Oil spike to drive up carbon credit prices

Record oil prices and a lower than expected supply of carbon credits from the UN's Clean Development Mechanism (CDM) will drive up the price of carbon allowances in the EU's Emissions Trading Scheme (ETS) over the coming years, resulting in an average price of €32 per tonne for the second phase of the scheme which runs up to 2013.

That is the conclusion of new research from analyst firm Point Carbon, which claimed that the high price of oil has driven up the price of natural gas, in turn encouraging power generators to switch to coal and buy in extra carbon credits to cover the emissions that result.

"We see €32 per tonne as a fair price for phase 2 European Union Allowances (EUAs), up €2 per tonne from our previous assessment of March this year," explained Kjersti Ulset, manager of Point Carbon's EU ETS team, adding that emissions would rise as a result of the growing attractiveness of coal compared to gas.

Currently, EUAs are trading at just over €27 per tonne, meaning that significant increases in the price of the allowances are to be expected over the next three years. These increases are likely to impact energy bills as suppliers seek to pass on the extra cost to customers, providing further incentive for firms to invest in energy-efficiency measures.

The report also found that while high oil prices are leading to wider use of carbon-intensive coal, the situation would have been worse still without the influence of the ETS, estimating that emissions in the power and heat sector are 20 million tonnes lower so far in 2008 than they would have been had carbon prices not been in place.

Ulset said that despite some switching from gas to coal, the carbon price has incentivised more power generators to burn natural gas than would otherwise have been the case. "As a result, we have seen internal abatement," she added.

The report also predicted that lower than expected availability of carbon offset credits through the UN's CDM would similarly drive up the price of EUAs, as companies would struggle to source sufficient offset credits and would instead be forced to buy extra credits from within the EU market.

Point Carbon's analysis suggests that 2.372 billion offset credits from the Kyoto mechanisms would be issued up to and including the first quarter of 2013, a fall of 158 million credits since the last update.