As Europe faces natural gas supply shortages this winter, the price of carbon in the EU’s emissions trading system soared to a new all-time high. The carbon price in the EU hit a new record on Friday to reach nearly €100 ($100), surpassing the previous high of €98.49 touched earlier this year.
The key reason for that is the surge in natural gas prices as Russia announced on Friday plans to shut off natural gas supplies to Europe for three days which added to concerns over a plunge in gas availability.
As the natural gas shortage is mounting, analysts are warning coal is becoming “re-embedded” in Europe’s electricity generation to make up for the tight supplies of gas. As coal is carbon emissions heavy energy resource, coal-fired generators will be buying carbon allowances which drives up the price for emitting a ton of carbon.
As natural gas price surges more than ten times the average level of the last decade, it is now becoming more profitable to burn less-expensive coal even when including the additional cost of carbon emissions on top.
“It’s all adding up to a bit of a perfect storm where we need to burn much dirtier fuel,” said Stephen Lewis from Redshaw Advisors. He also added that higher carbon prices were the result of a more limited supply of credits, since in August fewer are auctioned under the EU system.
Analysts are still debating whether the price of the European credits can remain at such elevated levels. Factories and industrial plants are facing pressure from high power prices and the looming European recession and are likely to temporarily shut or scale down their operations. That consequently could reduce demand for EU carbon credits.
However, continuing pressure from tight natural gas supplies, especially through the winter period could sustain carbon prices above the €100 mark.