EU carbon price hits record as gas shortages force return to coal

The price of carbon in the EU’s emissions trading system hit a new all-time high on Friday, as traders warned coal was becoming “re-embedded” in Europe’s electricity generation because of tight supplies of gas.

The price of EU ETS credits that are bought by polluters to compensate for carbon emissions rose to more than €99 in afternoon trading to surpass the previous high of €98.49 reached in February ahead of the invasion of Ukraine. Their price has risen 28 per cent since the beginning of August.

Traders said that the key reason for the rise was the surge in gas contracts for delivery next year, which have climbed dramatically as Russia has curbed supplies to the continent.

That is making it more likely that increased burning of coal for power generation as an alternative to gas is more than a short-term blip to get the EU through a difficult winter.

“Coal is becoming re-embedded in Europe’s energy mix as we see these long-term gas prices move up,” said one analyst at an energy hedge fund.

“So coal-fired generators are starting to buy carbon allowances to hedge that additional demand they now expect one to three years out.”

Rising carbon prices were supposed to turn gas — which can leak potent methane during production but emits about half as much CO₂ as coal when burnt — into a better proposition for utilities, and make low-emitting renewable energy sources more attractive still.

But the surge in gas prices has been so great — trading at more than ten times the average level of the last decade — that it is now more profitable to burn less-expensive coal instead, even when calculating the additional cost of carbon emissions on top.

Polluting companies that are regulated under the EU ETS are obliged to purchase the credits, or “allowances”, each of which grant permission to emit a tonne of carbon.

On Friday, the European Commission announced that more than €29bn in aid would be available between 2021 and 2030 to “partially compensate energy-intensive companies” for elevated electricity prices driven up by the cost of the EU credits.

Since the rising cost of credits contributed to higher electricity prices, certain energy-intensive companies in Germany, Estonia, Finland and the Netherlands would be able to apply for a partial refund between 2021 and 2030 of the carbon costs that electricity generators pass on, the commission said.

The plan would mitigate the “risk that these companies relocate their production to countries outside the EU with less ambitious climate policies”, said EU executive vice-president Margrethe Vestager.

Very high gas prices, and lower levels of hydropower and wind power in Europe than usual for the time of year, were also pushing power producers to turn to coal. That required them to buy more credits, since coal is the most polluting fuel.

“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. Higher prices were also the result of a more limited supply of credits, since in August fewer are auctioned under the EU system, he added.

Whether the price of the European credits can remain at such elevated levels is a matter of debate among analysts.

The escalating cost of power could also result in factories and industrial plants temporarily shutting or scaling down their operations, consequently reducing demand for EU carbon credits.

The threat of a European recession that reduces industrial output was “a worry”, Ingvild Sørhus, lead analyst at Refinitiv Carbon Research. But for now, “the economics in the power sector is overshadowing the demand disruption”, she said.