EU carbon price starts strongly after sluggish 2009

The price of carbon futures rose to more than €13 (£11.58) a tonne this morning in a surprise new year surge that followed a weak end to 2009.

The price of EU Allowances (EUAs) slumped from €15 at the start of December to about €12.50 at the end of the month as confidence in the market was dented by the failure of the Copenhagen summit to deliver an ambitious and binding agreement.

Prices initially fell eight per cent to €12.41 in the wake of the fallout from the summit, before eventually closing at the end of 2009 at €12.53.

The bearish market meant that the price of EUAs fell 21 per cent over the course of 2009, and many analysts predicted carbon prices would continue to fall in early 2010 as post-Copenhagen gloom and the excess of credits held by a large number of industrial firms forced down prices further.

But an early spike in carbon prices this morning took the price of EUAs back above €13 a tonne, giving analysts cause for optimism that cold weather across much of Europe could reverse the decline in carbon prices.

"As far as I can tell this surge is supportive of energy prices rather than being carbon specific. Both oil and gas prices have risen strongly because of the cold weather," observed Stefan Wächter, analyst with research firm Point Carbon.

The price of EUAs typically rises when gas prices rise, as the higher cost of gas encourages energy firms to switch to cheaper but more carbon-intensive coal-fired power plants, which in turn increases their demand for carbon allowances.

A strong carbon price is vital for encouraging firms to develop low-carbon technologies, as the more it costs to emit carbon, the more likely they are to look to alternatives.

Point Carbon estimates that a steady carbon price of at least €20 a tonne is needed before firms will begin to make meaningful moves away from using fossil fuels.

Prices for the current phase of the EU emissions trading scheme had been consistently above €20 a tonne, until the onset of recession led to a huge drop in industrial output that resulted in many firms being left with excess carbon allowances which they could sell.

As a result, growing numbers of environmental groups and businesses have been calling on governments to reduce the number of allowances available in order to effectively impose a floor price on the market.

Energy firm EDF said in a recent analysis that the government must put a floor in the carbon price to create enough certainty that nuclear power and renewable energy can be sold competitively in the future.

However, a separate study last month from analyst New Energy Finance suggested that despite the low price of carbon, there was still evidence that the ETS was encouraging increased investment in renewable energy technologies, and in particular biomass power plants.