Considering the interaction between carbon allowances and cryptocurrencies across time and frequencies: Potential risk-return and environmental benefits

This study examines the interdependencies between European Union Allowances (EUAs) on carbon emissions and traditional cryptocurrencies (Bitcoin, Ethereum, Binance Coin, Ripple and Bitcoin Cash) and green cryptocurrencies (Cardano, Stellar, EOS, TRON and IOTA) from January 2018 to February 2022. The study suggests that including EUAs in cryptocurrency portfolios could reduce environmental and financial risks. Wavelet coherence and wavelet phase difference analysis were used to identify significant relationships between the returns and value at risk (VaR) of EUAs and the selected cryptocurrencies, particularly during the COVID-19 pandemic. Key findings reveal interdependencies between EUAs returns and both traditional and green cryptocurrencies, with notable negative correlations for Ripple and Bitcoin in January 2018. Most green cryptocurrencies, with the exception of TRON, also showed negative correlations with EUAs during this period. In terms of VaR, traditional cryptocurrencies showed mid-frequency volatility, with Ethereum and Binance Coin showing higher risk in VaR connectedness compared to returns. The study also highlights a shift from positive to negative correlation in volatilities between EUA and traditional cryptocurrencies over time, with similar behavior observed for green cryptocurrencies. These findings are valuable for designing cryptocurrency investment strategies that diversify financial and environmental risks, supporting the development of hedging strategies, and highlighting the need for green economic policies.