, correlations influenced by external market events. Interestingly, compared to crude oil futures, there is a stronger dynamic link between carbon futures and natural gas futures, especially in the European market, demonstrating strong long-term persistence.