- The EU agreed to reforms at the end of last year
- April deadline for permit submissions prompted purchases
- The switch from Russian gas to coal has increased demand
LONDON, Feb 21 (Reuters) – The price of permits on the European Union’s carbon market hit 100 euros ($106.57) a tonne for the first time on Tuesday, a milestone that reflects rising costs that factories and power stations have to pay when they pollute.
The benchmark EU Allowance (EUA) contract hit a high of 101.25 euros per tonne and was trading at 100.49 euros per tonne at 15:49 GMT.
EUAs are the main currency of the European Union’s Emissions Trading System (ETS) which requires manufacturers, power companies and airlines to pay for every tonne of carbon dioxide they are emitting as part of the bloc’s efforts to meet its climate targets.
The more emitters have to pay for EU carbon permits to cover every tonne of C02 they produce, the more incentive they have to invest in low-carbon technologies and switch to cleaner fuels.
EU countries and lawmakers agreed to reform the EU carbon market late last year, setting a bullish mood that has intensified in recent weeks as companies approach the date April deadline to buy and submit enough CO2 permits to cover last year’s emissions.
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Traders also said expectations of cooler weather and low wind speeds have increased demand for permits from fossil fuel power generators in recent days and buying by speculators has also pushed prices higher. .
The price hike also follows an increase in demand for CO2 permits from the power sector in 2022, when dwindling Russian gas supplies helped fuel a 7% increase in electricity production. EU electricity from coal, the most CO2-intensive fossil fuel, despite the high price of CO2.
The return to coal has sparked fears for Europe’s climate goals, although EU policymakers say it is a short-term answer – and the high price of fossil fuels, to both coal and gas, will ultimately accelerate the shift to renewables.
However, the rise in carbon prices is a cause of political tensions in the EU and exceeding the threshold of 100 euros risks reigniting debates on prices.
Poland, which generates most of its electricity from coal, blamed high CO2 prices on speculators and demanded EU intervention to limit price spikes. Last year, Spanish Prime Minister Pedro Sanchez called for a cap on CO2 prices to help tackle soaring inflation.
Other EU countries see a robust carbon price as essential to achieving climate goals. A diplomat from an EU country, who spoke on condition of anonymity, said a strong carbon market sends “the right signals” to investors and industry on the need to accelerate the transition from fossil fuels.
The EU ETS was launched in 2005 and the price fell to near zero in 2007 during the global financial crisis when the market was severely oversupplied.
Years of weakness followed until CO2 prices started to recover in 2018, when the EU agreed to remove excess permits from the market.
Prices rose by 150% in 2021 when EU policymakers introduced their latest laws on reducing CO2 emissions.
The increase has helped reduce emissions by spurring utilities to switch from coal to gas, which produces about half the CO2 when burned, to avoid paying a bigger carbon bill – although soaring gas prices last year temporarily made coal production cheaper.
The 100 euro level has long been cited as a price that could incentivize some of the expensive technologies seen as necessary to limit global warming.
Investments in hydrogen produced from renewable energy – instead of the conventional method of production using gas – could become economically competitive if CO2 prices remain above 100 euros per tonne, said Mark Lewis, head of climate research at Andurand Capital Management.
“I wouldn’t underestimate its symbolic importance. People will start to realize we’re in a new paradigm,” Lewis added, but said hitting 100 euros once didn’t guarantee prices would stay above this level.
These technologies could also be boosted by new state aid or EU funding, as the bloc offers incentives for green industries, to prevent companies from relocating to take advantage of US subsidies offered to companies developing new technologies. such technologies in North America.
The iron and steel industry is among those turning to green hydrogen to help with the difficult task of producing carbon-neutral steel.
Brussels plans to phase out the free CO2 permits that sectors such as steel and cement currently receive and replace them with a first border carbon tax on emissions from imported goods, so that companies abroad pay the same CO2 price as European industry.
Carbon costs vary widely globally, with permits in the Chinese system currently costing less than $10.
Analysts said Europe’s carbon price could fall from the €100 level as the European Union agreed on Tuesday to auction more carbon permits to help raise €20 billion to help countries wean off Russian gas.
“Traders seem to be overlooking the short-term impact of additional supply coming into the market…and instead focusing on the medium-to-long term,” said Marcus Ferdinand, head of analytics at Greenfact, a environmental market company based in Oslo.
“I expect a correction as soon as changes to auction schedules are announced,” he said.
($1 = 0.9384 euros)
Reporting by Kate Abnett, Susanna Twidale, Nina Chestney and Nora Buli; Editing by Susan Fenton, Barbara Lewis and Tomasz Janowski
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