The price of carbon in Europe jumps to $106 as the energy crisis is over

 The price of carbon in Europe jumps to $106 as the energy crisis is over

The cost of carbon permits in Europe rose to €100 ($106.59) for the first time, supported by expectations of an improving economy and recovery in industrial production.

Demand for carbon contracts is growing in anticipation that lower natural gas prices will prompt some industrial companies to revive production that was curbed or halted last year due to rising energy costs.

At the same time, the prospect of tougher climate rules means the supply of emissions rights may be limited, deterring market participants from selling off any excess allowances they hold.

Marcus Ferdinand, Head of Analytics at Oslo-based Greenfact, said, “The optimistic economic outlook, or the less pessimistic one, reinforces the position of the bulls. Once again, it means higher carbon prices."

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The carbon price hike comes as policymakers tighten an emissions cap and trade regime in the European Union to help the bloc meet its target of cutting emissions by 55% by the end of the decade from 1990 levels.

A main committee in the European Parliament is still expected to vote on a preliminary deal, struck in December, that would further limit the supply of carbon credits from next year.

High carbon prices

Benchmark prices for the EU Emissions Trading System rose to 100.70 euros a tonne on Tuesday, extending their gains to 20% this year. Carbon permits, the main block tool for pollution reduction, impose decreasing emissions caps on thousands of facilities owned by utilities, manufacturers and airlines.

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Ulf Eck, chief investment officer of Northlander Commodity Advisors LLP, which has been betting on rising carbon prices in recent years, said that trajectory would only continue given the possibility of a €150 carbon price by next winter.

In a phone interview Tuesday, Eck explained, "I'm not really a believer in magic numbers, but I think carbon is on a long-term uptrend and we're going to continue to see it at all-time highs throughout this year."

He added that the Russian invasion raised the market's concern about the economic slowdown, and this was driven by the sharp rise in energy prices, and after energy prices returned to normal levels, carbon emissions also returned to their long-term upward path.

2022 emissions calculator

Companies that could not afford to hedge last year may return to the market before the deadline for accounting for last year's emissions, next April. And industries that shut down completely last year may buy new permits now that energy is cheap enough to operate.

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Business activity in the eurozone rose at its fastest pace in nine months in February as industrial production recovered and supply chain bottlenecks eased, according to data published on Tuesday.

The rules will likely be tightened. The reform of the emissions trading system, which is planned for 2024-2027, will increase the decrease in the annual emissions ceiling to 4.3% from its current rate of 2.2%, and then what is known as the “linear reduction factor” will accelerate to 4.4% from 2028.

In addition to the “linear reduction factor”, the European bloc intends to reduce allocations by 90 million in 2024 and 27 million in 2026, so that the two reductions together translate into a 62% decrease in pollution limits by the end of the current decade compared to the 2005 level.

Falling ceilings and increasing carbon prices are designed to accelerate the shift to clean technologies. However, the record high prices will likely renew calls from energy-intensive companies and some governments to control costs or risk damaging the region's fragile economic recovery.

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