EU carbon reaches 100 euros and takes the cost of pollution to a record high

LONDON, Feb 21 (Reuters) – The price of permits in the European Union’s carbon market hit 100 euros ($106.57) a tonne for the first time on Tuesday, a milestone that reflects the increased costs that factories and power plants must pay when they pollute.

The benchmark European Union (EUA) quota contract rose to a high of 101.25 euros a tonne and was trading at 100.49 euros a tonne by 1549 GMT.

The EUA is the main currency in the EU’s Emissions Trading System (ETS) which forces manufacturers, power companies and airlines to pay for every tonne of carbon dioxide they emit as part of the bloc’s efforts to meet its climate targets.

The more emitters have to pay for EU carbon permits to cover each tonne of C02 they produce, the greater the incentive to invest in low-carbon technologies and switch to less polluting fuels.

EU countries and lawmakers agreed on reforms to the EU’s carbon market late last year, creating a bullish mood that has intensified in recent weeks as companies approach an April deadline to buy and submit enough CO2 permits to cover last year’s emissions.

Traders also said expectations of cooler weather and low wind speeds boosted demand for permits from fossil fuel power generators in recent days, and that buying by speculators also drove prices.

The price increase also follows an increase in the power sector’s demand for CO2 permits in 2022, as dwindling Russian gas supplies contributed to a 7% increase in EU power generation from coal, the most CO2-intensive fossil fuel, despite the high CO2 price.

The shift to coal has raised fears about Europe’s climate targets, although EU politicians say it is a short-term reaction – and the high price of fossil fuels, both coal and gas, will eventually accelerate a shift to renewable energy.

Still, rising carbon prices are a cause of political tension in the EU, and breaching the €100 threshold is likely to revive debates about prices.

Poland, which produces most of its electricity from coal, has blamed high CO2 prices on speculators and sought EU intervention to limit price rises. Spanish Prime Minister Pedro Sanchez last year called for a carbon price cap to help tackle soaring inflation.

Other EU countries see a robust carbon price as crucial to achieving the climate goals. A diplomat from one EU country, who spoke on condition of anonymity, said a strong carbon market sent “the right signals” to investors and industry about the need to accelerate the transition away from fossil fuels.

YEARS OF WEAKNESS

The EU ETS was launched in 2005 and the price fell to almost zero in 2007 during the global financial crisis when the market was severely oversupplied.

Years of weakness followed until CO2 prices began to pick up in 2018 when the EU agreed to remove excess allowances from the market.

Prices rose by 150% in 2021 when EU policymakers set their latest CO2 reduction laws.

That increase helped reduce emissions by prompting companies to switch from coal to gas, which produces about half as much CO2 when burned, to avoid paying a bigger carbon bill — even though last year’s high gas prices temporarily made coal production cheaper.

The 100-euro level has long been touted as a price that could stimulate some of the expensive technologies seen as necessary to limit global warming.

Investments in hydrogen produced from renewable energy – instead of the conventional production method using gas – could become economically competitive if CO2 prices remained above 100 euros per tonne, said Mark Lewis, head of climate research at Andurand Capital Management.

“I don’t want to underestimate the symbolic importance of it. People will start to realize that we are in a new paradigm,” Lewis added, but said that reaching 100 euros once does not guarantee that prices will stay above that level.

Such technologies could also get a boost from new state aid or EU funding, as the bloc offers incentives to green industries to avoid firms moving to take advantage of US subsidies offered to companies developing such technologies in North America.

The iron and steel sector is among those who want green hydrogen to help with the difficult task of producing carbon neutral steel.

Brussels plans to phase out the free CO2 permits that sectors including steel and cement currently receive and replace them with a world-first carbon cap tax on the emissions of imported goods, to make companies abroad pay the same CO2 price as European industry.

Carbon costs vary widely globally, with permits in China’s scheme currently costing less than $10.

Analysts said the European carbon price could retreat from the 100-euro level as the European Union agreed on Tuesday to auction more carbon permits to help raise 20 billion euros to help countries wean themselves off Russian gas.

“Traders appear to be neglecting the short-term impact of additional supplies entering the market… and rather focusing on the medium to long-term picture,” said Marcus Ferdinand, head of research at Oslo-based environmental markets firm Greenfact.

“I expect a correction as soon as the changes to auction calendars are announced,” he said.

($1 = 0.9384 euros)

Reporting by Kate Abnett, Susanna Twidale, Nina Chestney and Nora Buli; Editing by Susan Fenton, Barbara Lewis and Tomasz Janowski

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