Energy bills could climb on carbon price hike

Price of carbon approaches three-month high as experts predict EU trading scheme will begin to inform investment decisions

The price of carbon credits in the European Emissions Trading Scheme (ETS) yesterday hit its highest level since July, raising the prospect of increased energy prices for businesses next year.

Under heavy trading, the price of EUAs or carbon credits for 2008 delivery reached €22.50 a tonne before closing at €22.35. Experts said that while the spot price for EUAs currently remained below €1 per tonne as a result of the widely reported over allocation of credits in phase one of the scheme, the forward price was climbing with the market appearing bullish about phase two of the scheme, which begins next year.

Trevor Sikorski of analyst firm Point Carbon said that the recent price increase in 2008 EUAs was being driven by the high price of oil and the likely knock-on impact on gas prices. He explained that increases in the cost of gas put upward pressure on carbon prices as energy companies tended to switch generation from gas to coal, resulting in higher carbon emissions and requiring them to buy in more carbon credits.

However, Sikorski added that a reduction in the credits assigned to polluters under phase two of the scheme combined with the EU imposed cap on the number of credits that can be imported into the scheme from outside Europe meant that the supply of EUAs was set to be much tighter and the price of carbon throughout 2008 was likely to remain around €25 per tonne.

He predicted that the increased carbon price would not only lead to a short-term switch from coal to gas as gas became more price competitive, it would also begin to impact long-term investment decisions.

"People are starting to expect that the price of carbon will stay above €20 and that will impact investment decisions and make low carbon energy generation more attractive," he said.

The expected increase in carbon prices is also likely to lead to higher energy bills for business and industrial customers, according to Sikorski.

"When we last had high carbon prices they did filter through to wholesale energy prices pretty quickly," he said. "A carbon price of €20 should lead to around an extra £5 per Mwh."

A spokeswoman for Defra said that the forward price of carbon for phase two of the ETS was "very encouraging" and provided evidence that the trading mechanism could provide the clear signal needed to drive investments in low carbon technologies and energy efficiency initiatives.

"Phase one didn't achieve as much as we'd have liked because the price collapsed," she said. "But we're beginning to see that if you have a good price for carbon it will provide an incentive for firms to cut emissions."