Carbon Prices at Two-Year High in Europe

Skyrocketing oil prices lead power companies to switch to dirtier coal power which, in turn, is blamed for the rise in carbon credit allowances

By Leigh Phillips

Carbon prices in the European Union have hit their highest level in two years on the back of spiralling oil prices.

The benchmark EU carbon contract for December delivery of EU allowances climbed to €27.54 on the European Climate Exchange — Europe's bourse for carbon credits—on Friday (6 June), according to Carbon Positive, a carbon offset management company.

The price is the highest carbon allowances have seen in 25 months, having risen some 40 percent in the last four months alone.

The rise is attributed by traders to the skyrocketing price for oil, which reached $139 a barrel before easing slightly Friday — jumping $10.75 in one day — the biggest single on-day price increase on record. The increase came atop a five percent rise the day before — totalling a $16-dollar hike in two days.

As oil prices escalate, power companies switch over to coal, which is cheaper but dirtier, requiring additional carbon allowances and pushing up the price of carbon.

The prices are a return to form for the European carbon market following the collapse of carbon prices after the over-allocation of credits in the first phase of the EU emissions trading scheme.

Carbon prices also dropped to €19 in February of this year on fears that a declining global economy would produce diminished demand for energy.

However, despite continued economic uncertainty, climbing oil prices have wiped out the effect of these worries on carbon prices.

Parallel to the price for EU allowances (EUAs), certified emissions reductions (CERs) have also risen steadily in the last month, climbing above €20 for the first time and closing at €20.30 on Friday.

CERs are carbon offset credits — issued under the Kyoto Protocol's Clean Development Mechanism (CDM) — whereby a reduction of carbon emissions through projects in developing countries — such as the planting of trees or the clean-up of refrigerator factories—can be used to offset emissions in industrialised countries. One CER is equivalent to a tonne of CO2.

European buyers are the major influence on the market for CERs, which can be used as offsets within the ETS. Rising oil prices are having an effect on the price of CERs as well, along with expectations that the number CDM projects in China will drop following the earthquake in Sichuan province.

The tightening of the issuance of CERs by the CDM auditors in the wake of the exposure of a number of projects of questionable environmental benefit is also pushing the price up.

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